California proposes revised health-plan tax to preserve Medi-Cal funding as insurers and doctors sue to block it
California Governor Gavin Newsom has backed a redesigned health-plan tax to preserve Medi-Cal financing after federal rules — tightened under the "One Big Beautiful Bill Act" — prevented the state from continuing its existing tax structure beyond 2026. The California Medical Association and California Association of Health Plans have filed a lawsuit to block the measure, arguing it violates Proposition 35, a voter-approved initiative limiting taxes on commercial health-plan enrollment. Health insurers have estimated the revised tax could raise premiums by approximately $100 per person per year, or around $400 annually for a family of four.
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California's Medi-Cal program, which covers low-income residents, has relied on a health-plan tax structure that draws federal matching funds. After Congress passed the "One Big Beautiful Bill Act," federal rules governing how states may structure such taxes changed, rendering California's existing approach potentially non-compliant after 2026. Newsom's administration proposed a redesigned tax that would, beginning in 2027 if federally approved, raise the levy on private health plans rather than solely on Medi-Cal insurers.
The state's Department of Finance described a two-track submission: one proposal structured similarly to the current tax that may face federal rejection, and a second that conforms to the new federal law by shifting costs toward private plans. If the federal government rejects the first track, Proposition 35 could sunset under current law, according to H.D. Palmer, deputy director for external affairs at the California Department of Finance.
The lawsuit filed by the California Medical Association and California Association of Health Plans centers on Proposition 35, passed by California voters with broad support. The proposition limits how much the state can tax commercial health-plan enrollment and restricts how that revenue may be spent. California Medical Association CEO Dustin Corcoran said in a statement that "the state does not get to ignore that law simply because following the law is inconvenient." Newsom spokeswoman Tara Gallegos responded that the governor believes the tax complies with the law and that "the courts will" agree.