Health Care Claims Tax to Live on in Michigan

Some fresh reporting from Michigan indicates that there is still quite a bit of certainty ahead for a health care tax scheme with big ERISA preemption considerations as it ropes in self-insured group health plans.  (See 11/23/12 blog post for prior reporting on this subject.)

While industry observers wait on a federal appeals court to rule on whether the state state’s Health Insurance Claims Act (HICA) violates federal law, there is one open question that appears to be settled, which is that the tax will not sunset at the end of the year as originally intended.

Governor Snyder is expected to sign legislation (SB 335) as early as this week that will extend the sunset provision for four years.  So this “temporary” tax sure has a permanent feel to it.

A proposal to hike the one percent tax was stripped from the legislation but that does not necessarily mean that it not going happen.  That’s because the Legislature has finalized the state’s 2013-2014 budget assuming $400 million in revenue coming from the HICA tax. 

The problem is that number likely overestimates revenue by at least $130 million based on the current year’s tax receipts.  Legislators hope to fill this revenue gap by tweaking the state’s no fault auto insurance system and related new vehicle fees, but if this is not done by October, they will be forced to pass what is known as a “negative supplemental appropriates bill” and the heat with again be on again to increase the HICA tax.

 And keep in mind that there is a two-to-one match from the federal government for all state revenue raise through the HICA tax, so a multiplier effect is in play, which further intensifies the pressure to maintain and increase the tax.  That said, It is sometimes easy to tune out when reading about predictable legislative maneuvering and lose focus on the real world implications, so let’s do that quickly now.

Last year, this blog spoke to a major multi-self-insured employer based on Michigan to gage how they have adapted to the HICA tax.   The response regarding the economic affect was largely expected – essentially that it raised the cost of doing business but that it has not prompted them to reconsider being self-insured.

 Their response regarding the compliance administrative burden was more telling.  While they have been able to figure how to comply with the law, if similar tax schemes pop up in other states the administrative burden will not grow incrementally, but rather exponentially and will force them to take another look at whether self-insurance is still the best option for them.  That’s compelling.

Absence intervention by a federal appeals court, it will be interesting to see whether this ERISA preemption assault can be quarantined with the Michigan state lines.