California voters will decide who wins on health care tax: Gavin Newsom or doctors

A two-year cash influx or a long-term investment? Come November it will be up to California voters whether to lock billions of special tax dollars into Medi-Cal — the state's health insurance program for low-income residents — or leave the decision up to lawmakers who might be tempted to use the money elsewhere.

The budget deal Gov. Gavin Newsom signed on Saturday commits roughly $2 billion through 2026 to increase payments to some doctors and health providers who see Medi-Cal patients, encouraging them to accept more low-income patients. The deal relies on a special tax that health insurance companies pay.

But there's a catch in the upcoming election, and it could undo some payment increases that are in the budget. Low-income families with young children are among the people who could lose out.

A ballot initiative supported by nearly the entire health care industry seeks to hold Newsom to a promise made last year to permanently secure that tax money for health care rather than letting future lawmakers use it to offset cuts to prisons, parks, roads and other services.

They say Newsom backtracked on their agreement when he put forward budget plans earlier this year to address the state's multibillion-dollar deficit. The tax is expected to generate more than $35 billion over the next four years. The budget Newsom signed puts most of that money in the state's general spending account.

But if voters pass the ballot initiative in November, they would effectively undo that part of the deal. Under the initiative, Medi-Cal would get more money, and a different but bigger group of doctors and providers would get higher rate increases than what is currently in the budget.

The initiative's main supporters, which include the California Medical Association and Planned Parenthood Affiliates of California, say voters should decide if they want to prevent future lawmakers from using money meant for Medi-Cal on other services.

"The best way to protect our Medi-Cal program and those vulnerable patients is to invest in it," said Jodi Hicks, co-chair of the initiative coalition and president of Planned Parenthood Affiliates of California. "Every day that a patient can see a doctor is a good day, and we need to invest and ensure that's happening for as long as we can."

The money in question comes from a special tax known as the Managed Care Organization, or MCO tax: Health insurers agree to be taxed to get a dollar-for-dollar match from the federal government.

The tax is projected to generate more than $5 billion next year. California has relied on this tax for decades to offset state general fund spending on Medi-Cal, which some experts say is risky given signals from the federal government that it may stop providing matching funds to the state. Doctors have argued that the money — while it lasts — should be used to increase provider payments.

Expanded access to Medi-Cal

For the past decade, California lawmakers have steadily restored Medi-Cal services cut during the Great Recession, added new ones, and expanded eligibility to include all low-income Californians regardless of citizenship. Today, more than 15 million Californians — more than a third of its residents — are enrolled in Medi-Cal, but many doctors say eligibility and benefit expansions have come without commensurate rate increases. As a result, too few providers accept Medi-Cal patients.

Assemblymember Akilah Weber, an obstetrician from La Mesa, said California's failure to increase rates makes it impossible to tackle long-standing health disparities among marginalized communities.

"It's nice to give people insurance, but if they have no providers to go to, we haven't done much," Weber said.

Weber, a Democrat, has not endorsed the ballot initiative. But during recent Assembly budget hearings, she criticized Newsom representatives for walking back earlier promises to increase rates. The budget deal partially reinstates rate increases — which Weber said was a "step in the right direction."

"We need a real show from the state and a commitment that we're ready to support hospitals and doctors and providers," Weber said.

Who wins and who loses in MCO tax

Money from the health care industry tax is an enticing target for groups trying to preserve or expand programs while the state faces a projected two-year deficit of $56 billion. Newsom has proposed increasing the tax twice this year to soften Medi-Cal's cost to the state's general fund.

"This agreement sets the state on a path for long-term fiscal stability – addressing the current shortfall and strengthening budget resilience down the road," Newsom said after the budget deal was announced.

Some of the groups who stand to get rate increases through the new budget include community health workers, private duty nurses, adult and pediatric day centers and children with Medi-Cal at risk of automatic disenrollment. If the ballot initiative passes, these groups won't get any money from the tax, which will instead be used to bump pay in other areas.

"We found a creative way to help since we had no money this year," said Sen. Caroline Menjivar, chair of the Senate health budget subcommittee.

Menjivar, a Democrat from Van Nuys, has been outspoken about not letting spending be dictated by wealthy special interest groups, such as the doctors and hospital lobbies, which support the initiative. Many of the smaller groups included in the budget have tried to get state help for years, but don't have "fancy lobbyists," Menjivar said.

Which California health providers get rate increases under the MCO tax?

The 2024-25 state budget and an upcoming ballot initiative seek to use money generated under the Managed Care Organization tax to increase Medi-Cal payments to providers. Different providers would get increases depending on whether the initiative passes. The tax on health insurance plans is estimated to generate between $6 billion to $9 billion annually. Higher payments went into effect in January 2024 for primary care, maternity care and some mental health services as a result of last year's budget action.

One service that would lose out if the initiative passes is intended to protect young children from losing health insurance. It gives children under age 5 continuous Medi-Cal eligibility, meaning they wouldn't have to re-enroll every year.

About 80 percent of children dropped from coverage annually lose insurance because of missing paperwork, wrong addresses or other procedural red tape, not because they no longer qualify for Medi-Cal, said Mayra Alvarez, president of The Children's Partnership, which advocated for the money in the state budget.

"We are very concerned that there is any proposal that would have the effect of rolling back health care coverage for children," Alvarez said of the ballot initiative. "We want to avoid even one more child losing coverage."

Proponents of the ballot initiative contend it's not a winners vs. losers situation. Past governors and Legislatures have routinely raided the tax to fill state budget gaps. Their logic: The money comes directly from the health care industry and should go back into the health system.

The initiative, Hicks says, prioritizes critical elements of the state's health care delivery system by funding clinics, emergency departments and primary care providers. It also deposits some tax money into the general fund to give legislators flexibility, Hicks said.

A calculated risk for Medi-Cal

Newsom was able to partially increase rates and subsidize Medi-Cal spending in the general fund, in part, because he wants to increase the tax levied on health plans. The more health plans are taxed, the more matching dollars the federal government funnels to California.

But some experts say that's a risky strategy.

Increasing the tax and then diverting the money to the general fund the way California is proposing to do is "really dangerous," said Diana Dooley, who served as California's secretary of Health and Human Services under former Gov. Jerry Brown.

The tax must be approved by the Centers for Medicare and Medicaid Services, which has already warned California that the state is exploiting the system and unlikely to get such a large tax benefit in future years. Federal regulators are eyeing changes to reduce how much money goes to California and the other 17 states that rely on the tax reimbursement policy.

Dooley said the federal government has tried to get rid of this funding stream in the past, even under the Obama Administration.

"They're not very sympathetic to California. They want to say 'California you're so big, you can take care of yourself.'" Dooley said. "We have to dance pretty carefully in our relationship with the federal government."

Representatives for Newsom did not respond to questions about the likelihood that the federal government will approve the tax increase.

Typically lawmakers don't want to cede budgeting control to voters, fiscal and policy experts say.

Previous voter initiatives that tie spending to specific buckets cause problems when lawmakers try to balance the budget during deficit years. Proposition 98, which passed in the 1988 election and allocates roughly 40 percent of the state budget to education, routinely comes under fire during budget season for hamstringing lawmakers.

"If every program runs a ballot initiative, you virtually guarantee immense budget deficits for as far as the eye can see," said Dan Schnur, a former Republican strategist who teaches political communication at the University of Southern California and UC Berkeley. "Every voter spending mandate creates an additional challenge for the Legislature."

Supported by the California Health Care Foundation (CHCF), which works to ensure that people have access to the care they need, when they need it, at a price they can afford. Visit www.chcf.org to learn more.

For more CalMatters stories, visit www.calmatters.org.