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NY 'Health Care Shortfall Fund' Seeks to Reap Benefits of Fidelis-Centene Deal

By Jack O'Brien  
   February 13, 2018

To address federal healthcare cuts, the New York state FY 2019 budget proposal seeks to apply surcharges to the sales of nonprofit health plans to for-profit systems.  

New York state lawmakers are aiming to create a “health care shortfall fund” to compensate for unexpected reductions in federal funding. Most of the fund's revenue would be derived from taxing the proceeds from converting nonprofit health plans to for-profit systems.

The fiscal year 2019 Executive Budget proposed by Gov. Andrew Cuomo would collect an estimated $750 million annually over the next four years by taxing the proceeds from the sale of nonprofit health companies to for-profit health companies.

“The budget establishes a fund to ensure the continued availability and expansion of funding for quality health services to New York State residents and to mitigate risks associated with the loss of federal funds,” an outline of the budget proposal read. “This fund will be initially populated with funds from any insurer conversion or similar transaction.”

Many regard this proposal as a way to capitalize on the pending acquisition of Fidelis Care, a nonprofit health plan owned by the state’s Roman Catholic bishops, by Centene Corporation, a Massachusetts for-profit health system.

The $3.75 billion deal was announced in September, and the enactment of such legislation would likely generate $250 million in annual state revenue from Fidelis alone. Cardinal Timothy Dolan, however, has already indicated that the Catholic Church plans to use the proceeds from the Fidelis sale to create a charitable foundation that provides health services to the needy in New York.

Bill Hammond, health policy director at the Empire Center for Public Policy, testified Monday before the Joint Legislative Fiscal Committees about the proposal and how it would affect Fidelis. In his testimony, Hammond said the state’s tax collection would redirect funds to the government instead of those in need, “effectively swiping from the collection basket.”

“The deal is not something the state should want to discourage,” Hammond said. “It would add a major new tax-paying business to the state’s economy, and the proposed foundation would become a source of charitable giving in perpetuity.”

Following precedent

The state has supported the policy by citing the actions taken by Empire Blue Cross Blue Shield, which converted from nonprofit status to for-profit in 2002. The conversion was approved, but since the company conducted its business with the state on a tax-exempt basis for years, New York ultimately collected 95% of the proceeds from the deal.

Hammond countered that the Blue Cross case was an anomaly, considering most conversions occur as a result of a state law that requires the court-approved transfer of charitable assets to a private foundation. However, since Fidelis qualifies as a health maintenance organization, the current statute would have to be revised for the proposed shortfall fund to collect the proceeds.

Currently, New York faces a $4 billion budget deficit and dwindling federal payments for cost-sharing reductions and the Medicaid Disproportionate Share Hospital program.

Hammond said the shortfall fund would be unable to adequately address growing long-term Medicaid costs, calling the approach a “fiscally unsound practice.” Additionally, Hammond said the federal cuts are being slowly phased in, allowing the state a reasonable amount of time to adjust in the interim.  

The Citizens Budget Commission (CBC), a nonpartisan advocacy group, echoed Hammond’s point, saying the state budget deficits were not being addressed through legislative reforms to Medicaid. Rather, the CBC said the state budget gaps relied on “one-time resources” as fixes, including “speculative revenues from possible health insurance company conversions to for-profit entities.”

The measure is expected to be part of omnibus budget negotiations ahead of the April 1 deadline.

Jack O'Brien is an associate editor at HealthLeaders. 


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