Michigan Health Care Claims Tax Fight -- Additional Rounds Ahead

It’s been a tough fight thus far in opposition to the Michigan Health Insurance Claims Assessment Act, which imposes a one percent (1%) assessment on all health care payers, including self-insured employers and certain business partners, for medical services rendered to Michigan residents in the state of Michigan.

As this blog has previously reported, business groups in Michigan signed off on the legislation last year noting it was part of a larger budget deal that was not as bad as possible alternatives.   ERISA preemption concerns were outweighed by the belief that self-insured employers could absorb the new tax without much disruption. 

Then in August of this year, a federal district court in Michigan dismissed an ERISA preemption lawsuit, which contended that the administrative obligations imposed by the Act are unlawful.    

Game over?  Well, not exactly.

An appeal of the District’s court ruling has just by filed with the Sixth Circuit Court Appeals and incorporates some very strong arguments to justify a reversal.  And this time, the self-insurance industry will have an unlikely ally in this legal fight – organized labor. 

What has not been widely recognized is that the tax applies to self-insured Taft-Hartley plans and the ERISA preemption argument is even stronger as it relates to these plans.   So it is a positive development that at least two Taft-Hartley plans are expected file amicus briefs next week. 

But while more pressure is being applied in Federal Court, things are heating back up in the Michigan State Legislature to make the tax significantly more onerous.

The Act was structured based on the assumption that it would raise $400 in annual revenue from all payers.   Of course, government budgeting is often suspect and Michigan bureaucrats have lived up to this reputation.  Through the first half of 2012, the state collected only $109 million from the health claims tax, which means the annualized estimate is short nearly $200 million.

So it should not come as any surprise that the Michigan Legislature is now considering a proposal during a lame duck session to significantly hike the tax.  SB 1359, introduced earlier this month, would allow for an unlimited and variable rate on the claims tax so that it would float up and down to ensure that the tax generates $400 million annually.  The bill would also eliminate the proportional credit/refund provision should the tax collect more than the $400 million target amount.

Interestingly, state business groups who provided tacit approval to the tax last year have now launched an aggressive lobbying effort to defeat the proposed 2.0 version.   We’ll see if labor groups join the cause. 

While it’s certainly encouraging that there is strong push back against SB 1359, the opposition remains focused on the economic argument.    Yes, this is clearly important but arguably not as important as the ERISA preemption issue.

We’ll concede that the most self-insured employers in Michigan have figured out how to comply with this new tax obligation, but multi-state employers will also tell you that if other states implement a similar tax scheme this would greatly complicate compliance efforts.  In turn, this could make the self-insurance option much less attractive – a particularly troubling development in the post-ACA world where self-insurance offers a critical safe harbor.

Look around.  Most states have budget challenges, especially as it relates to health care obligations.  If the Michigan tax withstands legal and legislative challenges then we should not be surprised if other states attempt the same approach.

So the stakes are high in Michigan as it is now ground zero in the ERISA preemption fight.

Captives & Dodd-Frank -- Hitting the Right Target

The recent announcement of an industry coalition to push for federal legislation clarifying that the Nonadmitted and Reinsurance Reform Act (NRRA), included as part of the Dodd-Frank law, does not apply to captive insurance companies certainly sounds like a positive initiative.  But despite good intentions, this blog is skeptical that it will acheive the desired result.

We have actually been tracking this issue for some time and is aware of discussions that have taken place with key congressional sources regarding the viability of a possible legislative fix (two conversations as recent as yesterday).  The consensus is that it could be done technically, but DC politics dictate that such an effort would be a heavy lift.

The political reality is that neither Democrats nor Republicans have the appetite to open up the Dodd-Frank Law for any changes at this point. 

Truth be told, congressional Republicans don’t want to do anything to help the law actually work, as this was a highly partisan piece of legislation, much like the Patient Protection and Affordable Care Act.  The only way Republicans would be motivated to even consider amending the legislation is if such action would substantively lessen the administrative burdens on the banking industry and provide certainty to the business community, especially small business.

 Democrats, for their part, will be resistant to “technical amendment” legislation even if they support it in principle for fear that it would become a legislative vehicle where additional amendments would be grafted on with the intent of watering down the law.

And neither party wants to come back under fire from the powerful financial services industry lobby, which would surely happen if Dodd-Frank is opened back up – even for so-called technical fixes.   

But just for the sake of argument, let’s assume that legislation is introduced and some co-sponsors are lined up.  Does that mean success is any more likely?  Probably not.  To understand this assessment, we need to talk about the relative political power of interest groups in DC. 

While many of the larger lobbying organizations active in DC have the ability to block and/or shape legislation, there are far fewer who have enough political juice to get their own special interest legislation passed through Congress, no matter how limited. To be blunt, the captive insurance industry simply does not fit into this latter, more exclusive group.   

Finally, the country’s biggest captive domiciles simply do not have powerful congressional delegations with regard to insurance-related issues, which could potentially offset the deficiencies and complications described above.  That is not to say these members of Congress would not be forceful advocates, they simply are not positioned to move legislation envisioned by proponents of this approach.

So does all this mean that there will never be clarity relative to whether the NRRA applies to captives?  Well, it may not to come from Congress for the reasons we just explained, but it may come from federal regulators as part of the Dodd-Frank rule-making process. 

In fact, this avenue is now being actively explored by self-insurance industry lobbyists.   This strategy can best be described as a “surgical strike,” as opposed to an expensive and pro-longed “land war,” which the congressional route would surely become. 

We’ll see if the political operatives now engaged with the regulators can hit the target.  But at least an arguably clearer path has been identified.