California state lawmakers on Thursday approved a bill to preserve federal funding for the state’s Medicaid program amid concerns that the proposal may cause private health insurance premiums to soar.

The new bill responds to recent federal rules mandating that California overhaul its managed care organization (MCO) tax, which the state collects from health insurance plans, CalMatters reported. Senate Bill 125 would decrease the tax on Medi-Cal plans while increasing the tax on private plans to the same level, according to the outlet. (RELATED: California Lets AI Determine Prisoner’s Fates Without Telling Anyone)

If Democratic California Gov. Gavin Newsom signs the legislation into law and the federal government accepts it, the new plan would likely impose higher costs on California residents who purchase private insurance but generate less revenue overall, CalMatters reported. Newsom is expected to finalize the legislation before the end of June, KCRA reported.

(Photo by Arturo Holmes/Getty Images for National Urban League)

The legislation would “impose an MCO provider tax on a health plan, as defined, for the 2027, 2028, and 2029 calendar years,” and would “prohibit the department from collecting the tax until the Director of Health Care Services certifies that the tax is a federally permissible health care-related tax meeting specified federal requirements, or until the department receives federal approval that the tax is a permissible health-care related tax, as specified,” according to the bill’s text. The bill would also “set the tax amount at $8.85 per countable enrollee per month, unless that amount is modified by the department under certain conditions.”

The MCO tax “provides a dedicated revenue stream that supports or strengthens Medi-Cal services, health care access, and improved care for millions of Californians,” according to California’s Department of Health Care Services (DHCS). Federal law lets U.S. states levy a tax on MCOs and other medical services to help cover the state share of Medicaid healthcare costs, according to the California Budget and Policy Center.

When reached for comment, DHCS and Newsom’s office each referred the Daily Caller News Foundation to California’s Department of Finance (DOF).

“What’s referred to as the ‘MCO Tax’ (‘MCO’ being short for Managed Care Organizations) has been an important financing mechanism for the Medi-Cal program for more than 20 years,” a DOF spokesperson told the DCNF. “The federal government is now forcing states to raise higher taxes on commercial health plans to maintain this specific financing mechanism.”

“To continue an MCO Tax to provide support for the Medi-Cal program, particularly as the state continues to face significant out-year structural deficits, the Administration has to structure the tax uniformly across both Medi-Cal managed care plans and commercial plans,” the spokesperson added. “Not adopting this proposal would mean leaving hundreds of millions in federal funds on the table and increasing the structural deficit by over $2 billion dollars, potentially necessitating additional spending reductions for core state programs such as Med-Cal.” 

“For these reasons, the Governor included this proposal in his revised budget plan last month,” according to the spokesperson. “And as you noted, both houses of the Legislature have adopted it as part of their version of the budget. So absent any dramatic last-minute changes, it will be reflected in the final budget agreement that we anticipate in the coming days.”

The California Medical Association (CMA) warned in a June 18 statement that the state’s 2026-2027 budget and accompanying health bill “include a $1.5 billion tax increase that will be passed on to consumers through higher health insurance premiums.” The increase may add up to $400 annually to premiums for a family of four, according to the CMA’s estimates. 

“As physicians, we see every day how difficult it is for patients to afford health care,” CMA President René Bravo said in a statement. “Many families are often forced to forgo coverage completely to save money for other basic expenses.”

CHICAGO, ILLINOIS – JUNE 18: Governor of California Gavin Newsom attends the dedication ceremony for the opening of the Barack Obama Presidential Center, in John Lewis Plaza, on June 18, 2026 in Chicago, Illinois. (Photo by Taylor Hill/Getty Images)

The California Association of Health Plans similarly asserted in a June 16 statement that the proposal “will increase premiums for California families, workers, small businesses, and public employees by hundreds of dollars” annually. 

“We are extremely disappointed that the Assembly voted to advance the Governor’s proposal to impose a $1.5 billion tax increase on health coverage that will increase premiums for California families, workers, small businesses, and public employees by hundreds of dollars every year,” The California Association of Health Plans said in a statement. “At a time when Californians are struggling with the rising costs of nearly everything, lawmakers should be focused on making health care more affordable, not more expensive.”

Newsom and the California state Legislature halted new enrollments by illegal immigrants in full-scope Medi-Cal coverage in June 2025 following criticisms over taxpayer costs, the DCNF previously reported. The freeze in new illegal immigrant enrollments began in January, according to CA.gov.

CA.gov’s website notes that if individuals are already enrolled in full-scope Medi-Cal, they will “stay covered no matter your immigration status if you complete your annual renewal.”

Democratic state lawmakers unveiled legislation in March aiming to reinstate Medi-Cal coverage for all income-qualifying California residents of any age, which includes illegal immigrants, CalMatters reported.

All content created by the Daily Caller News Foundation, an independent and nonpartisan newswire service, is available without charge to any legitimate news publisher that can provide a large audience. All republished articles must include our logo, our reporter’s byline and their DCNF affiliation. For any questions about our guidelines or partnering with us, please contact licensing@dailycallernewsfoundation.org.