About the Michigan 1% claims tax

The Michigan legislature passed a new 1% claims tax to fund Medicaid services. This new tax is needed to replace funding for Medicaid, formerly collected through a 6% tax on Medicaid health plans that was no longer permitted by the federal government for 2012.

Tax details

• The new tax:
  • Applies to services received in Michigan by residents of Michigan* on or after Jan. 1, 2012.
  • Will be levied on most medical, pharmacy, dental and vision claims for all commercial, individual, Medigap and Medicaid plans.
• Churches and schools are not exempt from the tax.
• The law limits the annual tax to $10,000 per insured individual or covered life.

Exclusions

• Claims paid:
  • For services Michigan residents receive while out-of-state
  • For services non-Michigan residents have received
  • By carriers or third-party administrators for specified accidents, specified diseases, accident-only coverage, credit, disability income or long-term care 
  • By a health plan for federal employees, Medicare, Medicare Advantage, TRICARE and the United States Veterans Administration 
• Deductibles, copays, coinsurance or other cost-sharing requirements
• Reimbursements from flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs) and Archer or Medicare Advantage medical savings accounts (MSAs)
• Claims-related (administrative) expenses  

Collecting the tax

Rates

The tax will be applied to monthly premiums as follows:

Fully funded groups and MyPriority members

The tax will appear as a line item on invoices no later than March (sooner if system updates are completed early) and will be applied retroactively back to January.

Self-funded (ASO) groups

The tax will appear on their January weekly funding invoices.

COBRA and the Michigan 1% claims tax

Employer groups can decide whether or not to include the 1% tax in their COBRA premiums in 2012 (if their plan hasn't renewed yet) and again in 2013. Priority Health and other insurers are adding the 1% tax as a separate line item on monthly billing statements, not as part of monthly premiums.

Here are some questions to ask yourself when making your decision about COBRA premiums:

Is this tax part of the applicable premium?

Section 4980B(f)(4) defines applicable premium as "...the cost to the plan for such period of the coverage for similarly situated beneficiaries with respect to whom a qualifying event has not occurred (without regard to whether such cost is paid by the employer or employee)."

It's not common, but some employers do factor administrative costs into the plan when calculating COBRA premiums.

If you do consider this to be a tax (not applicable premium) and charge it to the COBRA qualified beneficiaries, you must do the same for active employees.

Was the COBRA premium established before the start of the determination period?

A determination period is any 12-month period selected by the plan, but it must be applied consistently from year to year. According to Section 54.4980B-8, COBRA premiums must be set "…for a period of 12 months and shall be made before the beginning of such period." Most plans establish determination periods that coincide with the plan year. For plans that renewed January 1, 2012, including the 1% claims tax in the premium is a problem because the tax assessment is being made after the COBRA premiums were required to be established.

Does the tax constitute a valid reason to increase the COBRA premium?

COBRA premiums can be increased during a determination period for only three reasons:

1. The plan previously charged less than the maximum permitted.
2. The increase occurs during an 11-month disability extension.
3. The Qualified Beneficiary changes the coverage being received.

By omission, COBRA specifically prohibits midyear cost increases from being passed along to COBRA qualified beneficiaries.