California Prop 35 explained: Funding for Medi-Cal services

LOS ANGELES - Among the blitz of election ads flooding TV, social media and street corners, you won’t see any opposition to a ballot measure proposing to lock in billions of dollars to pay doctors more for treating low-income patients.

But opponents of Proposition 35 have a warning even if they don’t have the money to pay for ads: The measure could backfire and cause the state to lose billions in federal funding.

Prop. 35 would take an existing tax on health insurance plans and use the money to increase payment to doctors and other providers who see Medi-Cal patients. Its supporters have raised $50 million, drawing from groups representing hospitals, doctors and insurers.

Medi-Cal, the subsidized insurance plan serving some 14-million Californians, has ballooned in size over the past decade with increased eligibility and benefits. But those changes haven’t come with a commensurate increase in payment to doctors.

As a result, health care providers and advocates say too few doctors accept Medi-Cal, leaving patients with nowhere to turn.

According to the Public Policy Institute of California, the measure is leading and likely to pass.

But opponents, represented by a small coalition of community health advocates, seniors and activists for good governance say the details of the proposition put the state at risk of losing billions in federal funding.

That’s because the federal government under both the Biden and Trump administrations has warned California that its tax on health plans to fund Medi-Cal services takes unfair advantage of a loophole in federal regulations. The federal Centers for Medicare and Medicaid Services intends to close that loophole, regulators wrote in a letter to California officials late last year.

"This is the fatal flaw of this initiative," said Kiran Savage-Sangwan, executive director of the California Pan-Ethnic Health Coalition, which is leading the opposition. "We can all have opinions on how to spend the money, but we have to raise the funds first."

The problem, opponents say, lies in how California taxes health plans and how Prop. 35 limits changes in the future.

Right now, the Managed Care Organization Tax, also known as the MCO Tax, generates revenue for Medi-Cal by taxing health insurers that serve both Medi-Cal and commercially insured patients. The federal government gives California a dollar-for-dollar match to whatever funds are raised by the tax. For Prop. 35 that’s an estimated $7 billion to $8 billion annually through 2027.

However, California has historically placed the majority of the tax burden on Medi-Cal insurers and not commercial insurers. In its letter to state officials, federal regulators said Medi-Cal plans represent 50% of all insured people but bear "99% of the total tax burden." That is at odds with the spirit of the law, which is meant to redistribute revenue from commercial insurers to Medi-Cal plans, regulators wrote.

Prop. 35 would cap the tax on commercial insurers at a minimal rate. Any attempts to modify the tax would have to go back to the ballot box or be approved by three-fourths of the Legislature. Opponents say that means federal rule changes requiring the commercial tax to be more equal to the Medi-Cal tax will force the state to reduce taxes on the Medi-Cal plans.

"The end result of that is when the federal government makes good on their promise to change the rules on this tax, the revenue we raise from this tax will be dramatically reduced and we would leave billions of dollars on the table," Savage-Sangwan said.

Proponents of the measure said this argument is false but did not provide details. They say Prop. 35 will make the Medi-Cal program more stable and higher rates will encourage more providers to see low-income patients.

California’s Medi-Cal reimbursement rates fall in the bottom third compared to all other states, according to the Kaiser Family Foundation, and rates for specific services like obstetrics are among the lowest in the country.

"Prop. 35 is a critically needed investment to protect and expand access to care for Medi-Cal patients and all Californians," said Molly Weedn, spokesperson for the Yes on Prop. 35 campaign, in a statement. "The principal purpose behind Prop. 35 is to provide stability and predictability… to address the significant shortfall of providers who can see Medi-Cal patients."

The California Association of Health Plans said that it did not ask for the commercial tax cap in the proposition and that it has historically supported this tax structure to pay for Medi-Cal. A higher tax on commercial plans could increase premiums.

Where is Gov. Newsom on Prop. 35?

The largest donors to the yes campaign are the California Hospital Association, Global Medical Response, and the California Medical Association, which collectively donated $38 million. Opponents have raised no money, according to state campaign finance records.

Gov. Gavin Newsom has not taken a formal stance on the measure, although he said at a press conference in July that he’s concerned about how it would lock in tax revenue for a single purpose. The state budget he signed that month shifted most of the tax revenue from the tax on health insurers into the general fund to pay for the Medi-Cal program.

If voters approve Prop. 35, the state would face a $2.6 billion deficit in the current budget, which relies on the tax to fill in gaps. That deficit would increase to $11.9 billion over the next three budget cycles, according to an analysis from the Department of Finance.

"This initiative 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," Newsom said at the press conference.

Newsom’s office did not respond to multiple requests on whether he would formally oppose the measure.

Savage-Sangwan said the opposition has not solicited any money for their campaign.

"We are using the very small megaphone that we do have to just get the facts out," she said.

Trade-offs in 2024 health care ballot measure

The political split over Prop. 35 is unusual. The measure’s opponents are often on the same side as its supporters when it comes to health policy issues in the Capitol. But community health advocates say they’re speaking up because the future ramifications of the initiative are too risky.

"We want to make clear that the goals of the prop are goals we agree with. We recognize our providers in Medi-Cal are paid far too little and that disproportionately impacts people of color, children of color especially," said Mayra Alvarez, president of The Children’s Partnership, another opposing group.

Some lawmakers agree. During multiple budget hearings, Sen. Caroline Menjivar, a Democrat from Van Nuys, came to oppose the proposition in part because the industry organizations that negotiated who would get money from the tax left out "community providers" and those "who don’t have high-paid lobbyists."

"By listening to those with boots on the ground, the legislature developed a plan to equitably address many Medi-Cal concerns over the next few years," Menjivar said in a statement from the opposition campaign.

The tax is expected to generate more than $30 billion over the next four years. The budget Newsom signed puts most of the money in the state’s general spending account, but set aside roughly $2 billion to increase rates for services including community health workers, private duty nursing, adult and children’s day centers and children at risk of automatic Medi-Cal disenrollment. If Prop. 35 passes, different groups will get rate increases.

Weedn with the Yes on Prop. 35 campaign said the initiative won’t automatically cause cuts if it passes. It would be up to the Legislature to decide how to pay for the programs opponents are worried about, she said, and that the initiative provides about $2 billion of flexible dollars annually for legislative priorities.