2023–24 California State Budget Finalized—Health Care Highlights

Client Alert

Governor and Legislature’s State Budget Deal—Overview

After around-the-clock negotiations between Democratic legislative leaders and Governor Newsom, working against a looming June 30 constitutional deadline, leaders announced a budget agreement on Monday, June 26. Legislators began voting on Tuesday, June 27 on a series of budget amendments and budget “trailer” bills that will make statutory changes to implement the budget deal in time for the start of the fiscal year on July 1. Additionally, the state budget provides continued funding for previous health care commitments, renews the Managed Care Organization (MCO) Tax to provide $2.7 billion in state funds (and billions of matching federal funds) and makes first-time allocations that will earmark funding to improve the state’s Medi-Cal program, including reimbursement rate increases and other annual investments beginning in 2025 (see details below).

The overall state spending proposal totals $310 billion ($226 billion General Fund/$84 billion Special Fund) and addresses a $31.5 billion deficit. The deficit is mostly the result of falling state revenues in recent months due to a downturn in the stock market and resulting decreased capital gains, which is a volatile yet significant source of the state’s revenues. The budget agreement maintains the largest-ever reserves aimed at weathering projected deficits in the outyears as well as a potential economic recession in the coming year or two.

This year’s budget marked a major turnabout from several previous years of record surpluses, big ongoing program commitments and major one-time augmentations for projects such as broadband expansion in the current and future budget years. Adding to the uncertainties for this season’s budget negotiations was the delayed income tax return filing date due to the federal and state winter storm disaster declarations. As a result, actual revenues in the new budget can be only an educated guess until October 15, and further adjustments may be necessary early next year if revenues continue to underperform projections.

Last year’s state budget featured a $100 billion surplus, so this year’s shortfall was an unpleasant surprise for state budget makers, and solving the big deficit required some tough choices—for public and private stakeholders as well as policymakers. In the final budget, the state’s health care system as well as support for public education not only avoided major cuts but received additional support.

The deficit gap was closed with a combination of spending reductions totaling $8 billion, including a planned $750 million payment to the federal government to reduce the state’s $20 billion unemployment insurance debt and about $4 billion in funding previously earmarked for climate change and zero-emission programs, delayed spending of nearly $8 billion previously approved for coming years, and other fund shifts and accounting changes.

Significant Highlights of the New Budget


Health Care

The state budget provides continued funding for previous multiyear health care commitments, including funding increases for:

  • California’s universal access to affordable health care such as the state’s Medi-Cal eligibility expansion for undocumented adults.
  • Significant reforms under the governor’s ​California Advancing and​ Innovating Medi-Cal (CalAIM) to better integrate physical and behavioral health care and improve delivery of managed care, including expansion of CalAIM to support temporary housing assistance for those whom housing is necessary in order to provide health care services.
  • Increased premium subsidies for low- and middle-income members of Covered California, the state’s health benefits exchange.
  • The Governor and Legislature have also agreed to place a bond measure on the March ballot asking voters to increase bond funding for more behavioral health beds and transitional housing aimed at further reducing the incidence of homelessness.
  • The budget will fund continued implementation of expansion the Children and Youth Behavioral Health Initiative, and the Community Assistance, Recovery, and Empowerment (CARE) Act.

Managed Care Organization (MCO) Tax

The budget agreement implements allocations of available funds from the renewal of Managed Care Organization (MCO) tax to provide $2.7 billion in state funds (and billions of matching federal dollars) for reimbursement rate increases and other investments annually beginning in 2025 through 2029. Allocations include (state funds only):

  • $3.5 billion to the general fund to balance the budget.
  • $240 million to raise 2024 reimbursement rates for primary, OB/GYN and some mental health care services. This would increase rates, currently about 60% of what the federal government pays through Medicare, to 87.5% of Medicare rates. 
  • $150 million to the Distressed Hospital Loan program (in addition to the $150 million that was allocated earlier this year).
  • $50 million into the hospital loan program for seismic retrofitting. 
  • $75 million for new medical residency slots. These will likely be focused around Los Angeles, the Imperial Valley and the Central Valley. These funds will start in 2024 and continue for the next four years.

Starting in 2025, for about five years, MCO tax revenue will flow annually to these purposes:

  • $1.5 to $1.7 billion for the general fund.
  • $450 million for primary, OB/GYN and nonspecialty mental health care services. 
  • $575 million for other specialties with the biggest physician shortages as determined by the health plans and Department of Health Care Services. 
  • $245 million for outpatient services in hospitals.
  • $90 million for abortion and family planning clinics.
  • $255 million for emergency rooms.
  • $100 million for emergency room doctors.
  • $50 million for hospitals to handle mental health care.
  • $150 million for public hospitals.
  • $50 million for ambulances.
  • $75 million to help with health care workforce shortages.
  • $300 million for behavioral health slots in skilled nursing facilities, psychiatric facilities or outpatient facilities. 

Climate Change

  • Last year’s multiyear commitment of more than $6 billion towards battling climate change was reduced by $2.9 billion in the final agreement between the Governor and Democratic leadership.
  • Governor Newsom has indicated that he is seeking federal funding from the Inflation Reduction Act and the Infrastructure and Investment and Jobs Act to make up for the cuts. He also asked the legislature to seek voters’ approval of a climate bond ranging from $6 to $16 billion.


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