COMMITTEE ON LEGISLATIVE RESEARCH
OVERSIGHT DIVISION
FISCAL NOTE
L.R. No.: 4950-02
Bill No.: HB 1238
Subject: Taxation and Revenue - sales; Pharmacy
Type: Original
Date: March 12, 2002
FISCAL SUMMARY
| FUND AFFECTED | FY 2003 | FY 2004 | FY 2005 |
| All funds | ($3,466,200) | ($4,090,116) | ($4,826,337) |
| General | $31,194,145 | $31,456,940 | $31,454,536 |
| Conservation* | (Unknown) | (Unknown) | (Unknown) |
| Highway | ($792,502) | ($951,002) | ($1,141,202) |
| Pharmacy Tax Fund** | $0 | $0 | $0 |
| Total Estimated
Net Effect on All State Funds |
$26,935,443 to (Unknown) | $26,415,822 to (Unknown) | $25,486,997 to (Unknown) |
*Expected to exceed $100,000 annually.
**Revenues and expenditures of up to an estimated $177,600,000 would net to $0.
| FUND AFFECTED | FY 2003 | FY 2004 | FY 2005 |
| Federal | $49,711,961 | $49,715,365 | $49,714,579 |
| Total Estimated
Net Effect on All Federal Funds |
$49,711,961 | $49,715,365 | $49,714,579 |
| FUND AFFECTED | FY 2003 | FY 2004 | FY 2005 |
| Local Government | $0 | $0 | $0 |
Numbers within parentheses: ( ) indicate costs or losses.
This fiscal note contains 8 pages.
ASSUMPTION
Officials from the Department of Insurance, the State Treasurer's Office, and the Department of Health and Senior Services assume this proposal would not fiscally impact their agencies.
Officials from the Missouri Consolidated Health Care Plan (HCP) state this proposal imposes an additional tax on licensed retail pharmacies, effective July 1, 2002. The Department of Social Services is responsible for developing the formula based on gross retain prescription receipts, which is not to exceed 6%. Pharmacies will try to recoup this expense by passing it on to the consumer. When pharmacy contracts expire and are renegotiated, the pharmacies will request additional monies to recoup the cost of this additional tax. The contractors will merely pass the cost along through increased premiums. HCP estimates a pharmacy cost of $53 million for CY2002. If the effects were immediate, the potential for additional cost could be 6% of $53 million for ½ of CY2002 or $1,494,600. If the effects of the bill are not felt until CY2003, the associated cost, trended at 18% for inflation, could result in additional cost of $3,527,256.
Oversight assumes 6 % tax, a pharmacy inflation rate of 18% and that cost would be immediate. Therefore, costs to all funds would be $3,466,200 in FY 03; $4,090,116 in FY 04; and $4,826,337 in FY 05.
Officials from the Department of Public Safety - Missouri State Highway Patrol defer their fiscal note response to the Department of Transportation.
Officials from the Department of Transportation (DHT) state this legislation places a tax on the gross retail prescription receipts of pharmacies. The tax cannot exceed 6% of gross retail prescription receipts. This legislation will have no fiscal impact on DHT. Nothing in the legislation prevents the pharmacies from attempting to raising the cost of prescriptions to cover the tax. If prescription costs are increased due to the tax, then this legislation will have a fiscal
impact on the Highway & Patrol Medical Plan.
Assuming that pharmacies do pass this tax on to the consumer by increasing the cost of prescriptions, there would be a fiscal impact to the Medical Plan. DHT states in CY 2001 the ASSUMPTION (continued)
Medical Plan paid out $9,405,950 for prescription costs and based on projections from the
Medical Plan's Actuary, we are to assume prescription drug benefit costs will increase at a 20%
annualized rate. If pharmacies pass the tax on to the consumer and the tax was 6% of gross retail receipts then the Medical Plan would realize an additional 6.38% increase in prescription costs annually. Because the legislation does not give the exact tax percentage we assumed 6%, which is the maximum amount that is allowed. We also assumed that the pharmacies would gross up prescription charges to cover the 6% tax on the 6% increase to their prescriptions which is intended to cover their 6% tax on gross retail receipts.
To calculate the gross up DHT subtracted the tax rate of 6% from 100% which gave us 94%. We then divided the 6% tax by 94% which equals the gross up amount and which equated to an approximate 6.38% (6%/(1 - 6%)) increase. The total fiscal impact to the Medical Plan would be approximately $720,456 ((($9,405,950 x (100 + 20%)) x 6%)/(100% - 6%)) in CY 2002.
Currently 77% of the Medical Plan's total participation is due to DHT participants and 23% is due to MHP participants. Therefore, approximately $554,751 ($720,456 x 77%) of the total fiscal impact in CY 2002 would be due to DHT participants and $165,705 ($720,456 x 23%) would be due to MHP participants in CY 2002.
Historically, the department and the plan members have shared in any premium increases necessary because of increases in benefits. The costs may be shared in the long run (meaning shared between three categories: absorbed by the plan, state appropriated funds, and/or costs to individuals covered under the plan). However, the DHT (commission) must make a decision on what portion they will provide. Until the commission makes a decision, DHT can only provide the cost to the medical plan.
Officials from the Missouri Department of Conservation (MDC) assume this proposal would have fiscal impact on MDC funds because it imposes up to a 6% tax on retail pharmacy prescription sales. MDC estimates the impact to be $100,000 annually or more.
Officials from the Department of Mental Health (DMH) state that the DMH , Division of Comprehensive Psychiatric Services provides General Revenue funds to purchase drugs for consumers. Assuming that pharmacies would not pass this cost of doing business on to the customer, DMH assumes no fiscal impact.
Officials from the Department of Revenue (DOR) state the proposed legislation would require a new system. The complexity of the system includes, but is not limited to the due date of the 15th of the month, sharing duties and responsibilities with a separate agency (DOS), DOR providing information to DOS to collect the money, which is done separate from reporting, and then payable to DOR. It is estimated that the 6,228 hours of programming would be required to ASSUMPTION (continued)
develop a new system to handle the functions mentioned at a cost of $207,766. The State Data Center charges to implement the proposed legislation would be $40,530.
The Division of Taxation and Collection recommends that DOR not be included in this legislation other than as a cashiering function. If DOR only cashiers the pharmacy tax, there would be no administrative impact on the Division of Taxation and Collection. However, if the language remains as drafted DOR would need two Tax Processing Tech I's to process the monthly reports and provide Social Services with the quarterly figures to collect.
Officials from the Department of Social Services (DOS) assumes that they would be the primary agency responsible for the administration of the program. The responsibilities of the DOS would include (1) promulgating the rules on the formula for the tax, (2) notifying the pharmacies of the amount of tax due and amount of tax paid on a quarterly basis, (3) facilitating an offset, if requested by the provider, (4) notifying pharmacies of taxes due greater than 90 days, and (5) filing state plan amendment and make system changes to increase dispensing fees.
The Division of Medical Services (DMS) assumes the implementation and maintenance of this program would require one additional FTE. A Management Analysis Specialist II would be needed at an annual cost of $62,676 for salary, fringe benefits and equipment and expense.
The DMS estimates retail pharmacy sales for FY03 at $2.96 billion. This is based on a report produced by Novartis on calendar year 2000 and inflated 3% annually. For the purposes of this fiscal note, DMS assumed that the tax rate would be 1.86%, which would yield revenue of $55,056,000. The Medicaid dispensing fee would be adjusted to equal the tax assessment plus 10% which comes to $60,561,600 ($55,056,000 + ($55,056,000 x 10%)). The GR of $60,561,600 is $23,503,957. The net gain in terms of GR to the state is $31,552,043 ($55,056,600-$23,503,957). The GR of $31,552,043 allows DMS to draw federal funds of $49,746,702 for a total of $81,298,745. DMS assumed a 3% increase in FY04 and FY05.
DMS states the appropriations process governs the amount of the Medicaid dispensing fee. Currently, thereis a specific decision item in the FY 03 budget to increase the Medicaid dispensing fee, which in effect, would equal the tax assessment, plus ten percent. DMS assumes that the budget documents contained in the appropriation process provides the guidance that the Medicaid dispensing fee shall be increased, therefore DMS assumes a dispensing fee should be reflected in this fiscal note.
For purposes of this fiscal note, Oversight assumes the tax assessment would be adjusted annually to yield the same revenue.
| FISCAL IMPACT - State Government | FY 2003 | FY 2004 | FY 2005 |
| ALL FUNDS | |||
| Costs - All funds | |||
| Increased state contributions | ($3,466,200) | ($4,090,116) | ($4,826,337) |
| ESTIMATED NET EFFECT ON ALL FUNDS |
($3,466,200) |
($4,090,116) |
($4,826,337) |
| GENERAL REVENUE | |||
| Transfer in- Department of Social Services | |||
| From Pharmacy Tax Fund | $55,056,000 | $55,056,000 | $55,056,000 |
| Costs - Department of Social Services | |||
| Increased Medicaid pharmacy dispensing fee | ($23,503,957) | ($23,503,957) | ($23,503,957) |
| Costs - Department of Social Services - Division of Medical Services | |||
| Personal Services (1 FTE) | ($22,195) | ($22,750) | ($23,319) |
| Fringe Benefits | ($7,992) | ($8,213) | ($8,418) |
| Expense and Equipment | ($4,554) | ($374) | ($386) |
| Total Costs - Department of Social Services - Division of Medical Services |
($34,741) |
($31,337) |
($32,123) |
| Costs - Department of Revenue | |||
| Personal Services (2 FTE) | ($42,384) | ($43,444) | ($44,530) |
| Fringe Benefits | ($15,262) | ($15,644) | ($16,035) |
| Expense and Equipment | ($17,215) | ($4,678) | ($4,819) |
| Programming | ($248,296) | $0 | $0 |
| Total Costs - Department of Revenue | ($323,157) | ($63,766) | ($65,384) |
| ESTIMATED NET EFFECT ON GENERAL REVENUE |
$31,194,145 |
$31,456,940 |
$31,454,536 |
| CONSERVATION FUND | |||
| Costs - Missouri Department of Conservation | |||
| Costs-Increased state contribution | (Unknown) | (Unknown) | (Unknown) |
| ESTIMATED NET EFFECT ON CONSERVATION FUND* |
(UNKNOWN) |
(UNKNOWN) |
(UNKNOWN) |
| *Expected to exceed $100,000 annually. | |||
| HIGHWAY FUND | |||
| Costs - Department of Transportation | |||
| Increased state contribution | ($610,226) | ($732,272) | ($878,726) |
| Costs - Department of Public Safety - Missouri State Highway Patrol | |||
| Increased State Contribution | ($182,276) | ($218,730) | ($262,476) |
| ESTIMATED NET EFFECT TO HIGHWAY FUND |
($792,502) |
($951,002) |
($1,141,202) |
| PHARMACY TAX FUND | |||
| Income - Department of Revenue | |||
| Pharmacy tax | $55,056,000 | $55,056,000 | $55,056,000 |
| Transfer Out- - Department of Social Services | |||
| To General Revenue | ($55,056,000) | ($55,056,000) | ($55,056,000) |
| ESTIMATED NET EFFECT ON PHARMACY TAX FUND |
$0 |
$0 |
$0 |
| FEDERAL FUND | |||
| Income - Department of Social Services | |||
| Additional federal draw-downs | $49,746,702 | $49,746,702 | $49,746,702 |
| Costs - Department of Social Services - Division of Medical Services | |||
| Personal Services (1 FTE) | ($22,195) | ($22,750) | ($23,319) |
| Fringe Benefits | ($7,992) | ($8,213) | ($8,418) |
| Expense and Equipment | ($4,554) | ($374) | ($386) |
| Total Costs - Department of Social Services - Division of Medical Services |
($34,741) |
($31,337) |
($32,123) |
| ESTIMATED NET EFFECT ON FEDERAL FUND |
$49,711,961 |
$49,715,365 |
$49,714,579 |
| FISCAL IMPACT - Local Government | FY 2003 | FY 2004 | FY 2005 |
| $0 | $0 | $0 |
FISCAL IMPACT - Small Business
Small business that are pharmacies would be required to pay a tax on retail sales.
DESCRIPTION
This proposal imposes a tax upon licensed retail pharmacies in Missouri for the privilege of providing outpatient prescription drugs. The tax rate of up to will be based on monthly gross retail prescription receipts of pharmacies, not to exceed 6%.
The DOS will notify each individual pharmacy of the amount of quarterly tax due. The DOR will promulgate rules to carry-out the provisions of this proposal.
The proposal provides for a credit against the tax on pharmacies for certain taxes paid to the federal government and provides for offsets against any Medicaid payment due the pharmacy from the state.
All revenues from the tax will be deposited in the Pharmacy Tax Fund, created in the act. Moneys in the fund will be used to provide payments for services related to the Medicaid pharmacy program.
DESCRIPTION (continued)
The act contains an emergency clause and a sunset of June 30, 2005.
This legislation is not federally mandated, would not duplicate any other program and would not require additional capital improvements or rental space.
SOURCES OF INFORMATION
Department of Transportation
Department of Social Services
Missouri Consolidated Health Care Plan
Department of Insurance
Missouri Department of Conservation
Department of Public Safety -
Missouri State Highway Patrol
State Treasurer's Office
Department of Revenue
Department of Health
Department of Mental Health
Mickey Wilson, CPA
Acting Director
March 12, 2002