Doctors and Insurers Sue California Over Tax That Could Add Hundreds to Health Costs

California doctors and health insurers are suing the state over a new healthcare tax that they say violates a law approved directly by voters and could push insurance costs higher for millions of people. The California Medical Association and California Association of Health Plans filed the lawsuit in the California Supreme Court, challenging a new Managed Care Organization, or MCO, tax approved by lawmakers and signed by Gov. Gavin Newsom in June. Insurers estimate the tax could add about $100 a year per person to premiums, or roughly $400 annually for a family of four.

The New Tax Would Charge $8.85 Per Enrollee

The new tax was created through Senate Bill 125 and is scheduled to apply during the 2027, 2028 and 2029 calendar years if it receives the required federal approval. The law sets the tax at $8.85 per countable enrollee per month, although the amount can be modified under certain conditions. The revenue would go into a Medi-Cal Stability Fund and help finance the state’s share of Medi-Cal payments and managed-care costs.

Insurers Say Consumers Will Ultimately Pay

Health plans argue that the new expense will not simply disappear into insurers’ balance sheets because companies can pass additional costs through to people who purchase coverage. The California Association of Health Plans estimates that the $8.85 monthly charge could translate into roughly $100 more per year for an individual and about $400 for a family of four. The actual effect on individual premiums could vary depending on the insurer, plan and how much of the tax is passed through.

Proposition 35 Is at the Center of the Lawsuit

The legal fight centers on Proposition 35, a 2024 voter-approved measure that permanently established state authority for the existing MCO tax while setting rules for how the revenue could be used. The proposition included a $2.50-per-member-per-month limit on the tax associated with commercial health-plan enrollment, with a limited ability to increase that amount when necessary to comply with federal requirements. The doctors and insurers argue that the new $8.85 charge goes far beyond that voter-approved limit.

Why California Says the Change Is Necessary

The state says it is responding to major changes in federal Medicaid financing rules that make California’s previous MCO tax structure increasingly difficult to maintain. Federal legislation tightened rules governing healthcare-related taxes, including limits on the large difference between taxes imposed on Medicaid and non-Medicaid enrollment. California’s Department of Health Care Services says the existing MCO tax remains federally authorized through Dec. 31, 2026, but the structure will no longer be federally approvable afterward.

The Old Tax Relied Heavily on Medi-Cal Enrollment

California’s existing MCO tax has historically placed a much larger charge on Medi-Cal enrollment than on commercial enrollment. The Legislative Analyst’s Office reported that the 2025 rate was about $274 per month for each Medi-Cal enrollee compared with about $2 for each commercial enrollee, allowing California to generate substantial federal matching funds while keeping the commercial portion relatively small. More than 99% of the revenue from the current tax has historically come from the Medi-Cal side.

The Tax Is Meant to Help Keep Medi-Cal Funded

The dispute is ultimately tied to how California pays for healthcare for millions of low-income residents. The MCO tax is designed to generate revenue that can be paired with federal Medicaid funds, while the new law would place the proceeds into the Medi-Cal Stability Fund for specified healthcare expenses. State health officials say the MCO tax provides an important revenue stream for maintaining Medi-Cal services, access to care and payments to healthcare providers.

Federal Rules Created a Difficult Choice

California is caught between a voter-approved state framework and new federal restrictions on Medicaid financing. The Legislative Analyst’s Office says federal changes prevent states from continuing to rely on the same level of disproportionate taxation between Medicaid and non-Medicaid enrollment, while also gradually reducing federal revenue limits beginning in the coming years. State officials therefore faced the prospect of restructuring the MCO tax or losing access to some of the federal funding generated through it.

The Lawsuit Could Determine Who Bears the Cost

The lawsuit asks California’s highest court to decide whether lawmakers had the authority to create the new tax structure despite Proposition 35’s restrictions. The California Medical Association and California Association of Health Plans say the state cannot simply override a voter-approved limit because federal rules have changed, while Newsom’s administration argues the tax is necessary to adapt California’s healthcare financing system. The outcome could affect both the state’s Medi-Cal budget and the premiums paid by Californians with commercial health insurance.

California’s Healthcare Costs Face Another Test

The lawsuit arrives as California residents are already dealing with rising healthcare and insurance expenses, making even a relatively small per-person increase significant for households with tight budgets. If insurers pass the new tax through as projected, a family of four could face hundreds of dollars in additional annual premiums, although the exact impact remains uncertain and depends on how the costs are distributed. At the same time, California must find a way to maintain Medi-Cal funding while complying with federal rules and the limits voters placed on healthcare taxes, putting the courts at the center of a dispute that could affect both sides of the state’s healthcare system.