Administration’s Proposition 35 spending plan leans toward base rate support and time‑limited supplements; stakeholders say plan diverts voter intent

The subcommittee reviewed the administration’s proposed spending plan for Proposition 35 revenue, the managed‑care organization (MCO) tax voters approved in 2024. Proposition 35 made the MCO tax permanent and established domains for how the revenue can be spent. The administration released a two‑year plan for calendar years 2025 and 2026 as part of the May revision.

What the plan proposes

The administration’s plan totals about $2.27 billion per year in augmentations and includes a mix of uses across the domains required by the proposition. The Department of Health Care Services described the largest elements as: - Maintaining certain base rates for primary and general care, maternity care and non‑specialty mental health services at a floor (the plan references maintaining certain rates at no less than 87.5% of Medicare for some services) and using MCO tax revenue to support increased program costs tied to expanded benefits and workforce investments. - $1.6 billion across 2025 and 2026 proposed to support increases in managed‑care base rates relative to calendar year 2024 for primary care, specialty care, emergency medical transportation and outpatient hospital procedures, described as responding to higher per‑service costs, utilization and acuity. - Targeted supplemental payments to professional services (primary, specialty and emergency physicians) and to hospitals; investments in behavioral health data and throughput, flexible housing subsidy pools, graduate medical education, midwifery education and other workforce items.

Administration and LAO perspectives

DHCS said it structured the plan to stay within Proposition 35’s domains and to address documented increases in managed‑care purchasing costs and workforce needs. The Legislative Analyst’s Office (LAO) noted the plan is technically feasible under the short‑term provisions in Proposition 35 but highlighted a key trade‑off: using MCO tax revenue to cover increases in base managed‑care costs functions as a budget solution and reduces general‑fund pressure now, but it also can be seen as diverting funds voters were told would support provider rate increases and workforce investments.

Stakeholder reaction

A broad Coalition of hospitals, provider groups, family‑planning advocates and district hospitals urged the legislature to reject the administration’s proposed redirection of much of the Prop 35 pool to cover baseline managed‑care cost growth. Stakeholders noted the plan’s timing — a two‑year plan that ends when the law requires a different allocation framework in 2027 — and said much of the announced spending that appears to be for provider increases looks more like backfill of costs the general fund otherwise would have borne.

Committee questions and next steps

Members asked DHCS about how the plan will be implemented to ensure uniform dollar increases reach providers and how the department will communicate with managed‑care plans and providers. DHCS said it intends a mix of targeted supplemental and uniform dollar increases (the latter resembling the prior Prop 56 approach) in 2026 and that some targeted components already are reflected in 2025 rate certifications.

The committee requested more detail on the stakeholder advisory committee process and on safeguards to ensure uniform dollar increases reach safety‑net providers in low‑provider areas. Several members expressed concern that redirecting Prop 35 funds to cover base managed‑care growth may not deliver the expanded provider capacity voters expected and asked for more transparency and enforcement safeguards in the implementation plan.

Ending

The administration and LAO advised the legislature that the short‑term structure of Proposition 35 offers some flexibility in 2025–26 but that the law’s rules change in 2027. Members and stakeholders asked for additional detail on code lists, provider types and encounter codes for uniform dollar payments, and on contingency planning if federal rules change the MCO tax’s viability.