IN SUMMARY
- In June, lawmakers approved a healthcare tax aimed at addressing cuts to federal Medicaid, potentially raising premiums for Californians.
- In a new lawsuit, the California Medical Association and the California Association of Health Plans argue that this tax contravenes Proposition 35, which voters approved in 2024.
On Friday, a group of doctors and health insurers initiated legal action against Governor Gavin Newsom and the Legislature, claiming they acted unlawfully by passing a healthcare tax that might significantly boost insurance premiums for residents of California.
The lawsuit asserts that the newly enacted managed care organization tax, or MCO tax, undermines a 2024 ballot initiative designed to restrict healthcare taxes and mandates that the revenue be used for specific purposes. The California Medical Association, along with the California Association of Health Plans, has lodged this complaint with the California Supreme Court.
“California voters enacted Proposition 35 into law. The state cannot simply ignore that law because it finds compliance troublesome,” said Dustin Corcoran, CEO of the medical association, in a statement.
As for Newsom’s office, they have not provided immediate comments. However, H.D. Palmer, a spokesperson from the Department of Finance, mentioned in an earlier statement that the state seeks to reconcile the affordability issues affecting privately insured patients with the substantial federal Medi-Cal cuts.
Newsom had previously cautioned that the 2024 initiative could “hinder” the state’s budget, although he refrained from outright opposing it during the election.
For over two decades, California has imposed taxes on health insurers to finance Medi-Cal, the state’s support program for low-income individuals. Historically, the taxation rates have been lower for private health plans compared to those for Medi-Cal insurers. Yet, in June, the Legislature enacted a bill that significantly raised the tax for private plans.
Health insurers indicated that they would transfer these costs directly to consumers, leading to an increase in premiums by approximately $100 annually per individual. Consequently, a family of four could be looking at an increase of $400 per year, in addition to the usual annual rate hikes.
“California is disregarding the law by exceeding the tax limitations that voters instituted to safeguard Californians and businesses from rising healthcare expenses,” stated Charles Bacchi, the CEO of the health plans association.
For years, healthcare providers, including doctors, hospitals, clinics, and Medi-Cal insurers, have insisted that proceeds from this tax should be allocated to enhance Medi-Cal. They argued that the state has been misappropriating these funds to compensate for general fund shortfalls, resulting in providers often being reimbursed less than the actual cost of their services. In response, they sought voter approval in 2024 for a limited tax earmarked specifically for improvements to Medi-Cal.
However, after Congress amended the regulations around taxes that fund healthcare, including those levied on health plans, Newsom proposed, and the Legislature agreed to, submit two different tax proposals to the federal authorities. One would align with the 2024 initiative but is expected to be rejected by the federal government, while the other would follow federal guidelines, largely ignoring the initiative.
