The single largest cut in Gov. Gavin Newsom’s latest budget proposal threatens to undo a multi-billion dollar deal he made with health care industry leaders last year to shore up the state’s expansive public insurance program with a new tax.

Newsom wants to take $6.7 billion that had been earmarked for increased Medi-Cal payments to health care providers and instead use it to help plug the ballooning state deficit. Providers last year agreed to be taxed to generate that money with the stipulation that it be invested in Medi-Cal, the state’s insurance program for lower-income households.

Newsom said his budget proposal preserves core services for programs like Medi-Cal and emphasized that his administration has expanded services “like no other state in U.S. history has ever expanded.”

“We are maintaining that,” Newsom said during a recent budget presentation.

Groups representing doctors, hospitals and patients warn the cut would weaken an already overburdened health care system that serves one-third of the state’s population. Industry groups have gathered signatures to place a measure on the November ballot that would overrule any cuts made in the state budget and to prevent Newsom and future governors from repurposing Medi-Cal funds.

“We are deeply disappointed that the governor’s proposal jeopardizes access to health care for millions of Californians,” the Coalition to Protect Access to Care, the group supporting the ballot measure, said in a statement.

The coalition is the same group that brokered last year’s deal — known as the Managed Care Organization, or MCO, tax — and is primarily supported by the California Medical Association, California Hospital Association, ambulance operators, Planned Parenthood Affiliates of California and health insurers.

Under the original deal, the health insurance plans serving Medi-Cal patients would get taxed in order for the state to claim a dollar-for-dollar matching amount of money from the federal government. The promise was that the money generated — upwards of $35 billion for the state over four years — would be invested in the Medi-Cal system to increase reimbursement rates and attract doctors and other providers who otherwise say they don’t get paid enough.

Instead, Newsom’s new proposal increases the tax on health plans, uses the new money to alleviate the deficit, and cancels planned Medi-Cal rate increases for emergency room doctors, specialists and certain other providers. Increased payments that started in January for primary care, obstetrics and mental health would not be touched.

“This is mind-boggling for the public, but really the story is about equality,” said John Baackes, chief executive of L.A. Care Health Plan, the largest publicly operated health plan in the country.

For the past decade, California lawmakers have steadily restored Medi-Cal services cut during the Great Recession, added new ones, and expanded eligibility to include all low-income Californians regardless of citizenship. Today Medi-Cal covers things like dental exams, hearing aids, doula services and acupuncture. It is one of the most comprehensive public insurance plans in the country.

Expanding Medi-Cal access

L.A. Care serves more than 3 million Medi-Cal members in Southern California. Between January and March, more than 164,000 new members were enrolled when California granted Medi-Cal to working-age, undocumented immigrants. But increasing enrollment and benefits without providing more incentives to providers has strained the health system to a breaking point, Baackes said.

“Nobody is saying that the state doesn’t have a (budget) problem. We know they have a problem, but the cost that’s going to be paid by the people who benefit from the Medi-Cal program is very difficult for the providers to accept,” Baackes said.

Gov. Gavin Newsom addresses the media during a press conference unveiling his revised 2024-25 budget proposal at the Capitol Annex Swing Space in Sacramento on May 10, 2024. His proposal includes a change to the so-called MCO tax on California health care services. Photo by Fred Greaves for CalMatters

In recent budget hearings, representatives from the Newsom administration said they were trying to protect Medi-Cal’s core services while balancing a $27.6 billion deficit.

“These decisions and proposals are difficult and not put forward lightly,” said Michelle Baass, director of the Department of Health Care Services, which oversees Medi-Cal, during a recent Assembly budget hearing.

At that hearing, lawmakers who approved the tax deal last year accused the administration of not being honest about how the money would be used.

“I’m just wondering if any of the discussions we’ve had about the shortages, the closures, the issues that we have on the ground, the workforce shortages, if any of those things came into thought as you were trying to preserve core services, which is important, but if you don’t have providers to go to, what have we done?” said Assemblymember Akilah Weber, a Democrat and obstetrician from La Mesa, in the hearing.

Looking to California’s November election

Jarrod DePriest, president of Maxim Healthcare Services, said he was shocked to learn the “dollars meant to protect Medi-Cal” could be diverted. DePriest’s company provides home health services, such as nurses for people who would otherwise be confined in a hospital. A majority of its clients are children with complex health needs like cerebral palsy or severe respiratory problems, DePriest said.

Between 2018 and 2024, the number of nurses his company employs dropped by half because Medi-Cal reimbursement rates haven’t kept up with salaries and inflation, DePriest said. Consequently his company serves nearly 10,000 fewer patients.

“Down the road things will get worse and worse,” DePriest said.

His group and others, like air ambulance operators, were not included in the original Medi-Cal rate deal and are fighting for some of the tax revenue — but it’s unlikely with the current deficit. The proposed cuts signal to them that the state is unwilling to invest in Medi-Cal, which is exactly what ballot measure proponents hoped to avoid.

Dustin Corcoran, president of the California Medical Association and leader of the ballot coalition, said providers will only accept more Medi-Cal patients if they are confident the state will fund the program permanently.

“Medi-Cal has been underfunded for so long, one of the things we were trying to accomplish was the predictability and stability of rates,” Corcoran said. “You can’t have providers in situations where they don’t believe in consistency in the rates, and they have to choose between bankruptcy and patient abandonment. That shouldn’t be a choice that a provider ever has to make.”

Supported by the California Health Care Foundation (CHCF), which works to ensure that people have access to the care they need, when they need it, at a price they can afford. Visit www.chcf.org to learn more.

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