California advocates push to reinstate MCO tax to improve Medi-Cal


Hannah Saunders


Earlier this week, Gov. Gavin Newsom released his May Revision of the 2023-24 state budget, which calls for reinstating a managed care organization (MCO) tax in the state. An MCO tax—which was previously in place for over a decade, with the most recent tax having expired in December—would allow California to receive federal matching funds to support the Medi-Cal program.

California’s first MCO tax was passed in 2009 and although it expired in 2012, it consistently provided stable funding for the Medi-Cal program. The structure of the tax has differed over time, with the earlier version having imposed taxes on revenues of managed care plans and more recent versions having imposed taxes on managed care plans’ enrollment. The most recent MCO tax began in January of 2020, which gathered an annual General Fund saving of over $1.5 billion. 


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“The California Medical Association (CMA) applauds Governor Newsom’s ongoing efforts to achieve universal access to healthcare coverage for all Californians,” Donaldo Hernandez, MD, president of CMA said in a statement. “We support the renewal of the Managed Care Organization (MCO) tax and urge that it be fully invested in the Medi-Cal system that provides coverage to one in every three Californians to significantly improve access to care and address health disparities.” 

CMA has been a longtime supporter of the MCO tax. In January, CMA urged the governor’s administration to dedicate MCO tax revenues to raise Medi-Cal reimbursement rates. CMA claims that California has not made across-the-board increases to Medi-Cal rates since the early 1990s and that Medi-Cal still requires an ongoing revenue stream.

California is not the only state to impose the MCO Tax. The Kaiser Family Foundation (KFF) MCO Tax data tracking for states shows that there has been a steady increase of state’s using the tax over the past five years. In 2018, 12 states had a MCO Tax and by 2019, 14 states had one. That number dipped to 11 in 2020—not because states did away with the tax, but because they did not respond to KFF’s survey. In 2021, 14 states had a MCO Tax and last year, a total of 17 states had one—with Kansas and Washington state having implemented the tax for the first time.

While the tax requires federal approval, Newsom’s May Revision predicts the reinstatement will result in $19.4 billion in revenue from April 1st, 2023, until December 31st, 2026, to increase and maintain investments in Medi-Cal. Annual revenue will be about $5 billion, and $2.5 billion of 2023 revenue would be used to achieve a balanced budget and support Medi-Cal. 

The remaining $11.1 billion would go towards Medi-Cal investments for securing access, quality, and equity in Medi-Cal over an eight-to-10 year period. Of those funds, $10.3 billion would go towards a special fund reserve to allow for long-term sustainable Medi-Cal enhancement. 

“Medi-Cal reimbursement rates present challenges in bringing more providers into the system,” Linnea Koopmans, CEO of Local Health Plans California, said in a statement. “The MCO Tax renewal is an opportunity to bolster rates and move us closer to CalAIM’s policy goals of access, quality, and equity.” 

The tax would also fund Medi-Cal provider rate increases of at least 87.5% for specific providers, and would nullify Assembly Bill 97, which passed in the 2011-2012 session and cut Medi-Cal provider reimbursement rates by 10%, which CMA has long advocated to undo. 

“It is very welcome news that a significant share of the remaining provider reimbursement rate cuts from 2011 are proposed for elimination in the governor’s May revision, as these cuts have had a negative impact on patient access to care for more than a decade,” Hernandez said. 

The 87.5% provider rate increase would go into effect on Jan. 1st, 2024, and would apply to primary care providers, including nurse practitioners and physician’s assistants; maternity care, including OB/GYNs and doulas; and non-specialty mental health service providers. Rate increases will be passed on directly to providers, and the state will direct managed care plans to pay providers these rates at a minimum. 

“The MCO Tax is a valuable tool for generating much-needed additional revenue for the Medi-Cal program,” stated the Community Clinic Association of LA County (CCALAC). “We appreciate the increased revenue this proposed MCO model will generate and the investment in critically needed provider rate increases.” 

The cost of rate increases would be about $237 million, with $98 million from the General Fund for 2023-24. For the following calendar year it would be $580 million, with $240 from the General Fund. For the 2025-26 calendar year, rate increases would be $582 million, with $241 from the General Fund.

“The May Revise, however, proposes to spend the revenue from the MCO tax over an 8-to-10-year period,” CCALAC said. “We can make a more meaningful impact toward improving the Medi-Cal program and ensuring a robust provider network by making larger investments over a shorter time frame. We look forward to continued dialog with the administration about the MCO tax structure.” 

While the budget still has to pass the legislature and receive the governor’s signature, several Californian organizations see benefits of the proposed MCO tax. If the MCO tax becomes approved within the finalized budget, the Department of Health Care Services must submit a MCO tax proposal to CMS by June 30th. 

The California Association of Health Plans (CAHP), which represents 43 full-service health plans statewide, released a statement in response to the budget revision. 

“California’s health plans have been working constructively with the Administration on the proposed renewal of the Managed Care Organization (MCO) Tax and are pleased to see the Governor’s budget revision is proposing to invest a portion of the tax revenues into the Medi-Cal program,” CAHP stated. “Although we are still evaluating the details of the Governor’s proposal, California’s health plans fundamentally agree the MCO Tax should directly benefit and enhance services in the Medi-Cal program.”

CAHP also said that the tax must be affordable for health coverage buyers in the individual and employer markets, and must be predictable, stable, and equitable. CAHP looks forward to more developments, and believes that focusing on primary and specialty care is a crucial starting point.