Prop. 35: What is the Health Plan Tax?
In California, the Managed Care Organization Provider Tax is paid by healthcare providers to fund the state’s healthcare program. Proposition 35 would make this tax permanent, and restrict the ways the government can use the funds. What does all of this mean for you, and how should you think about it at the ballot box?
Summary of the Proposition
Proposition 35 concerns what is known as the health plan tax. If passed, Proposition 35 would make this type of tax permanent in the state of California starting in 2027. It would also restrict the ways in which the revenue from the tax could be spent.[1] There is a lot of background we need to cover in order to fully understand what this summary means.
Background
Health Plan Tax
Let’s start with the basics: What is the health plan tax?
California levies a tax on what are known as Managed Care Organizations, or MCOs, across the state. A Managed Care Organization is just what it sounds like – it’s an organization that manages healthcare services. More specifically, it is the companies that offer their members health insurance coverage.[2] Examples include Blue Cross, Blue Shield of California, Kaiser Permanente, Anthem, and so on. These organizations offer health services for a monthly payment – this usually is deducted directly from income if a member is enrolled in a plan through his or her employer.[3]
These organizations pay a tax based on the number of monthly members they had enrolled in the prior year. The MCO tax was first imposed in the state of California back in 2006 as a mechanism to help fund California’s state healthcare program – Medi-Cal. How it works is MCOs pay the tax and the federal government matches the amount paid dollar for dollar. The state government then uses this revenue – both the tax dollars and the federal matching – to pay for and expand the Medi-Cal program.[4] This is not a partisan structure or a unique design specific to California. As of 2019, 14 states had an MCO tax in place, and the structure has been passed across a wide variety of states, like Ohio, Tennessee, and Texas, as well as Oregon, Michigan, and Rhode Island.[5]
To summarize, the health plan tax is levied on healthcare providers – the companies that enroll you in health insurance – and the revenues collected are matched by the federal government, which is then used to pay for Medi-Cal in the state.
Covered Programs and Eligibility
The next question that comes to my mind is: what is this tax revenue funding? What is Medi-Cal, what types of programs or services is the money used for, and who is eligible for its coverage?
Medi-Cal is a public program across the State of California that provides access to health coverage to lower income individuals, families, or people with disabilities. Health coverage is provided through partnership with MCOs – so Medi-Cal contracts with already established MCOs, like Blue Cross, to subsidize the cost of care and therefore provide cost effective health insurance to anyone meeting the eligibility and income requirements.[6] These MCOs then turn around and pay a tax on their Medi-Cal enrollees to help fund parts of the program. Currently for 2024, the tax amount paid is $182.50 dollars for each Medi-Cal enrollee, and $1.75 for anyone else enrolled through private means, like through an employer.[7] As of 2022, there were over 15 million Californians enrolled Medi-Cal.[8] To put it in perspective, the population in the state that year was around 39 million people, so about 38% of California’s total population was insured through the Medi-Cal system.[9]
Medi-Cal covers ten comprehensive service categories that are designated as Essential Health Benefits. These services are:
1. Outpatient services,
2. Emergency services,
3. Hospitalization,
4. Maternity and Newborn care,
5. Mental Health and Substance Use Disorder Services,
6. Prescription Drugs,
7. Rehabilitative & Habilitative Services,
8. Laboratory services,
9. Preventive and wellness services & chronic disease management, and
10. Pediatric services.[10]
The Medi-Cal Health Benefits Webpage goes into more detail on what is covered within each of these categories, and for the most part they encompass standard healthcare services. For example, outpatient services include ambulatory services, standard doctor’s appointments, any treatment care like chemotherapy or radiology, and the like. Rehabilitative and Habilitative services cover physical and occupational therapy, as well as nursing facility costs, hearing aids, and home health services.
On the other hand, some services aren’t as standard. For example, preventative and wellness services encompass not just recommended vaccines, but also family planning services,[11] which includes abortion care. Abortion is covered under Medi-Cal regardless of the point in the pregnancy the abortion is performed, as well as without the need for medical justification or authorization. While abortion care can’t be funded by federal dollars, due to the Hyde Amendment passed in 1977, state dollars can fund abortion, depending on the state. In California, Medi-Cal includes this in coverage. Abortion care includes everything from costs related to any medication or procedures, as well as transportation and lodging, and can even cover individuals who travel from out of state to receive an abortion in California. Additionally, minors of any age can also receive coverage for abortion without consent of their caregiver or social worker if they are in foster care.[12]
Another example is gender affirming care, which includes coverage for mental health resources, hormone replacement therapy, and surgical procedures to bring an individual’s gender into alignment with the identified gender.[13]
It appears that Medi-Cal covers a wide range of healthcare services, ranging from the normal programs you might think of when it comes to healthcare – like doctor’s appointments, dental appointments, and outpatient therapies – to more controversial services, like abortion and transgender care. We’ll come back to this discussion in our response to the proposition near the end of the episode.
For now, let’s move to understanding just who, exactly, is eligible for this coverage?
Qualification is largely dependent on income. The threshold is for income to be below 138% the federal poverty level. For one person in California, that is an income of $20,783 per year or less. For a household of two, the threshold is $28,208 per year. Regardless of income, you can also qualify for Medi-Cal if you are over 65 years old or under 21 years old, are blind or disabled, or are pregnant.[14] Those are really the only eligibility requirements. In fact, just this year California became the first state to remove immigration status as an eligibility requirement. Undocumented immigrants of all ages are eligible for healthcare through Medi-Cal as long as they meet the income requirement.[15]
Overall, we have seen that Medi-Cal is meant to benefit low-income individuals and households across the state, regardless of immigration status, and it covers a wide range of medical services using both state and federal funding.
Budget Considerations & Monetary Impact
In terms of the numbers, how much does Medi-Cal cost the state, and how much does the MCO tax offset the costs?
In fiscal year 2022, the Medi-Cal program cost $121.9 billion dollars total, which included a combination of federal, state, and local funds. This breakdown was 70% paid by federal funding, 21% paid by the state budget, and 9% funded by other sources and local funds.[16] This means about $25.6 billion was paid for by state funding. In 2022, the tax brought in about $2.5 billion in revenue, paying for about 10% of the state’s contribution to Medi-Cal and also bringing in federal tax dollar matching funds.[17]
This, however, was before the rates mentioned earlier were enacted. These breakdowns are based off of the MCO tax that was enacted from 2016-2022, but it was extended via a new proposal in 2023, which is the tax currently in effect until 2026. The proposal in 2023 raised the tax on Medi-Cal enrollees from $50 in fiscal year 2022 to the $182.50 dollar amount mentioned earlier. Because of this drastic increase in rates, total revenue brought in by the tax has also increased in more recent years. According to the Legislative Analyst’s Office, this past fiscal year, ending in June 2024, it was projected for the tax to bring in $4.8 billion dollars, nearly double what it was in 2022. By the time the MCO tax expires in 2026, it was projected to have brought in a total of nearly $21 billion dollars over the 4 years.[18] This is clearly a sizeable increase, and poses a significant source for funding Medi-Cal.
Proposition 35 would make this tax permanent, so that it would no longer be up to the legislature to extend it every few years. The proposition would limit the increase in tax on commercial enrollees to a ceiling of $2.50, as well as limit total annual revenue from commercial enrollees to $36 million per year. The tax would still have to be approved federally every three years, as is required now.[19] Proposition 35 also specifies how this revenue is to be spent, and allocates it among different programs. Starting in 2027, it would allocate the funds to the following healthcare programs:
1. “Hospital and emergency department services: between $2 billion and $3 billion,
2. Primary care: over $3 billion,
3. Specialty care: around $3 billion,
4. Family planning: over $1 billion, and
5. Other services: nearly $1.5 billion.”[20]
The thing to understand about the MCO tax funding currently is that healthcare groups and advocates see the MCO tax as a source of revenue to augment Medi-Cal's coverage – meaning that rather than using the MCO tax revenue as a primary source of funding for Medi-Cal to continue working, Governor Newsom had originally promised to use the revenue from the tax to add to the services provided. One key initiative Newsom promised to use the MCO tax to fund was increasing base payments to providers.[21] Providers often are underpaid when treating patients on Medi-Cal versus patients who have private insurance, and because of that are less incentivized to see lower-income patients. To remedy that, when Newsom raised the rates of the MCO tax, he made a promise to use the higher revenue to increase these payments. However, because of the massive budget deficit that we’ve found ourselves in, Newsom put forth a budget proposal to use the MCO tax revenue to balance the budget in state funding to Medi-Cal as a whole.[22] Proponents of Proposition 35 want to restrict the funding to the programs and amounts I just mentioned in order to hold Newsom accountable to what he had originally promised to use the money for. However, on the flip side, by restricting the funds to specific activities, other programs under Medi-Cal that the MCO tax is not allocated to under Prop. 35 would most likely be cut due to budgetary restrictions. Dan Schnur, a Professor of Political Communication at both UC Berkeley and the University of Southern California, puts it this way, “If every program runs a ballot initiative, you virtually guarantee immense budget deficits for as far as the eye can see. Every voter spending mandate creates an additional challenge for the Legislature.”[23]
Support & Opposition
Given all of this background, who is supporting Proposition 35 and who is opposing it?
The Proposition is led by The Coalition to Protect Access to Care, and is also supported by both the Democratic and Republican Parties of California, the California Hospital Association, and Planned Parenthood. Proponents argue that this initiative will ensure further investment in California’s health care and continue to increase access to health care.[24] They also argue that the MCO tax revenue should be used for new investments in Medi-Cal instead of supporting the state’s general fund.[25] Proposition 35 is meant to hold Governor Newsom to his word and prevent him from using the tax revenue to fill in the gaps of the budget deficit.
However, Proposition 35 is opposed by Governor Newsom himself, and other groups like the League of Women Voters of California and Courage California. Opponents argue that while the goal of Proposition 35 is good, it is not the most effective solution as it makes the MCO tax permanent and restricts its revenue to certain healthcare programs, thus rendering it unavailable for other priorities and less flexible to respond to any changes in Medi-Cal funding that could come in future years.[26] Governor Newsom argues that it prevents him and the legislature from being able to balance the budget.[27]
Responses
It seems there are strong arguments being made on both sides, and a wide range of considerations to be made, spanning the healthcare system to the management of the state budget. With all of that being said, what are we to think about Proposition 35?
First, let’s lay out the options in front of us here:
To vote No on this proposition encourages the idea that Governor Newsom can raise money through taxes that are supposed to be allocated to a specific purpose, and then turn around and use that tax revenue to instead fund the deficit he has created. This is a dangerous idea. The governor and the legislature should not be able to bail themselves out of a massive deficit with tax dollars because they were irresponsible with the budget, and they shouldn’t lie to their constituents by saying they will fund certain programs that they don’t end up funding.
However, to vote Yes on this proposition makes a tax on managed care health insurance programs permanent, and dictates that it must be used to fund specific programs within Medi-Cal – which in turn pays for things like abortion care, gender affirming care, and medical insurance for undocumented immigrants. By focusing on specific programs, it would undercut funding to other programs within Medi-Cal and related to the healthcare system. And, while it would increase base pay to providers who see Medi-Cal patients, it could be argued this doesn’t fix the root cause which is a healthcare system that caps payment to providers because of the very design of the system in place. This is also not a great option, especially if, like me, you don’t agree with the Medicare system, the types of care that it funds, and how it uses taxpayer money. Lastly, by making the tax permanent, it makes it harder to change how the system operates, or to lessen the amount funded by tax dollars in future years.
The way I see it, this proposition sticks us with two not-so-great options. I think the best way to consider our options is to boil down which option changes the system, which keeps it the same, and ultimately which option – changing it or keeping it the same –will advance effective change in line with your values. To that end, voting No to Prop. 35 keeps things the same, it keeps the system the way it currently is, with an MCO tax that has to be reapproved each time it runs out and can be used for Medi-Cal and other programs as the legislature sees fit. Voting Yes on Prop. 35 is approving a change to that system – a permanent tax and limitations to the use of the funding.
The next questions in my thought process are: Does the system as it stands need to be changed? If so, does Prop. 35 change the system in ways that are good and address the root causes of its issues?
There is a lot that could be said about our healthcare system, especially as it relates to state and federal programs, like Medi-Cal and Medi-Care as a whole. The state government spends a large amount of the budget to fund these programs, as well as brings in billions in revenue through the MCO tax, yet is still facing potential cuts due to the multibillion-dollar budget deficit we find ourselves in. As mentioned earlier, healthcare providers are not paid adequately to incentivize them to help patients who have Medi-Cal, leading to shortages in healthcare providers and inequitable medical care. How could the state go about addressing these issues? To me, it seems that the problem lies not just in the funding to Medi-Cal, but within the very structure of the system as a whole.
It seems that there is an underlying assumption within our government, our legislature, and these health advocacy groups that healthcare is a basic human right and that it is the role of the government to ensure it is provided for everyone, citizens and noncitizens alike, no matter the cost. I would disagree starting here, before we even get to the healthcare system or the MCO tax or Proposition 35. What you believe about healthcare, human rights, and government responsibility will shape how you then think about these downstream issues. I would argue that instead of viewing healthcare as a basic universal human right to be guaranteed by the government, that it is a service provided at a cost which is regulated by the free market. The reason why there is a shortage of medical providers who want to take on Medi-Cal patients is because they are disincentivized to do so by the government regulating how much they can be reimbursed for their services and what services they can provide. In the same way that rent control creates shortages of housing due to disincentivizing landlords from renting and developers from building new construction, government healthcare acts the same way with doctors and healthcare services. There is an argument that working to privatize health care works with the free market to create greater supply and drive down demand, thus evening out both access to healthcare and the overall cost of healthcare. Competition and the free market lead to better care and more options for all people, including low-income individuals.[28]
Even if you disagree with the idea of working to privatize healthcare, there are still questions about the current Medi-Cal system, especially in California. Should taxpayer dollars and revenue from the MCO tax fund a healthcare program that includes paying for abortions, gender affirming care, and healthcare for illegal immigrants – who do not pay taxes into the system? These are beyond just topics of healthcare; these are controversial topics with moral implications. We won’t go into each of them today, but no matter what side of the political aisle you are on, it is obvious that there is much disagreement over abortion and gender transitions. Only 17 states across the country use the state Medicaid programs to fund abortion – 33 states, including states like Arizona, Colorado, Michigan, and Florida will only cover abortion costs in the exception cases, for rape, incest, or life of the mother.[29] Contrast that to California, which pays for all abortion costs regardless of the circumstances surrounding the abortion. It is up to the state to decide what it will fund, so should we support a system that has dedicated our tax dollars to funding these more controversial issues?
All of this is to make the point that the healthcare in our state suffers more problems than just a budget deficit. But the changes being proposed in Prop. 35 don’t address any of these issues; in fact, it funds and exacerbates them. If you as the voter don’t agree with the changes being proposed, and think we need to explore different solutions to improve our healthcare system, then I believe it is better to keep the system the same for now, and push for more effective change that aligns with your values. Voting no on Proposition 35 doesn’t mean that you necessarily want to support Governor Newsom bailing out the deficit with tax money he promised to go toward certain programs; what voting no means is that you recognize there are changes that need to be made, but the changes set forth this election don’t cut it. Changing the system to arguably make it worse isn’t the answer to a system that is broken from the start.
All in all, there is far more work to be done, but for this election cycle I’ll be voting no on Proposition 35.
References:
[1]Legislative Analyst’s Office. “Proposition 35 [Ballot],” 2024. https://www.lao.ca.gov/BallotAnalysis/Proposition?number=35&year=2024.
[2] Ratcliffe, Amber. “What Is a Managed Care Organization (MCO)?” MedTrainer, June 10, 2024. https://medtrainer.com/blog/managed-care-organization/.
[3] “Managed Care Organization Tax. [Ballot],” October 27, 2023. https://lao.ca.gov/BallotAnalysis/Initiative/2023-024#:~:text=MCOs%20and%20Medi%2DCal&text=Examples%20of%20MCOs%20in%20California,MCOs%20to%20Deliver%20Many%20Services.
[4] California Department of Health Care Services. “Managed Care Organization Provider Tax.” DHCS, May 2023. https://www.dhcs.ca.gov/Documents/LGA/Governors-Budget/DHCS-MCO-Tax-Primer-5-26-23.pdf.
[5] Schneider, Andy. “Taxing Medicaid Managed Care to Mitigate Medicaid Cuts.” Center for Children and Families, June 18, 2020. https://ccf.georgetown.edu/2020/05/14/taxing-medicaid-managed-care-to-mitigate-medicaid-cuts/.
[6] “Medi-Cal Plan | L.A. Care Health Plan,” n.d. https://www.lacare.org/health-plans/medi-cal.
[7] Ballotpedia. “California Proposition 35, Managed Care Organization Tax Authorization Initiative (2024) - Ballotpedia,” n.d. https://ballotpedia.org/California_Proposition_35,_Managed_Care_Organization_Tax_Authorization_Initiative_(2024).
[8] California Health Care Foundation. “Medi-Cal Facts and Figures – 2024 Edition - California Health Care Foundation,” August 6, 2024. https://www.chcf.org/publication/medi-cal-facts-and-figures-2024-edition/#related-links-and-downloads.
[9] U.S. Census Bureau. “Explore Census Data,” n.d. https://data.census.gov/profile/California?g=040XX00US06#health.
[10] California Department of Health Care Services, “What are Medi-Cal Benefits?,” CA.gov, n.d., https://www.dhcs.ca.gov/services/medi-cal/Pages/Medi-Cal_EHB_Benefits.aspx.
[11] California Department of Health Care Services. “Essential Health Benefits.” CA.gov, n.d. https://www.dhcs.ca.gov/services/medi-cal/Pages/Benefits_services.aspx#top.
[12] Access Reproductive Justice. “California Abortion Coverage in Medi-Cal and Private Insurance.” California Abortion Coverage in Medi-Cal and Private Insurance. National Health Law Program, n.d. https://accessrj.org/wp-content/uploads/2023/07/2023-06-28-CA-Abortion-Coverage-Medi-Cal-and-Private-Insurance-Fact-Sheet-FINAL.pdf.
[13] California Department of Health Care Services, “Transgender and Gender Diverse Services,” May 2022, https://mcweb.apps.prd.cammis.medi-cal.ca.gov/assets/F81D2354-BA35-4415-9B82-8B2DF9A505FA/transgender.pdf?access_token=6UyVkRRfByXTZEWIh8j8QaYylPyP5ULO.
[14] California Department of Health Care Services. “Do You Qualify for Medi-Cal Benefits?” CA.gov, n.d. https://www.dhcs.ca.gov/services/medi-cal/Pages/DoYouQualifyForMedi-Cal.aspx.
[15] Verano, Brenda. “California Becomes First State to Offer Health Insurance to All Eligible Undocumented Adults but Many Remain Uninsured Because of a Range of Enrollment Barriers.” Western Center on Poverty & Law, February 28, 2024. https://wclp.org/california-becomes-first-state-to-offer-health-insurance-to-all-eligible-undocumented-adults-but-many-remain-uninsured-because-of-a-range-of-enrollment-barriers/#:~:text=On%20Monday%2C%20California%20became%20the,%2C%20known%20as%20Medi%2DCal.
[16] Chapman, Athena, Samantha Pellón, and Chapman Consulting. “Medi-Cal Explained: Medi-Cal Financing and Spending.” California Health Care Foundation, 2023. https://www.chcf.org/wp-content/uploads/2023/06/MediCalExplainedFinancingSpending.pdf.
[17] Assembly Committee on Health, Jim Wood, Assembly Budget Subcommittee No. 1 on Health and Human Services, and Joaquin Arambula. “Managed Care Organization Tax: Background and Issues for Consideration on Administration’s Proposal,” May 30, 2023. https://lao.ca.gov/handouts/health/2023/MCO-Tax-053023.pdf.
[18] Legislative Analyst’s Office, “The 2024-25 Budget: The MCO Tax Package at May Revision,” May 22, 2024, https://lao.ca.gov/Publications/Report/4905.
[19] “Managed Care Organization Tax. [Ballot].”
[20] California Hospital Association. “The Managed Care Organization (MCO) Tax Frequently Asked Questions on the Proposed 2024 Ballot Initiative.” CalHospital.Org, September 2023. https://calhospital.org/wp-content/uploads/2023/09/MCO-Tax-Ballot-Initiative-FAQ_Final.pdf.
[21] Bluth, Rachel. “POLITICO Pro: Newsom Walks Back on Plan to Use MCO Tax for Additional Health Care Raises,” May 10, 2024. https://subscriber.politicopro.com/article/2024/05/newsom-walks-back-on-plan-to-use-mco-tax-for-additional-health-care-raises-00157453.
[22] Assembly Committee on Health et al., “Managed Care Organization Tax: Background and Issues for Consideration on Administration’s Proposal.”
[23] Hwang, Kristen. “California Voters Will Decide Who Wins on Health Care Tax: Gavin Newsom or Doctors.” CalMatters, July 2, 2024. https://calmatters.org/health/2024/07/medi-cal-mco-tax-initiative/.
[24] “California Proposition 35, Managed Care Organization Tax Authorization Initiative (2024) - Ballotpedia.”
[25] Hwang, Kristen. “California Prop 35: Managed Health Care Tax.” CalMatters, September 21, 2024. https://calmatters.org/california-voter-guide-2024/propositions/prop-35-health-care-tax/.
[26] “California Proposition 35, Managed Care Organization Tax Authorization Initiative (2024) - Ballotpedia.”
[27] Hwang, “California Prop 35: Managed Health Care Tax.”
[28] DailyWire+. “Ben Shapiro: You Don’t Have a ‘Right’ to Healthcare,” January 13, 2017. https://www.youtube.com/watch?v=dr4TZMPmbuw.
[29] KFF. “State Funding of Abortions Under Medicaid | KFF,” March 8, 2024. https://www.kff.org/medicaid/state-indicator/abortion-under-medicaid/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D#note-2.
