Why is Sacramento Raising the Cost of Your Health Insurance?
The state is violating voter-approved Proposition 35, raising taxes on Californians and worsening the state’s health care affordability crisis.
$400+Estimated added premium costs each year for a family of four
The California Association of Health Plans and the California Medical Association have filed a lawsuit to preserve Prop. 35’s voter-approved protections. About the lawsuit →
The Lawsuit
The California Medical Association and California Association of Health Plans have filed a lawsuit challenging the state’s MCO tax structure because it violates Prop. 35, the law approved by nearly 68% of California voters in 2024.
CAHP and CMA are not seeking to eliminate the MCO tax. They are asking the court to require the state to pursue an MCO tax that complies with both state and federal law, use the funds to support improving access to Medi-Cal and preserve Prop. 35’s voter-approved protections.
The Tax
California’s 2026-27 state budget and SB 125 restructure the state’s Managed Care Organization (MCO) tax, violating the law by increasing taxes on commercial health plans by more than triple the cap set by Prop. 35 and diverting the revenue generated to backfill General Fund shortfalls instead of expanding access to Medi-Cal.
The tax increases the tax from the $2.50 per-member-per-month limit established by Proposition 35 to $8.85. According to the nonpartisan Legislative Analyst’s Office, approximately $1.5 billion, or two-thirds of the net funding generated by the renewed tax, would come from private enrollment.
It is estimated that the tax will increase health care premium costs by over $100 per member, per year, or over $400 each year for a family of four.
What Proposition 35 Requires
Prop. 35 was designed to create a stable, dedicated funding source for Medi-Cal and includes key consumer and health care funding protections:
- Permanently establishes the Managed Care Organization (MCO) tax as a funding mechanism for Medi-Cal pending federal approval.
- Caps the tax on commercial health coverage to $2.50 per member, per month.
- Requires the funds to be spent on increasing access to Medi-Cal, not the general fund.
- Requires a three-fourths vote of the Legislature to amend the law.
How the Restructured MCO Tax Conflicts With Prop. 35
The state budget included a flat tax of $8.85 per member, per month on commercial health coverage, which is more than three times the limit set by Prop. 35.
Prop. 35 requires MCO tax revenue to be used to expand access to Medi-Cal care. Instead, the state is using those dollars to backfill the General Fund, diverting resources away from patients who need access to care.
Prop. 35 can only be amended by a three-fourths vote of the Legislature, and any change must further the initiative’s purpose. The vote on this budget trailer bill did not meet that threshold.
Why This Matters to Californians
A tax on health coverage doesn’t stop with health plans.
Higher taxes on commercial health coverage ultimately means higher premiums for California families and employers.
Rather than following the law under Prop. 35, the state is using a health care tax on working families to solve the state’s budget shortfall, leaving long-term Medi-Cal funding at risk to cover this year’s shortfall.
When Medi-Cal is underfunded, all California patients feel the consequences.
Protecting Medi-Cal funding isn’t just about protecting coverage for Medi-Cal patients. It’s about protecting access to care for all Californians.
What the Press Is Saying
“Proposition 35 also requires that much of the revenue be used to expand Medi-Cal services and increase provider rates, rather than offset general fund spending on the program.”
“Mr. Newsom plans to use his revised tax to backfill the general fund rather than increase payments to providers. His plan also violates a 2024 referendum that caps the tax on commercial health plans at $2.50 a month per enrollee and thus could draw a legal challenge.”
News Coverage
Resources
Frequently Asked Questions
California’s MCO Tax
What is the Managed Care Organization (MCO) tax, and why is it important to Medi-Cal?
The MCO tax is a funding mechanism that helps California finance Medi-Cal. The state taxes managed care organizations allowing California to draw down additional federal matching funds. It has been an important source of Medi-Cal financing for many years.
What is Proposition 35, and what did it change?
Approved by nearly 68% of California voters in November 2024, Proposition 35 made the MCO tax permanent under state law, subject to continued federal approval. It established limits on the tax imposed on commercial health plan enrollment, dedicated revenue to specified Medi-Cal purposes and established requirements for amending the voter-approved law.
Proposition 35 also changed how the state can use MCO tax revenue. Historically, the tax helped cover Medi-Cal costs that otherwise would have required General Fund dollars. Proposition 35 established dedicated funding requirements intended to direct more of that revenue toward specified health care services and investments.
What changed recently with the MCO tax?
New federal requirements under H.R. 1 mean California must adjust its existing MCO tax structure. In response, the state adopted a new MCO tax structure through its 2026-27 budget and SB 125, which substantially increases the tax tied to commercial health coverage. The new structure also uses MCO tax revenue to cover costs that otherwise would have been paid with General Fund dollars, freeing those dollars for other spending priorities rather than directing them toward additional Medi-Cal investments.
Under SB 125, the commercial-enrollment tax is $8.85 per enrollee per month, compared with the $2.50 limit established by Proposition 35. CMA and CAHP contend that the new structure and use of tax revenue violate the voter-approved law.
How could the state’s MCO tax affect Californians with commercial health coverage?
Health plans are responsible for paying the MCO tax, but higher taxes on health plan enrollment increase the cost of providing commercial health coverage and can ultimately put additional pressure on premiums paid by California’s working individuals, families and employers.
According to the Legislative Analyst’s Office, approximately $1.5 billion, or two-thirds of the renewed tax’s net funding, would come from commercial enrollment.
When Medi-Cal is underfunded, all California patients feel the consequences. Prop. 35 requires MCO tax revenue to be used to expand access to Medi-Cal care. Instead, the state is using those dollars to backfill the General Fund, diverting resources away from patients who need access to care.
Diverting resources away from Medi-Cal leaves patients without timely access to care, even for those with commercial plans. Patients who cannot get care end up in already-crowded emergency rooms, increasing wait times for everyone. And when hospitals and clinics struggle financially, communities can lose critical providers altogether.
Protecting Medi-Cal funding isn’t only about protecting coverage for Medi-Cal patients. It’s about protecting access to care for all Californians.
Understanding the Lawsuit
Why are CMA and CAHP suing the state?
CMA and CAHP support the MCO tax as an important source of Medi-Cal funding. The lawsuit challenges the state’s tax structure, which circumvents voter-approved Proposition 35 in three main ways: it exceeds the voter-approved limit on taxes tied to commercial health coverage, does not follow Proposition 35’s requirements governing how tax revenue is used and was enacted without the three-fourths legislative vote required for amendments to Proposition 35.
California can respond to the new federal requirements without disregarding the protections voters established.
Does the lawsuit seek to eliminate the MCO tax or take funding away from Medi-Cal?
No. CMA and CAHP support preserving the MCO tax as a sustainable source of Medi-Cal funding. The lawsuit challenges how the state has structured its tax, not the existence of the tax itself.
Our goal is an MCO tax that complies with both Proposition 35 and federal law, preserves dedicated funding for health care and avoids unnecessarily increasing costs for Californians with commercial health coverage.
What are CMA and CAHP asking the court to do?
We are asking the court to declare SB 125 invalid to the extent it conflicts with Proposition 35, require the state to pursue an MCO tax structure that complies with both state and federal law before the federal transition period for compliance with H.R. 1 ends on Dec. 31, 2026, and ensure MCO tax revenues are handled consistently with Proposition 35’s dedicated funding requirements to increase access to Medi-Cal care.
Why can’t California simply keep its existing MCO tax?
H.R. 1 changed federal requirements governing Medicaid provider taxes, including restrictions on tax structures that impose disproportionately higher rates on Medicaid enrollment than on other coverage.
California’s existing MCO tax remains federally authorized through Dec. 31, 2026. The state therefore needs to develop a structure that can satisfy the new federal requirements. CMA and CAHP contend that California can do so while also complying with Proposition 35.