(Bloomberg) -- California’s health-care plan for the poor,serving one in three people in the state and almost half itschildren, is facing a $1.1 billion funding gap amid a squabble overhow to replace a tax the federal government said is unfair.

To finance Medi-Cal, California charges 25 managed-care plans a3.9 percent tax on their total Medi-Cal revenue. The U.S.Department of Health and Human Services has said the levy fails tocomply with federal guidelines because it doesn’t apply to allmanaged-care providers.

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If California doesn’t fix the system before its tax expires inJune 2016, the state risks losing $1.1 billion in matching federalfunds that help pay the health-care costs for 11.3 million people.Seven other states, including Georgia, Kentucky, Michigan,Missouri, Ohio, Oregon and Pennsylvania, levied taxes similar toCalifornia’s.

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“There are very dire consequences for not resolving the issuenow,” said California Assemblyman Marc Levine, a Democrat. “If wehave to cut the budget to fill this hole, it will requireincreasing tuition at universities, deferring maintenance onhighways and cutting services to our most vulnerablepopulations.”

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Special session

Governor Jerry Brown, lawmakers and health plans haven’t beenable to agree on how to replace the tax, prompting the governor tocall a special session that convened earlier this month.

Brown, a Democrat, has proposed requiring about 40 managed- careorganizations to pay the tax using a tiered system based on howmany patients are enrolled in Medi-Cal. His budget office estimatedthe levy would raise $1.7 billion. Health providers would receive$1.1 billion, leaving them a financial liability of $660 million,according to a July 2 report by the state’s legislative analyst’soffice.

His proposal would give some managed care organizations acompetitive advantage, since those competing for Medi-Cal patientswould be subject to different tax rates based on that enrollment,the legislative analyst’s office said in a July 20 report.

Health plans with higher taxes could cede market share to otherswith lower fees, according to the study.

Flat tax

Levine introduced a bill that would instead levy a flat tax of$7.88 for each person enrolled per month in 45 health plans thatprovide managed-care coverage to 21 million Californians.

Of the $1.9 billion raised under the proposal, $1.1 billionwould pull in federal matching funds and the remainder would helppay for home-care services, developmental disability programs andincreased reimbursement rates to Medi-Cal providers.

The state’s three largest managed-care organizations would owesubstantially more tax under this structure, the legislativeanalyst’s office found.

“The governor has been clear that everything is on the table fordiscussion during this special session,” said Brown’s spokesmanEvan Westrup.

Insurance providers say Brown’s and Levine’s plans would raisepremiums for millions of consumers. The insurers are working withBrown’s office and legislators to devise a replacement to theexisting tax, said Charles Bacchi, chief executive of theCalifornia Association of Health Plans, a Sacramento-based tradegroup.

“When the federal government changed course and declared taxeslike California’s questionable it created a situation thatthreatens our state medical program,” Bacchi said. “What they areasking us to do is make employers and individuals pay a tax theydon’t currently pay in order to receive federal funding.”

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