When the state of Ohio released its proposed budget for the next two fiscal years, a significant provision was tucked away that aims to deal with a $597 million shortfall in FY2018. In 2009, Ohio began levying a sales tax on Medicaid Managed Care Organizations (MCOs). In sum, this was the mechanism that Ohio, and a number of other states, used to draw down federal Medicaid dollars.

This changed in 2014, when the federal Centers for Medicare and Medicaid Services (CMS) told Ohio and other states that the Medicaid MCO sales tax would no longer qualify as a source of revenue by which Ohio is able to draw down the federal money. In addition to the losses at the state level, local governments will also feel the effect of the new rules by virtue of the loss of over $200 million in revenue due to the piggyback tax levied by local governments.

Given these challenges, the budget proposes applying a “sales tax replacement” to both Medicaid MCOs and non-Medicaid MCOs. Applying the sales tax to both types of providers will yield an estimated $854 million annually for Ohio to continue drawing down the federal Medicaid funds. Because the proposed sales tax replacement is an allowable expense under the federal Medicaid guidelines, the state’s Medicaid MCOs will be entitled to recover the entire amount of the cost of the replacement tax, however non-Medicaid MCOs will not enjoy the same benefit.

The state estimates that the net benefit to the state’s coffers as a result of this change to be $615 million, replacing the loss of $597 million in FY2018.

These changes come as administration officials continue to monitor lagging state revenues. The Ohio House is currently hearing these and other introduced provisions in the administration’s budget, with expected changes later this spring.

For more information, visit the Office of Health Transformation’s website.