California doctors and health insurers sued Gov. Gavin Newsom and the state Legislature on Friday, contending that a new tax on health plans violates a tax limit voters wrote into law in 2024.
The California Medical Association and the California Association of Health Plans filed the complaint directly with the California Supreme Court. They argue that the tax, known as the managed care organization tax or MCO tax, circumvents Proposition 35, the initiative that restricts health care taxes and steers the revenue to specific purposes.
“California voters passed Proposition 35 and made it law,” Dustin Corcoran, the medical association’s chief executive, said in a statement. “The state does not get to ignore that law simply because following the law is inconvenient.”
Lawmakers passed the tax in June, raising the levy on private health plans as the state braced for large federal cuts to Medicaid. Insurers say they will pass the cost straight to customers: about $100 more per person each year, or $400 for a family of four, on top of the rate increases people typically see from year to year.
“California is breaking the law by blowing through a tax limit voters put in place to protect Californians and businesses from higher health care costs,” said Charles Bacchi, the chief executive of the health plans association.
California has taxed health insurers for more than 20 years to help fund Medi-Cal, its insurance program for low-income people, and has historically charged private plans at a lower rate than Medi-Cal insurers. For years, doctors, hospitals, clinics and Medi-Cal insurers argued that the revenue should go toward improving Medi-Cal, where they said provider payments fell short of what care costs, instead of replacing general fund spending. In 2024, they asked voters to approve a limited tax reserved for Medi-Cal improvements, and voters did.
Then Congress changed the rules last year on the taxes states use to generate health care revenue. Rather than lose the money, Mr. Newsom proposed, and the Legislature agreed, to submit two versions of the tax to the federal government for approval: one that complied with Proposition 35 but would be rejected, and one that met federal regulations while largely disregarding the initiative.
Mr. Newsom stopped short of opposing the initiative when it was on the ballot in 2024, but warned at the time that it would “hamstring” the state budget. His office did not immediately respond to a request for comment. H.D. Palmer, a spokesman for the Department of Finance, said in an earlier statement to CalMatters that the state wanted to balance affordability for privately insured patients against the scale of the federal Medi-Cal cuts.