Newsom’s Dirty Medicaid Trick Screws Over Californians

Outgoing California Gov. Gavin Newsom has a going-away present for Golden State residents: higher health insurance premiums. That is, unless a lawsuit recently filed by a series of health care providers succeeds, in which case California could have a multibillion-dollar hole in its budget.

These harmful consequences arise in part from Newsom’s lack of leadership, a trait the would-be presidential candidate would bring to Washington.

State Funding Gimmick

The problem arises from the intersection of federal law and a 2024 voter proposition. Specifically, California funds its Medicaid program via a tax on managed care organizations designed to maximize revenue from Medicaid beneficiaries, for whom the state can get extra federal matching funds. This year, the tax on insurers covering Medicaid enrollees comes to $274 per enrollee per month, compared to only $2.25 for non-Medicaid enrollees.

Since 2023, the Biden and Trump administrations have warned California that this disparate tax treatment violated the spirit of the Medicaid statute. Congress agreed, closing this loophole in Section 71117 of last year’s Big, Beautiful Bill. Under a final rule implementing the law released earlier this year, California will have to equalize the insurer tax disparity by next Jan. 1.

That’s where Proposition 35 comes in. The initiative, approved by voters in November 2024, imposes strict parameters on the tax and the programs it funds. While encouraging the state to “maximize the amount of federal [Medicaid] matching funds” received, the initiative limits the tax on non-Medicaid enrollees to no more than $2.50 per month and prohibits the legislature from diverting the tax to the state’s General Fund. Instead, Prop 35 includes specific instructions that the tax fund higher Medicaid reimbursements for various health care groups, most of whom endorsed the initiative.

Newsom and Democrats Violate Ballot Initiative

In June, the legislature passed, and Newsom signed, a law that complied with the new federal requirements — but not Proposition 35. The law raised the insurer tax on non-Medicaid enrollees to $8.85 per month, which, if fully passed on to consumers, would raise premiums for a family of four by over $300 per year. It also permitted the state to use funds from the tax “for cashflow loans to the General Fund.”

The higher tax on non-Medicaid enrollees, the language permitting transfers to the General Fund, and the legislature’s failure to approve the measure with a three-fourths margin all violate Proposition 35. Indeed, the bill explicitly stated “the intent of the Legislature” to enact a provider tax “that is not subject to” Proposition 35. 

Newsom plans to square this circle by engaging in a game of three-card monte. His administration will first ask Washington to approve an insurer tax that complies with Proposition 35 but not the new requirements in federal law and regulations. When federal officials reject that application — as Newsom’s office both expects and hopes it will — it will then seek approval of the tax the legislature approved.

Legal Mess Caused by Newsom’s Lack of Leadership

Unsurprisingly, the health care groups that pushed to enact Prop 35 sued. In their complaint, they asked the California Supreme Court to intervene directly, given the Jan. 1 deadline for changing the tax, and declare that Newsom’s gambit violates the state constitution by effectively nullifying the voter-passed initiative. Their complaint rightly noted that Newsom and the legislature can readily restructure the insurer tax to comply with both Prop 35 and the new federal law. Doing so, however, would sharply reduce the roughly $2 billion in revenue that the bill the legislature passed in June would generate.

This potential fiscal mess was both predictable and predicted when Proposition 35 passed. Federal officials had already warned California about its insurer tax gimmick, and some groups worried that Prop 35’s continued reliance on it meant the measure would backfire. But rather than marshaling opposition to the measure as fiscally irresponsible, Newsom instead waffled: “I haven’t come out publicly against it. But I’m implying a point of view. Perhaps you can read between those many, many lines.”

Talk about a profile in courage. Because Newsom decided to lead from behind, Californians now face the Scylla of higher health insurance premiums or the Charybdis of yet another state budget shortfall. If this is the type of leadership Newsom wants to bring to Washington, better for him to stay in Sacramento.