Newsom forced to roll back unwise Medi-Cal expansions

After the state unwisely expanding Medi-Cal in recent years, the program has descended into a fiscal crisis. Now Gov. Gavin Newsom proposes to roll back some of the expansions, but it may be too little too late given pending actions at the federal level.

Covering more than one-third of Californians, the Medi-Cal program’s costs are projected to escalate from $179 billion in FY 2024-2025 to $194.5 billion in FY 2025-2026. Most of this money comes from the federal government, and these federal funds are now in the crosshairs of congressional Republicans seeking hundreds of billions in healthcare savings as part of their ten-year budget reconciliation plan.

During the heady fiscal days of the early 2020s, Newsom and the legislature expanded Medi-Cal coverage to all adult illegal immigrants statewide.  More “individuals with certain statuses” (as Newsom calls them in his May budget revise) enrolled in Medi-Cal than expected, blowing a hole in the state’s budget earlier this year and necessitating a general fund loan to fund the expansion through June 30.

Now, Newsom proposes to close enrollment to new undocumented immigrants from January 1, 2026. This could produce a rush of new enrollments during the remainder of 2025, unless pressure from the Trump Administration encourages more undocumented adults to “self-deport”.

From January 1, 2027, Newsom proposes to begin collecting a $100 monthly premium from undocumented immigrants aged 19 or over still on Medi-Cal. This amount is a small fraction of the cost of providing medical coverage to this population, but is expected to raise $2 billion during its first full year of its implementation, in FY 2027-2028.

Neither of these reforms will be sufficient to shield California from a potential $3.5 billion federal cut now in the House budget markup. House Republicans are proposing to reduce the federal matching rate on the five million Medi-Cal recipients who were added to the program as part of the Obamacare expansion. Right now, the federal government pays 90 percent of their healthcare costs, but Congress proposes to reduce that rate to 80 percent for states that provide “any form of comprehensive health benefits coverage … to an alien who is not a qualified alien or otherwise lawfully residing in the United States.” To avoid this potential cut, California would have to remove all illegal aliens from the Medi-Cal program.

Another unwise Medi-Cal enhancement Newsom proposes to roll back is the extension of nursing home coverage for seniors with significant assets. As I discussed here previously, a 2021 budget trailer bill removed asset tests for Medi-Cal long-term care benefits. The unsurprising result has been much heavier program utilization. The Legislative Analyst recently estimated that this change caused 112,000 extra seniors to join the program’s caseload at a cost of $1.4 billion annually. Newsom’s May budget revise proposes to reinstate the asset test for Medi-Cal eligibility on January 1, 2026.  This proposal appears to be consistent with House Republican plans to require states to use asset tests.

One other federal level change that could impact California is a proposed restriction on Medicaid provider taxes like those included in last year’s Proposition 35. This voter initiative made permanent a special tax on Medi-Cal Managed Care Organizations such as LA Care that the state uses to attract additional federal matching funds. The House markup tightens the rules on state provider taxes that would likely either kill or force a major restructuring of the Prop 35 tax resulting in a loss of billions of federal Medi-Cal matching funds.

California’s excessive Medi-Cal spending has offered a juicy target for House Republicans, and given hardening attitudes on immigration across the country, California is unlikely to benefit from the public hostility focused on other types of potential Medicaid cuts. As a result, Newsom’s May Budget revision proposals may be the first in a series of reductions to the Medi-Cal program.

Marc Joffe is a fellow at California Policy Center.