Doctors and health insurers filed a lawsuit Friday against Governor Gavin Newsom and the Legislature, alleging they violated state law by approving a new healthcare tax. The complaint, filed with the California Supreme Court, claims this tax could substantially increase health insurance premiums for residents across California.
The lawsuit, brought by the California Medical Association and the California Association of Health Plans, specifically targets a recently passed tax on health plans known as the managed care organization (MCO) tax. The plaintiffs argue that this tax circumvents a 2024 voter-approved initiative (Proposition 35) that limits healthcare taxes and designates how revenue from such taxes must be used.
Dustin Corcoran, CEO of the medical association, stated that "California voters passed Proposition 35 and made it law. The state does not get to ignore that law simply because following the law is inconvenient.” The CEO of the health plans association, Charles Bacchi, further asserted that the state was exceeding a tax limit voters had established to shield Californians and businesses from increased healthcare expenses.
Health insurers have indicated they plan to pass the increased cost directly to consumers. This could result in a premium hike of approximately $100 per person each year. For a family of four, this translates to a potential annual increase of $400, in addition to typical year-to-year rate adjustments.
Tara Gallegos, a spokesperson for Governor Newsom, defended the tax, stating it enables the state to fund healthcare changes. “The state disagrees with their claims, and we believe the courts will too,” Gallegos said in an email. H.D. Palmer, a spokesperson for the Department of Finance, previously noted that the state aimed to balance the affordability concerns of privately insured patients with significant federal Medi-Cal cuts.
For more than two decades, California has imposed taxes on health insurers to help finance Medi-Cal, the state's health insurance program for low-income individuals. Historically, private health plans were taxed at a lower rate compared to Medi-Cal insurers. However, in June, the Legislature passed legislation that significantly increased the tax burden on private plans.
The 2024 initiative, which Governor Newsom stopped short of opposing but warned would “hamstring” the state budget at the time, was the culmination of years of advocacy. Doctors, hospitals, clinics, and Medi-Cal insurers had long argued that tax revenue should be dedicated to improving Medi-Cal services. They contended that the state was improperly using these funds to replace general fund spending, leading to many providers being paid significantly less than the actual cost of their services. In 2024, these groups sought voter approval for a limited tax specifically reserved for Medi-Cal enhancements.
Last year, Congress modified federal regulations concerning taxes used to generate revenue for healthcare, including those imposed on health plans. To prevent the loss of tax revenue due to these new federal rules, Governor Newsom proposed, and the Legislature subsequently approved, the submission of two distinct taxes to the federal government for approval. One tax was designed to comply with the 2024 voter initiative but was expected to be rejected by federal authorities. The other was structured to comply with federal regulations, largely disregarding the provisions of the initiative. This second tax is at the center of the current lawsuit.
