31 Jul An Overview of Proposition 35: A Tax on Managed Care Organizations
Proposition 35 is a ballot measure in California that aims to impose a permanent tax on managed care organizations providing services to the state’s Medicaid population. The measure also lays out specific ways the tax revenue must be utilized.
Background
Proposition 35 comes amid recent expansions to California’s Medicaid program. Legislators have broadened Medi-Cal eligibility to include individuals who meet income requirements, irrespective of immigration status. Despite this expansion, many healthcare providers and advocacy groups argue that reimbursement rates under Medi-Cal are insufficient to deal with the cost of care. The ballot measure aims to address this funding shortfall.
What is the MCO Tax?
California has historically applied an MCO tax periodically. In the summer of 2023, Governor Gavin Newsom and state legislators renewed this tax to support Medi-Cal, especially as more residents became eligible for coverage. According to the Legislative Analyst’s Office, the tax is projected to generate between $6 billion and $9 billion annually through 2026.
Initially, legislators agreed to use part of the tax revenue to increase the reimbursement rates for healthcare providers serving Medi-Cal patients. These increases were viewed as necessary to avoid provider shortages and long wait times for patients. Having said that, Governor Newsom later proposed 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, although less than initially planned.
Key Provisions of Proposition 35
Proposition 35 seeks to clearly define the allocation of MCO tax revenue. It limits the power of California lawmakers 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 the creation of a new advisory committee to 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 help guide 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 personnel.
- Supporting Medi-Cal costs from the state’s general fund, which finances most public services.
Starting in 2027, the measure sets up a formula for distributing funds to different programs, 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, mostly 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 Implications
The Legislative Analyst’s Office warned that Proposition 35 may decrease legislators’ flexibility in handling 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.