The Medi-Cal money pit

If you’re wondering why there are tax increases on top of tax increases this year, coming soon to a ballot near you if you haven’t seen them already, one reason is Medi-Cal spending. 

In California, 14.5 million people are on Medi-Cal, the safety-net health insurance program for low-income people. As of last October, that included 1.7 million individuals who have what the government calls “unsatisfactory immigration status.”

A new report from the Legislative Analyst’s Office warns that Medi-Cal spending has “more than doubled” over the past ten years, even “faster than the growth in the overall state budget.” In 2026-27, the governor’s budget estimates that Medi-Cal will cost $222 billion, of which $49 billion will come out of the state’s General Fund.

A big chunk of the rest of the funding comes from provider taxes. These are taxes and fees paid by managed care organizations, hospitals and other providers of health care. Then when the state gives that money back to those same entities to pay for Medi-Cal services, the federal government reimburses the state for 50% or more of those payments.

The higher the taxes on Medi-Cal providers, the more money California can “draw down” in federal dollars.

The federal government had rules intended to prevent gaming the system, such as a requirement for “uniformity.” That meant the states couldn’t tax Medicaid providers only, or tax them at a higher rate than private providers. However, there were waivers and clever structures that some states exploited to collect extra money from the federal government. Sometimes they would use that money for things that were outside the scope of Medicaid.

California did this and used some of the extra money to fund costly program expansions. For example, the governor and state lawmakers extended full-scope Medi-Cal (Medicaid) coverage to all income-eligible undocumented immigrants residing in the state.

U.S. law prohibits the use of federal tax dollars to provide more than a limited form of Medicaid to undocumented immigrants, so California uses state funds to provide full-scope Medi-Cal to this “expansion population.” However, it didn’t escape the federal government’s notice that some of the state money came from federal reimbursements of tax-boosted Medi-Cal expenses.

Last July the president signed H.R. 1, also known as the One Big Beautiful Bill and the Working Families Tax Cut. It tightened up the Medicaid reimbursement rules. The Legislative Analyst’s Office said this will require California to “notably reduce two large provider taxes – a tax on health plans and a fee on private hospitals,” resulting in “billions of dollars of lost revenue.”

In late January the federal government’s Centers for Medicare & Medicaid Services, or CMS, released a final rule that the agency said “would end states’ ability to exploit a health care-related tax loophole currently used by seven states to generate billions in federal Medicaid payments – without contributing their fair share or expanding care for Medicaid enrollees.”

California is one of those seven states, of course. CMS cited California’s tax rates on managed care organizations, or MCOs, as an example of “schemes” that “technically pass the current statistical test for permissibility due to an inadvertent loophole.” The state’s MCO tax rates are set at $274 (per member, per month) for Medicaid enrollees but only $1.75 for non-Medicaid members.

H.R. 1 also requires Medicaid recipients between the ages of 19 and 64 (with many exceptions) to prove that they’ve spent at least 80 hours per month working, studying, or volunteering. The requirement takes effect in 2027. In California, state officials have predicted that 1.4 million Medi-Cal enrollees will lose their coverage as a result of the work requirements. The new law also requires some Medi-Cal enrollees (working-age adults without kids) to have their eligibility redetermined every six months instead of every year. The LAO estimates that the work and renewal requirements together could mean 2.1 million fewer people on Medi-Cal by 2028.

Although California doesn’t have to enforce the work requirements on undocumented immigrants enrolled in state-funded Medi-Cal, Gov. Gavin Newsom said he will. Surging costs have already forced him to cut back the promised full-scope Medi-Cal benefits for the undocumented population. Newsom has cut dental benefits, added a $30 monthly premium and barred any more adults from enrolling.

To “fully assess drivers of base spending growth” in Medi-Cal, the Legislative Analyst’s Office recommended that the Legislature “direct the administration to provide more recent, granular information” for the budget process. Specifically, the LAO said lawmakers need more data on managed care rate trends, pharmacy use, and “caseload, costs and utilization for members with UIS (unsatisfactory immigration status).”

It’s an election year, so it’s likely that the legislature would rather not know.

Instead, we can expect much wailing about federal “cuts” to Medi-Cal that now require massive and multiple tax increases.

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And if you think that’s bad, wait until you see this: the “single-payer” healthcare proposal is back. Assembly Bill 1900 would put the state of California in the business of running everyone’s health care, replacing Medi-Cal, Medicare, union-negotiated health benefits and all private insurance. The bill states the “intent” of the Legislature to “develop a revenue plan” to pay for it. You know what that means. They have to pass it before we can find out what’s in it.

All of this goes to prove that health care is not a right. Health care is a service. Somebody has to provide that service. Somebody has to pay for it. If there are not enough providers and there’s not enough money, somebody has to ration it.

It also proves that government officials don’t have what it takes to run a lemonade stand.

Write Susan@SusanShelley.com and follow her on X @Susan_Shelley

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