California lawmakers approved a bill this month to restructure the state’s managed care organization (MCO) tax, a move aimed at maintaining crucial federal funding for Medi-Cal, the state’s Medicaid program. The bill, Senate Bill 125, faces criticism from health insurers and some legislators who warn it could lead to higher premiums for Californians with private health insurance.

The state’s MCO tax, which health plans pay to help fund Medi-Cal, must now comply with new federal rules that prohibit states from charging Medicaid plans a higher tax rate than private insurers. Until recently, California imposed a higher tax on Medi-Cal managed care plans compared to commercial plans. SB 125 lowers the tax rate on Medi-Cal plans and raises it for private insurance plans to a uniform rate of $8.85 per enrollee per month, projected to generate approximately $1.5 billion annually from private insurers.

If health plans pass the full cost of the tax to consumers, the Legislative Analyst’s Office estimates the change could increase private insurance premiums by about 1.5%, potentially adding around $100 per year in premiums for individual consumers, or as much as $400 annually for a family of four. The California Association of Health Plans has echoed these concerns, stating the tax increase is likely to be incorporated into premium rates as part of standard actuarial calculations.

Supporters emphasize the necessity of the tax adjustment to preserve federal matching funds that support Medi-Cal. The Department of Finance indicated the $8.85 monthly assessment was carefully chosen to balance revenue generation with affordability, expecting it to raise $2.3 billion annually. Of that, $2 billion would sustain current Medi-Cal services, while $300 million would fund prior rate increases for providers in key areas like primary, maternal, and mental health care.

Senate President Pro Tem Monique Limón acknowledged that the solution is imperfect but emphasized the urgency given federal funding changes. “We have as a Senate been very clear that we needed revenue,” she said, calling the measure a pragmatic response to federal requirements.

However, the tax plan has met opposition from some lawmakers and health industry groups. Sen. Akilah Weber Pierson described the proposal as “extremely problematic,” voicing concern about its economic impact on families despite voting in favor. The California Association of Health Plans, physician groups, and the California Hospital Association have urged the Legislature to reconsider, citing conflicts with Proposition 35, a 2024 voter initiative that limits taxes on private health plans and requires revenue to expand Medi-Cal services rather than offset general fund spending.

Critics argue that the tax effectively shifts costs to private consumers without expanding access or improving care. Dr. René Bravo, president of the California Medical Association, warned that raising premiums to balance the state budget could make coverage less affordable for families.

The changes follow a federal crackdown on the practice some officials have described as states using provider taxes to shift Medicaid costs onto the federal government. The Centers for Medicare and Medicaid Services finalized rules this year barring states from taxing Medicaid managed care plans at higher rates than commercial plans.

Governor Gavin Newsom is expected to sign the bill as part of the broader state budget. The measure will then require approval from federal agencies before taking effect. Observers note that federal sign-off is uncertain, and California faces the challenge of ensuring its tax plan complies with tightened federal restrictions while securing sufficient revenue to sustain Medi-Cal.

Consumer advocates stress the importance of transparency and directing tax revenues toward healthcare improvements rather than general budget needs. “What we don’t find acceptable is to have individual healthcare consumers pay increased premiums to support the MCO tax, and then just have that money backfill the general fund,” said Kiran Savage-Sangwan, executive director of the California Pan-Ethnic Health Network.