Doctors sue California over largest tax hike in history
A new California healthcare tax could add hundreds of dollars to some families’ annual insurance bills. Now, doctors and health insurance companies are suing the state, arguing the tax itself breaks a law approved by voters.
The California Medical Association (CMA) and California Association of Health Plans (CAHP) filed a lawsuit with the California Supreme Court challenging the state’s new Managed Care Organization, or MCO, tax. They say California lawmakers went beyond the limits set by Proposition 35, a healthcare measure approved by nearly 68% of voters in 2024.
The tax could add $400 a year for a family
California lawmakers approved the new MCO tax in June, and Gov. Gavin Newsom signed it into law as part of the state’s massive $350 billion budget. Insurance companies estimate the tax will add about $8.85 per enrollee each month. That works out to roughly $100 more per year for an individual and $400 for a family of four.
The MCO tax is imposed on managed-care organizations, which include health insurance plans serving both private customers and Medi-Cal patients. The state uses this type of tax to help fund Medi-Cal and draw additional federal healthcare money into California. The problem, according to the lawsuit, is how California structured the new tax.
California voters already put a limit on this
Proposition 35 did not just make the MCO tax permanent under state law. It also put limits on how much could be charged on commercial health coverage and established rules for how the resulting revenue should be used.
Under Prop. 35, the limit on the tax imposed on commercial enrollment is $2.50 per member per month. The new structure created by Senate Bill 125 instead imposes an $8.85-per-enrollee-per-month tax, which the doctors and health plans argue blows past the limit voters approved. They also say the state is diverting money toward plugging holes in the general budget instead of using it according to Prop. 35's healthcare funding requirements.
California might have a reason for rewriting the rules
According to the state, it needs to redesign the MCO tax because of changes to federal Medicaid funding rules. New federal requirements are forcing California to change how its healthcare tax works. State officials have argued that the new structure is necessary to maintain federal funding for Medi-Cal while dealing with a major budget squeeze.
Nevertheless, the lawsuit really doesn't dispute that California needs to adapt. The core argument from the CMA and CAHP is that the state can change the tax while still following Prop. 35.
More than just a healthcare bill
The MCO tax was one of two major new levies approved by California lawmakers as they worked to close revenue gaps in the state's record-breaking budget. The other is a new tax on software downloads, affecting everyday digital products and services. Together, the measures have been described by the California Taxpayers Association as the largest tax increase in California history.
The California Supreme Court will decide what happens next, as doctors and health plans are asking it to declare SB 125 invalid and require the state to create an MCO tax structure that follows both federal requirements and Proposition 35. They also want the state to follow Prop. 35's rules for spending the tax revenue.
Sources: New York Post, Ground News
