States eye Medicaid taxes that could affect employers 

The Beatles once bemoaned the reality of taxes in the song "Taxman”: “if you drive a car, I’ll take the street; if you try to sit, I’ll tax your seat.” Six decades later, some plan sponsors may also bemoan a new tax — in the form of fees that will ultimately be paid by employers — to offset state Medicaid shortfalls.

Medicaid funding is an increasing challenge Here, There and Everywhere. Changes from the One Big Beautiful Bill Act (OBBBA) plus rising program costs have put financial pressure on states, causing them to assess how to fully fund the joint state-federal program.

A recent US Government Accountability Office report estimated that some two-thirds of Medicaid enrollees work full-time.

What has happened

Instead of singing an Eleanor Rigby-like lament, a Fab Four of states — California, Colorado, New Jersey, and Washington — have tried to address the issue head-on this year, with bills in California and New Jersey receiving their governor’s signature:   

• California. This state is often at the vanguard of new legislation, standing out like a Yellow Submarine. This year’s result is a new law significantly raising provider taxes on commercial plans that are managed care organizations (MCOs), including HMOs. For calendar years 2027, 2028, and 2029, a tax of $8.85 per enrollee per month applies to MCOs, $6.60 more than in 2026. The specific issue was matching federal funds for Med-Cal, the state’s Medicaid program. The current MCO tax had a much higher rate for Medi-Cal managed care plans at $274 per enrollee per month, than commercial managed care plans at $2.25 per enrollee per month. The OBBBA requires a uniform tax. CMS notified states last year that they needed to modify their MCO tax scheme to comply with the OBBBA by the end of 2026. The revised tax is subject to CMS approval, unless the state director of health care services certifies that the tax is federally permissible. This month, a California Assembly Republican Caucus letter to CMS argued that “its practical effect is a new tax on health plans that will ultimately be passed on to employers, workers, retirees, and families through higher health insurance premiums.”
• Colorado. The approach in HB 1327 was an enterprise fee paid by employers with 500 or more workers. The annual amount would have been $2,300 per worker receiving Medicaid benefits, with some exemptions, such as non-profit organizations and employers offering affordable health coverage. When the bill passed the House on May 5, there was little time for Senate action. The legislature adjourned May 13. As a result, the bill’s supporters must wait another year before singing “Good Day Sunshine.”
• New Jersey. “Got to Get You into My Life” could have been the theme song for the law applicable to employers with at least 50 employees on Medicaid. The law aims to bring in $145 million per year. Annual fees are $325 per person for employers with 50 to 249 employees on Medicaid, $525 for those with 250 to 499, and $725 for those with 500 or more. Exceptions exist for new hires in their first 90 days, as well as part-time, per-diem, temporary, and seasonal workers. The first payment is due April 15, 2027.
• Washington. The story in this state might have been “And Your Bird Can Sing” because SB 6173 — proposing an  assessment on certain employers for Medicaid enrollees — never took flight, failing to make it out of committee.

Employer implications

In 2017, Nevada adopted a different approach, requiring an annual public report of all employers with 50 or more employees and the number of full-time employees on Medicaid. One thing is certain: the debate will continue, and more states may weigh in. Proponents of an employer tax argue that employers who fail to provide affordable coverage to low-wage earners should bear some of the Medicaid cost. Opponents argue that a fee or tax disincentivizes hiring these workers and will result in higher consumer prices. When and where this issue will pop up next is anybody’s guess. Or as the lads from Liverpool might say, “Tomorrow Never Knows.”