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California Enacts SB 125 to Restructure Managed Care Organization Tax

On June 29, 2026, California Governor Gavin Newsom signed into law SB 125, a law which restructures California’s existing tax on managed care organizations (MCO tax).

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Background

The funding for Medicaid is a shared responsibility by the federal government and the states. Federal Medicaid regulations allow states to impose provider-related taxes on health care providers (like managed care plans, nursing homes, hospitals and ambulance companies), and the revenue from these taxes can serve as part of the state’s share of spending for Medicaid. Every state except Alaska has at least one health care provider tax. These taxes allow a state to draw down additional federal funding for its Medicaid program, as long as the taxes are broad-based, uniformly imposed, and contain no hold-harmless provisions.

In November 2024, California voters approved Proposition 35, which made permanent a tax on managed care organizations, and authorized expenditures to increase reimbursement rates for health care providers in the Medi-Cal program.

This plan to increase funding for Medi-Cal was thwarted eight months later, when President Trump signed into law the One Big Beautiful Bill Act (OBBBA). Among its provisions, OBBBA imposed significant additional limitations on states’ use of health care provider taxes including a prohibition on new or increased provider taxes, a phasing down of the federal threshold on the size of the tax, and a revision which barred taxes that impose a higher rate on Medicaid providers or plans than on non-Medicaid providers or plans. Upon the signing of OBBBA, California’s MCO tax was in violation of federal law, putting billions of dollars in state Medi-Cal funding at risk.

Provisions in SB 125

SB 125 was enacted in order to preserve some of California’s ability to draw down federal funds for Medi-Cal, given the changed federal rules around provider taxes. It does the following:

• For calendar years 2027, 2028, and 2029, SB 125 assesses a tax of $8.85 per enrollee per month on managed care organizations inside and outside Medi-Cal.
• Continuously appropriates funds deposited in the newly established Medi-Cal Stability Fund to DHCS to support certain Medi-Cal expenditures.
• Makes assessment of the MCO tax operative on January 1, 2027, or the effective date of any necessary federal approvals, whichever is later.

Impact

According to the Senate Rules Committee, the state revenue from the revised MCO tax will support the nonfederal share of expenditures in the Medi-Cal program, resulting in state General Fund savings of $575 million in 2026-27, $2.3 billion in 2027-28 and 2028-29, and $1.7 billion in 2029-30. This revenue is a fraction of the approximate $8 billion annually that was raised by the Prop. 35 MCO tax and is closer to the MCO tax revenue in California prior to Prop. 35.

Aside from the state budget impact, it is expected that newly taxed MCOs will pass along some of that cost to insureds in the form of higher premiums. The California Association of Health Plans has estimated the cost to be an additional $100 per covered person.