- Tennessee requires all health maintenance organizations (HMOs) doing business in Tennessee to pay a 5.5% tax on all premium dollars collected from or on behalf of enrollees. Because all Medicaid enrollees in Tennessee are enrolled in HMOs (generally called Managed Care Organizations, or MCOs, in the TennCare context), Tennessee receives tax payments from TennCare MCOs from the premiums they collect on behalf of TennCare enrollees.
- If Tennessee decides to expand Medicaid, the federal government will pick up all of the cost of the expansion for the first three years (2014-2016). Depending on the number of newly eligible individuals who enroll in the first three years, this could bring between $1.5 and $1.9 billion additional federal dollars to Tennessee by 2016. All of this federal money will be paid as premiums to TennCare MCOs and thus will be subject to the state?s 5.5% HMO tax. Medicaid expansion could generate between $85 million and $100 million in additional HMO tax revenues for the state by 2016 and will cost the state nothing until 2017.
- Even in 2017, when the federal share of the cost of expansion is reduced to 95%, the state?s 5% share of the cost will still be more than offset by revenues from the 5.5% HMO tax. Again, depending on the number of newly eligible individuals enrolled, the state could see between $3.8 and $4.4 million in net revenues from the expansion in 2017.
- After 2017, the state will face net costs from Medicaid expansion, but these net costs will still be significantly reduced by revenues from the HMO tax. So, after 2019, when the federal government?s share of the payment drops to 90%, Tennessee?s effective share of the cost will not be 10% but will be 4.5%, because it will recover the remaining 5.5% of the cost in taxes.
- Because of the significant tax revenues that would be generated in the first four years of Medicaid expansion, only in 2021 would the cumulative costs for the state exceed the cumulative additional revenues generated by the HMO tax. In other words, Tennessee could expand Medicaid and cover as many as 330,000 additional people for seven years at no cost to the State.
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