Doctors and Insurers Sue California Over Health Care Tax

Doctors and health insurers have filed a lawsuit against California Gov. Gavin Newsom and the state Legislature, alleging that a recently approved healthcare tax violates a 2024 voter initiative designed to limit such taxes. The complaint, filed with the California Supreme Court by the California Medical Association and the California Association of Health Plans, claims the managed care organization (MCO) tax circumvents the initiative's restrictions and could lead to substantial increases in insurance premiums for Californians.

According to the lawsuit, the state is ignoring a law passed by voters. "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," said Dustin Corcoran, CEO of the medical association.

A spokesperson for Newsom, Tara Gallegos, stated that the tax enables the state to implement changes that fund healthcare. "The state disagrees with their claims, and we believe the courts will too," Gallegos said.

For over two decades, California has taxed health insurers to support Medi-Cal, the state's program for low-income residents. Historically, private health plans were taxed at a lower rate than Medi-Cal insurers. However, in June, the Legislature passed a bill that significantly increased the tax on private plans.

Health insurers have stated that they intend to pass these costs directly to consumers, potentially raising premiums by approximately $100 per person annually. This could result in a $400 yearly increase for a family of four, in addition to typical annual rate hikes.

"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, CEO of the health plans association.

Providers and Medi-Cal insurers have long argued that revenue from the tax should be dedicated to improving Medi-Cal, contending that the state has improperly used the funds to offset general spending. In 2024, these groups advocated for a limited tax specifically for Medi-Cal enhancements.

However, changes to federal regulations regarding taxes used for healthcare revenue prompted Newsom to propose and the Legislature to approve two taxes for federal approval. One tax was intended to comply with the 2024 initiative but faced federal rejection, while the other adhered to federal regulations, largely sidestepping the voter-approved initiative. H.D. Palmer, a spokesperson for the Department of Finance, previously indicated that the state sought to balance concerns about the affordability of private insurance with potential federal cuts to Medi-Cal.