FOLLOW US

Laws passed directly by voters are supposed to carry a certain weight, a kind of political bedrock that elected officials can't simply chip away at when convenient. That's exactly the argument now being made in a new lawsuit, as doctors and health insurers sue Gov. Gavin Newsom, alleging he and the Legislature broke the law when they approved a healthcare tax capable of substantially driving up insurance premiums for Californians.

The Allegation at the Center of the Case

Filed Friday, the lawsuit claims the recently passed tax on health plans — known as the managed care organization tax, or MCO tax — effectively circumvents a 2024 ballot initiative that limits healthcare taxes and directs their revenue toward specific, voter-approved purposes. The California Medical Association and California Association of Health Plans filed the complaint directly with the California Supreme Court.

Voters Spoke, Plaintiffs Say Sacramento Didn't Listen

"California voters passed Proposition 35 and made it law. The state does not get to ignore that law simply because following the law is inconvenient," said Dustin Corcoran, CEO of the medical association, framing the dispute as a fundamental question of whether elected officials can sidestep direct democracy when it suits their budget needs.

The Governor's Office Pushes Back

Tara Gallegos, a spokesperson for Newsom, defended the tax as a legitimate tool allowing the state to adjust how it funds healthcare. "The state disagrees with their claims, and we believe the courts will too," Gallegos said in an email — a brief but confident rebuttal to the lawsuit's core argument.

Balancing Competing Financial Pressures

H.D. Palmer, a spokesperson for the Department of Finance, previously told CalMatters that the state was attempting to balance affordability concerns for privately insured patients against the backdrop of large-scale federal Medi-Cal cuts — a juggling act between two groups of patients whose financial interests don't always align neatly.

A Warning Newsom Gave, But Didn't Act On

Notably, Newsom stopped short of formally opposing the 2024 initiative when it appeared on the ballot, though he did warn at the time that it could "hamstring" the state budget — a prediction that now hangs over the current legal dispute like foreshadowing nobody quite heeded.

Two Decades of Taxing Health Plans to Fund Medi-Cal

For more than 20 years, California has imposed taxes on health insurers specifically to help fund Medi-Cal, the state's insurance program serving low-income residents. Historically, the state taxed private health plans at a lower rate than it taxed Medi-Cal insurers. That changed in June, when the Legislature passed a bill substantially raising the tax rate on private plans.

Consumers Expected to Foot the Bill

Health insurers say they intend to pass this new cost directly onto consumers, spiking premiums by roughly $100 per person annually. For a family of four, that translates to a $400 yearly increase — stacked directly on top of the rate hikes people typically already absorb from one year to the next.

Insurers Call It a Broken Promise

"California is breaking the law by blowing through a tax limit voters put in place to protect Californians and businesses from higher health care costs," said Charles Bacchi, CEO of the health plans association, framing the tax increase as a direct violation of the exact protections voters thought they'd secured.

A Years-Long Push for Medi-Cal Funding Reform

Doctors, hospitals, clinics and Medi-Cal insurers have long argued that revenue generated from this tax should be funneled specifically toward improving Medi-Cal itself. They've claimed the state was instead inappropriately using the money to replace general fund spending, leaving many healthcare providers paid far less than what their services actually cost. In 2024, these groups asked voters to approve a more limited tax, one specifically reserved for Medi-Cal improvements — the very initiative now at the center of this legal fight.

A Federal Rule Change Complicates Everything

Adding another layer to the dispute, Congress last year altered the rules governing taxes used to generate healthcare revenue, including those imposed on health plans. Rather than risk losing the revenue generated by the existing tax structure, Newsom proposed — and the Legislature agreed — to submit two separate tax versions to the federal government for approval: one that complied with the 2024 initiative but was expected to be rejected by federal regulators, and a second that complied with federal rules while largely disregarding the initiative's original intent.

For California's doctors, insurers and the patients caught in between, this lawsuit now sets up a high-stakes legal question: whether a tax designed to navigate shifting federal rules can still honor the specific promises voters approved at the ballot box, or whether practical necessity has simply overridden the letter of the law.