Ohio: Plan to replace lost revenue chugs along

When Gov. John Kasich signed the budget legislation for the new fiscal year, which began on July 1, 2017, he vetoed a number of provisions, as we explained at the time. One of these was designed to help counties and transit authorities cope with the revenues that they were going to lose from the elimination of the sales tax on Managed Care Organizations (MCO). At issue is more than $600 million.

A fact sheet put out by the state, titled Responsibly Replacing the Medicaid MCO Sales Tax, notes that Ohio’s sales tax on MCOs, which is based on Medicaid payments that the MCOs receive from the state, has been in place since 2009. But in 2014, the federal Centers for Medicare and Medicaid Services (CMS) declared that as of July 2017, Ohio's Medicaid MCO sales tax would no longer be a permissible taxing method used to draw down Medicaid matching funds from the federal government.

Seeking a suitable replacement for that revenue, Gov. Kasich included a plan in his budget proposal to impose a broad-based tax on all Medicaid MCOs and non-Medicaid major medical MCOs, to generate $858 million annually. The Medicaid MCOs’ tax rate would range from $26 to $56 per member per month. Non-Medicaid major medical MCOs would pay a significantly lower rate of $1 to $2 per member per month.

According to the fact sheet, Medicaid MCOs would recover the entire cost of the sales tax replacement, $854 million annually, because that cost is an allowed expense reimbursed by Ohio Medicaid and CMS. However, non-Medicaid MCOs are not eligible for reimbursement, so the federal CMS-approved plan would limit the financial impact on these non-Medicaid entities by constraining the total combined tax to just $4 million annually.

Because the MCO replacement plan did not generate revenue for local taxing authorities, the Executive Budget provided two types of transition assistance to counties and transit authorities:

1. $49 million in revenue replacement for the last quarter of calendar year 2017, to be provided to all 88 counties, and eight transit authorities, to completely replace revenue lost from Oct. 1, 2017 to Dec. 31, 2017.
2. $158 million in formula loss assistance post-calendar year 2017. This was to be provided in one lump sum, based on a multi-year formula that considers each taxing authority's reliance on the Medicaid MCO sales tax, actual Medicaid MCO sales tax distributions, per capita sales tax base, and total permissive sales tax distributions.

Ultimately, the Kasich administration anticipated that the plan would produce $615 million in state revenues, fully replacing the $597 million that Ohio would have received under the existing Medicaid MCO sales tax system.

However, what ended up in the final budget bill was a different tax mechanism, an increase to the franchise fee, to raise an additional $200 million, to be applied proportionately across health insuring corporation plans. Federal approval from CMS was necessary to implement this mechanism as well.

Gov. Kasich’s veto, however, precluded federal CMS approval. In his veto message, he explained that the different mechanism risks the $615 million currently permitted by the health insuring corporation (HIC) waiver. “Further, the Executive Budget has already provided transition payments for counties as they adjust their budgets in preparation for the end of the existing tax,” reasoned the governor. The Ohio House voted to override the governor’s veto by a vote of 87-10 in early July.

Recent Developments

The County Commissioners Association of Ohio (CCAO) has been following this matter closely, and applauded the House’s veto override. Among the CCAO’s reasons are these:

• In the absence of a revenue replacement mechanism, counties would have to reduce or eliminate funding for programs that invest in economic growth and exacerbate the growing pressure on important systems like criminal justice, public safety, and child protection. The demand on these services is only growing in the wake of the opiate epidemic. 
• Pursuing an increase in the HIC franchise fee would not jeopardize Ohio’s current waiver. In the event that the request to reset the fee is not approved, the existing waiver would remain in place. The original waiver met the criteria necessary for automatic approval and would continue to meet those criteria.

More recently, in late August, the CCAO put out a legislative alert reporting that the Ohio Senate requested a two-week hold on the MCO revenue replacement amendment override vote. During this time, officials from the transit authorities, lawmakers, and the administration will come together in an attempt to reach an alternative solution.

According to a subsequent legislative alert, among the questions being discussed are these:

• What is the target dollar amount to help counties and transits with the annual revenue stream loss of $207 million?
• How long would that revenue replacement last?
• How would it be distributed?
• Where are the funds coming from?

A spokesman for the Senate president told Bloomberg that Senate Republicans were prepared to pursue an override vote if the efforts to reach a negotiated settlement “fail to bear fruit.” As of this writing, however, lawmakers have not taken any new action.