Governor’s 2025-26 Proposed Budget Preserves Key Investments in Health Care

Governor Gavin Newsom released his 2025-2026 Budget Proposal on Friday, January 10, 2025. This year’s budget assumes a stronger fiscal position than in recent years, with a modest surplus. The budget proposal preserves key investments in healthcare, including primary care provider rate increases through the Managed Care Organization tax, and maintains baseline funding for workforce programs such as the Song-Brown Program.

The 2025-26 Governor’s Budget proposes $322 billion in state spending, including $229 billion from the General Fund. The budget also includes a total of $17 billion in reserves. Twenty-six percent of total state expenditures is dedicated to health-related spending.

The Governor’s Budget includes $296. billion from all funding sources, including federal funds  ($84 billion General Fund) for all health and human services programs in 2025-26.

The 2025-2026 Budget includes:

• Proposition 35 and the Managed Care Organization (MCO) Tax- In November 2024, voters approved Proposition 35, which requires California to make the Managed Care Organization (MCO) Tax permanent. This tax provides critical funding for the Medi-Cal program, which serves low-income Californians.

  For the upcoming years, the state projects MCO Tax revenue of $7.9 billion in 2024-25, $4.4 billion in 2025-26, and $3.3 billion in 2026-27. These funds will continue to support Medi-Cal, but the exact spending plan for the tax revenue starting in 2025 will be developed in consultation with a stakeholder advisory committee, as required by Proposition 35.

  Importantly, Proposition 35 makes some changes to prior funding commitments. While provider rate increases for primary care, maternal care, and non-specialty mental health services implemented in 2024 will continue through 2025 and 2026, other increases authorized in the 2024 Budget Act will no longer apply as of January 2025. However, new monies from Proposition 35 are reflected in the 2025-6 budget proposal.

  While this version of the MCO Tax aims to create long-term stability for Medi-Cal funding, CAFP members should be aware that future spending decisions will depend on the input of the advisory committee administered under the Department of Health Care Services (DHCS), federal waiver approval, and ongoing budget considerations.

• Prescription Drug Affordability—Given the rising costs of pharmacy expenditures, the Administration will continue to evaluate the key drivers of prescription drug cost growth. Building on the goals of the Office of Health Care Affordability and CalRx, the Administration is exploring approaches to increase transparency in the pharmacy supply chain and improve the affordability of prescription drugs in California.
• Behavioral Health Community-Based Organized Networks of Equitable Care and Treatment (BH-CONNECT) Demonstration Approval- In December 2024, the federal government approved approximately $8 billion (state, local, and federal funds) for the BH-CONNECT Demonstration effective January 1, 2025, through December 31, 2029. The funding will support activities and services administered by the DHCS, Department of Social Services (DSS), and the Department of Health Care Access and Information (HCAI). The Demonstration includes statewide and county opt-in components to expand and strengthen the behavioral health continuum for Medi-Cal members living with significant behavioral health conditions, with a focus on children and youth, individuals experiencing or at risk of homelessness, and justice-involved individuals.

• AIDS Drug Assistance Program (ADAP)-$8.5 million in 2025-26 and ongoing from the AIDS Drug Assistance Program Special Fund for enhancements to ADAP and the Pre-Exposure Prophylaxis Assistance Program, effective January 2025. The Budget proposes reimbursing Medicare Part B premiums and out-of-pocket costs and expand the employer-based health insurance premium payment program for ADAP enrollees. Compared to revised 2024-25 expenditures, the Budget provides an increase of $42.3 million total funds for the ADAP program in 2025-26.

• Diaper Initiative—Up to $7.4 million General Fund in 2025-26 and $12.5 million General Fund in 2026-27 for the Department of Health Care Access and Information to contract for the provision of a three-month supply of diapers at no cost to California families with newborn babies via hospital systems to improve maternal and newborn health outcomes.

• Workforce Programs- The budget maintains $108.9 million for workforce programs to ensure the state keeps its promise to those already awarded funding for residencies, nursing training, and other pipeline programs.

Strategic Budget Allocations and Legislative Priorities
The Governor's proposed budget allocates $1.2 billion in limited new funding for workload and discretionary purposes. As a result, the legislature must be strategic in introducing legislation to stay within this funding limit, which may make it challenging for stakeholders to prioritize budget and legislative requests.

Next Steps
CAFP will work with the legislature and allies to advocate for healthcare enhancement and expansion across California. Our ongoing dedication includes working with the Administration and the Legislature to ensure continuous growth in the primary care physician workforce. We will work to fortify healthcare resources, enhance access, and help to safeguard funding for a robust and resilient healthcare system benefiting all Californians.