Budget Deal Delivers Billions for California Healthcare Sector

California state government and healthcare interests have achieved an agreement on the spending of billions of dollars generated by the Managed Care Organization tax on insurance plans. The deal is intended to underpin a major investment in healthcare in California, particularly for providers and facilities that serve low-income individuals. The plan, agreed as part of the state’s latest budget, is projected to inject approximately $19 billion of state funds into the Medi-Cal program.

What Is the Insurance Tax Deal and Why Was It Needed?

Similar taxes have been applied to California insurance plans in the past, but this will be the first time the proceeds will be targeted toward investment in healthcare infrastructure. As recently as a year ago, the tax had been expected to be allowed to expire. California’s huge number of Medicaid users means that demand for care is much larger than the number of physicians willing or able to accept Medi-Cal at current reimbursement levels. Offering more support and higher reimbursement for facilities and physicians serving California’s low-income population was a primary goal of negotiations about the renewed tax.

Past versions of this tax were not earmarked for healthcare spending, but were instead used to pad the state’s coffers more generally. For the new budget, stakeholders throughout the healthcare industry and government insisted that tax money raised from the tax on managed healthcare plans be used for healthcare-related improvements. The investment will bring in matching funds from the federal government due to the federally supported funding model for Medicaid programs. With the addition of federal funds, the agreement could allow for as much as $35 billion to be pumped into Medi-Cal.

How Did the Deal Get Done?

The stakeholders who worked to build the landmark agreement included hospitals, community clinics, physicians and government officials. Negotiations have been ongoing since November of 2022. The combined healthcare industry stakeholders joined under the banner “Coalition to Protect Access to Care” to persuade the governor and legislature that directing the insurance tax to healthcare spending was essential. While each segment stressed the specific concerns of their members, the various
health insurance broker, hospital and physician interest groups were united in their belief that the Medicaid sector needed urgent investment.

Though insurers broadly agreed to the renewal of the tax earlier in the year, finalizing the deal has meant months of wrangling over how to divide the proceeds among the various healthcare sectors. In addition to how much will be spent and on what, government, industry and citizens groups have disagreed over when and how fast the money will be spent as well. The final deal has cut the timeline for implementing the new spending down from a proposed ten years to five years. The Coalition has also put forward the notion of making the increased funding permanent through a future referendum for an amendment to the California constitution.

How Will the Tax Revenues Be Used to Boost Healthcare?

Most of the targeted spending from the tax will begin in 2025, and several provisions will address expanding the number of healthcare providers across the state. In addition to increasing reimbursement for some physicians, the plan also includes spending millions of dollars to attract newly graduated med students to physician residencies in hospitals that serve lower-income California residents. The University of California will receive $75 million for the purpose of enrolling more students in the state university’s medical degree programs. It is hoped that these investments will ease the shortage of physicians that is currently a barrierto access for many patients.

In addition to the medical school and residency funding, there are also provisions designed to shore up poorer hospitals and clinics that a primary means of accessing care for
Medi-Cal patients. Part of the hospital support will include millions of dollars in loans to struggling nonprofit hospitals. Millions will also be invested in providing inpatient care for people experiencing mental health conditions, to redress a critical shortage of mental health facilities. California’s Department of Health Care Services will administer the new hospital and clinic spending based on where the lack of access to healthcare is most urgent.



California has been one of the most active states in evaluating and implementing policies to ensure healthcare coverage for all of the state’s residents. For more information on how new government plans and regulations may affect your health insurance plan,
contact Sackett & Associates Insurance Services.