Medi-Cal is facing a financial crisis from state and federal cuts

from Dan WaltersCalMatters

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Gavin Newsom likes to brag about his accomplishments as governor, a syndrome that sometimes backfires when reality rears its ugly head. So it was in January 2022, when he proposed expanding health care coverage to all in the state, including undocumented immigrants.

“I was campaigning for universal health care,” Newsom said. “We deliver that.”

Actually, that wasn’t quite true. While running for governor, he promised he would provide single-payer health care, but did not follow through on it after winning the election.

Instead, he and the Legislature gradually increased eligibility for Medi-Cal government health program for the poorsupplementing with a budget that expands Medi-Cal to all who don’t already have coverage, mostly immigrant adults.

The state can afford it, Newsom said of the 2022-2023 budget, because it has a $97.5 billion surplus, adding that “no state in American history has had a surplus as big as this one.”

The the claimed surplus turned out to be a mirage. State budget officials later admitted they had overstated revenue by $165 billion over four years. After spending much of the phantom surplus to expand Medi-Cal and other programs, the budget quickly developed chronic deficits.

The deficits were exacerbated by miscalculations about how much the Medi-Cal expansion would cost. In 2025, after the extension had been in effect for a year, state officials said it was costing $6.2 billion more than expected.

To lessen its impact, Newsom reversed course on 100 percent health care coverage and asked the Legislature to freeze enrollment. Its current budget gently describes the twist thus: “The Governor’s budget includes proposals to help align program spending with projected revenues to mitigate projected structural operating deficits in future years.”

Meanwhile, President Donald Trump and a Republican Congress have tightened federal support, forcing the state to increase its share if it wants to keep Medi-Cal coverage.

Finally, the cost of providing Medi-Cal’s promised services has outpaced spending in the overall budget, according to a new report from the Office of the Legislative Analyst.

“As Medi-Cal grew at a faster rate, its share of the state budget increased, especially after the COVID-19 pandemic,” the report said. “Medi-Cal spending growth is driven by underlying program trends as well as policy changes expanding eligibility, benefits and provider rates.”

However, there is an ongoing conflict between the state and those who provide Medi-Cal services over the level of payments, and another between providers over how payments are distributed. With billions of dollars at stake, the conflicts are manifesting themselves in sharp clashes in the legislature, in the courts and in the voting arena.

One sticking point is a trick California and other states use to maximize federal funds — special taxes on health care providers that are used to draw more federal matching payments in exchange for state promises to offset the taxes with additional reimbursements to providers.

This is legal Ponzi scheme. The feds have restricted its use in the past, and the Trump administration has taken additional measures. State officials are also at loggerheads with providers over how the extra federal dollars are distributed.

The legislative analyst’s report captures all of these trends to describe the perfect storm of pressure on a program that has grown to reach 14.5 million Californians — more than a third of the state’s population — and cost more than $200 billion a year, the largest single line item in the budget.

Two decades ago, then-Gov. Arnold Schwarzenegger’s budget director, Mike Genestwarned that Medi-Cal costs are rising so fast they could overwhelm the state’s finances. His prophecy becomes reality.

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.