California Lawmakers Advance Tax Proposal That Could Raise Health Insurance Premiums

SACRAMENTO – California lawmakers and the governor are moving forward with a plan to increase the state's managed care organization (MCO) tax, a legislative maneuver that could lead to higher private health insurance rates for businesses and individuals as soon as next year.

The proposal, which is advancing as part of the state's budget negotiations, comes at a time when Californians are already facing significant increases in healthcare costs. Premiums for health plans sold through the state's marketplace, Covered California, are set to rise by an average of more than 10% for the upcoming year, according to the Public Policy Institute of California. This tax proposal adds another layer of financial pressure on the state's employers, many of whom provide health coverage to their employees.

While proposals to tax managed care organizations or large corporations are often framed as targeting only the biggest players, the financial impact inevitably ripples through the entire economy. In our experience, these costs are rarely absorbed at the top; they are passed down in the form of higher premiums for the health plans that small and mid-sized businesses purchase for their employees. This creates a direct challenge to managing operational budgets and maintaining competitive benefits packages. Proactive financial modeling is essential for businesses to understand and prepare for these cascading effects on their bottom line. Navigating the complexities of state-level tax changes is a core component of our tax preparation and compliance services, as it directly impacts a company's financial health. To understand how shifting state tax policies could affect your business, we encourage you to contact C&S Finance Group LLC at csfinancegroup.com.

The MCO tax is a mechanism used by states to help finance their Medicaid programs, known as Medi-Cal in California. By taxing health insurance plans that serve Medi-Cal patients, the state can draw down additional matching funds from the federal government. However, health insurers typically pass the cost of this tax on to their customers in the commercial market, including employers and individuals who buy their own plans, resulting in higher premiums.

This initiative is part of a broader effort by state Democrats to address a looming healthcare funding shortfall. In a related move, a group of Democratic State Senators recently proposed a new tax specifically targeting the state's top 2% of corporations. According to the proposal's outline, this new fee would take effect in January 2027 and is estimated to generate between $5 billion and $8 billion annually for a special fund dedicated to Medi-Cal.

Lawmakers have stated this corporate tax is a response to a projected $9.5 billion annual healthcare funding gap in California, which they attribute to federal policy changes. The proposal has been met with caution from the business community. Rob Lapsley, president of the California Business Roundtable, which represents many of the state's largest corporations, warned that increased business taxes would ultimately be passed on to consumers through higher prices for goods and services.

The debate over new taxes is unfolding against a backdrop of already escalating healthcare costs. The double-digit average premium increase for Covered California plans varies significantly by region, from a 7.4% rise in the Sacramento area to a nearly 13% jump in the Fresno region. These increases are among the largest in recent years for the state's health insurance marketplace.

Further complicating the affordability picture is the status of federal subsidies. Currently, about 90% of Covered California enrollees receive federal assistance that helps offset rising premiums. Enhanced tax credits, which were expanded during the pandemic and extended through 2025 by the Inflation Reduction Act, have been particularly crucial for middle-income households. If these enhanced subsidies are not extended again, some families could face annual premium increases of more than $6,000 per person, according to analysis from the Public Policy Institute of California.

According to the state's Legislative Analyst's Office, other market forces could also push premiums higher. An increase in uncompensated care, for example, could lead hospitals and other providers to negotiate higher reimbursement rates from private insurance plans to cover their losses. These higher negotiated rates would then be reflected in future insurance premiums.

The current tax proposals are the latest in a long-running, intense debate in California over how to fund healthcare. In the background, more sweeping proposals like AB 1900, or CalCare, continue to be discussed. CalCare would establish a single-payer system, effectively eliminating private health insurance companies in the state and having the government pay providers directly. While similar bills have been passed by the legislature in the past only to be vetoed, recent polling shows strong support for the concept among California's Democratic voters, ensuring the fundamental structure of the state's healthcare financing will remain a central political issue.

As the MCO tax increase and the corporate tax proposal move through the legislative process, California business owners will be closely watching the outcome of the state's budget negotiations. The final decisions made in Sacramento will have direct and significant consequences for the cost of doing business and providing employee health benefits in the nation's largest state economy.