California MCOs: Proposed State Budget Tax Effective Date of April 2023

California Governor Gavin Newsom, as part of the state’s May budget revision process, proposed that the multiyear managed care organization (MCO) tax renewal have an effective date retroactive to April 1, 2023. This is nine months earlier than it was initially proposed to start.

The revision also included significant increases to provider rates as compared to the initial budget proposal. In addition, it added a new workforce initiative to the existing 1115 demonstration waiver to address gaps in the behavioral health continuum of care for certain Medi-Cal members.

Key Impacts

The earlier renewal of the MCO tax resulted in approximately $3.7 billion annual state benefit for calendar year 2023. To obtain the benefit, the California Department of Health Care Services (DHCS) must submit its MCO tax proposal to Centers for Medicare & Medicaid Services (CMS) by June 30, 2023. The revised budget also increased MCO revenue to achieve $19.4 billion over the proposed MCO tax period.

A portion of this revenue will support an increase in provider rates to at least 87.5% of Medicare for specified providers, including the following services, beginning January 1, 2024:

  • Primary care, including nurse practitioners and physician assistants
  • Maternity care, including OB/GYN and doulas
  • Non-specialty mental health services

Further, DHCS will begin a long-term assessment of which future rate augmentations will deliver the greatest benefit to improving Medi-Cal systems across California. DHCS will then return with a proposed set of investments and augmentations that will be put forward to the Legislature in the 2024–2025 Governor’s Budget, with an intended effective date of January 1, 2025. It’s estimated the model could achieve $3.7 billion total funding annually for ongoing rate increases beginning in 2025 for about eight to 10 years.

The 1115 demonstration waiver, mentioned above, also aims to address gaps in the behavioral health continuum of care for Medi-Cal members living with serious mental illness and serious emotional disturbance.

The revised budget added a new workforce initiative to the waiver granting $480 million a year for the five years—$2.4 billion in total—to strengthen the pipeline of behavioral health professionals, including improving short-term recruitment and retention efforts. It includes initial funding to support the behavioral health modernization proposal.

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For help understanding the impact of the California budget revision to your health care organization, contact your Moss Adams professional.

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