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Stakeholders press DHCS to convene Prop 35 advisory committee quickly so MCO tax funds reach providers
Summary
Panelists urged faster implementation of Proposition 35 and clearer timelines for payments to providers. DHCS said it has nine of the advisory committee's appointments and is scheduling meetings; LAO and providers warned of federal uncertainty that could shrink future MCO tax revenue and urged legislative oversight.
The subcommittee examined implementation plans for Proposition 35 — the measure that continuously appropriates the Managed Care Organization (MCO) tax revenues beginning in 2025 and authorizes new payment methodologies — and took testimony from DHCS, the Department of Finance and multiple provider groups.
DHCS staff explained that Prop 35 requires consultation with a stakeholder advisory committee before proposing or implementing payment methodologies. The department said nine of the committee members had been appointed and that it is developing timelines for the committee's first meetings. DHCS emphasized that the structure and timing of specific payments will depend on the payment methodologies the committee recommends and that federal approval and cash‑flow timing affect when funds are available to offset General Fund costs or provide augmentations.
Local and statewide provider groups, including the California Medical Association, California Hospital Association, children's hospitals, primary care and specialty care groups, urged DHCS to convene the advisory committee immediately so the state can submit required State Plan Amendments and draw down federal matching funds. Multiple witnesses warned that delays could forfeit federal match and slow funds reaching providers; the California Medical Association asked the state to submit amendments promptly because CMS reviews amendments on a quarterly cycle.
LAO testimony noted two fiscal patterns to consider: (1) Prop 35's rules are likely to require more MCO tax revenue for augmentations and less to offset General Fund spending starting in 2027, and (2) federal regulatory changes previously signaled could reduce the allowable size of future provider taxes — meaning the MCO tax that begins in 2027 could be smaller than the current tax. LAO recommended early legislative oversight and a set of questions for DHCS, including timing and how augmentations will be structured and flow to providers.
Providers raised specific issues they want the advisory committee to address: timetables for payments reaching clinics and physicians (some plans have not implemented 2023–24 rate increases), how augmentations will be structured in managed‑care contracts, and how small providers, community clinics and rural hospitals will receive rate increases. Air ambulance operators and representatives of congregate living health facilities (CLIFs) asked the committee and Legislature for bridge funding to cover the 2025–26 gap while the MCO tax framework is implemented; several speakers said certain rate increases in last year's budget were made inoperative by the passage of Prop 35 and need targeted attention.
DHCS cautioned that there is uncertainty about federal policy changes and that CMS had indicated potential rules tightening provider tax approvals; the department said it will be mindful of those potential changes while designing 2025–26 augmentations. Several legislators urged urgency in convening the advisory committee and in getting money flowing to communities with provider shortages, especially rural areas.
