California lawmakers have approved a proposal to overhaul a health insurance tax that helps fund Medi-Cal, a move intended to preserve federal dollars for the state’s Medicaid program but one that health industry leaders warn could raise premiums for residents with private coverage.
The bill, Senate Bill 125, responds to new federal limits on how states may tax health plans. California’s managed care organization tax, known as the MCO tax, is charged to health plans that coordinate care for their members. Until now, California has taxed Medi-Cal plans at a higher rate than private health plans, allowing the state to generate billions of dollars annually and draw additional federal matching funds for Medi-Cal.
Under the revised plan approved by the Legislature, Medi-Cal plans and private plans would be taxed at the same monthly rate: $8.85 per enrollee. If signed by Gov. Gavin Newsom and approved by the federal government, the change would shift more of the tax burden onto privately insured Californians while producing less revenue overall than the current structure.
The issue matters across Southern California and the Inland Empire, where many families already face rising health care costs and where Medi-Cal covers large numbers of low-income residents, children, seniors and people with disabilities.
Senate President Pro Tem Monique Limón, a Santa Barbara Democrat, acknowledged this week that lawmakers were not choosing from ideal options. She said the Senate still had concerns, but the state needed to act quickly to protect revenue amid changes at the federal level.
“We have as a Senate been very clear that we needed revenue,” Limón told reporters, describing the decision as one lawmakers believed they could manage while federal rules continue to shift.
The federal changes stem from a tax and spending law passed by Congress last summer. Those rules restrict provider taxes, including taxes on health plans. Under the previous structure, California received nearly $8 billion a year from the MCO tax, according to the Legislative Analyst’s Office. The new federal limits are expected to reduce that amount by billions of dollars.
The Legislature’s proposal would not directly increase insurance premiums. Instead, it would raise taxes on private health plans, which say they would pass those costs on to customers.
The Legislative Analyst’s Office has estimated that if health plans pass along the full cost, privately insured Californians could see monthly premiums rise by about 1.5%. That would come in addition to routine annual premium increases.
The California Association of Health Plans estimates the added tax could cost consumers roughly $100 more per year in premiums. For a family of four, the increase could amount to about $400 annually.
Charles Bacchi, president of the association, said taxes and fees are factored into the administrative portion of insurance premiums.
“That is just actuarial science,” Bacchi said. “So when you increase taxes on health plans and insurers, that is built into premium rates and the customer pays it.”
The Newsom administration has said the proposal seeks to balance affordability concerns for people with private insurance against the need to maintain funding for Medi-Cal as federal support shrinks.
H.D. Palmer, a spokesperson for the state Department of Finance, said the $8.85 monthly assessment was chosen because it would generate about $2.3 billion a year, similar to the amount California received before 2023 to support Medi-Cal. About $2 billion would go toward existing Medi-Cal services, while roughly $300 million would support previously approved rate increases for providers offering primary care, maternity care and mental health services to Medi-Cal patients, Palmer said.
Some lawmakers voiced reservations even as the bill moved forward. Sen. Akilah Weber Pierson, a San Diego Democrat and physician, called the proposal “extremely problematic” during a Wednesday hearing and said she was uncomfortable with the cost it could impose on families. She ultimately voted for the measure Thursday.
Health plans, physician groups and the California Hospital Association urged lawmakers to reject the proposal in its current form.
After the Assembly approved the bill, the California Association of Health Plans criticized the vote, saying it clashed with state leaders’ stated focus on affordability.
“It is difficult to reconcile those statements with a vote that will increase health insurance premiums on the very people policymakers say they are trying to help,” the group said.
Opponents also argue the proposal conflicts with Proposition 35, the 2024 voter-approved measure that limits taxes on private health plans and requires much of the revenue to be used to expand Medi-Cal services and increase provider rates, rather than backfill general fund spending.
Dr. René Bravo, president of the California Medical Association, said using higher insurance costs to help stabilize the state budget would hurt families.
“Raising health insurance premiums to help balance the state budget is simply robbing Peter to pay Paul,” Bravo said. “It will only make it harder for families to keep coverage and get the care they need.”
California is being forced to redesign the tax because of new federal rules issued under last year’s congressional spending plan. The state’s current approach taxed Medicaid plans more heavily than commercial plans, then used the proceeds to draw down federal matching funds.
Federal officials under the Trump administration have argued that states have used such arrangements to shift Medicaid costs to the federal government. The Centers for Medicare and Medicaid Services issued a final rule earlier this year barring states from taxing Medicaid plans at a higher rate than private plans.
Now that the Legislature has approved the revised tax plan, Newsom must sign it before California can seek federal approval. Budget observers expect him to do so because the proposal closely mirrors the administration’s own plan.
Consumer advocates say preserving MCO tax revenue is essential to keeping Medi-Cal stable. But they also say lawmakers should ensure that any added costs paid by privately insured residents are used to improve health care, not simply to reduce pressure on the state budget.
Kiran Savage-Sangwan, executive director of the California Pan-Ethnic Health Network, said consumers should not be asked to pay higher premiums only to have the money backfill the general fund.
The largest remaining uncertainty is whether the federal government will approve California’s revised tax structure. Without that approval, the state would not be able to continue using the tax to draw down federal matching funds.
Adriana Ramos-Yamamoto, a senior policy fellow at the California Budget and Policy Center, said lawmakers’ task is to craft a plan that complies with the new federal rules. But approval is not assured.
“It’s not a guarantee that the federal government will approve our new MCO tax proposal,” she said.
Original source: CalMatters
