Sen. Dawn Gile (D-Anne Arundel) knew she faced a complex job — pushing legislation that could unravel years of missed tax collections on captive insurance policies kept in offshore accounts by the state’s nonprofit hospitals.
The job got more complex when drafting errors in the bill she proposed, Senate Bill 890, forced her to heavily amend her own bill in committee, and then when senators repeatedly asked for more time to study the issue when it hit the floor.
Gile and the Senate bowed to the obvious Thursday, agreeing to a new amendment that puts collection of the tax on the hospitals’ captive insurance on hold for two years. During that time, the Maryland Insurance Administration will study the issue and report back to lawmakers before the 2028 General Assembly session.
“Because there’s not a lot of clarity to what we have right now, based on what the existing investigations that MIA has ongoing,” Gile said on the Senate floor Thursday, “and out of, I think of concern too, for the fiscal health of our health care system and especially our rural hospitals going forward, we thought the best approach would be … doing a moratorium.”
One lawmaker called the delay a “good compromise” after questions were raised about whether nonprofit hospitals have dodged millions in taxes on money in offshore insurance accounts for more than two decades — or if those funds are even subject to state tax collections in the first place.
The version of the bill calling for a moratorium could be up for a final Senate vote next week.
At issue is what’s known as “captive insurance,” which is when a company forms its own insurance company — a captive — to help cover financial losses that are not covered by commercial insurance. Hospitals may form a captive for the purpose of covering the costs of medical malpractice claims and cybersecurity risks, for example.
Maryland does not have a regulatory framework to let companies establish captives within the state. That’s why decades ago Maryland nonprofit hospitals set up captives in offshore locations such as the Cayman Islands, hospital representatives testified during hearings on the bill earlier this year.
But in the years since, there’s been questions about whether the Maryland Insurance Administration should have been collecting money from nonprofit hospitals with offshore captive insurance under a statute that subjects other nonprofits to those taxes.
Most hospitals believed they were not subject to the tax. But some other nonprofit organizations may have been paying that tax, raising questions on whether the MIA was enforcing the tax or might have been leaving millions owed to the state. A national whistleblower asserts that as much as $3 billion of nonprofit hospital funds are sitting in those offshore captives.
The proposed solution, SB 890, initially came in with a full exemption for nonprofit hospitals from paying state taxes on captive insurance. Hospital officials testifying on the bill said there were “a couple of drafting errors” that resulted in a fiscal note showing a loss of millions in state revenue.
Hospitals offered amendments that would have required them to pay a 3% tax going forward, but they did not include any retroactive penalties for taxes not paid in the past. The Senate Finance Committee approved that version of the bill last week and sent it to the full Senate.
But after several conversations with the Maryland Hospital Association, the Maryland Insurance Administration, other stakeholders and lawmakers, Gile offered the amendment to put a two-year moratorium on the tax collection for all nonprofits.
“I think this is a good compromise,” Sen. Justin Ready (R-Frederick and Carroll) said, adding that it’s important to “get to the bottom” of the issue.
Some lawmakers are also worried that impending state and federal policy changes on how hospitals are paid in the coming years will threaten their ability to stay open, particularly for those in rural counties, which is why some wanted just move forward with a prospective fix and not require hospitals cough up millions of dollars suddenly.
“We’re really concerned about the financial health of our hospitals right now” Gile said after the Senate approved her amendment to create a tax moratorium. “We need to give our hospitals some breathing room.”
If approved by the Senate next week, SB 890 would still need to go to the House for consideration. A House version of the bill, House Bill 1228, has not received a vote in the Ways and Means Committee.
