Doctors and Insurers Sue Gavin Newsom Over California Healthcare Tax Law
- The state does not get to ignore that law simply because following the law is inconvenient, said Dustin Corcoran, CEO of the California Medical Association, according to reporting...
- The California Medical Association and the California Association of Health Plans filed their complaint directly with the California Supreme Court, as reported by CalMatters.
- Health insurers warn that the state's tax policy will force them to pass costs directly on to consumers.
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, said Dustin Corcoran, CEO of the California Medical Association, according to reporting by CalMatters. That legal dispute escalated Friday, when doctors and health insurers filed a lawsuit against Gov. Gavin Newsom and the Legislature over a newly approved healthcare tax that is expected to drive up insurance premiums.
California Supreme Court Lawsuit Targets Managed Care Organization Tax
The California Medical Association and the California Association of Health Plans filed their complaint directly with the California Supreme Court, as reported by CalMatters. The legal challenge targets the managed care organization tax, known as the MCO tax, which lawmakers approved in June. Plaintiffs argue that the tax circumvents Proposition 35, a voter-approved initiative from 2024 that explicitly limits healthcare taxes and directs any resulting revenue toward specific designated purposes rather than general state spending.
For more than two decades, California has levied taxes on health insurers to help fund Medi-Cal, the state’s public insurance program for low-income residents. Historically, the state taxed private health plans at a lower rate than Medi-Cal insurers, but the June legislation substantially raised the tax on private plans. State officials implemented the change to help balance the affordability concerns of privately insured patients against large-scale federal Medi-Cal cuts, H.D. Palmer, a spokesperson for the Department of Finance, stated in previous remarks reported by CalMatters.
Projected Premium Spikes and Financial Impact on Families
Health insurers warn that the state’s tax policy will force them to pass costs directly on to consumers. According to industry projections cited by CalMatters, the tax will spike insurance premiums by about $100 per person each year. For a typical family of four, that translates to an annual increase of $400, adding to the rate hikes policyholders already face year over year.
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, said Charles Bacchi, CEO of the health plans association, in coverage from CalMatters. For years, doctors, hospitals, clinics, and Medi-Cal insurers maintained that tax revenue should improve Medi-Cal rather than replace general fund spending, pointing out that many providers receive far less than their services actually cost.
Newsom Submits Two Tax Structures for Federal Approval
The dispute stems partly from federal regulatory changes enacted last year regarding taxes used to generate healthcare revenue. Rather than forfeit the funding generated by the tax, Newsom proposed, and the Legislature agreed to submit two separate tax structures to the federal government for approval. One structure complied with the 2024 initiative but faced certain rejection by federal regulators, while the second structure complied with federal regulations while largely bypassing Proposition 35.
Tara Gallegos, a spokesperson for Gov. Newsom, defended the state’s approach in an email reported by CalMatters, stating that the tax allows the state to make necessary changes to fund healthcare. The state disagrees with their claims, and we believe the courts will too, Gallegos said. Newsom previously warned during the 2024 ballot campaign that the initiative would hamstring the state budget, though he stopped short of formally opposing it at the time.
The state disagrees with their claims, and we believe the courts will too.