The California Medical Association and the California Association of Health Plans say a rate set by SB 125 conflicts with Proposition 35, approved by voters. Insurers warn the charge could add about $100 a year per person to costs.
The two industry groups filed a lawsuit against Gov. Gavin Newsom and state officials in the California Supreme Court. They are challenging the managed care organization tax, known as the MCO tax, and argue that the structure established under SB 125 bypasses limits set by Proposition 35.
Voters approved Proposition 35 in November 2024. The measure made the health-plan tax permanent, directed its revenue to specified Medi-Cal purposes and set a limit on the burden imposed on commercial coverage. Under SB 125, the charge on commercial plans is $8.85 per enrollee each month, according to the California Medical Association. Proposition 35 sets a $2.50 monthly limit per member.
The associations say changes affecting Proposition 35 must receive a three-quarters vote in the Legislature. They also argue the tax revenue must be spent on the Medi-Cal purposes specified by the measure. The medical association said voters put those rules into law and the state cannot disregard them.
Insurers estimate that the new charge could raise annual costs by about $100 per person. A family of four could pay roughly $400 more a year, on top of typical premium increases. Those figures are industry estimates. The groups say insurers will pass the added costs on to customers.
The Newsom administration rejected the plaintiffs’ arguments. Tara Gallegos, a spokesperson for the governor, told CalMatters that the tax allows the state to make changes to fund health care and said the administration believes the courts will reject the claims.
The plaintiffs asked the court to invalidate SB 125 and require the state to adopt a tax structure by Dec. 31 that complies with both Proposition 35 and federal rules. The dispute followed federal changes to health-care financing rules that complicated the previous tax structure.