Doctors and Insurers Sue California Over Healthcare Tax and Premium Hikes

On October 4, 2026, the California Medical Association and the California Association of Health Plans filed a lawsuit with the California Supreme Court against Gov. Gavin Newsom and the Legislature, alleging that a newly approved healthcare tax violates Proposition 35 by circumventing voter-approved limits on healthcare taxes and driving up insurance premiums.

Tax Increases Raise Family Costs and Clash with Protections

• Impact on Family Budgets: For a standard family of four, this translates to an approximate $400 yearly increase, compounding existing annual rate adjustments.
• Healthcare Access Implications: While the tax was designed by the state to offset large-scale federal Medi-Cal cuts, the resulting hikes on private insurance plans directly clash with statutory taxpayer protections established by California voters.

The Legal Clash Over the Managed Care Organization Tax

The core dispute centers on the managed care organization tax, commonly referred to as the MCO tax, which was passed by the Legislature in June. For more than two decades, California has levied taxes on health insurers to help finance Medi-Cal, the state’s public insurance program for low-income residents. Historically, the state taxed private health plans at a lower rate than Medi-Cal insurers. However, the recent legislative action substantially raised the tax burden on private plans.

According to the legal complaint filed by the California Medical Association and the California Association of Health Plans, this maneuver violates Proposition 35, a ballot initiative passed by voters in 2024. Proposition 35 was designed to limit healthcare taxes and ensure that resulting revenues are strictly dedicated to specific healthcare improvements rather than general fund maneuvers. California voters passed Proposition 35 and made it law. The state does not get to ignore that law simply because following the law is inconvenient, stated Dustin Corcoran, CEO of the medical association.

Charles Bacchi, CEO of the health plans association, echoed these concerns in reporting by CalMatters, stating, California is breaking the law by blowing through a tax limit put in place to protect Californians and businesses from higher health care costs. Insurers assert that the elevated tax rates force them to increase private premiums by about $100 per person each year, adding a $400 annual increase for a family of four.

State Officials Defend Tax as Necessary Fiscal Mechanism

State officials have defended the tax structure as a necessary fiscal mechanism to maintain healthcare funding streams amid shifting federal regulations. Tara Gallegos, a spokesperson for Gov. Gavin Newsom, maintained that the tax enables the state to implement vital changes to fund healthcare, noting in an email that The state disagrees with their claims, and we believe the courts will too.

Additional context provided by H.D. Palmer, a spokesperson for the Department of Finance, indicates that the administration sought to balance the affordability concerns of privately insured patients against the threat of large-scale federal Medi-Cal cuts. When Proposition 35 was on the ballot, Gov. Newsom warned that the initiative would “hamstring” the state budget, though he stopped short of formally opposing it. The legal standoff intensified after Congress altered rules governing taxes used to generate healthcare revenue, prompting the state to submit two distinct tax models to the federal government: one compliant with the 2024 voter initiative and another compliant with federal regulations that largely disregarded Proposition 35.

Stakeholder Group	Stance on MCO Tax	Projected Impact / Action
California Medical Association & Health Plans Association	Opposed	Filed California Supreme Court lawsuit; cite violations of Prop 35 and project $100/person annual premium increases.
State Administration (Gov. Newsom & Dept. of Finance)	Defended	Implemented tax to counteract federal Medi-Cal funding cuts; maintains state actions are legally sound.

California Supreme Court Reviews Legal Battle

With the complaint now docketed before the California Supreme Court, the legal battle moves from the legislative arena to judicial review.

More on this story: California Proposition 3 tax hike faces revenue erosion from high earners

References

• CalMatters: Doctors, insurers sue California over health care tax law. Published October 2026.