California’s redesigned health tax hit with lawsuit

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Hello and welcome back to Capitol Confidential! 

Happy Monday. 

For the next several weeks we will be focusing intensely on upcoming elections, specifically on the race for governor and the very long list of state ballot measures. 

But first: The dust is still settling on Gov. Gavin Newsom’s bill-signing sprint, and what did – and didn’t – make it past his desk. We’ll dig into his about-face on AI regulations today, plus a new lawsuit that challenges California’s health tax redesign. 

Two powerful lobbying groups representing physicians and health plans are pushing back against the controversial legislative response to President Donald Trump’s far-reaching Medicaid cuts, filing a lawsuit against a revised healthcare plan tax. 

The California Medical Association and California Association of Health Plans filed a lawsuit with the California Supreme Court on Friday challenging the new tax structure enacted via SB125. 

They allege it violates Proposition 35, passed in 2024, which in part earmarked how funds raised through the state’s Managed Care Organization tax, or MCO tax, is spent on healthcare. 

After the Trump administration enacted a host of new changes to federal funding for Medicaid through H.R. 1, the Legislature introduced SB125 as a way of backfilling a portion of the federal money the state relies on to keep Medi-Cal humming.

Signed into law on June 29 with the budget, SB125 proposes the state’s Centers for Medicare & Medicaid Services raise the tax rate on commercial plans if they cannot get a federal waiver to leave its existing MCO tax structure – something the Trump administration has signaled isn’t likely. The tax hike’s funds are to be funneled into a “Medi-Cal Stability Fund” meant to offset the loss in federal dollars. 

It sparked a wave of intense debates, as leading opposition from physicians and healthcare plans warned the change could shift more of the tax burden onto people with private insurance, potentially contributing to higher premiums. They also warned it would conflict with Proposition 35 – and are now officially asking the court to weigh in. 

Supporters of the budget trailer bill, including author Sen. John Laird, D-Santa Cruz, presented it as an imperfect but needed response to significant federal cuts. In a statement upon its passage alongside two other trailer bills, Laird conceded there “will be debate about individual provisions” in the bills but said that “the alternative would have been more significant reductions” to programs and services like healthcare.

Groups representing health plans and physicians have continued to push back on the new tax structure. 

“H.R. 1 changed the federal rules governing the MCO tax, but it did not erase California law,” California Medical Association CEO Dustin Corcoran said in a statement. “The state has a path to comply with both. Instead, it is choosing to pursue a higher-revenue approach that violates the law and will make health care more expensive for Californians, while diverting the tax revenue away from improving access to health care.”

A bill Newsom signed in 2019 widened the statute of limitations for survivors of childhood sexual abuse, allowing them to file civil lawsuits to recover damages. 

When it went into effect early 2020, individuals in the state were able to file lawsuits up to their 40th birthday or up to five years after the discovery of psychological injury. It also opened a three-year window for people to file lawsuits for even older allegations – in all, a significant expansion aimed at giving survivors greater access to legal recourse.

But as the Chronicle’s Sophia Bollag reported, the law also opened up a host of financial and legal consequences. It ushered in a wave of lawsuits against schools, local governments and private entities such as the Boy Scouts and the Catholic Church, resulting in massive liability for public entities.

In response, Newsom on Wednesday signed SB577 by Laird, to raise the burden of proof for people older than 40 suing a government entity, such as a school or a county, over child sexual abuse allegations. 

Under the new law, Bollag reported, those plaintiffs will need to show “clear and convincing evidence” that the entity knew of the misconduct and failed to protect the plaintiff if the alleged abuse occurred before 2024. In those cases, the bill also directs courts to consider the public entity’s finances and the potential effect of a judgment on its ability to provide public services.

But the law doesn’t stop there. It also includes several new regulations designed to address other issues around sexual assault prevention and reporting in schools. 

The law requires cities, counties and school districts to adopt written codes of conduct and sexual assault prevention plans, including reporting protocols, designed to protect minors. Bollag reported the law also requires increased state monitoring of foster care and juvenile justice agencies, in light of the many sexual abuse claims against such entities.

SB577 also expands training for mandated reporters, including teachers and police officers, who are required to report suspected child abuse and grooming. 

The new law also directs the California attorney general to investigate allegations of child sexual abuse and allegations of fraudulent cases in Los Angeles County, specifically. A Los Angeles Times investigation last year revealed that some plaintiffs said they were paid to sue, in some cases over fabricated claims of sexual assault.

In a signing statement, Newsom said the new law “attempts to thread the needle.”

“This measure represents an important and necessary first step toward reform that simultaneously addresses the wrongs of the past while providing public institutions relief from certain plaintiffs and attorneys who may engage in unscrupulous conduct,” he wrote. “I implore the Legislature to continue to make changes to further address this untenable situation.”

The governor took a dramatic change in tack this year on AI regulations – signing the vast majority of the bills lawmakers sent to his desk – after years of taking a more conservative approach. 

As Bollag reported, several of the bills Newsom signed this year were versions of ones he vetoed in the past. 

The change surprised some supporters of the measures, who had tempered their expectations after years of watching Newsom, a longtime ally of the tech industry, veto some of the most sweeping efforts to regulate AI in favor of more targeted or narrowed guardrails. 

They include a four-year ban on AI chatbot toys and other child safety legislation and labor-backed efforts to limit the use of AI to surveil and manage employees. 

One of those signed bills is from Sen. Jerry McNerney, D-Pleasanton, which bans AI “robobosses” – AI bots making critical managerial decisions such as hiring, firing and disciplining human workers. The bill, SB947, was sponsored by the California Federation of Labor Unions, AFL-CIO, and was signed into law by Newsom on Wednesday. 

“Nobody wants to be fired by a machine,” McNerney told the Chronicle in August. 

But Newsom’s overall turnaround on AI regulations, plus his surprise executive order that sped up several AI regulation bills’ implementation timelines and created an AI working group to mull other regulatory options, didn’t grace every AI bill with a golden signature. 

A handful of high-profile AI bills nabbed the dreaded veto. 

They include AB1542 by Assembly Member Chris Ward, D-San Diego, which would have banned companies from selling users’ sensitive data, like location data from near abortion clinics or protest sites, Bollag reported. 

Also vetoed: AB2575 by Assembly Member Liz Ortega, D-San Leandro, which would have  prohibited hospitals from punishing nurses who override an AI-generated treatment plan. That decision drew harsh rebuke from California’s nurses union, though they also praised Newsom for signing a different measure regulating AI use in medicine. 

Newsom also vetoed SB903 by Sen. Steve Padilla, D-San Diego, that would have banned AI bots from providing or advertising “therapy” to users. 

Padilla criticized the governor’s decision to veto the measure, but also noted that Newsom had also signed four of his other tech regulation bills, including one enacting stronger protections for children interacting with AI chatbots.

“Obviously it’s a big disappointment,” Padilla said of the veto. “But overall, with respect to the bills that were signed, a number of them on this topic, we feel like there were some great strides going forward and some substantial legislation that sets a standard and an example for the rest of the country.”

Questions? Thoughts? Interesting tidbits to share? Reach out at [email protected], and follow me on X, @KathrynPlmr.