California Insurers and Doctors Sue Newsom Over MCO Tax

California health insurers and medical associations filed a lawsuit against Gov. Gavin Newsom’s administration, challenging a recently passed health plan tax that they claim violates a voter-approved initiative limiting healthcare taxes. The legal complaint, filed directly with the California Supreme Court, argues that the managed care organization tax will spike annual insurance premiums by about $100 per person, costing a family of four roughly $400 extra each year.

California Medical Association and Health Plans Sue Over Tax

The California Medical Association and the California Association of Health Plans brought the legal challenge forward to block the managed care organization tax enacted by the state Legislature in June. For more than two decades, California has levied taxes on health insurers to help fund Medi-Cal, the state’s insurance program for low-income residents. Historically, the state taxed private health plans at a lower rate than Medi-Cal insurers, but the recent legislation substantially raised the tax rate on private plans.

Health insurers stated they plan to pass the new costs directly on to consumers, resulting in the estimated $100 per person annual premium increases. California is breaking the law by blowing through a tax limit voters put in place to protect Californians and businesses from higher health care costs, California Association of Health Plans CEO Charles Bacchi said in a statement.

California voters passed Proposition 35 and made it law. The state does not get to ignore that law simply because following the law is inconvenient.

Dustin Corcoran

State Officials Defend Medi-Cal Funding and Federal Rules

Tara Gallegos, a spokesperson for Gov. Gavin Newsom, stated that the tax allows the state to make vital changes to fund healthcare. The state disagrees with their claims, and we believe the courts will too, Gallegos said in an email.

Department of Finance spokesperson H.D. Palmer explained in a previous statement to CalMatters that the state aimed to balance the affordability concerns of privately insured patients against large-scale federal Medi-Cal cuts. The policy dispute stems from federal rule changes enacted by Congress regarding taxes used to generate healthcare revenue. To prevent the loss of tax-generated funds after Congress altered federal rules, Newsom and the Legislature submitted two separate taxes for federal approval: one compliant with the 2024 voter initiative that the federal government would reject, and another complying with federal regulations while largely disregarding the voter-approved measure.

California Supreme Court Reviews Medi-Cal Tax Revenue Dispute

Doctors, hospitals, clinics, and Medi-Cal insurers argued for years that revenue generated from the tax should be dedicated entirely to improving Medi-Cal rather than replacing general fund spending. Proponents of Proposition 35 intended to secure a limited tax reserved strictly for Medi-Cal improvements. With the California Supreme Court now possessing the lawsuit, the timeline for a judicial decision remains unannounced, and it is still unknown how the court will balance voter-approved tax limits against federal funding requirements and state budget adjustments.