California Proposition 35 — Provides Permanent Funding for Medi-Cal Health Care Services

Yes on Proposition 35

Provides Permanent Funding for Medi-Cal Health Care Services

What is it?

Prop 35 permanently authorizes a tax on managed care organizations (MCOs) to fund Medi-Cal programs. Medi-Cal is California's Medicaid, a government program that subsidizes health insurances for adults and children with limited income. MCOs provide the majority of Californians with healthcare – Kaiser Permanente, Anthem Blue Cross, and Blue Shield are all examples of MCOs that provide care through Medi-Cal.

This tax will immediately be allocated to the cost of the tax on Medi-Cal enrollment and administrative costs. In 2025 and 2026, this tax will provide $2.7 billion to Medi-Cal and health workforce programs, and $2 billion to the general fund to offset Medi-Cal funding. The tax also includes provisions for subsidizing drug prices beginning in 2027.

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More Information

Every year, the California State government goes through an approval process to determine the budget for the following year. This is highly political, and organizations keep tabs on promises made and promises kept. Last year, Governor Gavin Newsom said that he would allocate the funds received from a tax on managed care organizations (MCOs) to the providers who work with Medi-Cal, California's low-income health insurance program. At the time, he had stated that it would go to multiple programs across access, primary care, maternity care, and mental health. This year, he went back on that statement in the face of a $26.7 billion state deficit — which is really closer to $45 billion — noting that he needed the budgetary flexibility.

Currently, California benefits from a policy loophole that allows the state to access federal funds through a tax on managed care organizations in California's Medi-Cal system. MCOs provide in-network patient care for their enrollees. The San Francisco MCOs are Kaiser Permanente, Anthem Blue Cross, and the San Francisco Health Plan.

The policy loophole that California uses is based on simple Medicaid financing rules: for every $1 spent by the state on Medicaid, the federal government spends $1. So California started taxing MCOs, paying for those taxes out of the state fund, and using the money paid for those taxes as a way to claim federal funds. If California taxes an MCO $205 and pays for their $205 tax, then the federal government will also pay $205 because it matches 1:1 California's spending on Medicaid. So California benefits by, practically speaking, earning $205.

Currently, California taxes its MCOs that provide Medi-Cal health plans $205 for every new Medi-Cal enrollee, and $1.75 for every commercial enrollee (non-Medi-Cal). The funding that California draws from the federal government for this tax is anticipated to be 5 billion next year.

Now the reason that this initiative is on the November ballot is because healthcare providers want to hold Newsom to what he originally said he would use the MCO tax for. Newsom changed his funding priorities, given the state's budgetary concerns, and so they want to force his hand by bringing the decision to voters. The thing is, this is a complicated tax — its structure, history, and intended purpose are not initially clear, and at the ballot box it's just too easy to gloss over what will really happen if we pass it.

So let's break it down, and consider the pros and cons of passing this initiative.

Pro

Permanently secures Medi-Cal funding for a set of predetermined priorities.
Guarantees that Medicaid dollars are being spent on Medicaid, instead of being repurposed for some other use that is not medical in nature.
Initially restrictive with which services receive funding increases, then opens more services to funding increases in the long term (beginning in 2027).

Con

Restricts the California budget, and the ability to use the funds received for this tax, despite other funding streams for Medi-Cal.
Makes permanent a set of provisions for where funding from this tax can go, thereby limiting possibly necessary changes to its structure.
Requires a supermajority (three-fourths) of the Legislature to make any amendments to the chapter.

Mechanically, this bill guarantees 5 things:

Permanent Funding Stream: Creates dedicated and permanent funding sources to support increased reimbursement rates for healthcare providers serving Medi-Cal patients. Creates a "Protect Access to Healthcare Fund" to contain these funds, which will remain separate from the California General Fund.
Increased Reimbursement Rates: mandates that the reimbursement rates for Medi-Cal services be increased to levels that cover the costs of care, with specific allocations for primary care, specialty care, emergency services, mental health, and family planning.
Prescription Drug Affordability: funds the production of generic drugs under the California Affordable Drug Manufacturing Act of 2020, with the aim to reduce the cost of prescription drugs.
Healthcare Workforce Support: has provisions to attract, retain, and expand the healthcare workforce through various programs, including loan repayment assistance and funding for graduate medical education.
Increased and new funding for Emergency Medical Services, and Mental Health Services: provides increased funding for ground and air emergency medical transportation. Allocates new funds to expand access to mental health services, such as increasing the supply of psychiatric beds and hospitals.

Objections to this bill are based on how the bill may possibly restrict the budget by creating provisions that cannot be manipulated by the legislature. Gavin Newsom is on record for saying that Prop 35 "hamstrings our ability to have the kind of flexibility that's required at the moment we're living in. 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."

Fiscal impacts

In the short term (2025 through 2026), Prop 35 will likely increase state costs to the tune of $1 billion to $2 billion because Prop 35 "reduces the amount of health plan tax revenue that can be used to help pay for existing costs in Medi-Cal," according to the Legislative Analyst's Office.

But in the long run (after 2027), the fiscal effects are not known. This is because the final allowable tax is subject to approval by federal regulators, and they may deem the tax too large, thus reducing the amount of revenue the state can collect. In addition, when comparing the tax measure to future state finances, we must look at two possible futures: one where this measure fails and the state fails to renew the existing tax, and one where the state does renew the existing tax. The former would result in lower state revenues, while the latter would result in stable state revenues.

See "Fiscal Effects" section of the Legislative Analyst's Office report (PDF)

Why is this on the ballot?

A group of medical organizations and hospitals are backing this measure. Of the $11.7 million raised to put this measure on the ballot, the Global Medical Response, Inc (an ambulance and EMT services company) contributed $3 million, the California Hospitals Committee on Issues contributed $2 million, and the California Medical Association contributed $2 million.

According to Article II, Section 8 of the California Constitution, citizens may introduce statutes (laws) by collecting signatures (5% of the votes cast in the most recent Governor's race). The statute must then be approved by voters with a simple majority of 50% + 1.

Proponent: "Coalition to Protect Access to Healthcare"
Placed on ballot by: Paid signature gathering

As of July 29, 2024 there is no organized opposition to this measure.

Why vote Yes?

At the end of the day, Prop 35 is a budget set-aside, which impairs how legislators can make decisions about the budget. But that said, it locks in funding for important Medi-Cal services that should not be subject to political jockeying.

Consider it this way: every year, California politicians have to balance the budget, which is a highly political process consisting of what (and who) gets funding and what (and who) doesn't. One way that the budget is made highly political is when well-coordinated campaigns bring measures to the ballot box that force politicians to spend the budget a certain way. That's what a budget set-aside is.

And that is what is happening here. Prop 35 requires that California spend the money earned from a federal Medicaid tax loophole on a set of provisions that are outlined in this ballot measure.

The simplest way to understand this ballot proposition is as follows:

A bunch of medical groups came together to figure out how the money from a federal Medicaid loophole should be spent. Here's a partial list of Medi-Cal service changes that would receive funding if Prop 35 passes, provided by the Legislative Analyst's Office:

Prop 35 changes

While we are generally opposed to budget set-asides, we believe that Prop 35 reflects the needs of doctors and practitioners represented by the medical associations in support of this bill, including the California Medical Association, the California Dental Association, Planned Parenthood, the Hospital Council of Northern and Central California, and Stanford Health Care to name just a few. A full list of the coalition is available online.

Vote YES to ensure that these critical Medi-Cal services receive funding for the years to come, and that the funding needs of doctors and practitioners are respected.