Lawmakers approved the $14.4 billion plan on a party-line, 45-31 vote on Monday.
"Fundamentally, health care is a right and not a privilege, and it ought to be afforded to everybody," Assembly Speaker Fabian Nunez, the bill's author, told his colleagues before they voted. "Make no mistake about it, this is truly a historic effort."
Funding for the health care package relies on fees imposed on hospitals and employers, as well as boosting the tax on cigarettes. If the plan is passed by the Senate, it will go to voters in November 2008.
It would represent the largest health care overhaul undertaken by any state if voters give their approval.
Of the 5.1 million people who are considered permanently uninsured in California, 3.7 million would be covered under the plan, according to Nunez's office. That includes children from low-income families, employees at small businesses that cannot afford to provide health insurance and Californians with pre-existing medical conditions who have trouble finding coverage.
The Assembly leader struck the deal last week with Gov. Arnold Schwarzenegger, who made health care reform his top policy priority this year and broke ranks with his party to get it done.
"It is time for the people to stop living in fear of losing their medical coverage, of living in fear that they are literally one hospital stay away from having to file personal bankruptcy," Schwarzenegger said at a news conference after the Assembly vote, surrounded by Democratic lawmakers.
Members of his own party, health insurance companies and business groups criticized the proposal, in part because they say it relies on risky funding sources. They also said it penalizes California employers.
The tobacco tax would bring in about one-tenth of the health care program's funding, but critics said the amount of money generated by the tax increase will decline as fewer people smoke and buy cigarettes in California. The program also relies on $4.5 billion in federal matching dollars that Republicans say may not materialize.
Republicans said the state cannot afford a massive health care reform plan as it faces a budget deficit projected at $10 billion to $14 billion over the next two fiscal years.
Committing to such a long-term expenditure with questionable revenue could create "a fiscal meltdown in California," Assemblyman Chuck DeVore, R-Irvine, told his fellow lawmakers.
He also criticized Schwarzenegger for raising spending and promoting tax increases after the governor was elected on a platform of fiscal responsibility.
Assembly Minority Leader Mike Villines, R-Clovis, predicted the reform plan would fail at the ballot, in part because voters will reject higher taxes.
The plan represents a compromise between Schwarzenegger and legislative Democrats. The governor had wanted to require all Californians to buy a health insurance policy, but Democrats worried about affordability for lower-income workers. In turn, Democrats wanted employers to chip in more money to pay for the program.
The bill would require all employers to spend a minimum amount on employees' health care or contribute to a state-run insurance pool.
Nunez said employers would be assessed on a sliding scale, ranging from 1 percent to 6.5 percent of payroll depending on the size of the company. The cigarette tax - now 87 cents per pack in California - would rise by as much as $2 per pack.