Doctors and Health Insurers Sue California Over a Tax That Could Raise Premiums

The lawsuit targets an $8.85 monthly charge on every enrollee, more than triple the cap voters approved in Prop. 35.

California voters capped a tax on health plans two years ago. In June, lawmakers set a new one at more than triple that cap. Now doctors and health insurers want the state Supreme Court to stop it, in a petition the court logged late Thursday.

Insurers have said they'll pass the cost to customers, CalMatters first reported. The new charge is $8.85 for every enrollee each month, roughly $106 a year. That's about $100 more per person each year, on top of the usual annual rate hikes, and about $400 for a family of four.

The case turns on a vote count. Under Proposition 35, changing the tax takes a three-fourths vote of the Legislature, says the petition from the California Medical Association and the California Association of Health Plans. On June 18, only 27 senators voted yes on Senate Bill 125, with 9 against. Three-fourths of the 40-member Senate would be 30. The Assembly had approved the bill 54-19 on June 15, the petition says.

The tax has helped pay for Medi-Cal, which covers low-income Californians, for more than 20 years. Voters boxed it in, two-to-one, on Nov. 5, 2024. Their Proposition 35 made the tax permanent, capped the private piece at $2.50 a member each month and walled the money off for Medi-Cal, including higher pay for doctors and hospitals.

Dustin Corcoran is the medical association's CEO and one of Proposition 35's official proponents. "The state does not get to ignore that law simply because following the law is inconvenient," he said in a statement, CalMatters reported.

Washington is why the state wanted a new tax. Plans used to pay far more for each Medi-Cal member than for each privately insured one, and a 2025 federal law known as H.R. 1 now requires the same rate for both, the petition says. New federal Medicaid rules do, too. SB 125 became law June 29 as Chapter 24 of this year's statutes, according to the bill's text. It levies the $8.85 charge on every countable enrollee from 2027 through 2029, and the money goes into a new Medi-Cal Stability Fund.

For doctors, the fight is also about where the money goes. The new law sets aside none of the tax to raise what providers are paid, the petition says, quoting the Legislative Analyst's Office. Citing the analyst, it says the Newsom administration expects about $2.3 billion a year from the tax in later years. That money would cover Medi-Cal costs the general fund would otherwise carry.

On Aug. 12, the Department of Health Care Services told health plans it intends to send federal regulators two versions of the tax before year's end, according to the petition. One follows Proposition 35, and the department expects regulators to reject it because its Medi-Cal and private rates don't match. The other is the flat $8.85 tax it hopes will win approval.

The petition calls the first version "built-to-fail." It argues one tax could satisfy both the voters and Washington, though it would raise less.

The governor's office expects to win. "The state disagrees with their claims, and we believe the courts will too," Tara Gallegos, a spokesperson for Gov. Gavin Newsom, wrote in an email to CalMatters. H.D. Palmer, a Department of Finance spokesperson, had earlier told CalMatters the state was weighing two things: affordability for privately insured patients and deep federal Medi-Cal cuts. Newsom didn't oppose Proposition 35 in 2024, though he warned it would "hamstring" the budget.

The case is No. S298916. The plaintiffs want the court to bar the state from carrying out SB 125 or submitting it to federal regulators, to order a version that meets both Proposition 35 and federal rules by Dec. 31, and to keep any tax money inside the measure's spending rules. They named the health care services department, the Department of Finance, their directors and Controller Malia Cohen as respondents.

They want an answer before Dec. 31. That's the federal deadline for California to submit a tax that takes effect Jan. 1, 2027. If SB 125 is struck down after that, the petition warns, a federal ban on new taxes of this kind could cost the state its federal matching money for good.

Source: calmatters.org, retrieved October 4, 2026. Other sources: mcotaxlawsuitfacts.com, calmatters.digitaldemocracy.org.