Medi-Cal faces funding emergency from state miscalculations, federal budget cuts

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

“I campaigned on universal health care,” Newsom said. “We’re delivering that.”

Actually that wasn’t quite true. While running for governor, he pledged he would deliver single-payer health care but didn’t pursue it after winning election.

Instead he and the Legislature incrementally increased eligibility for Medi-Cal, the state’s health care program for the poor, topping out with a budget that expanded Medi-Cal to everyone still lacking coverage, mostly adult immigrants.

The state could afford it, Newsom said of the 2022-23 budget, because it had a $97.5 billion surplus, adding “no other state in American history has ever experienced a surplus as large as this.”

The claimed surplus turned out to be a mirage. State budget officials later acknowledged they had overestimated revenues by $165 billion over four years. Having spent much of the phantom surplus on Medi-Cal expansion and other programs, the budget quickly developed chronic deficits.

The deficits were worsened by faulty estimates of how much the Medi-Cal expansion would cost. In 2025, after the expansion had been in effect for a year, state officials said it was costing $6.2 billion more than anticipated.

To reduce its impact, Newsom reversed course on 100% health care coverage and has asked the Legislature to freeze enrollments. His current budget blandly describes the reversal this way: “The governor’s budget includes proposals to help align program expenditures with projected revenue to mitigate the projected structural operating deficits in the out-years.”

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

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

“Because Medi-Cal grew at a faster rate, its share of the state budget increased, particularly following the COVID-19 pandemic,” the report says. “Medi-Cal’s spending growth is due to underlying programmatic trends, as well as policy changes expanding eligibility, benefits, and provider rates.”

Nevertheless, there is a running conflict between the state and those who provide Medi-Cal’s services over the level of payments, and another among providers over how payments are divvied up. With billions of dollars at stake, the conflicts manifest in sharp skirmishes in the Legislature, in courts and in the ballot measure arena.

One point of friction is a gimmick that California and other states use to maximize federal funds — special taxes on health care providers, which are used to draw down more federal matching payments in return for state promises to offset the taxes with additional reimbursements to providers.

It’s a legal Ponzi scheme. The feds limited its use in the past, and the Trump administration has cracked down further. State officials also spar with providers over how the additional federal dollars are allocated.

The legislative analyst’s report captures all of these trends to describe a perfect storm of pressures on a program that had grown to cover 14.5 million Californians — more than a third of the state’s population — and costing more than $200 billion a year, by far the budget’s largest single item.

Two decades ago, then-Gov. Arnold Schwarzenegger’s budget director, Mike Genest, warned that Medi-Cal costs were growing so quickly they could overwhelm the state’s finances. His prophecy is becoming a reality.