Six House members want HHS to reject California's revamped Medicaid managed care tax, arguing it will raise costs for families and insurers alike. Billions in federal Medi-Cal funding now hang on the outcome
A group of California Republicans in Congress is pushing the Trump administration to block a new tax on health insurers before it ever takes effect. Six House members, including Reps. Kevin Kiley and James Gallagher, sent a letter Friday to Health and Human Services Secretary Robert F. Kennedy Jr. and Centers for Medicare and Medicaid Services Administrator Dr. Mehmet Oz, asking them to deny federal approval of California's newly expanded managed care organization tax, according to the Sacramento Bee. It's the second such letter to HHS this month, following an earlier one from more than a dozen state Assembly Republicans.
Gov. Gavin Newsom signed the tax into law last month with support from the Democratic legislative supermajority. It still needs sign-off from CMS, the federal agency that oversees Medicaid, before it can take effect, and that approval isn't guaranteed.
California didn't do this by choice. Its MCO tax, in place in some form since 2005, works by taxing health plans and using the revenue to draw down additional federal Medicaid matching dollars, which then fund higher Medi-Cal provider payments. Federal law requires these provider taxes to be broadly and evenly applied, so California, like many states, has relied on a federal waiver of those "broad-based" and "uniformity" requirements to run a tax that charges different rates depending on how much Medicaid business a plan does.
Last year's federal reconciliation law, the One Big Beautiful Bill Act, restricts exactly that waiver pathway. Signed in July 2025, it directs CMS to stop treating these differentiated, waiver-dependent provider taxes as permissible once they effectively charge lower rates to plans with less Medicaid business and higher rates to plans with more, a structure regulators say no longer counts as "generally redistributive." CMS has since issued a final rule implementing that restriction and separately proposed bringing state taxes on Medicaid managed care insurers under tighter federal oversight as their own tax category. Insurance Business has previously covered warnings from hospital groups that OBBBA's broader restrictions on state Medicaid financing would ripple well beyond Medicaid enrollees themselves.
Under the new rules, California could either restructure and raise the tax on commercial health plans to keep qualifying for federal matching funds, or let the funding lapse. It chose to raise the tax.
The tax applies to Medi-Cal managed care organizations, including the state's largest plans: Anthem Blue Cross, Health Net, Molina Healthcare, Kaiser Permanente and L.A. Care Health Plan, the country's largest publicly operated health plan. State finance officials say the increase, estimated to cost a family of four roughly $400 a year, is needed to fund targeted rate increases for Medi-Cal providers as the program faces mounting budget pressure. The prior version of the tax, approved by CMS in December 2024, was projected to generate roughly $7.2 billion in additional Medi-Cal funding through the end of 2026. What's now in question is whether the revised, higher structure needed to comply with OBBBA gets the same approval.
California Department of Finance spokesperson H.D. Palmer said the tax was "crafted to comply with the federal law changes" that Congress and the president signed into law last year, and that the state expects CMS to approve it on that basis.
Kiley's letter takes the opposite view, calling the tax "unacceptable" and arguing residents already facing high living costs shouldn't absorb another increase passed through by insurers.
Health insurers operating in California are now caught between a state trying to preserve billions in federal Medicaid funding under tighter new rules, and members of its own congressional delegation asking Washington to say no. If CMS denies the waiver, California loses a major funding source for Medi-Cal provider rates just as the program is already running budget deficits, and the state will need another way to close that gap. If CMS approves it, commercial insurers absorb a materially higher MCO tax bill. Either way, the decision will set the terms for managed care costs and Medi-Cal provider payments in the country's largest state Medicaid program.
