Each Wonks’ Corner, a member of Blue Shield’s government affairs team dives into a current policy topic. See our previous Wonks’ Corner blogs here.
California Budget Status Update
California’s 2026–27 budget negotiations are expected to conclude in the coming days. While the Legislature approved the main budget appropriations bill, AB 109 Budget Act of 2026, on June 15th, negotiations with the Governor continue on several significant fiscal and health care issues. The June 15th vote met the constitutional deadline with a final budget package anticipated before the July 1 start of the fiscal year. Additional adjustments may be considered as federal policy changes are implemented, updated revenue information becomes available, and other conditions evolve.
The Legislature’s two-party agreement reflects a different fiscal approach than the Governor’s May Revision. According to the Legislative Analyst’s Office, the legislative plan assumes approximately $5.5 billion in additional revenues and reduces a planned transfer to the Temporary Surplus Holding Account by about $2 billion, generating roughly $8 billion in additional resources, yet reserves remain the same, given the Legislature’s proposal to reject various spending reductions in health and human services.
Managed Care Organization (MCO) Tax Remains a Central Issue
The Managed Care Organization (MCO) tax is one of the most central issues in this year’s budget. On June 18th, the Legislature advanced the MCO tax proposal, Senate Bill 125, which largely aligns with the Governor’s May Revision. The passage of the proposal comes as the state faces pressure to modify the existing tax set to expire on December 31, 2026 and comply with new federal rules. The tax imposes $1.5 billion in cost on consumers in fully insured products, like those offered through Covered CA.
The MCO tax debate is taking place within a broader budget package, which also includes several tax and revenue trailer bills (SB 122 and SB/AB 176). These proposals include the Governor’s May Revision software sales tax among other provisions, including proposed limitations on businesses’ use of tax credits, primarily research and development (R&D).
Medi-Cal Policy Changes: Differing Proposals by Governor and Legislature
When it comes to the state’s Medi-Cal program, the Legislature’s two-party agreement delays implementation of several Medi-Cal policy changes (proposed by the Governor), leaving key decisions to be resolved under the new Administration until July 1, 2027. Rejected and delayed Medi-Cal policy changes, include cuts to dental benefits and supplemental dental payments, increase of Medi-Cal asset limit, and the increase of premiums for adults with unsatisfactory immigration status (UIS).
Negotiations with the current Governor also continue as the Governor and Legislature have differing views on the proposal to transition members with unsatisfactory immigration status (UIS) from managed care to fee-for-service beginning January 1, 2027.
The Legislative agreement also includes additional support for counties and public hospitals to help mitigate impacts associated with changes to federal Medicaid financing rules under H.R. 1.
What Happens Next
Budget trailer bills will continue moving through fiscal committees over the coming days. Legislative debates have highlighted broader questions about whether budget solutions should rely more heavily on spending reductions or taxes. While leaders are working toward a final budget agreement before the July 1 start of the fiscal year, some trailer bills and implementing legislation may continue to move after that date.
