Unpacking Pritzker’s Tax Proposals: MCO Tax

Illinois Gov. J.B. Pritzker says he’s counting on new taxes to help close the state’s 3.2 billion dollar budget hole. NPR Illinois reporters are taking a closer look at some of his ideas. First up, Jaclyn Driscoll breaks down the biggest chunk of revenue in Pritzker’s proposal - a tax on health insurers.

If all goes according to plan for Gov. J.B. Pritzker, the tax will not only bring in more money, but also free up state dollars currently spent on Medicaid to be used elsewhere.

"This would be structured to generate approximately $390 million in revenue to cover a portion of the state's Medicaid costs," said Pritzker in his budget address in January.

There are not many details on what these freed-up funds would actually be used for. State Rep. Greg Harris, a Democrat from Chicago who has been working on this idea for years, said they could "support increasing wages for healthcare workers and (relieve) some of the burden on taxpayers by replacing state dollars with federal dollars."

Pritzker has called this an “MCO assessment” - a tax on managed care organizations. That’s true, but not the whole story.

In the simplest form, MCOs are insurance providers. Under Medicaid managed care, the state pays the organizations for Medicaid patients, and they provide coverage. In essence, MCOs are the middleman managing the medicaid money.

So, Pritzker has said he wants to tax them. But, health insurance experts say there’s no way to do that without taxing every insurer. That means private insurers, too - the big guys and the little guys.

Aaron Winters, with the Illinois Chamber of Commerce, says because that tax is just going to get passed onto consumers.

"One of the most important issues for everyday citizens is the rising cost of health care," said Winters. "Taxing healthcare to get more federal funds to cover Medicaid isn't going to result in more affordable healthcare options for the everyday worker."

Harris says lawmakers can easily take care of that: "In the bill, we will specifically prohibit insurance companies from passing the tax onto consumers."

To put it bluntly: Insurance companies would eat that tax.

The Governor's Senior Budget Staff also addressed this in a budget briefing. They said they can tax different insurers at different levels or percentages, and the private insurers wouldn't be hit as hard.

Let’s assume that everything goes to plan and lawmakers work out a deal that protects consumers. How does a tax on insurers both bring in money and make more money for the state?

To understand this - it helps to know a little about how Medicaid funding works. Illinois pays insurance for some low-income residents, and the federal government reimburses the state for a portion of those costs. Essentially, the more money the state puts in, the more the feds pay out.

The MCO tax would put more money in, and as Greg Harris explains, "would allow us to obtain hundreds of millions of dollars of federal matching dollars to support the state budget."

Illinois receives the lowest amount of federal funding per Medicaid beneficiary. Advocates argue, this tax is an untapped resource that our very broke state needs.

Theoretically, some of that money then could go back to the insurers to offset the taxes. Again, the Governor's budget staff addressed this. They said it won't be a dollar for dollar match, but in general it will bring more money into the Medicaid system -- which could mean they get more money from the state.

But safety net hospitals, hospitals whose primary clients are on Medicaid, have other ideas for the funding. And without getting too far into the weeds, it’s important to mention, safety net hospitals are generally not happy with MCO's.

"The MCOs have put us through hoops trying to bill and re-bill and face denials," said Tim Egan, the CEO of Roseland Community Hospital located on the South Side of Chicago. "The denial range for MCOs is approximately 25 percent. When the state of Illinois used to administer the Medicaid program, the denial rate was closer to 4 percent."

The state of Illinois used to manage the payments for Medicaid years ago, and it seemed to be an easier process according to some hospitals. Doctors would perform a service, they would submit the claim, and then they could get reimbursed. So, it was a fee-for-service charge. However, some argued doctors may have been billing unnecessary tests or lengthened stays and it was costing the state more money. Which is why MCOs took over -- to manage that care.

But Egan said MCOs make it incredibly difficult for his hospital to get reimbursed. In fact, he said because they so frequently deny claims, Roseland is out $7 million dollars.

"The state is paying all this money into the MCOs and that money is not flowing out to the providers," he said. "That's got to stop."

Egan said this tax could help with much needed funding for hospitals with high Medicaid populations.

The Illinois Department of Healthcare and Family Services, which oversees the Medicaid program said this in a statement:

"The new administration is committed to bringing stakeholders together and engagin all parties in the work to provide the highest quality care to Medicaid members. HFS has implemented a number of upgrades and is cooperatively evaluating policies to ensure efficient billing, payment, administration, and other systems. The Department welcomes the opportunity to work with the General Assembly on efforts to enhance Medicaid and help our members lead healthier lives."