Proposition 35: A Tax on Managed Care Organizations

 

Proposition 35 is a proposed ballot measure in California that aims to enforce a fixed tax on managed care organizations (MCOs) that provide healthcare services for Medi-Cal. The measure also outlines specific ways the tax revenue must be utilized.

Background

Proposition 35 comes amid recent expansions to California's Medicaid program, Medi-Cal. Lawmakers have expanded Medi-Cal eligibility to include individuals who meet income requirements despite immigration status. Despite this expansion, many healthcare providers and advocacy groups claim that reimbursement rates under Medi-Cal are inadequate to cover the cost of care. Proposition 35 aims to address this funding shortfall.

What is the MCO Tax?

California has historically implemented an MCO tax periodically. In the summer of 2023, Governor Gavin Newsom and state legislators renewed this tax to support Medi-Cal, particularly as more residents became eligible for Medi-Cal coverage. According to the Legislative Analyst's Office, the tax is projected to generate between $6 billion and $9 billion annually through 2026.

Initially, lawmakers agreed to use part of the tax revenue to increase the reimbursement rates for providers serving Medi-Cal patients. These increases were viewed as necessary to avoid provider shortages and long wait times for patients. However, Governor Newsom later proposed reallocating billions from the MCO tax to pay for other Medi-Cal expenses. Consequently, the agreed-upon budget included funds for Medi-Cal provider rate increases, although less than initially planned.

Key Provisions of Proposition 35

Proposition 35 seeks to clearly define the allocation of MCO tax revenue. It limits California lawmakers' power to redirect these funds for other purposes, requiring a supermajority—three-quarters of the members—from both the state Assembly and Senate to make any changes to the measure in the future.

The proposition also proposes creating a new advisory committee for the Department of Health Care Services. This committee would include people from various sectors of the healthcare industry, such as physicians, hospitals, clinics, labor unions, and other healthcare stakeholders, to steer the allocation of tax revenue.

Allocation of Funds

In the short term, Proposition 35 mandates that the tax revenue be allocated as initially planned before Governor Newsom's proposed reallocations. This includes:

• Increasing reimbursement rates for healthcare providers under Medi-Cal.
• Funding training programs for healthcare workers.
• Supporting Medi-Cal costs from the state's general fund, which finances most public services.

The measure establishes a formula for distributing funds to different programs starting in 2027, with allocations contingent on the revenue generated by the tax.

Support and Financial Backing for Proposition 35

The Coalition to Protect Access to Care, a group comprising various healthcare organizations and associations, along with the California Democratic Party and the California Republican Party, have endorsed the measure. As of now, no organized opposition committees have been identified.

Additionally, significant financial contributions have been made to support Proposition 35, largely from healthcare industry groups:

• Global Medical Response Inc. has donated $5 million.
• California Hospitals Committee on Issues, sponsored by the California Association of Hospitals and Health Systems, contributed $2 million.
• The California Medical Association has provided $3.2 million.

Financial Ramifications

The Legislative Analyst's Office noted that Proposition 35 might reduce legislators' flexibility in overseeing the state budget. According to reports, Governor Newsom urged the coalition backing the measure to remove it from the ballot. The state's current budget relies on revenue from the MCO tax, and passing Proposition 35 could interfere with existing budgetary plans, according to arrangements in the health budget bill.

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MEDICAID MANAGED CARE RX BENEFITS HELP STATES

Medicaid prescription drug spending has been on the rise and some states have elected to carve out prescription drug benefits and shift to a Fee-For-Service (FFS) model. In theory, this delivery system helps states leverage their purchasing power to reduce costs and increase oversight. However, recent data reveals that when compared to FFS models, managed care prescription services save significantly more on brand name and generic drugs while also improving the quality of care.

In a 2018 report, the Association for Community Affiliated Plans (ACAP) studied Medicaid prescription drug spending between 2011 and 2017. The trade association focused on key expenditure trends and dynamics related to Medicaid's pharmacy benefits. Here is what the report discovered:

• Over a six-year period, managed care drug benefits produced significant savings despite the increase of prescription drug costs. "The average net (post-rebate) cost per MCO-paid Medicaid prescription during 2016 was $37, 73 percent of the average net cost of Medicaid prescriptions paid in the fee-for-service (FFS) setting during 2017, which was $50."

• The report also identified that managed care prescription services had higher usage of generic drugs which helped to minimize drug expenses. "In 2017, generic drugs represented 88.1 percent of MCO-paid Medicaid prescriptions versus 83.7 percent in the FFS setting."

• Six states that shifted to managed care prescription benefits only had a 1 percent increase in net costs per prescription between 2011 and 2014. Meanwhile, seven states that carved out pharmacy benefits saw a 20 percent surge in net costs per prescription during the same period. Compared to the six states that switched to a managed care model, these seven states missed out on an approximated $307 million in savings in 2014.

• Finally, including prescription drug services improves the quality of care. Since Medicaid health plans handle all of a patient's benefits, the plan can coordinate and communicate with providers more effectively. This makes care less complicated and also decreases unnecessary hospitalizations and emergency room use.

As a result of skyrocketing pharmaceutical drug costs and the increased size of the Medicaid population, some states have carved out pharmacy benefits and shifted to FFS models to rein in costs. However, data shows that Medicaid plans are able to save more when pharmacy and medical benefits are integrated together. Not only are plans able to save money on prescription drug costs, but they also improve the quality of care for their members. To preserve the program's resources and ensure its sustainability, states may want to reevaluate carving out benefits.

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CONCERNS RELATING TO CA's PHARMACY CARVE OUT

California's Governor, Gavin Newsom, signed an order at the beginning of 2019 to transition all pharmacy services for Medi-Cal from managed care to a FFS model. The consolidated purchasing power would make use of the state's population size to negotiate drug prices with pharmaceutical manufacturing companies. Private payers and insurance providers would also be allowed to participate in the public health system and negotiate prices.

The state's plan to take control of the pharmacy benefits for all of Medi-Cal's recipients has been controversial. There are concerns over its likely impact on MCOs, PBMs, pharmacies and the coordination of care. Currently, California's pharmacy benefit for Medicaid managed care is administered by ten separate PBMs. They are responsible for 90 percent of the state's Medicaid beneficiaries.

L.A. Care CEO, John Baackes, believes that the carve out will make coordinating care more challenging. He stated, "I think one of the advantages of a managed Medi-Cal plan like ours is that for people who are in very difficult circumstances health-wise, we do provide an element of care management that's important and if there's an element of the benefit that we don't control, then it's awkward."

In addition, critics are concerned about the impact that the pharmacy benefit carve out could have on pharmacies. While purchasing in bulk directly from manufacturers could drive down costs, it's unclear as to how drugs will be dispensed and how local pharmacies will maintain a profit.

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