Proposition 35: A Tax on Managed Care Organizations

 

Proposition 35 is a proposed ballot measure in California that aims to enforce a fixed tax on managed care organizations (MCOs) that provide healthcare services for Medi-Cal. The measure also outlines specific ways the tax revenue must be utilized.

Background

Proposition 35 comes amid recent expansions to California's Medicaid program, Medi-Cal. Lawmakers have expanded Medi-Cal eligibility to include individuals who meet income requirements despite immigration status. Despite this expansion, many healthcare providers and advocacy groups claim that reimbursement rates under Medi-Cal are inadequate to cover the cost of care. Proposition 35 aims to address this funding shortfall.

What is the MCO Tax?

California has historically implemented an MCO tax periodically. In the summer of 2023, Governor Gavin Newsom and state legislators renewed 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 is projected to generate between $6 billion and $9 billion annually through 2026.

Initially, lawmakers agreed to use part of the tax revenue to increase the reimbursement rates for providers serving Medi-Cal patients. These increases were viewed as necessary to avoid provider shortages and long wait times for patients. However, Governor Newsom later proposed reallocating billions from the MCO tax to pay for other Medi-Cal expenses. Consequently, the agreed-upon budget included funds for Medi-Cal provider rate increases, although less than initially planned.

Key Provisions of Proposition 35

Proposition 35 seeks to clearly define the allocation of MCO tax revenue. 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 people 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 establishes 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 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 financial 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.

Financial Ramifications

The Legislative Analyst's Office noted that Proposition 35 might reduce legislators' flexibility in overseeing 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 arrangements in the health budget bill.

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