Kiley, GOP Lawmakers Urge HHS to Block Newsom’s Healthcare Tax

Independent U.S. Rep. Kevin Kiley of California, joined by Republican colleagues including Reps. Jay Obernolte, James Gallagher, Ken Calvert, Vince Fong, and Young Kim, has formally asked the U.S. Department of Health and Human Services to deny federal approval of Governor Gavin Newsom’s restructured Managed Care Organization (MCO) tax. 

In a letter dated July 24 to HHS Secretary Robert F. Kennedy Jr. and Centers for Medicare & Medicaid Services Administrator Dr. Mehmet Oz, the lawmakers warned that the proposal “would dramatically increase costs on commercial health plans to preserve state revenue rather than make health care more affordable.” 

They noted that a family of four is estimated to pay an additional $400 a year in premiums due to the new $8.85-per-person monthly tax. “Californians are already shouldered with the highest cost of living in the United States. This proposal will only make things worse,” the letter states. 

The burden would fall not only on families but also on small businesses, potentially incentivizing employers to drop or reduce health benefits and push more people onto less generous Affordable Care Act plans or Medicaid. 

Kiley highlighted the announcement on X Monday, writing: “We are formally asking the U.S. Department of Health and Human Services to block Newsom’s new healthcare tax. Voters expressly prohibited him from imposing such a tax, which will increase premiums by up to $400 for California families.”

We are formally asking the U.S. Department of Health and Human Services to block Newsom's new healthcare tax. Voters expressly prohibited him from imposing such a tax, which will increase premiums by up to $400 for California families. pic.twitter.com/E7OhZYf2Rq

— Kevin Kiley (@KevinKileyCA) July 27, 2026

The tax stems from Senate Bill 125, signed by Newsom as part of the state’s 2026-27 budget package. It imposes a uniform $8.85 per enrollee per month tax on commercial health plans, Medi-Cal managed care plans, and ACA Marketplace plans for calendar years 2027 through 2029. 

This restructuring followed federal changes under the Working Families Tax Cut (H.R. 1) that required states to apply provider taxes more uniformly, ending the prior practice of taxing Medi-Cal plans at far higher rates than commercial ones while drawing down federal matching funds. 

California voters, however, had already spoken. In November 2024, they approved Proposition 35 with nearly 68% support. The measure made the existing MCO tax permanent (subject to federal approval), directed revenues specifically toward Medi-Cal improvements such as higher provider rates, and limited the tax on commercial health plans. 

Critics of the new proposal argue the $8.85 rate far exceeds prior commercial limits and effectively shifts costs onto private insurance to help backfill the state budget rather than solely strengthening Medi-Cal as voters intended. 

Major stakeholder groups oppose the hike, including the California Medical Association, California Hospital Association, California Primary Care Association, California Association of Health Plans, and the California Chamber of Commerce. 

The California Association of Health Plans has estimated the commercial-side impact at roughly $1.5 billion annually, with costs passed through to premiums. 

The letter urges the Trump administration officials to reject the proposal and press California to “reprioritize its budget and put forward a proposal that complies with the uniformity standards while avoiding unnecessary increases in health care costs.” 

Federal approval is required for the tax to take effect and for the state to continue drawing related Medicaid matching funds.This request comes amid broader scrutiny of California’s health spending and fiscal management. 

As the California Globe has previously detailed, Governor Newsom has overseen drastic growth in the state budget during his tenure. Recent actions by HHS under Secretary Kennedy have also included pausing over $1 billion in Medicaid payments to California over suspected fraud concerns, underscoring heightened federal oversight of the state’s programs. 

Newsom administration officials have framed the MCO restructuring as necessary compliance with federal rules to protect Medi-Cal funding after changes that reduced the prior tax’s net benefit. Opponents counter that Sacramento chose to raise commercial rates rather than lower overall rates or find alternative budget solutions, placing the burden on working families already facing elevated living costs.

The letter emphasizes that “this stance is not partisan.” With the tax needing federal green light before it can operate (targeting a January 1, 2027 effective date or later upon approval), the decision now rests with Kennedy and Oz.

Whether HHS blocks the measure could determine if California families face hundreds more in annual premiums or if the state is forced back to the drawing board on health financing in Newsom’s final months in office.