California strikes huge deal unlocking billions for health care

SACRAMENTO, Calif. — Major players in California’s health care field have reached a deal on how they want the state to spend $19 billion in proceeds of a renewed tax on insurance plans plus the federal funds that go with it — a development that followed months of private negotiations between bitter industry rivals, state lawmakers and the governor’s office.

The complex agreement, reported here for the first time, resolves a sticking point in budget talks that lawmakers and Gov. Gavin Newsom have been working to resolve by June 30. It would impose a tax on health care plans in what those involved described as a once-in-a-generation investment into a system that serves nearly 16 million Californians. It’s a massive victory for the health care industry that came about through an alliance of powerful interests that are often avowed enemies in the statehouse.

The last three times California levied this tax on health plans, it used the money to balance the budget during economic downturns. Now, for the first time, much of the revenue will be spent to improve the state’s publicly subsidized health care system — and in a year when the state faces a $32 billion budget deficit.

After federal funds are factored in, the state will be able to spend north of $35 billion, said Jennifer Kent, a former administration official who helped the coalition propose a structure for the tax.

It would be the largest-ever investment in Medi-Cal, California’s Medicaid system.

“We’re trying to serve a Medi-Cal program that’s the size of some states’ total population,” said Linnea Koopmans, CEO of the Local Health Plans of California, who was part of the coalition. “It takes an investment of this magnitude to have a meaningful impact.”

To pull it off, doctors and health plans, hospitals and organized labor, emergency services providers, safety net clinics and Planned Parenthood all had to get behind a single proposal while balancing the governor’s need to put money in the state coffers and the Legislature’s desire to spend on constituent priorities like keeping hospitals open.

They did it by meeting for two hours each week since November, debating spending details at the headquarters of the California Medical Association over lunch, where they filled the conference room whiteboards with calculations. Dustin Corcoran, the CEO of the medical association who chairs the coalition, said he’s even had dreams about the tax.

“There was a lot of sausage making,” Corcoran said. “It’s not always pleasant or fun, but we landed in a spot we can be really proud of.”

Health plans will be taxed based on how many people they cover, and that money is used to leverage billions more from the federal government, all while passing nearly no costs on to consumers. Historically, these taxes on managed care plans — the MCO tax — have been swept into the state’s general fund, used to balance the budget whenever times got tough.

But this year, nearly every health care advocate and elected official in the state was demanding the money stay in the health care system. California has added millions more people to Medicaid in recent years, and is adding more benefits as the state overhauls the program. But there aren’t enough doctors to see all those new members. The coalition pushed hard for the state to step in and raise reimbursement rates so that more physicians will treat Medi-Cal patients.

There need to be doctors to see people before they get to the emergency room, Corcoran said.

“The MCO tax in and of itself is not going to be a panacea for all of the shortcomings of Medi-Cal system," Corcoran said. “But it can go a long way in addressing those historical inequities.”

At one point, the Newsom administration wanted the bulk of the money to go into the general budget to fund existing priorities in Medi-Cal, like expanding the program to eligible undocumented immigrants. In May, he outlined a plan to boost reimbursement rates for some specialties, balance the budget and stash the rest of the money away to be doled out over the course of several years. That made legislators and industry leaders uneasy, worried the money would be gobbled up by other budget priorities later.

Some of the spending will start next year, but the bulk won’t start until 2025.

For the coming year, the deal hews closely to what Newsom proposed in May. Some of the money will be used to balance the budget, with $3.5 billion going into the general fund. Three specialties will get a boost to their reimbursement rates: Primary care, OBGYN and some mental health care services will start being paid 87.5 percent of what the federal government pays them through Medicare.

And $75 million will be used to create new residency slots for medical school graduates. California is a net exporter of med school grads, and these new residents will be focused in underserved areas, likely in the Central Valley, parts of Los Angeles and the Imperial Valley.

The deal includes money to bolster struggling hospitals, ease workforce shortages and entice more specialists to see Medi-Cal patients. It will be up to the Department of Health Care Services to determine who is in line based on where patients are having the hardest time getting care. The coalition leaders say they want to avoid a lobbying frenzy where each special interest jockeys to get themselves a pay increase.

“Instead of just coming to the Legislature for our individual needs, this is a way to really look at things in a more holistic way for patients,” said Jodi Hicks, the CEO of Planned Parenthood Affiliates of California and the vice-chair of the coalition.

The state would spend $300 million for behavioral health beds under the agreement — part of a push to stop cycling people in need of mental health care through jails and emergency rooms. California has a shortage of 6,000 mental health beds and is preparing to ask voters in 2024 to approve nearly $5 billion in bonds to build more.

The last time California tried to renew this tax, in 2016, it took a year of intense lobbying by then-Gov. Jerry Brown and his administration, who ultimately had to call a special session of the Legislature to get it passed.

Last year, the tax was set to expire with no plan to renew it. Over the course of seven months it became the biggest ever investment in Medi-Cal.

“This really feels like a victory,” Koopmans said.