CMA Challenges California’s Renewed MCO Tax

The Supreme Court filing questions whether SB 125 complies with Proposition 35 as a December 31 federal transition deadline approaches.

The California Medical Association and the California Association of Health Plans have filed a lawsuit in the California Supreme Court challenging the managed care organization tax enacted through SB 125. The associations argue that the law violates Proposition 35’s voter-approved restrictions on taxation and the use of Medi-Cal funding.

The renewed tax is part of California’s enacted budget package, but implementation remains subject to federal approval. The spending plan assumes approval for January 2027 through December 2029, according to the

At issue is how California can preserve Medi-Cal financing while complying with both Proposition 35 and new federal requirements under H.R. 1.

According to the associations’ announcement, SB 125 establishes an $8.85-per-enrollee-per-month tax on commercial enrollment. The plaintiffs contend that this exceeds Proposition 35’s $2.50 limit. The initiative permits a limited increase when necessary for federal compliance or approval; the associations argue that SB 125 goes beyond what it allows.

The federal-state tension is consequential. In its May Revision analysis, the LAO explained that H.R. 1 requires proportional taxation of Medi-Cal and private health plan enrollment, while Proposition 35 restricts the private-enrollment tax. Without amending Proposition 35, the LAO concluded, California would have to scale back the Medi-Cal tax to comply with both laws—substantially reducing revenue.

The administration has taken a different approach. In a May 20 stakeholder meeting summary, the Department of Health Care Services stated that Proposition 35 does not prevent California from implementing an MCO tax outside the initiative’s provisions. That explanation predates the lawsuit and is not a response to the filing.

The plaintiffs challenge that interpretation. They also allege that SB 125 was enacted without the three-fourths legislative vote required for qualifying amendments to Proposition 35 and that the state’s spending approach improperly substitutes tax revenue for General Fund support rather than delivering the access investments voters required.

December 31, 2026 is the critical deadline. According to the release, the existing tax’s federal authorization and the H.R. 1 transition period end on that date. The associations ask the court to invalidate SB 125, require the state to pursue a structure compliant with both laws by December 31, and enforce Proposition 35’s dedicated funding requirements.

The financial stakes extend to commercial coverage. The LAO estimates that the renewed tax would generate approximately $2.3 billion in net revenue, with about $1.5 billion—roughly two-thirds—derived from private enrollment. It expects the tax to be costlier to health plans and likely their consumers, without establishing a specific premium increase for households or employers. LAO spending-plan analysis

Both plaintiffs have interests in the outcome: the medical association represents physicians, while CAHP represents health plans, including those subject to the commercial-enrollment tax.

For Los Angeles physicians, the potential implications involve Medi-Cal resources and the cost of providing employee health coverage. More than 3.1 million county residents received Medi-Cal in June 2026, underscoring the program’s local reach.