California’s Managed Care Organization Tax
California is focused on ensuring the long-term stability of the Medi-Cal program. The Managed Care Organization (MCO) Tax provides a dedicated revenue stream that supports or strengthens Medi-Cal services, health care access, and improved care for millions of Californians. DHCS worked closely with the federal Centers for Medicare & Medicaid Services (CMS) to renew this funding mechanism to ensure that California can continue making critical investments in the Medi-Cal program. Proposition 35 now provides a framework for how this funding must be used moving forward.
Frequently Asked Questions
What is the MCO Tax, and how does it work?
The MCO Tax is a federally allowable Medicaid funding mechanism, whereby a tax is imposed on managed care organizations (MCO) and the revenue from the tax may then be used to support Medicaid expenditures (with federal matching funds, when available). Under the California program, the amount of the tax each MCO is required to pay is calculated based on the number of applicable members the plan serves.
The current structure of the MCO Tax was authorized in State law by Assembly Bill (AB) 119 (Chapter 13, Statutes of 2023) effective for April 1, 2023, through December 31, 2026, and further amended by Senate Bill (SB) 136 (Chapter 6, Statutes of 2024) and AB 160 (Chapter 39, Statutes of 2024) effective for January 1, 2024, through December 31, 2026.
What federal approvals has California received for the MCO Tax?
In December 2023, the federal Centers for Medicare & Medicaid Services (CMS) approved a waiver authorizing California’s MCO Tax in accordance with AB 119. In December 2024, CMS approved an amendment, effective for January 1, 2024, through December 31, 2026, authorizing the collection of increased taxes pursuant to SB 136 and AB 160 and the final step needed to implement the tax under current law.
Do other states use an MCO tax?
What is Proposition 35?
Proposition 35, approved by California voters in November 2024, permanently establishes state authority for the existing tax on MCOs and specifies permissible uses of the tax revenues collected pursuant to AB 119, beginning within the calendar year 2025 tax period. Further, it requires DHCS to consult with a stakeholder advisory committee to develop and implement new or modified payment methodologies pursuant to Proposition 35.
Is stakeholder engagement required under Proposition 35?
Proposition 35 requires DHCS to consult with a newly created stakeholder advisory committee before proposing any new or revised provider payments supported by MCO tax revenue. The Protect Access to Health Care Act Stakeholder Advisory Committee is appointed by the Governor and legislative leaders and includes a diverse mix of health care stakeholders.
When will the first stakeholder advisory commiee meeting be held?
DHCS has scheduled and confirmed a quorum for the first committee meeting on April 14, 2025, starting at 11:30 a.m. Meetings are open to the public and will include the opportunity for public comment. While Proposition 35 states that committee members' terms begin 45 days after the initiative’s effective date (January 1, 2025), it does not mandate that the committee meet by a specific date.
Who serves on the stakeholder advisory committee?
The committee is comprised of representatives from various health care sectors, including physicians, hospitals, private ambulance providers, family planning and reproductive health providers, Medi-Cal managed care plans, clinics, dentists, and organized labor. Members are appointed by the Governor, the Speaker of the Assembly, and the Senate President pro Tempore. See the complete list of committee members.
What is the purpose of the committee?
The committee’s role is to advise DHCS on developing and implementing components of the Protect Access to Health Care Act of 2024.
Has DHCS created new proposals for how the MCO Tax should be spent?
Following the passage of Proposition 35, DHCS began developing a new set of proposals in line with the proposition's requirements.
DHCS is working diligently to develop a thoughtful approach to utilizing these funds under Proposition 35’s framework. In consultation with the stakeholder advisory committee, we will ensure the Medi-Cal program’s goals for quality, access, and fiscal sustainability are supported.
Has DHCS missed any deadlines related to Proposition 35 and lost federal fundig as a result of missing any deadlines?
No. DHCS has not missed any deadlines related to Proposition 35, and no federal funding has been left on the table. DHCS has already received federal approval for the full amount of MCO Tax revenue authorized under the MCO Tax.
All applicable revenues subject to Proposition 35 are deposited in the Protect Access to Health Care Fund and cannot be used for any purposes other than those specified in Proposition 35. These funds remain available to be matched with federal funds to the extent the payment methodologies ultimately adopted under Proposition 35 allow for it. When the funds subject to Proposition 35 are spent, DHCS can and will draw down federal funding under the applicable payment methodologies.
Proposition 35 outlines specific steps DHCS must follow before implementing new or revised provider payments using revenue subject to Proposition 35. These steps include consulting with a stakeholder advisory committee before any proposals can be advanced, which is a prerequisite for identifying the appropriate mechanisms (such as a State Plan Amendment or other vehicle) for seeking necessary federal approvals. This process is underway, and DHCS is moving forward in accordance with the law. Revenues subject to Proposition 35 remain available and will be matched with federal funds to the maximum extent allowed by the payment methodologies ultimately adopted.
What is a State Plan Amendment, and how does it relate to Proposition 35?
A State Plan Amendment (SPA) is a formal request that California submits to CMS to change how certain aspects of Medi-Cal operate.
Under federal law, certain payment changes, primarily for services delivered in the Medi-Cal fee-for-service delivery system, may require a SPA. For many other payment methodologies, a SPA is not required; for example, generally, a SPA is not required for payment changes related to services provided by Medi-Cal managed care plans, for which other federal approval mechanisms may apply. If a SPA is required, DHCS must publish a public notice at least one day before the proposed effective date and submit the SPA to CMS by the end of the calendar quarter in which it would take effect.
In the case of Proposition 35, DHCS, in collaborating with the advisory committee, will develop new payment methodologies that may require different types of federal approvals, not necessarily a SPA. These methodologies are being shaped in consultation with the advisory committee to ensure they align with Proposition 35’s requirements.
What were the 2024 Medi-Cal provider rate increases, and how do they relate to Proposition 35?
In 2024, DHCS implemented targeted provider rate increases for primary care, obstetric, and non-specialty mental health services. These increases raised Medi-Cal payment rates to at least 87.5% of Medicare rates for eligible services and providers. After Proposition 35 passed in November 2024, it superseded other legislation as of January 1, 2025, and established a new framework for how MCO Tax revenues collected pursuant to AB 119 must be used.
DHCS implemented the 2024 rate increases for services reimbursed directly by DHCS as of January 3, 2024, and published final guidance for Medi-Cal managed care plans on June 20, 2024. As of March 2025, all but three Medi-Cal managed care plans have reported having fully implemented the 2024 rate increases. DHCS continues to take action to ensure compliance, including issuing non-compliance and warning notices, and will be imposing Corrective Action Plans on plans that still have not complied.
Now, under Proposition 35, DHCS is developing new or revised payment methodologies that incorporate and build on, but are not identical to, the 2024 increases. These new methodologies must go through stakeholder consultation via the advisory committee and may require federal approval.
