Feds to decide fate of $2 billion California plan to fund Medi-Cal

The fate of the state’s $2 billion plan to maintain health insurance for low-income and disabled Californians is now in the hands of Mehmet Oz, the celebrity doctor and Republican administrator of the U.S. Centers for Medicare and Medicaid Services.

State Republicans appealed directly to Oz in a letter on Monday, asking him to reject Gov. Gavin Newsom‘s plan to fund Medi-Cal, the state version of Medicaid, by raising a tax on insurance companies such as Kaiser Permanente and Anthem Blue Cross. Oz’s agency has regulatory power over California’s plan for the managed care tax.

The proposed tax would likely increase the cost of a health insurance premium for a single person by about $100 per year, according to a nonpartisan state analysis. It would replace a portion of federal dollars lost to California as the Trump administration blocks states from using a budget maneuver to tap more federal dollars for Medicaid. Advocates say more Californians could lose healthcare coverage without the tax hike.

A White House spokesperson did not say when federal regulators might issue their decision, but took shots at Newsom — a political foil for Trump who is expected to run for president after he leaves the governor’s office in January.

“The administration cannot prejudge an application until it’s thoroughly reviewed, but Gavin Newsom proudly pushing a plan that could jack up insurance premiums is on par for California Democrats,” White House spokesperson Kush Desai wrote in an email.

Christian Beltran, deputy director of legislation for the California Department of Finance, said the proposed tax was crafted to comply with the federal requirements.

“If the federal government denies the proposal,” he said, Newsom’s administration “will review the rationale for the denial, assess options and determine next steps.”

Newsom and state Democrats finalized the plan last week as they searched for ways to comply with elements of President Donald Trump’s signature One Big Beautiful Bill Act, which cracked down on tax maneuvers widely used by states to help finance Medicaid.

Medi-Cal covers 14 million Californians who are low-income or disabled at no cost or reduced prices. When a patient with Medi-Cal goes to the hospital, the cost of their care is split between the state and federal government.

In the last fiscal year, the federal government spent $120 billion on the program, and California spent $45 billion from the state’s general fund. As governor, Newsom has dramatically expanded Medi-Cal to cover more people and more care.

Federal law has long allowed states to tax hospitals and health insurers to inject more funding into their Medicaid programs. For more than a decade, California has taxed health insurance companies and funneled that money to Medi-Cal and the state’s general fund. The California Association of Health Plans, which represents health insurance companies, supported the tax because it mainly benefited Medi-Cal.

California also used a budget maneuver to reimburse insurers, while extracting more funding from the federal government. When the state collected taxes on health plans, it would unlock more matching funds from the federal government. After collecting the additional federal dollars, the state would refund most of the tax to the insurance companies.

In 2024, California made $7.6 billion in net revenue with this arrangement.

“It’s an arcane financing structure that was hidden behind the scenes for a reason,” said Rachel Linn Gish, communications director for the nonprofit Health Access California, which advocates for patients. “It was like, ‘Don’t look how the sausage is made, we’re glad that we’re getting the $8 billion for Medi-Cal.’”

Every state except Alaska uses a similar “provider tax,” according to the nonpartisan research firm KFF. Both Republican and Democratic presidents have tried and failed to eliminate such taxes over the decades.

The Trump administration ultimately clamped down on the practice last year, describing it as a “loophole.”

California Democrats, who anxiously pivoted to focus on “affordability” in the wake of Trump’s 2024 reelection, said the president’s policy forced them to pursue their planned tax hike on insurers. If approved by federal regulators, the tax would bring in billions of dollars less than the previous practice of taxing and reimbursing insurers while taking in federal funds, and the plan will slightly raise insurance premiums for individual patients. That would come atop other costs that drove a double-digit increase in private premiums at the beginning of 2026.

“That is a direct consequence of a federal government that has been relentlessly dismantling safety net programs across the country,” Jesse Gabriel, a Democrat who chairs the powerful Assembly budget committee, said in June.

The California Association of Health Plans opposed the tax increase, and a spokesperson said lawmakers should have pursued other options. The California Medical Association, which represents doctors, said it would raise costs and make it harder for patients to access care.

“Raising health insurance premiums to help balance the state budget is simply robbing Peter to pay Paul,” René Bravo, the association’s president, said in a statement. “It will only make it harder for families to keep coverage and get the care they need.”

California’s current tax will expire at the end of the year, leaving a potential funding gap if federal regulators deny the plan, said Adriana Ramos-Yamamoto, a policy fellow at the left-leaning California Budget and Policy Center. Lawmakers would have to start over, she said, looking for cuts or new revenues to help fund Medi-Cal and the state’s priorities.

As Newsom and state Democrats grapple with the Trump administration’s historic cuts to Medicaid, food assistance, subsidies for buyers of private health insurance policies and more, they have largely postponed planned cuts to the state’s portion of funding for Medi-Cal.

Along with the tax hike, the agreement settled upon by Newsom and lawmakers last week delays the governor’s plans to cut or freeze Medi-Cal coverage for immigrants without legal status until next summer. Those immigrants will keep their dental coverage until July 2027, according to Health Access California.

Immigrants with legal status, including those granted asylum, will have until then to prepare for fee-for-service Medi-Cal coverage. Under those plans, care is not coordinated for patients — an approach that is less expensive for the state.

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