According to Columbus Business First, the Ohio Department of Medicaid is reviewing the application of state sales and use taxes to premiums received by Medicaid managed care organizations (MCOs) in light of a federal regulatory memo calling the practice into question. The state uses the tax revenue to obtain additional federal Medicaid matching funds, and increases the per-member monthly (capitation) payments to the plans in order to hold the MCOs harmless.
The July 25, 2014 memo from the Centers for Medicare and Medicaid Services states that amendments made in the Deficit Reduction Act of 2005 (DRA) terminated states’ ability to tax only Medicaid MCOs. The memo explains that "taxing a subset of health care services or providers at the same rate as a statewide sales tax, for example, does not result in equal treatment if the tax is applied specifically to a subset of health care services or providers (such as Medicaid MCOs), since the providers or users of those health care services are being treated differently than others who are not within the specified universe."
It remains unclear how other states imposing similar health care-related taxes on Medicaid MCOs will respond. In May, 2014, the Inspector General of the Department of Health and Human Services concluded that Pennsylvania’s gross receipts tax on Medicaid MCOs was impermissible for purposes of Medicaid funding. However, Michigan reinstated its use tax on Medicaid MCOs effective retroactive to April 1, 2014.