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Another View: Legislators must protect consumers from health tax

California lawmakers discuss a proposal to restructure taxes on health plans and boost funding for developmental disability services on Feb. 22. The Legislature approved a plan Monday.
California lawmakers discuss a proposal to restructure taxes on health plans and boost funding for developmental disability services on Feb. 22. The Legislature approved a plan Monday. The Associated Press

Legislators who just approved a new tax on managed health care plans are touting it as a win-win for Californians (“Bipartisanship produced a good fix for health tax,” Viewpoints, March 1).

They say the tax will enable the state to secure over $1 billion annually in matching federal funding for Medi-Cal without raising premiums for consumers. Lawmakers assume the tax hike won’t be passed on because they paired it with cuts that will reduce net state taxes on health insurers by about $100 million.

But the assumption is wrong. The package will raise taxes on some insurance plans and lower them on others. Insurers can be expected to raise rates for the more heavily taxed ones and reduce them for the lightly taxed ones.

Kaiser Permanente, one of the state’s largest insurers, sells virtually none of the plans subject to a tax cut. So its choice is to either raise rates by the amount of the new assessment or cut profits. It’s difficult to imagine it will do the latter. The vast majority of small businesses and people who buy coverage on their own will likely pay higher premiums since they mostly buy managed care policies taxed at higher rates.

Legislators could do two simple things, however, to deter insurers from passing increases on to customers.

One would be to change the way rebates are calculated under the “medical loss ratio” law, which requires health insurers to return money to customers when they spend less than 80 percent of premiums on medical care. The law allows insurers, when calculating the rebate amount, to deduct taxes from the premiums. Legislators should prohibit taxes from being deducted. That would make insurers who increase rates to recoup the tax more likely to have to pay rebates.

Second, lawmakers could change how regulators review health insurance rates. Existing law requires insurers to submit proposed rate hikes to regulators, who then determine whether they are unreasonable. While regulators don’t have authority to stop insurers from charging these rates, insurers are eager to avoid the label and therefore often lower final premium amounts. It is expected that insurers will pass tax increases on to consumers, so legislators need to direct regulators to treat any pass-through as unreasonable.

Unless legislators take these steps to keep insurers from shifting the managed care tax onto consumers, it won’t be a win-win for Californians.

Michael Johnson is former public policy director at Blue Shield of California. He can be contacted at mikemsj@gmail.com.

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