The Yes on Prop 35 campaign has raised over $48 million as of Sept. 9, according to campaign filings with the secretary of state. The measure would use money from a tax on managed-care health plans mainly to hike the pay of physicians, hospitals, community clinics, and other providers in Medi-Cal, the state’s version of Medicaid.

For many months, there was no organized opposition. But shortly after Labor Day, a small group of community advocates, including the League of Women Voters of California, California Pan-Ethnic Health Network, and The Children’s Partnership, announced they were united against it.

“We do not have the deep pockets that the proponents of the initiative do,” said Kiran Savage-Sangwan, executive director of the California Pan-Ethnic Health Network. No fundraising has been recorded from opposition groups thus far.

Gov. Gavin Newsom hasn’t taken a public stance, but he has warned that the proposal to lock in how proceeds from the managed-care tax are used would hamstring his administration’s ability to address the state’s yawning budget gap.

The people represented by some of the opposition groups include Medi-Cal patients who are among the state’s most vulnerable — children, seniors, people with disabilities, and the chronically ill — as well as some workers who provide ancillary care to them.

The opponents say that if Proposition 35 passes, the patients, workers, and programs they care about could lose millions of dollars included for them in this year’s state budget. That’s because the ballot measure would supersede the budget, and it leaves them out of the health tax proceeds.

The budget currently provides tens of millions of dollars a year to raise the pay of community health workers, nonemergency medical transport drivers, and private-duty nurses, among other personnel. It also funds the cost of a new program, scheduled to start Jan. 1, that allows children through age 4 to stay on Medi-Cal without requiring their families to prove eligibility every year. Child health advocates say that will help avoid potentially harmful gaps in coverage.

Mayra Alvarez, president of The Children’s Partnership, estimates the program would bring coverage stability to about 1.2 million California kids. But funding for it will be at risk if Proposition 35 passes, she warns.

It’s not that the money for that program, or the pay increases for ancillary health care workers, would necessarily go away forever. But advocates would have to fight for it in subsequent budget rounds.

Dustin Corcoran, CEO of the California Medical Association, told me that in addition to the Medi-Cal pay hikes, and some funding for medical education and extra residency slots, the initiative would provide $2 billion a year in 2025 and 2026 to the state’s general fund, “which the legislature can appropriate as they see fit, which vastly exceeds the cost of the programs you mentioned.” CMA and Planned Parenthood Affiliates of California are leading the charge on Proposition 35.

Corcoran’s comments suggest that the groups worried about losing funding if Proposition 35 passes should be able to get it restored in future budgets. Given the current fiscal crisis, however, not everyone is buying it.

“We’re short tens of billions of dollars,” says Ramon Castellblanch, vice president of the California Alliance for Retired Americans, which opposes the measure. “For these people to say, ‘Wait, the general fund is going to cover it’ — is that called gaslighting?”

Proposition 35 proponents say that children, seniors, and disabled or chronically ill people also use doctors, hospitals, and community clinics, for which the measure does provide extra money.

They argue the initiative will go a long way toward addressing Medi-Cal’s historically low pay rates, enticing more providers to participate in the program and enabling those who already do to take more Medi-Cal patients.

“This will be the most significant investment in the Medi-Cal system since the Affordable Care Act,” Corcoran says. “I think it holds great promise for improved access to care, improved quality of care, shorter wait times for all Californians in our ERs, and elimination of health care deserts that are popping up in too many parts of our state.”

Another concern raised by Proposition 35 skeptics is that a long-threatened change in federal rules governing how states collect managed-care taxes to fund Medicaid could torpedo the plans of California — and some of the other 18 states with such a tax.

Proposition 35 sets specific dollar amounts through 2026, which are based on the managed-care tax approved by the federal government last year. But the tax, which California has had in some form since 2009, must be renewed and federally approved every three years. That means that the tax requires another federal approval starting in 2027, the year the ballot measure would make funding permanent.

California’s managed-care tax comes from a levy imposed on health plans, based on monthly numbers of both Medi-Cal and commercial insurance enrollees. The money raised is matched by the federal government, doubling the spending power.

Federal rules require that the health plans be reimbursed for the tax they pay on their Medi-Cal membership. Since the Medi-Cal rate is around 100 times as much as the rate on commercial membership, 99% of the revenue from the tax is on the Medi-Cal side, thus holding many of the health plans almost entirely harmless and minimizing any impact on premiums.

But the federal government has been warning California for years, most recently in a letter it sent in late 2023 accompanying its approval of the managed-care tax, that it will require more balance between the commercial and Medi-Cal levies. Were it to change the rules in that direction, it could cause a major headache in California for a couple of reasons.

First, as proponents of Proposition 35 readily acknowledge, there is no political appetite for an increase in the amount of tax raised on commercial health plan memberships. That’s because it would likely lead to a rebellion by health plans or a jump in premiums that would anger employers, privately insured individuals, and plenty of other people. In that case, the only way to comply would be to lower the tax rate on Medi-Cal enrollment, which would significantly reduce revenue.

Second, though the ballot measure contains flexibility for small changes, it requires a three-fourths majority vote in the legislature for any major changes. That would be a tall order.

“Say the federal administration comes back and says, ‘You can’t do this anymore,’ which seems likely,” says Savage-Sangwan, who is also a spokesperson for the opposing coalition. “We’re going to be stuck with a whole lot less money.”

So far, however, the feds have not followed through on repeated warnings, and Proposition 35 proponents seem to be betting the threat of changes will prove nothing more than bluster.

We’ll see.

This article was produced by KFF Health News, which publishes California Healthline, an editorially independent service of the California Health Care Foundation. 

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Baackes, 78, who will retire after the end of the year, helped transform L.A. Care into a major market player following its expansion under the Affordable Care Act. He implemented a new administrative structure and promoted a new internal culture. The insurer generated $11.3 billion in revenue last year, with membership close to 2.6 million people — nearly 900,000 more than when Baackes took the reins in March 2015.

“I recognized when I got here that L.A. Care was a big frog in a big pond,” he said in an interview with KFF Health News on the 10th floor of L.A. Care’s downtown headquarters. But the organization still had a small-plan mentality, he said, until he convinced his staff “that we had an opportunity to really be leaders.”

Baackes moved to Los Angeles from Philadelphia, where he had headed the Medicare Advantage business of AmeriHealth Caritas VIP Care. He started at L.A. Care 15 months after the implementation of the ACA, which expanded Medicaid eligibility and created insurance exchanges where uninsured people could buy federally subsidized coverage.

L.A. Care’s Medi-Cal rolls swelled, and it offered a new health plan sold on the state’s ACA exchange, Covered California, as well as one for medically vulnerable seniors who are eligible both for Medi-Cal and Medicare.

But Baackes saw that L.A. Care didn’t have the right structure to manage the bigger organization it had become. So, he hired directors to oversee each of the health plans and revamped the chain of command.

The changes required a long period of reorientation, Baackes recalled. Then, “one of the officers came up to me one day and said, ‘Well, before I had to talk to everybody, but now I know who to talk to.’ I thought, ‘OK, phew, now we’re making progress.’”

Baackes has sometimes butted heads with state regulators, including when L.A. Care was fined $55 million in 2022 for “deep-rooted, systemic failures that threaten the health and safety of its members.” Baackes thought the fine was not justified. L.A. Care contested it and still has not paid it.

Baackes, who will retain his position as chair of Charles R. Drew University of Medicine and Science, a medical school that trains health professionals to work in underserved areas, expounded on the shortcomings and successes of the U.S. health system and Medi-Cal, which covers well over a third of California’s population.

Like many of his colleagues, he believes Medi-Cal’s principal flaw is low payments to providers, which is exacerbated by a shortage of labor in health care. That discourages doctors and other providers from taking Medi-Cal patients, limiting their choices and extending their wait times for care. He supports Proposition 35, a measure on the ballot this November that would secure a permanent revenue stream to increase Medi-Cal payments.

L.A. Care tackled the labor shortage by creating a $205 million fund to pay for medical school scholarships, help clinics hire doctors, and offer educational debt relief to doctors who work in safety-net settings. Jennifer Kent, former director of the California Department of Health Care Services, which oversees the Medi-Cal program, said she was impressed when Baackes used money from a rate settlement with her agency to help fund those initiatives.

“John very clearly has an appreciation and a passion for the program and what it represents in terms of the power to change people’s lives,” Kent said.

This interview with Baackes has been edited for length and clarity:

Q: Voters will decide, with their vote on Proposition 35, whether money from an industry tax will be locked into Medi-Cal permanently, curbing Gov. Gavin Newsom’s plan to tap the revenue for the state’s budget shortfall. Where do you stand on this?

I understand they’ve got a budget deficit, and they’ve got to do something about it. But we have to have security of the funding, and if it’s going to be decided in every budget, there’s going to be politics and other priorities. This is the same way education runs. They went to a ballot initiative to lock in their portion of the budget, and I think the health of over one-third of the population is as important as education.

Q: Medi-Cal has embarked on an ambitious expansion, including full coverage for all immigrants, a push to increase the amount of primary care provided, the elimination of an asset test, and continuous coverage for children up to age 5, among other things. Does the provider shortage in Medi-Cal dampen the prospects of these efforts?

Absolutely. If we are giving people expansion in access, then we have to have the resources for them to take advantage of it — unless we’re going to say, “Yeah, you have access, but figure it out on your own.” If we look at Los Angeles County, we’ve got plenty of doctors bumping into each other in places like Beverly Hills and Santa Monica. But if you go to South L.A., the Antelope Valley, it’s a different story.

Q: What do you think of the Office of Health Care Affordability’s goal of limiting annual health care spending increases to 3.5% at first, and ultimately to 3%?

Well-intended, but I do not see how it can be effective without causing a lot of damage along the way. You can restrict the amount of money that can be spent, but it doesn’t fix the underlying drivers of why it costs so much.

Q: So it could ultimately reduce care for patients?

Yeah. I think so. Because if doctors and nurses demand higher salaries and can command them because there aren’t enough people, then having an administrative hammer that you can’t spend more isn’t going to work.

Q: A lot of people would say the whole U.S. health care system, not just Medicaid, is failing patients. Access to care, and the cost of it, is difficult for a lot of people. How do we fix the system?

We need to simplify the regulatory environment. Regardless of whether it’s commercial insurance, Medicare, or Medicaid, the regulations are piling up and they cost money. The second thing: I think particularly the safety-net providers might have to say there can be no for-profit or private equity investors in that area. I’m not against capitalism. I just think if you’re going to make that money on a system that’s underfunded in the first place, something is being lost.

Q: What are your thoughts about the California Advancing and Innovating Medi-Cal program (CalAIM), especially the community supports such as meals designed for specific medical conditions, home modifications, and help finding housing?

CalAIM is a wonderful program in the sense that it begins to recognize that social determinants do influence your health. So we’re finally saying, “OK, we’ll put some money toward paying for those.” But the trade-off is that they want to reduce the medical costs by making these investments. The problem is we are trying to save dollars that are already deeply discounted. Of the 14 community supports they have, the one that is in my mind a slam dunk is the medically tailored meals.

Q: How has your thinking about health care evolved?

What I’ve learned and experienced is that health care is part of social justice, and we have to think of it that way. Any other way of thinking of it is going to create winners and losers.

This article was produced by KFF Health News, which publishes California Healthline, an editorially independent service of the California Health Care Foundation. 

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The legislation, sponsored by Attorney General Rob Bonta, would require private equity groups and hedge funds to notify his office of planned purchases of many types of health care businesses and obtain its consent. It also reinforces state laws that bar nonphysicians from directly employing doctors or directing their activities, which is a primary reason for the doctor association’s support.

Private equity firms raise money from institutional investors such as pension funds and typically acquire companies they believe can be run more profitably. Then they look to boost earnings and sell the assets for multiples of what they paid for them.

That can be good for future retirees and sometimes for mismanaged companies that need a capital infusion and a new direction. But critics say the profit-first approach isn’t good for health care. Private equity deals in the sector are coming under increased scrutiny around the country amid mounting evidence that they often lead to higher prices, lower-quality care, and reduced access to core health services.

Opponents of the bill, led by the state’s hospital association, the California Chamber of Commerce, and a national private equity advocacy group, say it would discourage much-needed investment. The hospital industry has already persuaded lawmakers to exempt sales of for-profit hospitals from the proposed law.

“We preferred not to make that amendment,” Bonta said in an interview. “But we still have a strong bill that provides very important protections.”

The legislation would still apply to a broad swath of medical businesses, including clinics, physician groups, nursing homes, testing labs, and outpatient facilities, among others. Nonprofit hospital deals are already subject to the attorney general’s review.

A final vote on the bill could come this month if a state Senate committee moves it forward.

Nationally, private equity investors have spent $1 trillion on health care acquisitions in the past decade, according to a report by The Commonwealth Fund. Physician practices have been especially attractive to them, with transactions growing sixfold in a decade and often leading to significant price increases. Other types of outpatient services, as well as clinics, have also been targets.

In California, the value of private equity health care deals grew more than twentyfold from 2005 to 2021, from less than $1 billion to $20 billion, according to the California Health Care Foundation. Private equity firms are tracking the pending legislation closely but so far haven’t slowed investment in California, according to a new report from the research firm PitchBook.

Multiple studies, as well as a series of reports by KFF Health News, have documented some of the difficulties created by private equity in health care.

Research published last December in the Journal of the American Medical Association showed a larger likelihood of adverse events such as patient infections and falls at private equity hospitals compared with others. Analysts say more research is needed on how patient care is being affected but that the impact on cost is clear.

“We can be almost certain that after a private equity acquisition, we’re going to be paying more for the same thing or for something that’s gotten worse,” said Kristof Stremikis, director of Market Analysis and Insight at the California Health Care Foundation.

Most private equity deals in health care are below the $119.5 million threshold that triggers a requirement to notify federal regulators, so they often slide under the government radar. The Federal Trade Commission is stepping up scrutiny, and last year it sued a private equity-backed anesthesia group for anticompetitive practices in Texas.

Lawmakers in several other states, including Connecticut, Minnesota, and Massachusetts, have proposed legislation that would subject private equity deals to greater transparency.

Not all private equity firms are bad operators, said Assembly member Jim Wood, a Democrat from Healdsburg, but review is essential: “If you are a good entity, you shouldn’t fear this.”

The bill would require the attorney general to examine proposed transactions to determine their impact on the quality and accessibility of care, as well as on regional competition and prices.

Critics note that private equity deals are often financed with debt that is then owed by the acquired company. In many cases, private equity groups sell off real estate to generate immediate returns for investors and the new owners of the property then charge the acquired company rent.

That was a factor in the financial collapse of Steward Health Care, a multistate hospital system that was owned by the private equity firm Cerberus Capital Management from 2010 to 2020, according to a report by the Private Equity Stakeholder Project, a nonprofit that supports the California bill. Steward filed for Chapter 11 bankruptcy in May. “Almost all of the most distressed US healthcare companies are owned by private equity firms,” according to another study by the group.

Opponents of the legislation argue it would dampen much-needed investment in an industry with soaring operating costs. “Our concern is that it will cut off funding that can improve health care,” said Ned Wigglesworth, a spokesperson for Californians to Protect Community Health Care, a coalition of groups fighting the legislation. The prospect of having to submit to a lengthy review by the attorney general, he said, would create “a chilling effect on private funders.”

Proponents of private equity investment point to what they say are notable successes in California health care.

Children’s Choice Dental Care, for example, said in a letter to state senators that it logs over 227,000 dental visits annually, mostly with children on Medi-Cal, the health insurance program for low-income Californians. “We have been able to expand to 25 locations, because we have been able to access capital from a private equity firm,” the group wrote.

Ivy Fertility, with clinics in California and eight other states, said in a letter to state senators that private investment has expanded its ability to provide fertility treatments at a time when demand for them is increasing.

Researchers note that private equity investors are hardly alone when it comes to health care profiteering, which extends even to nonprofits. Sutter Health, a major nonprofit hospital chain, for example, settled for $575 million in a lawsuit brought by then-Attorney General Xavier Becerra, for unfair contracting and pricing.

“It’s helpful to look at ownership classes like private equity, but at the end of the day we should look at behavior, and anyone can do the things that private equity firms do,” said Christopher Cai, a physician and health policy researcher at Harvard Medical School. He added, though, that private equity investors are “more likely to engage in financially risky or purely profit-driven behavior.”

This article was produced by KFF Health News, which publishes California Healthline, an editorially independent service of the California Health Care Foundation. 

KFF Health News is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF—an independent source of health policy research, polling, and journalism. Learn more about KFF.

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The Democratic vice president could influence the Federal Trade Commission and instruct the departments of Justice and Health and Human Services to prioritize enforcement of antitrust laws and channel resources accordingly. Already, the Biden administration has taken an aggressive stance against mergers and acquisitions. In his first year in office, President Joe Biden issued an executive order intended to intensify antitrust enforcement across multiple industries, including health care.

Under Biden, the FTC and DOJ have fought more mergers than they have in decades, often targeting health care deals.

“What Harris could do is set the tone that she is going to continue this laser focus on competition and health care prices,” said Katie Gudiksen, a senior health policy researcher at University of California College of the Law, San Francisco.

The Harris campaign didn’t respond to a request for comment.

For decades, the health industry has undergone consolidation despite government efforts to maintain competition. When health systems expand, adding hospitals and doctor practices to their portfolios, they often gain a large enough share of regional health care resources to command higher prices from insurers. That results in higher premiums and other health care costs for consumers and employers, according to numerous studies.

Health insurers have also consolidated in recent decades, leaving only a handful controlling most markets.

Health care analysts say it’s possible for Harris to slow the momentum of consolidation by blocking future mergers that could lead to higher prices and lower-quality care. But many of them agree the consolidation that has already taken place is an inescapable feature of the U.S. health care landscape.

“It’s hard to unscramble the eggs,” said Bob Town, an economics professor at the University of Texas.

There were nearly 1,600 hospital mergers in the U.S. from 1998 to 2017 and 428 hospital and health system mergers from 2018 to 2023, according to a KFF study. The percentage of community hospitals that belong to a larger health system rose from 53 in 2005 to 68 in 2022. And in another sign of market concentration, as of January, well over three-quarters of the nation’s physicians were employed by hospitals or corporations, according to a report produced by Avalere Health.

Despite former President Donald Trump’s hostility to regulation as a candidate, his administration was active on antitrust efforts — though it did allow one of the largest health care mergers in U.S. history, between drugstore chain CVS Health and the insurer Aetna. Overall, Trump’s Justice Department was more aggressive on mergers than past Republican administrations.

Harris, as California’s attorney general from 2011 to 2017, jump-started health care investigations and enforcement.

“She pushed back against anticompetitive pricing,” said Rob Bonta, California’s current attorney general, who is a Democrat.

One of Harris’ most impactful decisions was a 2012 investigation into whether consolidation among hospitals and physician practices gave health systems the clout to demand higher prices. That probe bore fruit six years later after Harris’ successor, Xavier Becerra, filed a landmark lawsuit against Sutter Health, the giant Northern California hospital operator, for anticompetitive behavior. Sutter settled with the state for $575 million.

In 2014, Harris was among 16 state attorneys general who joined the FTC in a lawsuit to dismantle a merger between one of Idaho’s largest hospital chains and its biggest physician group. In 2016, Harris joined the U.S. Department of Justice and 11 other states in a successful lawsuit to block a proposed $48.3 billion merger between two of the nation’s largest health insurers, Cigna and Anthem.

Attempts to give the state attorney general the power to nix or impose conditions on a wide range of health care mergers have been fiercely, and successfully, opposed by California’s hospital industry. Most recently, the hospital industry persuaded state lawmakers to exempt for-profit hospitals from pending legislation that would subject private equity-backed health care transactions to review by the attorney general.

A spokesperson for the California Hospital Association declined to comment.

As attorney general of California, Harris’ work was eased by the state’s deep-blue political hue. Were she to be elected president, she could face a less hospitable political environment, especially if Republicans control one or both houses of Congress. In addition, she could face opposition from powerful health care lobbyists.

Though it often gets a bad rap, consolidation in health care also confers benefits. Many doctors choose to join large organizations because it relieves them of the administrative headaches and financial burdens of running their own practices. And being absorbed into a large health system can be a lifeline for financially troubled hospitals.

Still, a major reason health systems choose to expand through acquisition is to accumulate market clout so they can match consolidation among insurers and bargain with them for higher payments. It’s an understandable reaction to the financial pressures hospitals are under, said James Robinson, a professor of health economics at the University of California-Berkeley.

Robinson noted that hospitals are required to treat anyone who shows up at the emergency room, including uninsured people. Many hospitals have a large number of patients on Medicaid, which pays poorly. And in California, they face a series of regulatory requirements, including seismic retrofitting and nurse staffing minimums, that are expensive. “How are they going to pay for that?” Robinson said.

At the federal level, any effort to blunt anticompetitive mergers would depend in part on how aggressive the FTC is in pursuing the most egregious cases. FTC Chair Lina Khan has made the FTC more proactive in this regard.

Last year, the FTC and DOJ jointly issued new merger guidelines, which suggested the federal government would scrutinize deals more closely and take a broader view of which ones violate antitrust laws. In September, the FTC filed a lawsuit against an anesthesiology group and its private equity backer, alleging they had engaged in anticompetitive practices in Texas to drive up prices.

In January, the agency sued to stop a $320 million hospital acquisition in North Carolina.

Still, many transactions don’t come to the attention of the FTC because their value is below its $119.5 million reporting threshold. And even if it heard about more deals, “it is very underresourced and needing to be very selective in which mergers they challenge,” said Paul Ginsburg, a professor of the practice of health policy at the University of Southern California’s Sol Price School of Public Policy.

Khan’s term ends in September 2024, and Harris, if elected, could try to reappoint her, though her ability to do so may depend on which party controls the Senate.

Harris could also promote regulations that discourage monopolistic behaviors such as all-or-nothing contracting, in which large health systems refuse to do business with insurance companies unless they agree to include all their facilities in their networks, whether needed or not. That behavior was one of the core allegations in the Sutter case.

She could also seek policies at the Department of Health and Human Services, which runs Medicare and Medicaid, that encourage competition.

Bonta, California’s current attorney general, said that, while there are bad mergers, there are also good ones. “We approve them all the time,” he said. “And we approve them with conditions that address cost and that address access and that address quality.”

He expects Harris to bring similar concerns to the presidency if she wins.

This article was produced by KFF Health News, which publishes California Healthline, an editorially independent service of the California Health Care Foundation. 

KFF Health News is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF—an independent source of health policy research, polling, and journalism. Learn more about KFF.

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An initiative, supported by virtually every sector of the state’s health care industry as well as the local Republican and Democratic parties, would lock in the money for Medi-Cal, California’s version of the Medicaid health insurance program for low-income residents. The funds would be used primarily to increase payment rates for health care professionals who serve Medi-Cal patients.

Newsom, a Democrat, initially supported using the money for that purpose. But after California’s fiscal situation darkened, he reversed course in May, proposing to divert most of it to reduce the state’s $45 billion budget deficit.

The money is from a tax on managed-care health plans that’s been around for two decades but has historically been used to offset existing state spending rather than support new investments in Medi-Cal.

“The importance of this ballot initiative is finally being serious about investing in the viability of the Medi-Cal system,” said Adam Dougherty, chief of emergency medicine at Sutter Medical Center in Sacramento. “The MCO tax literally touches every aspect of the Medi-Cal system, and it can’t be at the mercy of year-to-year budget crises.”

Michael Genest, a former finance director under Republican Gov. Arnold Schwarzenegger, noted that several ballot initiatives approved by voters in the past continue to narrow the state’s fiscal choices, including one that limits property tax increases and another that guarantees a large share of the state budget to schools.

“We do ballot-box budgeting in the state of California. We’ve done it forever. And everything we’ve done in that regard has turned out to be very hard on fiscal stability,” Genest said.

It’s possible that the Coalition to Protect Access to Care, made up of doctors, hospitals, health plans, and other medical providers, could settle their differences with state leaders before a June 27 deadline to withdraw the initiative.

Newsom’s desire to claw back most of the promised money puts him at odds with proponents of the initiative, many of whom have long counted themselves among his allies. Elana Ross, a spokesperson for Newsom, declined to comment on the status of the initiative.

In May, Newsom proposed using about $6.7 billion previously earmarked for Medi-Cal pay hikes and some other health care priorities, mostly in 2025 and 2026, to offset existing state spending. His proposal would retain Medi-Cal payment increases totaling around $300 million a year for some primary care, mental health, and maternity services.

The legislature passed a new budget on June 13 largely following the governor’s wishes by canceling the planned Medi-Cal increases in 2025. But Newsom hasn’t signed off.

“What was approved represents a two-house agreement between the Senate and the Assembly — not an agreement with the governor,” said H.D. Palmer, spokesperson for the state’s Department of Finance. “We’ll respectfully decline to speculate on what the contours of a final agreement would look like.”

Revenue from the managed-care tax allows the state to draw matching federal dollars, more than doubling the amount available. Federal and state money would also be used to reimburse the health plans for nearly all the taxes they paid, theoretically having no effect on insurance premiums.

California is among 19 states that have such an “MCO tax” in place to help fund their Medicaid programs. Using the tax revenue to pay Medi-Cal providers more is “a generational opportunity to fundamentally fix access to care for Medi-Cal recipients,” said Dustin Corcoran, CEO of the California Medical Association and a spokesperson for the ballot initiative.

Corcoran said internal polling shows the initiative has public support by “very healthy margins,” though he declined to share specific numbers.

If the initiative does end up on the November ballot and is approved, it would override any compromise Newsom strikes with lawmakers. It would restore the previously planned Medi-Cal investments for 2025 and 2026. And it would make the increased funding, and more of it, permanent starting in 2027, though that would require federal approval.

Proponents of the initiative say it is fundamentally a question of health equity. Medi-Cal covers medical and mental health services for nearly 15 million Californians, well over a third of the state, many of them among the poorest and most vulnerable residents. The program has a budget of about $157 billion, including recent expansions to cover all immigrants regardless of legal status and a $12 billion experiment to offer socioeconomic supports not traditionally covered by health insurance.

But access to care is notoriously spotty for many Medi-Cal patients, in part because low payment rates discourage providers from seeing them. The shortage is particularly acute in specialty care.

“Our patients wait months for access to specialists or travel great distances to see them,” said Joel Ramirez, chief medical officer of Camarena Health, a chain of over 20 community clinics based in Madera. “Higher rates would allow for more providers.”

Ramirez said 60% to 70% of Camarena’s patients are on Medi-Cal, many of them farmworkers. “It’s a tall ask for them to find time off work and get the transportation to travel an hour for an appointment,” he said. “Whatever condition that patient has that needs the attention of a specialist is being either untreated or incompletely treated.”

Dougherty, Sutter Medical Center’s ER chief, said that over half of his patients are on Medi-Cal and the ER is always at full capacity, with the waiting rooms jammed and an insufficient number of beds. The initiative, he said, “allows us to hire more staff, add more beds, create more infrastructure for the volume we’re seeing.”

This article was produced by KFF Health News, which publishes California Healthline, an editorially independent service of the California Health Care Foundation. 

KFF Health News is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF—an independent source of health policy research, polling, and journalism. Learn more about KFF.

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It’s uncertain whether the state can get insurers, hospitals and medical groups to collaborate on containing costs even as they jockey for their slice of California’s $400 billion-plus health-care pie.

The verdict could take years.

In late April, the state’s new Office of Health Care Affordability set a five-year target for spending growth that starts at 3.5 percent for 2025 and drops to 3 percent by 2029. The goal of the embryonic agency is to make care more affordable and accessible while improving health outcomes and reducing inequity.

To do so, California’s affordability office must confront high prices, unnecessary medical treatments, overuse of high-cost care like emergency rooms, and administrative waste. Not to mention state policies that favor greater investment in health care, which means more revenue for the industry.

This year, when the office was considering an annual per capita spending growth target of 3 percent, the California Hospital Association said the figure did not account for the state’s aging population, new investments in its Medicaid program and other cost pressures. Instead, the hospitals proposed a 5.3 percent average annual target over the five-year period.

The California Medical Association, which represents the state’s doctors, has expressed similar concerns.

For health-care organizations that miss the target, a long and messy process begins that could end with fines of as much as 100 percent of the overspending. But that probably wouldn’t happen until 2030 or beyond, if ever.

In 2013, Massachusetts was the first state to set annual spending targets. Connecticut, Delaware, Nevada, New Jersey, Oregon, Rhode Island and Washington are among other states that have set targets.

The results in Massachusetts have been mixed: The state beat its target in three of the first five years, falling below the average national spending increase.

But more recently, its health spending has increased. In 2022, it exceeded the target by nearly double, and the state’s Health Policy Commission, which oversees spending control efforts, warned of “many alarming trends.”

Proponents of California’s affordability agency hope that open dialogue — coupled with plans to make more detailed spending data public, including for specific health-care organizations — will foster greater industry accountability.

Rhode Island, despite a preexisting policy of limiting hospital price increases, exceeded its overall health-care spending growth target in 2019, the year it took effect. In 2020 and 2021, spending was largely skewed by the coronavirus pandemic. But in 2022, the spending increase came in at half the state’s target rate.

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The goal of the agency, established in 2022, is to make care more affordable and accessible while improving health outcomes, especially for the most disadvantaged state residents. That will require a sustained wrestling match with a sprawling, often dysfunctional health system and powerful industry players who have lots of experience fighting one another and the state.

Can the new agency get insurers, hospitals, and medical groups to collaborate on containing costs even as they jockey for position in the state’s $405 billion health care economy? Can the system be transformed so that financial rewards are tied more to providing quality care than to charging, often exorbitantly, for a seemingly limitless number of services and procedures?

The jury is out, and it could be for many years.

California is the ninth state — after Connecticut, Delaware, Massachusetts, Nevada, New Jersey, Oregon, Rhode Island, and Washington — to set annual health spending targets.

Massachusetts, which started annual spending targets in 2013, was the first state to do so. It’s the only one old enough to have a substantial pre-pandemic track record, and its results are mixed: The annual health spending increases were below the target in three of the first five years and dropped beneath the national average. But more recently, health spending has greatly increased.

In 2022, growth in health care expenditures exceeded Massachusetts’ target by a wide margin. The Health Policy Commission, the state agency established to oversee the spending control efforts, warned that “there are many alarming trends which, if unaddressed, will result in a health care system that is unaffordable.”

Neighboring Rhode Island, despite a preexisting policy of limiting hospital price increases, exceeded its overall health care spending growth target in 2019, the year it took effect. In 2020 and 2021, spending was largely skewed by the pandemic. In 2022, the spending increase came in at half the state’s target rate. Connecticut and Delaware, by contrast, both overshot their 2022 targets.

It’s all a work in progress, and California’s agency will, to some extent, be playing it by ear in the face of state policies and demographic realities that require more spending on health care.

And it will inevitably face pushback from the industry as it confronts unreasonably high prices, unnecessary medical treatments, overuse of high-cost care, administrative waste, and the inflationary concentration of a growing number of hospitals in a small number of hands.

“If you’re telling an industry we need to slow down spending growth, you’re telling them we need to slow down your revenue growth,” says Michael Bailit, president of Bailit Health, a Massachusetts-based consulting group, who has consulted for various states, including California. “And maybe that’s going to be heard as ‘we have to restrain your margins.’ These are very difficult conversations.”

Some of California’s most significant health care sectors have voiced disagreement with the fledgling affordability agency, even as they avoid overtly opposing its goals.

In April, when the affordability office was considering an annual per capita spending growth target of 3%, the California Hospital Association sent it a letter saying hospitals “stand ready to work with” the agency. But the proposed number was far too low, the association argued, because it failed to account for California’s aging population, new investments in Medi-Cal, and other cost pressures.

The hospital group suggested a spending increase target averaging 5.3% over five years, 2025-29. That’s slightly higher than the 5.2% average annual increase in per capita health spending over the five years from 2015 to 2020.

Five days after the hospital association sent its letter, the affordability board approved a slightly less aggressive target that starts at 3.5% in 2025 and drops to 3% by 2029. Carmela Coyle, the association’s chief executive, said in a statement that the board’s decision still failed to account for an aging population, the growing need for mental health and addiction treatment, and a labor shortage.

The California Medical Association, which represents the state’s doctors, expressed similar concerns. The new phased-in target, it said, was “less unreasonable” than the original plan, but the group would “continue to advocate against an artificially low spending target that will have real-life negative impacts on patient access and quality of care.”

But let’s give the state some credit here. The mission on which it is embarking is very ambitious, and it’s hard to argue with the motivation behind it: to interject some financial reason and provide relief for millions of Californians who forgo needed medical care or nix other important household expenses to afford it.

Sushmita Morris, a 38-year-old Pasadena resident, was shocked by a bill she received for an outpatient procedure last July at the University of Southern California’s Keck Hospital, following a miscarriage. The procedure lasted all of 30 minutes, Morris says, and when she received a bill from the doctor for slightly over $700, she paid it. But then a bill from the hospital arrived, totaling nearly $9,000, and her share was over $4,600.

Morris called the Keck billing office multiple times asking for an itemization of the charges but got nowhere. “I got a robotic answer, ‘You have a high-deductible plan,’” she says. “But I should still receive a bill within reason for what was done.” She has refused to pay that bill and expects to hear soon from a collection agency.

The road to more affordable health care will be long and chock-full of big challenges and unforeseen events that could alter the landscape and require considerable flexibility.

Some flexibility is built in. For one thing, the state cap on spending increases may not apply to health care institutions, industry segments, or geographic regions that can show their circumstances justify higher spending — for example, older, sicker patients or sharp increases in the cost of labor.

For those that exceed the limit without such justification, the first step will be a performance improvement plan. If that doesn’t work, at some point — yet to be determined — the affordability office can levy financial penalties up to the full amount by which an organization exceeds the target. But that is unlikely to happen until at least 2030, given the time lag of data collection, followed by conversations with those who exceed the target, and potential improvement plans.

In California, officials, consumer advocates, and health care experts say engagement among all the players, informed by robust and institution-specific data on cost trends, will yield greater transparency and, ultimately, accountability.

Richard Kronick, a public health professor at the University of California-San Diego and a member of the affordability board, notes there is scant public data about cost trends at specific health care institutions. However, “we will know that in the future,” he says, “and I think that knowing it and having that information in the public will put some pressure on those organizations.”

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Legislation by state Sen. Scott Wiener (D) and Assembly member Marie Waldron (R) would allow the therapeutic use of psilocybin, mescaline, ecstasy and dimethyltryptamine — a chemical that occurs in the psychoactive ayahuasca plant mixture — in state-approved locations under the supervision of licensed individuals. It would also regulate the production, distribution, quality control and sale of those psychedelics.

The bill is intended to get across the desk of Gov. Gavin Newsom, a Democrat who vetoed broader decriminalization legislation last year while calling psychedelics “an exciting frontier” and asking for “regulated treatment guidelines” in the next version.

While most psychedelics are prohibited under federal law, research has shown them to be promising treatments for depression, anxiety, post-traumatic stress disorder and addiction. Several large cities including D.C., have effectively decriminalized their use, as has Colorado. Oregon, which previously decriminalized personal possession of all illegal drugs, including psychedelics, rolled back that policy but created a system to regulate the use of psilocybin mushrooms.

Leanne Cavellini, 49, of Pleasanton, Calif., attended a psychedelic retreat in Mexico this year. She said the experience helped her overcome deep-rooted trauma.

“The person I was before was a wound-up tight ball of rubber bands who kept everything in and felt a lot of fear and worry,” Cavellini said. “The person I am today is very free. I live in the present moment. I don’t live other people’s lives, and I don’t take on their emotions.”

State regulation, though, doesn’t always mean easy access. Oregon permits consumption of psilocybin mushrooms only under the guidance of state-licensed facilitators in “psilocybin service centers.” Sessions can cost more than $2,500; they’re not covered by insurance.

Colorado is building regulated “healing centers,” where people will be able to take psilocybin mushrooms and some other psychedelics under the supervision of licensed facilitators.

In California, one obstacle is the state’s $45 billion budget deficit. Its elected leaders are already looking for programs to cut. One that doesn’t yet exist could be low-hanging fruit.

Under the pending legislation, anyone hoping to be licensed to supervise people using psychedelics will need a professional health credential.

Bills pending in several other states would ease access to psychedelics or relax current laws against them.

Some first responder and veterans groups are among legalization’s biggest boosters, and there is significant public support. A survey out of the University of California at Berkeley last year showed 61 percent of registered voters in the United States support regulated therapeutic access to psychedelics — though nearly half of those respondents said such drugs were not “good for society.”

Ken Finn, the former president of the American Board of Pain Medicine, said although the science around psychedelics is promising, the California legislation is premature “pending more robust and rigorous research to protect public safety.”

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“The guy was up there screaming and squirming. Then the cab caught on fire,” Trammell says. “I couldn’t move him. He burned to death right there in my arms.”

Memories of that gruesome death and other traumatic incidents he had witnessed as a firefighter in Mountain View, California, didn’t seem to bother Trammell for the first seven years after he retired in 2015. But then he started crying a lot, drinking heavily, and losing sleep. At first, he didn’t understand why, but he would later come to suspect he was suffering from post-traumatic stress disorder.

After therapy failed to improve his mental well-being, he heard about the potential benefits of psychedelic drugs to help first responders with PTSD.

Last July, Trammell went on a retreat in Puerto Vallarta, Mexico, organized by The S.I.R.E.N. Project, a nonprofit that advocates the use of psychedelics and other alternative medicines to help first responders. He took psilocybin mushrooms and, the next day, another psychedelic derived from the toxic secretions of the Sonoran Desert toad. The experience, he says, produced an existential shift in the way he thinks of the terrible things he saw as a firefighter.

“All that trauma and all that crap I saw and dealt with, it’s all very temporary and everything goes back into the universe as energy,” Trammell says.

Abundant research has shown that psychedelics have the potential to produce lasting relief from depression, anxiety, PTSD, addiction, and other mental health conditions. Many universities around the United States have programs researching psychedelics. But experts warn that these powerful drugs are not for everybody, especially those with a history of psychosis or cardiovascular problems.

Most psychedelic drugs are prohibited under federal law, but California may soon join a growing number of local and state governments allowing their use.

A bill working its way through the California Legislature, would allow the therapeutic use of psilocybin; mescaline; MDMA, the active ingredient in ecstasy; and dimethyltryptamine, the active ingredient in ayahuasca, a plant-based psychoactive tea. The drugs could be purchased and ingested in approved locations under the supervision of facilitators, who would undergo training and be licensed by a new state board. The facilitators would need a professional health credential to qualify.

The bill, co-sponsored by Sen. Scott Wiener (D-San Francisco), Assembly member Marie Waldron (R-San Diego), and several other lawmakers, follows last year’s unsuccessful effort to decriminalize certain psychedelics for personal use. Gov. Gavin Newsom, a Democrat, vetoed that bill, though he extolled psychedelics as “an exciting frontier” and asked for new legislation with “regulated treatment guidelines.”

Wiener says the new bill was drafted with Newsom’s request in mind. It is supported by some veterans and first responder groups and opposed by numerous law enforcement agencies.

One potential roadblock is the state’s budget deficit, pegged at between $38 billion and $73 billion. Newsom and legislative leaders may choose not to launch a new initiative when they are cutting existing programs. “That is something we’ll certainly grapple with,” Wiener says.

The legislation, which is making its way through committees, would require the new board to begin accepting facilitator license applications in April 2026. The system would look somewhat like the one in Oregon, which allows the use of psilocybin mushrooms under the guidance of state-licensed facilitators at psilocybin service centers. And like Oregon, California would not allow for the personal use or possession of psychedelics; the drugs would have to be purchased and consumed at the authorized locations.

Colorado, following the passage of a ballot initiative in 2022, is creating a system of regulated “healing centers,” where people will be able to legally consume psilocybin mushrooms and some other psychedelics under the supervision of licensed facilitators. Colorado’s law allows for the personal use and possession of a handful of psychedelics.

In California, the cities of Oakland, San Francisco, Berkeley, Santa Cruz, and Arcata have effectively decriminalized many psychedelics, as have other cities around the United States, including Ann Arbor, Michigan; Cambridge, Massachusetts; Detroit; Minneapolis; Seattle; and Washington, D.C.

Psychedelics such as psilocybin, ayahuasca, and peyote have been used for thousands of years by Indigenous populations in Latin America and the current-day United States. And some non-Indigenous groups use these substances in a spiritual way.

The Church of Ambrosia, with locations in San Francisco and Oakland, considers psilocybin mushrooms, also known as magic mushrooms, a sacrament. “Mushrooms affect the border between this world and the next, and allow people to connect to their soul,” says Dave Hodges, founder and pastor of the church.

Hodges was behind an unsuccessful attempt to get an initiative on the California ballot this year that would have decriminalized the possession and use of mushrooms. He hopes it will qualify for the 2026 ballot.

The pending California legislation is rooted in studies showing psychedelics can be powerful agents in mental health treatment.

Charles Grob, a psychiatry professor at the University of California-Los Angeles School of Medicine who has researched psychedelics for nearly 40 years, led a study that found synthetic psilocybin could help reduce end-of-life anxiety in patients with advanced-stage cancer.

Grob says MDMA is good for couples counseling because it facilitates communication and puts people in touch with their feelings. And he conducted research in Brazil that showed ayahuasca used in a religious context helped people overcome alcoholism.

But Grob warns that the unsupervised use of psychedelics can be dangerous and says people should undergo mental and medical health screenings before ingesting them. “There are cases of people going off the rails. It’s a small minority, but it can happen, and when it does happen it can be very frightening,” Grob says.

Ken Finn, past president of the American Board of Pain Medicine, says that psychedelics have a number of side effects, including elevated blood pressure, high heart rate, and vomiting, and that they can trigger “persistent psychosis” in a small minority of users. Legal drugs also pose risks, he says, “but we have much better guardrails on things like prescriptions and over-the-counter medications.” He also worries about product contamination and says manufacturers would need to be tightly regulated.

Another potential problem is health equity. Since insurance would not cover these sessions, at least initially, they would likely attract people with disposable income. A supervised psilocybin journey in Oregon, for example, can cost more than $2,500.

Many people who have experienced psychedelics corroborate the research results. Ben Kramer, a former Marine who served in Afghanistan and now works as a psilocybin facilitator in Beaverton, Oregon, says a high-dose mushroom session altered his worldview.

“I relived the first time I was ever shot at in Afghanistan,” he says. “I was there. I had this overwhelming love and compassion for the guy who was shooting at me, who was fighting for what he believed in, just like I was.”

Another characteristic of psychedelic therapy is that just a few sessions can potentially produce lasting results.

Trammell, the retired firefighter, hasn’t taken psychedelics since that retreat in Mexico 10 months ago. “I just felt like I kind of got what I needed,” he says. “I’ve been fine ever since.”

This article was produced by KFF Health News, which publishes California Healthline, an editorially independent service of the California Health Care Foundation. 

KFF Health News is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF—an independent source of health policy research, polling, and journalism. Learn more about KFF.

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Many of its patients are aging Chinese speakers with limited incomes who are reliant on Medicare and Medi-Cal, which pay less than commercial insurance and often don’t fully cover provider costs. And due to an arcane federal rule, Chinese Hospital receives a lower rate of reimbursement than many other hospitals that treat a large number of low-income patients. Add the high cost of labor and supplies in this post-pandemic world, and it’s not hard to see why the hospital lost $20 million over the past two years and tapped a nearly $10.4 million loan from the state’s distressed hospital loan fund.

Yet the 88-bed hospital has strong ties to the University of California-San Francisco and the city’s public health department. And it gets support from businesses, charities, and the surrounding community. For Jian Zhang, 58, the hospital’s CEO since 2017, fundraising is like breathing.

“I feel like it’s a full-time job for me,” said Zhang, who arrived in San Francisco from Guangzhou, China, as an international student in 1990, earned a nursing doctorate from the University of San Francisco, and has remained in the Bay Area.

Revenue from fundraising and other services have provided a big boost, helping the hospital significantly offset what it lost on patient care in 2022, according to the hospital and state data. By contrast, Madera Community Hospital and Beverly Hospital were far less able to do so. Those hospitals, which also serve low-income populations with many patients on government health care programs, filed for bankruptcy last year.

Chinese Hospital has its roots in a medicinal dispensary, founded in 1899 to provide health care for Chinese immigrants who were effectively excluded from mainstream medical facilities. The hospital itself opened in 1925, and a second building was added next door in 1979. In 2016, a new building replaced the original hospital.

Today, Chinese Hospital includes those two buildings plus five outpatient clinics offering Eastern and Western medicine, spread out across San Francisco and neighboring San Mateo County. Through partnerships, Chinese Hospital has been able to offer specialty services to its patients, including eye surgery, palliative care, and a stroke center. And $10 million in grants it received from the state last year will help build a subacute unit, which is for fragile patients who still need nursing and monitoring following a hospital stay.

In an interview with KFF Health News senior correspondent Bernard J. Wolfson, Zhang discussed the challenges facing small independent hospitals, including Chinese Hospital, and offered her vision for its future. The following Q&A has been edited for length and clarity:

Q: What are some of the main challenges your hospital faces?

We are facing all the challenges other hospitals are facing, especially the covid pandemic and its associated negative impact — the physician shortage and workforce shortage, the labor cost increases. But as a small community hospital, we don’t have a lot of reserve money. It’s hard to make ends meet.

That is a huge challenge because of the low reimbursement rate. We serve more than 80% Medicare and Medi-Cal patients.

Q: What are some specific challenges of serving a largely Chinese population?

In this market, with the workforce shortage, and especially after the pandemic, it’s even harder to recruit bilingual physicians, and other bilingual staff.

And culturally, Chinese patients, when they are sick, need to drink soup for healing or eat certain other foods for healing. You can’t be providing sandwiches and salads. They won’t eat that. So our kitchen has to provide Chinese food, has to boil soup, and then we have to cook different food for our patients who are non-Chinese.

Q: Are you concerned about the state’s budget shortfall?

Absolutely. We all were expecting that Medi-Cal would increase rates. We have been pushing that for many years. But if it’s not going to happen, a lot of our programs we probably won’t be able to do. I am very concerned about it.

Q: Chinese Hospital has its own health plan, and you said 40% to 50% of your patients are members of it. How has that helped?

It’s like Kaiser Permanente. You have your own members, and you manage them. You want your patients to be in outpatient. So you take care of them, keep them healthy, so they don’t need to come to the hospital for acute care. That’s how you save money.

Q: And I imagine that getting fixed monthly payments — capitation payments — for a large proportion of your patients also helps?

Definitely, capitation payments help. Especially during the pandemic. Think about it. If you didn’t have capitation payments, when procedures were canceled, you didn’t have income.

Q: What else has helped you weather the storm?

We have partnerships with San Francisco’s Department of Public Health and UCSF. During the pandemic, we took overflow patients from the city, so we didn’t have to lay off a lot of people. We signed a contract with the city to open up the second floor of our hospital to take overflow patients from Zuckerberg San Francisco General hospital.

Q: You also have strong fundraising activity.

We do have strong community support. The hospital is not just a hospital to me. It’s really part of our history. In the past, it was the only place [Chinese people] could go. Wherever I went, to a conference, for example, somebody would raise their hand and say, “Oh, I was born at Chinese Hospital” or “My grandfather was born at Chinese Hospital.” It is really, really deeply rooted in the community.

Q: What’s your vision for the future of the hospital?

Chinese Hospital is very important to the community, and I want to see it survive and thrive. But it definitely needs support from the government and from the community. Moving forward, we will continue to build on collaborations and partnerships.

This article was produced by KFF Health News, which publishes California Healthline, an editorially independent service of the California Health Care Foundation. 

KFF Health News is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF—an independent source of health policy research, polling, and journalism. Learn more about KFF.

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