Your guide to Proposition 35: Taxing managed care organizations

Proposition 35 would seek to permanently impose a tax on health insurance providers known as managed care organizations, which provide or arrange services for a monthly payment. The ballot measure would also designate how the money can be used.

The proposal comes as California lawmakers have expanded the pool of people eligible for Medi-Cal, the California Medicaid program, to include those who meet income criteria regardless of their immigration status. Healthcare providers and advocacy groups have complained, however, that California does not pay adequately for providing care under Medi-Cal. Proposition 35 aims to boost that funding.

This isn’t a new thing: California has imposed an “MCO tax” off and on over the years. The latest version of the tax is expected to generate between $7 billion and $8 billion annually, the Legislative Analyst’s Office has estimated.

Health plans are charged the tax based on how many people they serve, with higher rates charged for Medi-Cal recipients than those with commercial coverage.
California can reap more federal money as a result of charging the tax.

In summer 2023, Gov. Gavin Newsom and state lawmakers decided to renew the tax to help fund Medi-Cal as the state made more Californians eligible for coverage.

Lawmakers said they would dedicate some of that tax revenue to increase the reimbursement rates that healthcare providers are paid under Medi-Cal. Healthcare providers said boosting rates was crucial to prevent Medi-Cal patients from facing shortages of providers and long waits.

This year, however, Newsom sought to repurpose billions of dollars from the MCO tax to cover other Medi-Cal program costs. The budget plan ultimately agreed to by state lawmakers included money for Medi-Cal rate increases for healthcare providers, but less than what was previously planned.

Proposition 35 would seek to make the MCO tax permanent, although California would still need federal approval to keep charging the tax.

It would spell out how the MCO tax revenue can be used. And it would also limit the ability of California lawmakers to reroute such funding for other uses, requiring at least three-quarters of members from each house — the state Assembly and Senate — to amend the measure in the future.

It would also set up a new committee that would advise the Department of Health Care Services on efforts supported by the tax money, which would include people representing physicians, hospitals, clinics, organized labor and other groups involved in healthcare.

In the short term, the ballot measure would require the money to be allocated in generally the same way that California had been planning before Newsom sought to repurpose the funds.

That would include increases in the reimbursement rates paid to healthcare providers under the Medi-Cal program and funding to help train healthcare workers, among other efforts. Some money would go to help cover costs for Medi-Cal in the general fund, the state account that pays for most public services.

Starting in 2027, the ballot measure sets out a formula for funding different programs, with some spending hinging on how much money the tax pulls into state coffers.

The Legislative Analyst’s Office said in an analysis last year that the ballot measure could give state lawmakers less flexibility to balance the California budget in the future. Newsom wanted the coalition backing the measure to take it off the ballot, The Times has reported.

The state has also passed a budget that relies on the money from the MCO tax. Passing Proposition 35 could unravel some of those existing plans for the funding, according to provisions in the health budget bill.

The state legislative analyst estimated that in the short term, the ballot measure would increase funding for Medi-Cal and other health programs between roughly $2 billion and $5 billion annually.

It would also increase state costs between $1 billion and $2 billion annually in upcoming years, the legislative analyst concluded.

Proposition 35 is backed by the Coalition to Protect Access to Care, which includes a range of groups involved in healthcare. Among them are the California Hospital Assn., the California Medical Assn., the California Primary Care Assn., Planned Parenthood Affiliates of California, labor unions, emergency responders and community health centers. Both the California Democratic Party and the California Republican Party support it.

The ballot measure is an opportunity to “invest in providers in a way that would allow folks to expand the patient population” they serve, and for providers already assisting Medi-Cal patients to “expand the services they provide,” said Jodi Hicks, president and chief executive of Planned Parenthood Affiliates of California.

It’s important that “the system as a whole is funded so that patients can get the care they need,” Hicks said. For instance, she said, if a Medi-Cal patient can get a mammogram at a clinic, specialty care also needs to be available if that mammogram shows something is wrong.

California has made strides in expanding who is eligible for Medi-Cal and what services are covered, “but we need to guarantee for folks that if they are on the program, they are able to access those services.”

Erin Kelly, executive director of the Children’s Specialty Care Coalition, told lawmakers that “we fear that without the passage of Prop. 35, Medi-Cal provider rates will remain vulnerable to cuts each year, and medical groups will not have the certainty and the predictability to make meaningful and sustainable investments needed to improve access within the Medi-Cal program for children in need of specialty care.”

The Children’s Partnership, an advocacy group focused on the needs of children, said there is no question that California pays too little to healthcare providers under the Medi-Cal program. But its president, Mayra Alvarez, criticized Proposition 35 for restricting how the funding can be used and said those decisions had been left to a group of healthcare provider organizations “with little voice from the community.”

The group is also concerned that Proposition 35 would change which Medi-Cal services and programs get funding increases in coming years. For instance, the Children’s Partnership warned it would unravel plans funded in the state budget to ensure continuous coverage under Medi-Cal for children under the age of 5.

Other groups opposed include the California Pan-Ethnic Health Network, the League of Women Voters of California, Courage California, and the California Alliance for Retired Americans.

Some groups, while not taking an official position on Proposition 35, have also voiced concerns about it: At an August hearing, the Western Center on Law and Poverty said it was worried that restricting future flexibility in budgeting could result in cuts to safety net programs when state budgets were tight.

The anticipated changes in which programs would get funding increases if Proposition 35 passes have also troubled groups that provide day care to adults and nursing care at home for medically complex children.

Hicks, responding to such concerns, said Proposition 35 guarantees that some of the tax money would go into the general fund, where state leaders “would have that flexibility to spend those dollars in healthcare.” She said the measure does not bar lawmakers from approving funding for other programs they want to support.

Top donors are healthcare industry groups such as Global Medical Response Inc. with $13 million, California Hospitals Committee on Issues sponsored by California Assn. of Hospitals and Health Systems with $15 million, and the California Medical Assn. with $9.3 million. Local Planned Parenthood committees have contributed more than $1 million combined.

The Times has not identified any opposing committees.