California is confronting an unlikely coalition of doctors and health insurers over a revised tax on private health plans, a move designed to preserve billions in Medi-Cal financing after new federal restrictions. Gov. Gavin Newsom and Democratic lawmakers support the redesigned levy, which would raise taxes on private health plans beginning in 2027 if approved by the federal government. The tax is intended to replace a financing mechanism that has drawn down federal matching funds for the state's Medicaid program, but critics warn it could shift more costs onto privately insured Californians.
The dispute centers on how California funds Medi-Cal, the state's Medicaid program, which provides healthcare to low-income residents, including immigrants without legal status. Providing healthcare to immigrants without legal status cost California an estimated $12.4 billion in 2025, according to the Associated Press. Federal changes, particularly the One Big Beautiful Bill Act, will prevent California from continuing its existing health-plan tax structure after 2026, forcing the state to redesign a financing mechanism that has generated billions for the program. The new proposal would raise the levy on private health plans if federally approved, potentially increasing premiums for their customers.
Brian Blase, president of the right-of-center Paragon Health Institute, told Fox News Digital that expanding coverage to immigrants without legal status created a need for California to raise taxes. «The One Big Beautiful Bill Act limited California's ability to target the tax just on Medicaid insurers, so California is proposing to raise the health insurance tax on people that have private coverage... the estimates are that would increase insurance for families by $400 a year,» he said. «That is just because California doesn't want to deal with its unsustainable spending... there are many people on the program who are not eligible for the program, and that is not even accounting for the fact that California has expanded Medicaid to all unauthorized immigrants in the state.»
The California Medical Association and the California Association of Health Plans are suing to block the tax increase. Their challenge is not based on the argument that it benefits immigrants without legal status, but on allegations that the measure violates voter-approved limits on health-plan taxes and restrictions on how the resulting revenue can be spent. The alliance is notable because doctors and insurance companies often find themselves on opposite sides of healthcare debates. Proposition 35, passed with overwhelming support from California voters, limits how much California can tax commercial health-plan enrollment, constraining the state's options as it tries to comply with new federal rules governing the much higher tax previously imposed on Medi-Cal enrollment.
«California voters passed Proposition 35 and made it law. The state does not get to ignore that law simply because following the law is inconvenient,» California Medical Association CEO Dustin Corcoran said in a statement. Health insurers warn the cost of the revised tax could be passed directly on to consumers through higher premiums, estimating an increase of about $100 per person per year. A family of four, for example, could face an additional $400 annually on top of normal rate increases.
Newsom spokeswoman Tara Gallegos said the governor maintains that his tax increase is not rendered illegal by the proposition. «The state disagrees with their claims, and we believe the courts will too,» she told Fox News Digital of the lawsuit. H.D. Palmer, deputy director for external affairs at the California Department of Finance, explained that the new tax measure was designed to comply with the One Big Beautiful Bill Act. According to Palmer, the state's current health tax regime may conflict with the bill, and the state is submitting a proposal with two tracks — one similar to the current taxing scheme but potentially running afoul of federal law, and another that conforms to the One Big Beautiful Bill Act by shifting costs toward private plans.
«If the federal government declines to approve the tax that is structured similar to the existing [health plan tax], Proposition 35 may then sunset per current law,» Palmer added. The debate unfolds against a backdrop of a mass exodus from California over the past decade, with the cost of living cited as a chief reason for leaving. One analysis found that almost 10 million people moved from California to other states between 2010 and 2024, while just over 7 million moved to California from elsewhere in the country during the same period. The departure of higher-income residents has raised concerns about the state's financial outlook, as California relies heavily on income taxes.