31 Jul Proposition 35: A Tax on Managed Care Organizations
Proposition 35 is a ballot measure in California that seeks to enforce a long-term tax on managed care organizations (MCOs) that provide healthcare services for the Medicaid population. The measure also outlines specific ways the tax revenue must be used.
Context and Background
The ballot initiative comes amid recent expansions to California’s Medicaid program. Lawmakers have expanded Medi-Cal eligibility to include individuals who meet income requirements, regardless of immigration status. Despite this expansion, many providers and advocacy groups argue that reimbursement rates under Medi-Cal are inadequate to cover the cost of care. The ballot measure aims to address this funding shortfall.
What is the MCO Tax?
California has traditionally applied an MCO tax periodically. In the summer of 2023, Governor Gavin Newsom and state legislators revived this tax to support Medi-Cal, particularly as more residents became eligible for Medi-Cal coverage. According to the Legislative Analyst’s Office, the tax will generate between $6 billion and $9 billion annually through 2026.
At first, legislators agreed to use part of the tax revenue to increase the reimbursement rates for healthcare providers serving Medi-Cal patients. These increases were seen as necessary to avoid provider shortages and long patient wait times. However, Governor Newsom later suggested reallocating billions from the MCO tax to pay for other Medi-Cal expenses. Ultimately, the agreed-upon budget included funds for Medi-Cal provider rate increases, though less than originally planned.
Key Provisions of Proposition 35
Proposition 35 seeks to define the allocation of MCO tax revenue clearly. It limits California lawmakers’ power to redirect these funds for other purposes, requiring a supermajority—three-quarters of the members—from both the state Assembly and Senate to make any changes to the measure in the future.
The proposition also proposes creating a new advisory committee for the Department of Health Care Services. This committee would include individuals from various sectors of the healthcare industry, such as physicians, hospitals, clinics, labor unions, and other healthcare stakeholders, to steer the allocation of tax revenue.
Allocation of Funds
In the short term, Proposition 35 mandates that the tax revenue be allocated as initially planned before Governor Newsom’s proposed reallocations. This includes:
- Increasing reimbursement rates for healthcare providers under Medi-Cal.
- Funding training programs for healthcare workers.
- Supporting Medi-Cal costs from the state’s general fund, which finances most public services.
The measure sets up a formula for distributing funds to different programs starting in 2027, with allocations contingent on the revenue generated by the tax.
Support and Financial Backing for Proposition 35
The Coalition to Protect Access to Care, a group comprising various healthcare organizations and associations along with both the California Democratic Party and the California Republican Party have endorsed the measure. As of now, no organized opposition committees have been identified.
Additionally, significant monetary contributions have been made to support Proposition 35, largely from healthcare industry groups:
- Global Medical Response Inc. has donated $5 million.
- California Hospitals Committee on Issues, sponsored by the California Association of Hospitals and Health Systems, contributed $2 million.
- The California Medical Association has provided $3.2 million.
Budgetary Ramifications
The Legislative Analyst’s Office warned that Proposition 35 may decrease lawmakers’ flexibility in managing the state budget. According to reports, Governor Newsom urged the coalition backing the measure to remove it from the ballot. The state’s current budget relies on revenue from the MCO tax, and passing Proposition 35 could interfere with existing budgetary plans, according to provisions in the health budget bill.