By: Jake C. Trinh

California’s managed care organization (“MCO”) tax has been rewritten once again, and this time the change was not optional. On June 29, 2026, Governor Newsom signed Senate Bill 125, chaptered as Chapter 24 of the Statutes of 2026, restructuring the tax that health plans doing business in California pay to help fund Medi-Cal. The bill was necessary because the version of the tax California had been counting on no longer complied with federal law.

Some background helps explain how the state got here. Medicaid is funded jointly by the federal government and the states, and federal regulations allow states to impose taxes on health care providers, including managed care plans, to help cover the state’s share of program costs. States can then use that revenue to draw down additional federal matching funds. To qualify, a provider tax must be broad based, uniformly imposed, and free of hold harmless provisions that effectively guarantee the taxed entities get their money back. Every state but Alaska uses some version of this tool.

California has relied on an MCO tax in various forms since 2005, and voters made the tax permanent in November 2024 through Proposition 35 (“Prop. 35”), which also dedicated the revenue to raising Medi-Cal provider reimbursement rates. The version of the tax in place at that time used a tiered structure that charged Medi-Cal managed care plans a substantially higher rate than commercial plans. Under that structure, the middle tier applied to Medi-Cal enrollees reached roughly $182.50 per enrollee, compared to just a few dollars for non-Medi-Cal enrollees in the same tier.

That structure ran into trouble eight months later. On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (“OBBBA”), which imposed new federal limits on how states can use provider taxes, including a rule barring any tax that applies a higher rate to Medicaid business than to non-Medicaid business. California’s tiered MCO tax did precisely that, and it fell out of compliance the moment the OBBBA was signed. Without a fix, the state stood to lose access to billions of dollars in federal Medi-Cal matching funds.

SB 125 is that fix. For calendar years 2027 through 2029, the bill assesses a flat tax of $8.85 per enrollee per month on MCOs, applied equally whether the enrollee is in Medi-Cal or a commercial plan. It also creates a Medi-Cal Stability Fund and continuously appropriates the tax revenue to the Department of Health Care Services (“DHCS”) to support Medi-Cal expenditures, and it gives DHCS authority to adjust the taxing tiers and schedule going forward. Collection will not begin until January 1, 2027, or until the necessary federal approval comes through, whichever is later.

The dollar figures tell the rest of the story. Because the new tax is flat rather than tiered, commercial and other non-Medi-Cal plans that previously paid only a few dollars per enrollee per month will now pay the same $8.85 that Medi-Cal plans pay. According to the Senate Rules Committee’s analysis, the restructured tax is projected to generate general fund support of roughly $575 million in fiscal year 2026-2027, $2.3 billion in each of the following two years, and $1.7 billion in 2029-2030. That is a fraction of the nearly $8 billion a year the Prop. 35 version of the tax was projected to raise, and it is closer to what the tax generated before Prop. 35 passed. The California Association of Health Plans has estimated the flattened rate will add roughly $100 per year to the cost of coverage per covered person, a cost that plans are expected to pass through in premiums.

For health plans operating in California, the practical effect will likely show up in two places over the next few years: rate filings, as plans account for the new assessment in setting premiums, and reserves, as commercial and other non-Medi-Cal plans absorb a cost they did not previously face at this level. Plans that had little or no exposure under the old tiered structure should not assume that will continue once collection begins. The federal approval timeline is also worth watching, since it determines when the $8.85 assessment actually takes effect, and DHCS’s authority to adjust the taxing tiers and schedule means the mechanics of the tax could still shift before collection starts.