Administration pitching renewed MCO tax to plug May Revision gap; lawmakers want consumer and timing analysis

State budget officials told a Senate subcommittee hearing that a renewed managed care organization tax could generate roughly $2.3 billion a year and is a central revenue piece of the May Revision.

Department of Health Care Services and Department of Finance witnesses outlined a two‑component approach designed to comply with conflicting federal rules and a 2024 voter measure. The administration said it will submit a renewal for a tax substantially similar to what Proposition 35 authorizes and seek a separate HR‑1‑compatible component that would require legislative authorization.

Jason, a budget analyst who testified for the Legislative Analyst's Office, framed the key trade‑offs: the proposed MCO tax would be more proportionate between Medi‑Cal and private enrollment and could result in a per‑member per‑month tax of about $8.85. "That $8.85 per member per month is about a 1 to 2% increase in premiums," Jason said, describing it as a "very rough rule of thumb" and urging the committee to weigh consumer cost implications against the need for revenue.

Department of Finance acknowledged the potential for higher premiums but said the state's fiscal picture and federal constraints make the MCO tax an important funding source. Officials also noted that provider taxes remain a common tool nationally because they draw down federal matching funds.

Committee members asked how the proposal would be allocated. DHCS said approximately $2.0 billion of the revenue would be used to support the Medi‑Cal program generally (offsetting general‑fund costs) and about $300 million annually would support targeted provider rate increases that began in 2024.

Members also pressed the administration about timing and federal approval. The administration said it would submit the package to CMS and that prior renewals followed a similar timeline — but acknowledged there is no guaranteed approval timetable and that, if federal approval does not arrive as expected, the legislature would have to consider contingencies, including potential supplemental actions.

Lawmakers and analysts flagged other concerns: the distribution of tax burden across private and public enrollment, whether employers would alter market behavior (for example, moving to self‑insured arrangements), and the relative trade‑offs between using MCO tax revenues as a general budget solution versus reserving more proceeds for targeted provider rate increases.

The committee held the proposal open as staff continued to review trailer bill language and supporting analyses.