California doctors and health insurers have sued Gov. Gavin Newsom and the Legislature, alleging they broke the law by approving a healthcare tax that could substantially increase insurance premiums across the state. The complaint was filed Friday with the California Supreme Court.

The legal challenge targets a tax on health plans known as the managed care organization tax, or MCO tax. The California Medical Association and the California Association of Health Plans argue that the recently passed measure circumvents a 2024 voter initiative governing healthcare taxes.

That initiative limits healthcare taxes and directs the resulting revenue toward specific purposes. The lawsuit contends that state leaders cannot disregard those restrictions while pursuing a different approach to healthcare funding.

“California voters passed Proposition 35 and made it law. The state does not get to ignore that law simply because following the law is inconvenient,” medical association CEO Dustin Corcoran said in a statement.

Newsom’s office rejected the allegations and defended the tax as a way for the state to adjust healthcare funding. Tara Gallegos, a spokesperson for Newsom, said the administration expects the challenge to fail.

“The state disagrees with their claims, and we believe the courts will too,” Gallegos said in an email.

H.D. Palmer, a spokesperson for the Department of Finance, previously told CalMatters that the state was trying to balance affordability concerns among privately insured patients against large scale federal cuts to Medi-Cal.

Newsom did not oppose the 2024 initiative while it was before voters, although he warned at the time that it would “hamstring” the state budget. The initiative later became the central legal issue in the dispute over the new tax structure.

California has taxed health insurers for more than 20 years to help finance Medi-Cal, the state insurance program serving people with low incomes. Historically, private health plans were taxed at a lower rate than Medi-Cal insurers.

That changed in June, when the Legislature passed a bill substantially increasing the tax imposed on private plans. Health insurers say the added expense will not remain confined to the companies paying the tax.

Instead, insurers say they will pass the cost directly to consumers, increasing premiums by about $100 per person each year. A family of four could therefore face an annual increase of $400.

Those added costs would come on top of the insurance rate increases consumers typically encounter from year to year. The projected impact has placed affordability at the center of the lawsuit.

“California is breaking the law by blowing through a tax limit voters put in place to protect Californians and businesses from higher health care costs,” said Charles Bacchi, CEO of the health plans association.

Doctors, hospitals, clinics and Medi-Cal insurers have long argued that revenue from the tax should be used to improve Medi-Cal. They have also maintained that the state was improperly using the money to replace general fund spending while many providers received payments far below the cost of their services.

In 2024, those groups asked voters to approve a limited tax whose proceeds would be reserved for Medi-Cal improvements. Congress later changed federal rules governing taxes used to generate healthcare revenue, including taxes imposed on health plans.

Rather than surrender the revenue generated by the tax, Newsom proposed submitting two taxes to the federal government for approval, and the Legislature agreed. One complied with the 2024 initiative but was expected to be rejected by federal officials.

The second complied with federal regulations while largely disregarding the voter approved initiative. That approach now sits at the heart of the complaint brought by the two healthcare organizations before the California Supreme Court.