Considering Medi-Cal in the Midst of a Changing Fiscal and Policy Landscape

2025-26 BUDGET Considering Medi-Cal in the Midst of a Changing Fiscal and Policy Landscape GABRIEL PETEK | LEGISLATIVE ANALYST OCTOBER 2025 www.lao.ca.gov 1 AN LAO REPORT 2 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Executive Summary Medi-Cal Faces Major Changes Due to a Shifting Fiscal and Policy Landscape. After a decade of significant expansions, Medi-Cal, California’s Medicaid program, faces a new fiscal and policy landscape. California’s fiscal situation has tightened while Medi-Cal costs are rising, prompting the Legislature to enact a series of reductions to Medi-Cal in June 2025. Following these actions, Congress enacted H.R. 1 in July 2025, which significantly changes federal Medicaid eligibility and financing policies. These federal changes will result in many billions of dollars in lost federal funding and place new workload demands and costs on providers, counties, and the state, with state costs alone potentially up to several billion dollars annually. H.R. 1 also could result in over 1 million people exiting from Medi-Cal, though the exact level of disenrollment is uncertain. As such, we raise the following three key questions for legislative deliberation. How Should H.R. 1 Provisions Be Implemented? The changes prompted by H.R. 1 create a number of implementation decisions for the state. For example, the state must decide how to adjust a tax on health plans, historically a key source of financial support for Medi-Cal. The tax is expected to notably shrink under new H.R. 1 rules and existing state law, creating a few billion dollars of cost pressure for the state General Fund. The Legislature, however, could choose to adjust the health plan tax to generate a similar amount of revenue, but at higher cost to California health plans and their consumers. H.R. 1 also creates new eligibility requirements, largely centered on adults without children. The law grants states some flexibility around implementing these requirements, with the potential to exempt more people from the rules and mitigate disenrollments. We recommend the Legislature conduct early oversight of the administration’s implementation decisions and provide policy direction for implementation through legislation. What Changes May Be Needed to Eligibility, Benefits, and Financing? The state does not have fiscal capacity to backfill all of the lost federal revenue resulting from H.R. 1. Moreover, given the state’s fiscal condition, absorbing the additional General Fund costs from the federal policy changes may not be feasible. As such, the Legislature will want to consider how to balance Medi-Cal eligibility, benefits, and financing moving forward. Changes to Medi-Cal will come with key policy trade-offs around access, costs, and other priorities that the Legislature will need to weigh. How Can the State Respond to the Increase in the Uninsured Population? Many of the people who exit Medi-Cal as a result of H.R. 1 likely will face barriers to obtaining alternative sources of coverage, potentially leaving them without a source of comprehensive health insurance. There are no simple state interventions to address these barriers. Renewing county indigent health programs—a key source of coverage for low-income populations prior to the recent Medi-Cal eligibility expansions—would require significasnt fiscal restructuring. H.R. 1 also bars many people who are disenrolled from Medi-Cal from receiving federal subsidies in California’s health insurance exchange. Moreover, the potential for expanding employer-sponsored coverage may be limited, in part, because some who exit Medi-Cal will do so because they do not work enough to meet new federal eligibility requirements. Given these challenges, the Legislature likely will need to explore new approaches, pursue creative solutions, and rebalance its fiscal and programmatic priorities. www.lao.ca.gov 3 AN LAO REPORT 4 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT INTRODUCTION Over the last decade, the state has taken reduces federal support to California in various steps to expand eligibility, benefits, and provider ways, likely resulting in further reductions to payments in Medi-Cal, California’s Medicaid the Medi-Cal program. program. These expansions were prompted by This report aims to assist the Legislature as it additional federal funds—largely through the Patient responds to this changing landscape. We begin Protection and Affordable Care Act (ACA)—and with background on the Medi-Cal program, the generally sustained state tax revenue growth. major programmatic expansions over the last Medi-Cal, however, is entering a new landscape. decade, and the recent pullbacks of some of Costs have exceeded expectations and due these expansions. Next, we describe the major to structural budget deficits, the state enacted changes in the new federal legislation and analyze several reductions to Medi-Cal during the 2025-26 the associated programmatic and fiscal effects budget cycle. Following these actions, in July in California. We conclude with key issues and 2025, Congress enacted legislation that makes questions for the Legislature to consider in the changes to Medicaid. This legislation—H.R. 1— coming months and years. BACKGROUND MEDI-CAL BASICS eligibility to additional populations (many of which come with matching federal funds). California has In this section, we (1) provide an overview of the also received waivers from certain federal rules Medi-Cal program and (2) describe how Medi-Cal over the years, generally to test new approaches for is funded. serving beneficiaries and delivering care. Overview of the Medi-Cal Program Medi-Cal Provides Services Through Medi-Cal Provides Health Care Services Multiple Systems. The primary way that Medi-Cal to Low-Income Californians. Like Medicaid delivers services to beneficiaries is by contracting programs in other states, Medi-Cal covers health with public and private health plans (known as care for low-income Californians. The program the managed care system). The state provides covers a range of services, such as doctor visits, these plans monthly payments to enroll Medi-Cal hospital and nursing facility stays, mental health beneficiaries, while the plans, in turn, arrange and care, substance use disorder treatment, and dental pay for the health care of their enrollees. In some services. Medi-Cal is a major source of health care cases, however, the state reimburses providers coverage in California, with almost 15 million people directly under a fee-for-service system. This applies (over one-third of all Californians) estimated to be to certain services (such as pharmacy benefits) and enrolled in 2025-26. some populations not enrolled in managed care. Medi-Cal Is a State-Federal Partnership. Counties Also Have a Key Role in Medi-Cal. The state and the federal government share In addition to the federal and state governments, programmatic and fiscal responsibilities for counties also perform a few key functions in Medi-Cal. The federal government created Medicaid Medi-Cal. Counties determine eligibility for and imposes program requirements on states, such Medi-Cal applicants and also provide services, as covering a minimum set of services and certain such as behavioral health care and personal populations. The state, in turn, is responsible for care. Some counties operate their own hospitals, implementing Medi-Cal. California has chosen to clinics, and other health facilities, which serve go beyond the minimum federal requirements, such Medi-Cal beneficiaries (in addition to other as by covering optional services and expanding low-income people). www.lao.ca.gov 5 AN LAO REPORT Medi-Cal Finance state or local dollar spent generates one federal dollar). In some cases, however, the federal share More Than Half of Medi-Cal Funding Comes is higher or lower. Services for childless adults, From Federal Matching Funds. In 2025-26, the for example, receive a 90 percent federal match, Medi-Cal budget is estimated to be $197 billion, whereas abortion services do not qualify for any making it the largest program in the state budget federal match. in terms of total funds. As Figure 1 shows, federal funds comprise more than half of this amount. General Fund Is the Next Largest Source… Specific matching formulas determine the overall California covers the nonfederal share of Medi-Cal federal share. In most cases, California’s federal costs primarily through the General Fund. Medi-Cal matching rate is 50 percent (meaning that every accounts for about 15 percent of General Fund expenditures in a typical year, making it the second largest allocation after K-14 education. Figure 1 …Followed by Provider Taxes and Fees… Largest Share of Medi-Cal Funding Like most states, California helps fund its Medicaid Comes From Federal Government program using provider taxes and fees. These taxes and fees assess charges on certain kinds $197 Billion at 2025-26 Budget Act of health care providers (such as health plans and hospitals) for the services they deliver to Medicaid and non-Medicaid patients. The state has long used provider taxes and fees to draw down more federal funds while imposing little net cost on the providers General Fund themselves. The way this works is complex. In general, some of the additional federal funds help to cover costs for providers or support supplemental Provider Taxes provider payments. As a result of this arrangement, and Fees Federal much of the cost ultimately falls on the federal government. The federal government limits its costs by imposing a number of rules on the size and Other State scope of such taxes and fees. As Figure 2 shows, and Local Funds California has four provider taxes and fees, two of which are particularly large in terms of net revenue: a tax on health plans and a fee on private hospitals. Figure 2 California Has Four Provider Taxes and Fees Approximate Annual Tax or Fee Charged Providers Revenue General Use Managed Care Organization Health plans Around $7.5 billion (net)a Increased Medi-Cal provider rates and Tax General Fund savings. Hospital Quality Assurance Private hospitals Over $5 billionb Supplemental Medi-Cal payments to Fee private hospitals and General Fund savings. Long-Term Care Quality Long-term care facilities Around $700 million Portion of state cost of long-term care Assurance Fees facility reimbursement rates. Ground Emergency Medical Private GEMT providers $55 million Increased Medi-Cal payments to private Transport (GEMT) Quality ground emergency transport providers Assurance Fee and General Fund savings. a Reflects revenue that is directly available to the state for higher provider rates and General Fund savings. b Does not reflect proposed increase to fee, bringing annual to around $10 billion, that is pending federal approval. 6 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT …And Other State and Local Figure 3 Funds. California has turned to other sources as well to cover Medi-Cal’s Budget Has More Than Medi-Cal costs. For example, Quadrupled Over Last Two Decades voter-approved tobacco taxes over (In Billions) the years have helped to support and expand Medi-Cal. Local $200 governments also help cover the cost of certain Medi-Cal services, such as behavioral health care and 150 public hospital services. RECENT MEDI-CAL 100 EXPANSIONS AND PULLBACKS 50 Other Funds As Figure 3 shows, the Medi-Cal program has grown over the past two decades, more than General Fund quadrupling on a total fund basis. 2005-06 2009-10 2013-14 2017-18 2021-22 2025-26 As Figure 4 shows, this growth recently outpaced the growth of the state’s General Fund budget after generally keeping pace Figure 4 in previous years. While some of this growth is due to certain Medi-Cal Growth Recently underlying factors, such as state Outpaced Growth in State Budget demographic changes, much of Share of State General Fund Spending for Medi-Cal it was driven by policy changes expanding program eligibility, 25% provider payments, and benefits. 20 In this section, we (1) discuss these expansions and (2) describe 15 recent state decisions to pull back 10 some of the expansions in light of budgetary constraints. 5 Major Expansions 2005-06 2009-10 2013-14 2017-18 2021-22 2025-26 Over Last Decade, State Expanded Medi-Cal Eligibility for Three Key Populations. In several recent years, California in 2010, California opted to extend eligibility has undertaken major eligibility expansions in to this population in 2014. The federal Medi-Cal. These expansions primarily affect three government initially covered 100 percent of populations, described below. the cost of the expansion, with this share eventually falling to 90 percent. Today, nearly • Childless Adults. Historically, low-income, 5 million Medi-Cal enrollees (33 percent) are childless adults were not eligible for Medi-Cal. estimated to be in this population. Following Congress’s enactment of the ACA www.lao.ca.gov 7 AN LAO REPORT • Undocumented People. Federal Medicaid documented immigrants residing in the United funding is restricted when services are States for less than five years—eligible for provided to immigrants. Only certain comprehensive coverage many years prior.) groups of immigrants–such as permanent • Seniors and Persons With Disabilities residents meeting any applicable waiting With Assets. Historically, Medi-Cal eligibility period requirements—qualify for federal for seniors and persons with disabilities was cost sharing for all Medicaid services. The subject to asset limits in addition to income remaining groups—deemed by federal limits. The asset limit varied by household size law as having unsatisfactory immigration and excluded certain properties (such as a status (UIS)—are only eligible for federal household’s primary residence and vehicle). cost sharing for limited services, including In July 2022, the state increased the asset emergency and certain pregnancy-related limit (for a household of one, from $2,000 care. In California, the largest UIS group is to $130,000), and then in January 2024, undocumented people. In recent years, the eliminated it entirely. Our recent report, The state extended eligibility for comprehensive 2025-26 Budget: Understanding Recent coverage to undocumented people. Because Increases in the Medi-Cal Senior Caseload, these additional services are not eligible estimated that the latter change increased for federal funding, the state has covered Medi-Cal caseload by about 100,000 people. the entire cost of these expansions using State Used Flexibilities to Mitigate Significant General Fund. As Figure 5 shows, the state Disenrollments. During the COVID-19 pandemic, gradually phased in the expansions over time, the state generally paused redetermining eligibility prioritizing certain age groups first. Today, for Medi-Cal enrollees. This meant that new people 1.7 million Medi-Cal enrollees (11 percent) continued entering the Medi-Cal program while very are estimated to be undocumented and have few existing enrollees exited, resulting in historically comprehensive coverage. (The state had high caseload. The state enacted this policy as a already made other UIS groups—primarily condition of receiving enhanced federal funding. This federal condition ended in March 2023, prompting resumed Figure 5 redeterminations. To mitigate California Made Undocumented People Eligible for substantial disenrollments, the Comprehensive Medi-Cal Coverage in Steps state enacted certain federally Enacting Budget Act and Start Date for Each Expansion allowed flexibilities, such as automated renewal for certain enrollees. These flexibilities Budget Act 2015-16 2019-20 2021-22 2022-23 expired at the end of June 2025, likely leading to more substantial disenrollments from Medi-Cal over Start Date May 2016 January 2020 May 2022 January 2024 the next several months. Voters Have Expanded Funds for Medi-Cal Provider Rate Increases… California voters have approved three ballot measures focused on increasing Medi-Cal provider reimbursement rates to improve access to health care. Two Children Young Adults Adults Older Adults of the measures—Proposition 52 0-18 19-25 26-49 50 and older (2016) and Proposition 35 (2024)— made California’s private hospital 8 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT fee and health plan tax permanent, setting aside estimates, with General Fund spending for this funds specifically for provider rate increases. For policy change estimated to be around $700 million more information on Proposition 35, see our recent annually. Generally, these higher costs have been publication The 2025-26 Budget: MCO Tax and driven by greater-than-expected caseload and Proposition 35. The third measure—Proposition 56 service utilization. (2016)—increased taxes on tobacco products and Due to Fiscal Constraints, Recent Budget directed most of the associated revenue to the Act Pulled Back Some of These Expansions. Medi-Cal program. Many of the above expansions occurred when …As Has the Administration. State law also the state’s General Fund revenue was growing. allows the administration to increase certain In recent years, however, the state’s fiscal situation funds for provider rates, and in recent years it has tightened, resulting in budget problems (when has exercised this authority. The administration the General Fund does not have enough money is currently seeking approval from the federal to cover costs). The state is also projected to face government to draw down more federal funding ongoing deficits in the future. These trends, along by increasing the private hospital fee and local with the higher-than-expected Medi-Cal costs, spending from public hospitals. These actions prompted the Legislature to pull back some of these would result in higher payments to hospitals in recent expansions. We describe some of the major 2025. Some of these increases are intended to help pullbacks below. cover higher costs to hospitals from a legislatively Undocumented Adults’ Eligibility for mandated increase in the minimum wage for Comprehensive Coverage Will Be Frozen. certain health care workers (Chapter 890 of 2023 Beginning in January 2026, eligibility for [SB 525, Durazo]). comprehensive coverage for undocumented adults State Has Adopted Certain Other Additional and seniors will be frozen. (Eligibility for children— Benefits. California has adopted certain other new those under 19 years old—will remain open for benefits over the last decade. Many are part of a new enrollment.) This means that only the adults series of major federal waivers collectively called who already have comprehensive coverage as of California Advancing and Innovating Medi-Cal December 31, 2025 will continue to have access to (CalAIM). The most notable of these new benefits this level of coverage. Newly enrolled adults, as well provide specialized case management and certain as those who lose coverage after January 2026, non-health supports, and target Medi-Cal’s will only be allowed to access limited coverage medically neediest, costliest populations. Some for emergency and certain pregnancy-related new benefits are tied to CalAIM’s limited-term care. This policy change is expected to reduce waiver authority and are contingent on federal undocumented enrollment in comprehensive waiver renewal. coverage, as people over time drop off Medi-Cal and cannot re-enroll in comprehensive coverage. Recent Pullbacks of Expansions Beneficiaries With UIS Will Have to Pay Costs of Some Expansions Are Significantly Premiums. Beginning in July 2027, adults with Higher Than Originally Estimated. The Medi-Cal UIS (including undocumented adults) will be program’s complexity and size make it challenging required to pay a $30 monthly premium to remain to predict the cost of new policies with precision. enrolled in comprehensive coverage. The premium Accordingly, the cost of some of the recent will only apply to adults aged 19-59. This policy expansions have exceeded original estimates. is expected to add to the disenrolling effect of Most notably, the undocumented persons eligibility the undocumented persons’ freeze, as some expansions are estimated to be $10 billion General undocumented beneficiaries may be unable or Fund annually (around one-quarter of total unwilling to pay the premium, losing comprehensive General Fund spending in Medi-Cal)—more than coverage and remaining permanently barred from double the initial estimates. The cost of the asset re-enrolling in it. limit elimination also is more than double initial www.lao.ca.gov 9 AN LAO REPORT Asset Limit Is Returning. Beginning in an individual). Given that the elimination of this January 2026, the state will reinstate an asset asset limit increased Medi-Cal’s senior caseload, limit for seniors and persons with disabilities. its reinstatement will likely reduce caseload among The limit will return to the level that existed from this population. July 2022 through December 2023 ($130,000 for FEDERAL MEDICAID PROVISIONS AND THEIR EFFECTS In this section, we provide an overview of the over ten years, representing the most significant key federal changes to Medicaid and describe changes to federal Medicaid policy since the ACA. their programmatic and fiscal effects in the More Detail on Changes Are Emerging. As California context. Figure 6 shows, only a handful of changes under H.R. 1 took effect immediately. The legislation sets OVERVIEW OF FEDERAL CHANGES out a schedule for the remaining changes to be Recent Federal Legislation Makes Numerous implemented over the next few years. For many Changes to Medicaid. In July 2025, Congress changes, their full effects will depend in part on passed and the President signed H.R. 1—titled the forthcoming guidance from federal regulators, as One Big Beautiful Bill Act. This legislation includes well as state implementation decisions. As a result, about $1 trillion in federal Medicaid reductions our descriptions and analyses of these changes are preliminary and subject to change as more details become available. Figure 6 Federal Changes Begin Over a Staggered Time Frame Key Federal Changes Changes to New rules for disproportionate taxes and managed care provider payments Provider Taxes Lower revenue limit Start of reductions to existing managed care provider payments Community engagement and redetermination requirements Changes for New cost-sharing requirement Adults Changes for Lower federal match and expanded Unsatisfactory Immigration Status definition Immigrants Other Prohibition on certain family planning providers Changes Rural Health Transformation Program New long-term care home equity limit July October October January October January October 2025 2026 2027 2028 Note: Start date of some changes may differ from figure, depending on forthcoming federal guidance. 10 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Changes Generally Fall in Three Key Areas. For non-expansion states, provider taxes will While H.R. 1 includes numerous changes to remain frozen at their current levels so long as they Medicaid, most of these changes generally fall into meet other requirements. three key categories: (1) changes to provider tax Reduces Allowable Managed Care Directed rules, (2) changes to eligibility and cost-sharing Payments to Providers. Under H.R. 1, states will requirements for adults, and (3) changes affecting face tighter limits in the amount of money they immigrant populations. Below, we provide a can direct to providers in their managed care more detailed description of each category, as systems. States often fund their share of these well as some additional changes falling outside directed payments using provider taxes, thereby these categories. drawing down federal funds at no cost to their general funds. For states that implemented the Changes to Provider Tax Rules Medicaid expansion to childless adults (such as Notably Scales Back Use of Provider Taxes. California), the new limit will be the comparable A key way that H.R. 1 achieves sizable federal rate paid in the federal Medicare program. (For savings in Medicaid is by scaling back states’ use non-expansion states, the limit will be 110 percent of provider taxes. While these taxes will still be of the comparable Medicare rate.) Previously, the allowed under H.R. 1, states will need to follow new allowable limit was the average rates health plans stricter rules limiting their use. Below, we describe pay in the commercial sector, which tend to be the key changes. higher than Medicare rates. The lower limit became Further Limits Disproportionately Taxing effective in July 2025. However, the measure allows Medicaid Services. Under H.R. 1, states can no states in certain cases to gradually ramp down longer use certain strategies to disproportionately their existing payments to the new limit beginning tax Medicaid services relative to non-Medicaid January 2028. services. This issue matters from a federal Changes for Adults perspective because disproportionate taxes tend to result in higher federal costs. While federal Affects Adults, Particularly Those Without rules already limited disproportionate taxation, Children, in a Number of Ways. Another key area many states—including California—were able to of focus for H.R. 1 is adults enrolled in Medicaid, levy them. This is because states could adopt especially those without children. From a fiscal approaches that still met federal mathematical tests perspective, childless adults are among the most that measured disproportionality. Under H.R. 1, expensive population for the federal government states are now prohibited from using some of these because of the relatively high federal share of cost approaches, effective July 2025. The legislation (90 percent). Below, we describe some of the key allows the Secretary of Health and Human Services H.R. 1 changes affecting adults. (HHS) to grant states up to three years to comply. Requires Community Engagement to Gradually Reduces Revenue Limit Over Time. Maintain Eligibility. Beginning at the end of 2026, H.R. 1 also scales back states’ use of provider nondisabled, childless adults enrolled in Medicaid taxes by ratcheting down an existing revenue must comply with a new community engagement limit. The current limit—set at 6 percent of a taxed requirement. To remain eligible, they will need to provider group’s overall net patient revenue—is verify that they have completed at least 80 hours intended to prevent states from adopting very per month of work, education, or community large taxes and imposing high costs on the federal service. Some groups will be exempt from the government. Beginning in Federal Fiscal Year requirement (such as recently released inmates), 2028, this limit will decline gradually over time until and states can adopt certain other exemptions for reaching 3.5 percent in Federal Fiscal Year 2032. people facing medical or economic hardships. This 3.5 percent requirement only applies to states Increased Frequency of Eligibility that expanded Medicaid coverage to childless Determinations. H.R. 1 also increases the adults as part of the ACA (such as California). frequency with which states must redetermine www.lao.ca.gov 11 AN LAO REPORT eligibility for childless adults. Currently, states Other Key Changes generally redetermine eligibility every 12 months. Prohibits Enforcement of New Eligibility Rules. Beginning January 2027, H.R. 1 requires states The Centers for Medicare & Medicaid Services to redetermine eligibility for childless adults every (CMS) previously adopted two rules intended to six months. streamline eligibility and enrollment processes, such Requires Cost-Sharing for Certain Services. as by verifying income and assets using electronic Beginning in 2028, childless adults with incomes data. The first rule (finalized in 2023) applied to above 100 percent of the federal poverty level will people dually enrolled in Medicare and Medicaid, face new copayments of up to $35 per service while the second rule (finalized in 2024) applied to for certain Medi-Cal benefits. Previous Medicaid the rest of the Medicaid population. H.R. 1 prohibits law allowed, but did not require, states to impose federal administrators from enforcing the elements cost-sharing requirements on select populations. of these rules that have not yet gone into effect, The new requirement will only apply to childless giving states greater flexibility to decide whether adults earning more than 100 percent of the federal to implement the streamlined processes. The poverty limit. Certain services, such as primary prohibition on enforcement will remain in effect until care and behavioral health care, are excluded from October 1, 2034. the requirement. Creates New Home Equity Limit for Long-Term Care. Seniors and persons with disabilities apply Changes for Immigrant Population for Medicaid under a separate set of rules that Changes Rules for Immigrant Population. typically include a verification of assets. Starting in H.R. 1 further accomplishes federal savings January 2028, H.R. 1 requires people who qualify for by changing rules around federal funding for Medicaid under certain rules and use long-term care comprehensive coverage and limited coverage to prove that their home equity is no greater than (pregnancy and emergency-related care). $1 million to remain eligible. This amount will not be We describe these changes below. adjusted for inflation over time. Although California Adds More Immigrant Groups to UIS has historically excluded an applicant’s primary Population. H.R. 1 narrows the definition of residence when verifying assets, H.R. 1 removes which immigrant groups are considered to have states’ ability to exercise this option. satisfactory immigration status, generally limiting Prohibits Family Planning Funds for Certain eligibility to lawful permanent residents. These new Abortion Providers. H.R. 1 prohibits federal rules exclude some populations previously deemed Medicaid payments to certain nonprofit entities to have satisfactory status, such as refuges and that provide abortions and that received at least asylum grantees. These groups will now effectively $800,000 in Medicaid payments in 2023. These be considered to have UIS, meaning that most of the entities cannot receive federal Medicaid funds for services provided to them will not qualify for federal any health care services. As written in H.R. 1, this matching funds (outside of limited coverage). prohibition would be in effect from July 2025 until Reduces Federal Funding for UIS Childless July 2026. Adults. H.R. 1 also reduces the federal matching Requires Additional Eligibility Verifications. rate for emergency services provided to childless H.R. 1 requires states to take additional steps adults with UIS. As with childless adults who to verify Medicaid eligibility using administrative have satisfactory immigration status, the federal data. Specifically, states must create standardized government currently pays 90 percent of emergency processes to confirm enrollees’ mailing addresses care costs. Beginning in October 2026, the federal using certain data sources. States must also submit government will only pay the state’s regular enrollees’ social security numbers to CMS monthly federal match rate (50 percent in California) for so that the federal administration can check for these services. duplicate enrollment across states. Additionally, states must conduct quarterly reviews to ensure that deceased individuals do not remain enrolled in Medicaid. 12 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Provides Additional Funding for Rural …Evidence Suggests Many Will Disenroll Providers. H.R. 1 creates the Rural Health Due to Administrative Burden. Even though Transformation Fund, which will allocate $50 billion many enrollees already work or attend school, the in state grants over five years (beginning in new community engagement requirement likely Federal Fiscal Year 2026) generally to support will result in many disenrollments. Some social rural health providers. States must use the grants service programs (such as CalFresh) already for a specified list of approved activities, such as include work requirements, and a few states provider payments, technology assistance, chronic previously experimented with such requirements disease prevention and management, substance in their Medicaid programs. The research on these use disorder treatments, clinician recruitment, efforts suggests two key effects. First, the policies and value-based care models. The federal generally did not increase employment, resulting administration will allocate half of the $10 billion in disenrollment among unemployed beneficiaries. available per year equally among states. This means Second, many of those who were already working that each state will receive $100 million annually failed to adequately prove compliance and were for five years (assuming that all states apply and disenrolled from their programs. This is likely receive approval). The federal administration will because these beneficiaries found the new eligibility allocate the remaining half of funds to at least processes—which included additional verification one-quarter of all states based on criteria to be requirements—too administratively burdensome. determined by the HHS Secretary. These criteria In California, another challenge is that the state must include the share of a state’s population and counties have little experience—or systems located in a rural area, the share of rural health for—tracking beneficiary work and education as a facilities nationwide located in a state, and the condition of eligibility in Medi-Cal. status of hospitals in the state. Increased Redetermination Frequency Also Likely Will Result in Disenrollment. The move to PROGRAMMATIC AND a six-month redetermination period likely will further FISCAL EFFECTS decrease the childless adult caseload. In part, this is because the new process will more quickly Impact to Medi-Cal identify beneficiaries whose household income Beneficiaries and Caseload rises above the eligibility threshold. Some eligible beneficiaries also may struggle to demonstrate Millions of Medi-Cal Enrollees Likely Would their eligibility at the higher frequency due to Be Subject to New Eligibility and Cost-Sharing administrative burden. Rules. Most of the new Medicaid rules primarily apply to childless adults. This population is Total Level of Disenrollment Is Uncertain. estimated to comprise around 5 million people, While it is likely that the new eligibility policies will or around one-third of Medi-Cal’s total caseload. result in some level of disenrollment, the magnitude A portion of this population could be exempt from of this effect is uncertain. Much of the impact will some of the new policies as specified in H.R. 1. depend on how the state implements the new rules. Even with these exemptions, the number of Given this uncertainty, we considered independent people who fall within these rules likely will be in analyses that model the Medicaid disenrolling the millions. effects of the provisions in H.R. 1. For example, the Congressional Budget Office (CBO) has provided its Though Many Affected Enrollees Already own national disenrollment projections. Allocating Appear to Work… Past research has found that CBO’s estimates of the eligibility-related changes many adults in Medicaid work, with the remainder to California (based on California’s share of national reporting certain barriers (such as caregiving Medicaid enrollment), we estimate that Medi-Cal responsibilities) to seeking employment. Based on disenrollments across all Medicaid changes in limited data, more than half of affected Medi-Cal H.R. 1 could be around 1.2 million people. beneficiaries already meet the new community engagement requirement through a mix of work and education. www.lao.ca.gov 13 AN LAO REPORT Most Disenrolled People Likely Would however, the effects of copays have been more Become Uninsured. Many independent analyses uncertain. In large part, this is because Medi-Cal (including those from CBO) project that the vast providers could not refuse services to patients majority of people disenrolled from Medicaid who did not pay their required out of pocket share. as a result of H.R. 1’s provisions would become The state eliminated required copays a few years uninsured, rather than find alternative kinds of ago to simplify service delivery. Compounding this coverage. This is because other forms of coverage uncertainty, the state has significant discretion in are likely not available to this population. For how it implements cost sharing requirements under example, most disenrolled adults probably lack H.R. 1, lending to many possible outcomes. access to employer-sponsored health coverage Impact to Medi-Cal Providers since their typical work patterns—part-time or seasonal—limit their access to such coverage. Health Plan Tax May Become Very Small… H.R. 1 also disqualifies certain people disenrolled Under the new provider tax rules, the tax on from Medicaid from qualifying for federally health plans likely will be much smaller than under subsidized premiums in state health insurance current law. This is because the state would have to exchanges, like Covered California. significantly reduce tax rates to make the Medi-Cal and commercial tax rates proportional. The tax Cost Sharing for Beneficiaries May Decrease rate on Medi-Cal enrollment ($274 per member, Utilization. The requirement for states to implement per month in 2025) is more than 100 times the tax cost sharing may reduce utilization of certain rate on commercial enrollment ($2 per member, services, though there is significant uncertainty per month in 2025). Proposition 35, however, about the magnitude. Research suggests that limits the size of the tax on commercial enrollment copays can have substantial effects on utilization, to nominal amounts. (The nearby box provides and that some kinds of services (such as pharmacy) more information on Proposition 35’s interaction may be more sensitive than others. In Medi-Cal, How Proposition 35 Interacts With Federal Law Makes Tax Permanent, Conditioned on Federal Approval. California has charged a specific tax on health plans (known as the Managed Care Organization Tax) for more than a decade. Proposition 35, approved by voters in 2024, made this tax permanent in state law. The measure, however, conditions the state’s ability to charge the tax on receiving federal approval. Federal approval, which typically is required every few years, is important because it enables the state to use the tax to draw down more federal funds for Medi-Cal. Accordingly, if the state fails to obtain federal approval, the health plan tax—as well as Proposition 35’s requirements on spending the associated funds—is not in effect. Allows Changes to Tax to Meet Federal Requirements… Federal regulators have periodically changed rules around approving provider taxes, sometimes requiring the state to restructure the health plan tax. Proposition 35 anticipates this dynamic. Specifically, though the measure makes the tax’s existing structure permanent, it also requires the state to amend it to comply with any future federal rule changes. …Except for Key Limit on Tax on Commercial Enrollment. While the state has broad authority to change the health plan tax’s structure to comply with federal rules, there are certain limits. Most notably, the measure generally limits the tax rate on commercial enrollment to around its existing size ($2.50 per monthly enrollee, with an annual revenue cap of $36 million and some room to slightly exceed these amounts). This provision envisions the state’s current practice of generating revenue primarily from the much larger tax rate on Medi-Cal enrollment. This is because the Medi-Cal tax rate generates revenue to the state by drawing down more federal funding, whereas the commercial tax rate falls on health plans and their consumers to pay. 14 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT with federal rules.) As a result, the health plan in the hospital fee likely would be limited term, with tax under H.R. 1 likely will raise tens of millions of the fee ramping down over time to comply with dollars annually, rather than the billions of dollars it the reduction in the revenue limit. If the federal currently generates. government rejects the larger fee, then hospitals …Resulting in Much Smaller Augmentations will not benefit from the anticipated programmatic for Providers. Under Proposition 35, most of the increases that would otherwise result. money from future health plan taxes must go to …As Will Public and Private Hospital provider rate increases and other augmentations. Managed Care Payments… Payments to hospitals While some of these augmentations have already in the Medi-Cal managed care system also will occurred, they were scheduled to notably increase decline over time. This is because of the required beginning in 2027 had the health plan tax remained gradual reduction in managed care payments at its current size. With the tax expected to to the level paid in Medicare. At the time of this shrink, providers likely will not receive the larger analysis, the Department of Health Care Services augmentations planned for 2027. (DHCS) had not provided estimates of how Private Hospital Fee Also Could Decline Over Medi-Cal hospital payments compare to Medicare. Time… Federal policy changes also likely will result However, it is our understanding from discussions in a smaller private hospital fee, though for different with stakeholders that some Medi-Cal hospital reasons. Relative to the health plan tax, the private payments are higher. hospital fee is less disproportionately levied on …Resulting in Funding Declines to Hospitals. Medi-Cal services and has fewer constraints on the In all, the reductions in the private hospital fee and tax rates. (The nearby box has more information managed care directed payments will result in less on Proposition 52’s requirements.) However, the funding to hospitals over time. The magnitude, most recent version of the fee in 2025—which is timing, and distribution of these funding losses, significantly larger than in prior years—has not yet however, are uncertain. received federal approval. If approved, the increase How Proposition 52 Works Makes Private Hospital Fee Permanent. Similar to Proposition 35 (2024) and the health plan tax, Proposition 52 (2016) made a pre-existing fee on private hospitals (known as the Hospital Quality Assurance Fee) permanent in state law. Similar to the health plan tax, the fee must be approved by the federal government every few years to draw down federal funds for Medi-Cal. In contrast to Proposition 35, however, Proposition 52 does not place direct limits on the fee rates enacted on Medi-Cal and non-Medi-Cal services. As such, the state has more flexibility to adjust the fee levels over time to comply with federal rules. Fee Supports Hospital Supplemental Payments… As was the case prior to Proposition 52’s enactment, the private hospital fee primarily supports Medi-Cal payments for hospital services. It accomplishes this purpose by receiving matching federal funds, with both federal funds and hospital fee revenue generally flowing back to private hospitals as payments. Most hospitals get more money back from this arrangement than they pay in fees. That said, some hospitals, particularly those that primarily provide care to non-Medi-Cal patients, incur net costs as a result of the fee program. …And General Fund Offset for Medi-Cal. A sizable portion of hospital fee revenue—typically around one-quarter each year—helps offset General Fund spending on Medi-Cal. Proposition 52 effectively locks the share of revenue in place permanently, ensuring that a majority of the fee revenue directly benefits private hospitals that pay the fee, rather than the General Fund. www.lao.ca.gov 15 AN LAO REPORT Safety Net Providers Likely Will Face Higher policy responses.) We estimate there will be three Uncompensated Care Costs. Some of the key direct effects, on net potentially costing as impacts from Medi-Cal caseload reductions and much as several billion dollars in annual General increases in the uninsured population likely will fall Fund costs. on safety net hospitals and clinics. This is because • Cost to Backfill Lower Provider Tax these providers have a statutory responsibility Revenue. By far the largest direct cost to the to provide health care to patients, regardless of state General Fund would come from lower ability to pay. These providers could have larger provider tax revenue as a result of H.R. 1. shortfalls in funding, as a greater share of services The health plan tax and private hospital fee would come without full reimbursement (also known currently support the Medi-Cal program, and as uncompensated care). The magnitude of this H.R. 1 provisions will reduce funding from both impact is uncertain as it depends on the number sources. Absent changes to Medi-Cal, the of people that lose Medi-Cal coverage, become state would need to backfill much of this lost uninsured, and still seek out services from safety funding. This cost could be in the low billions net providers. of dollars annually. Impact to State • Reduced Spending From Lower Medi-Cal Enrollment and Service Utilization. Another Federal Changes Create Three Key Direct key fiscal effect to the state would be from Fiscal Effects to State General Fund. Taken disenrollments due to the new eligibility together, H.R. 1’s changes to Medicaid will reduce policies. Generally, these policies would result federal funding for California. Some of these in less spending. This is because caseload is reductions will have direct effects on the state’s a key driver of Medi-Cal costs, and reductions General Fund, either by increasing or reducing in caseload result in lower spending. Despite costs. Direct fiscal effects refer to nondiscretionary the potential for large disenrollments, however, budgetary changes under federal and state General Fund savings likely would be limited, law, rather than discretionary policy responses potentially reaching into the hundreds of to H.R. 1’s provisions. (See the nearby box for millions of dollars. Most of the total savings more information on the distinction between our (likely in the billions of dollars) would instead definition of direct fiscal effects and discretionary accrue to the federal government, which pays Defining Direct Fiscal Effects For the purposes of this report, we define direct fiscal effects as costs or savings to the General Fund required under H.R. 1 and existing state law. Absent changes in state law, the General Fund will either have to cover these costs or will experience fewer costs. For example, reductions in federal matching funds require a backfill from the General Fund to maintain service levels, thereby increasing state costs. Conversely, disenrollments due to new community engagement requirements will reduce state costs. Importantly, our estimates assume that most of the lost federal funding from H.R. 1—which could be as much as tens of billions of dollars—do not place costs directly on the General Fund. Instead, these broader costs will depend on discretionary policy choices by the Legislature. For example, much of the lost federal funding would come from caseload reductions associated with the new community engagement requirements. Caseload reductions result in lower costs to the state. Backfilling this lost federal funding, such as by creating a new state-only program for people disenrolled from Medi-Cal, would be a discretionary choice and a substantial change in existing state policy. 16 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT for most of the cost to enroll childless adults. While our assessment of the state’s budget The new cost-sharing requirements also could condition will be updated in November, recent reduce utilization of certain services, though state tax collections have improved since budget this effect is uncertain and depends on how enactment. This gain, however, likely reflects the state implements the requirements. an exuberant stock market, with the rest of the • Cost to Backfill Lost Federal Funding for economy appearing fragile. With the federal Certain Immigrant Populations. There also legislation now finalized and the state already would be direct state costs from the changes projected to have ongoing deficits, the Legislature affecting immigrants. This is because less likely cannot cover all of these costs from existing federal funding would be available to cover General Fund resources while maintaining the costs for this population. The fiscal effect current level of service in the Medi-Cal program. could be significant. For example, we estimate Federal Changes Also Place More the reduction in federal funding for emergency Administrative Workload on the State. The care services alone could cost around state will need to undertake significant action to $1 billion annually in state funds. However, implement many of the H.R. 1 required changes to the cost could be less if immigrant caseloads Medi-Cal. For example, DHCS will need to translate decline due to the enrollment freeze, new federal changes into practical guidance for health state-imposed premiums, or evolving federal plans and counties, as well as provide technical immigration policies. assistance to affected entities. In some cases, the federal changes may require updates to information Estimates of Net Costs Are Imprecise… technology (IT) systems to implement them. The The above fiscal impacts are challenging to precisely extent of these administrative costs is unknown. estimate. They depend in part on forthcoming federal guidance and state implementation Impact to Counties decisions that are currently unknown. Counties Will Face Costs From New Workload …and Their Timing Remains Uncertain. Demands… Counties are the primary administrators In addition, the time line for some key changes of eligibility determinations in Medi-Cal and will be remains uncertain. Most notably, when the state responsible for implementing many of the eligibility will need to comply with the new disproportionality changes in H.R. 1. These changes, along with rule for provider taxes is uncertain. This is because the recent end of the redetermination flexibilities H.R. 1 begins this new requirement in July 2025, but from the COVID-19 public health emergency, may allows the HHS Secretary to grant states up to three significantly increase the amount of hours county years to comply. Compounding this uncertainty, staff spend on processing eligibility determinations. the HHS had already proposed related draft …and Losses as Medi-Cal Providers. guidance to states in May 2025, before Congress In addition to their administrative responsibilities, enacted H.R. 1. This draft guidance suggested counties provide certain Medi-Cal services that California, as well as a few other states, would (like behavioral health services for high-needs have to adjust its provider taxes relatively quickly. individuals) and some operate hospitals, clinics, or In light of Congress’s enactment of H.R. 1, however, other health facilities. As such, many counties could which provides somewhat different time lines than face the same funding challenges as other Medi-Cal envisioned in the proposed guidance, the due date providers discussed earlier. In particular, county-run for California to adjust its taxes is difficult to project. safety net facilities would see reduced revenue as State Budget Has Constrained Capacity they treat more uninsured individuals. to Address H.R. 1’s Cost Pressures. Magnitude of Costs Is Still Emerging. Though Notwithstanding many Medi-Cal cost pressures county costs from H.R. 1 are likely, the total effect from H.R. 1 facing the Legislature, the General across the state is uncertain. Counties and other Fund already is expected to face a deficit in stakeholders were still reviewing H.R. 1’s provisions 2026-27 and subsequent fiscal years. The 2026-27 and potential effects when we spoke to them earlier deficit, projected to be $17 billion as of June 2025, this year. That said, costs likely will vary significantly was estimated before Congress passed H.R. 1. across counties. www.lao.ca.gov 17 AN LAO REPORT ISSUES FOR LEGISLATIVE CONSIDERATION In this section, we raise three key issues for private hospital fee raises other policy trade-offs. the Legislature to consider: (1) how to implement A higher fee on commercial services could increase the changes to Medi-Cal under H.R. 1, (2) how to costs on some hospitals, particularly those with consider the Medi-Cal program in light of these fewer Medi-Cal-funded services. By contrast, a changes and state fiscal constraints, and (3) how lower fee on Medi-Cal services could reduce the disenrollments from Medi-Cal might affect other amount of fee revenue, reducing payments to sources of health care coverage. hospitals and funding to the state. How Should the State Implement IMPLEMENTING Eligibility and Cost-Sharing FEDERAL CHANGES Requirements? How Should the State Restructure State Could Track Work Completion Through Provider Taxes? Income. Though federal Medicaid law will now require most nondisabled, childless adults to Legislative Action Could Preserve complete 80 hours of community engagement each Large Health Plan Tax by Shifting the Tax Burden. Once it is time to comply with the new month, H.R. 1 grants states certain flexibilities to disproportionality rules, the greatest changes likely track beneficiary compliance. Most notably, states will be needed for the health plan tax. Though can determine compliance via employment using an current law generally will require this new tax to income-based approach, rather than a work-hour be much smaller, there is a way the state could approach. Under the income-based approach, maintain a similar level of revenue as today (before enrollees will be required to earn at least $580 each the required reduction in the revenue limit under month—the federal minimum wage ($7.25 per hour) federal law). Proposition 35 allows the Legislature multiplied by 80 hours. Using an income-based to amend its provisions with a three-fourths vote in approach could result in fewer disenrollments each house, so long as the amendment furthers the relative to an hours-based approach. Primarily, this measure’s intent and purpose. Thus, the Legislature is because DHCS might be able to gather income potentially could amend the measure’s limit on data through existing sources, reducing needed taxing commercial enrollment, enabling the state to documentation from members and administrative have a large and proportionate tax. Such an action workload for counties. In addition, because would ensure the state could continue to draw California’s minimum wage ($16.50 per hour for down significant federal funds to support Medi-Cal, most employers in 2025) is notably higher than the a key goal of Proposition 35. That said, as the federal minimum wage, some Californians might nearby box explains, increasing the commercial meet the income threshold before meeting the tax would shift more costs onto California health 80-hour threshold. care consumers. State Could Exempt More Adults From Many Potential Adjustments to Private Community Engagement Requirements. Hospital Fee. In contrast to the health plan tax, the The federal legislation also allows states to state has a wider array of choices to make with the exempt additional populations from community private hospital fee. This is because Proposition 52, engagement requirements. These exemptions which provides the parameters for the fee, does likely would apply to a nontrivial number of people not limit fee levels on hospital services provided to from the requirement altogether. Under one of people with commercial insurance. The measure the likely more impactful exemptions, states can also grants the state the ability to adjust the fee choose to exempt Medicaid members that reside program to comply with federal rules. While facing in a county with high unemployment rates relative fewer legal hurdles, having a large, proportionate to the national average. Based on July 2025 18 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT unemployment data, about 20 counties in California Expanding Flexibilities Could Limit currently meet the criteria, and several more are Disenrollments at Relatively Low State Cost… close. We estimate that this additional exemption Each of the eligibility flexibilities granted to alone could exclude at least a few hundred states could limit the number of people who are thousand individuals. disenrolled from Medi-Cal. Available evidence Enhanced Federal Funds Could Assist With suggests that work requirements in welfare State IT Needs. To implement new eligibility programs fail to increase employment among requirements, the state likely will need to adjust beneficiaries while disenrolling some who already its Medi-Cal eligibility IT systems. The extent of participate in the labor market. Also, while needed changes would depend on some of the disenrollments will result in some state savings, implementation choices the state makes. CMS these savings will be fairly limited. Instead, has indicated that states might be eligible for most of the savings would accrue to the federal enhanced federal funding to upgrade their Medicaid government, which covers most of the cost of IT systems in response to H.R. 1. As such, the services for childless adults in Medi-Cal. Given Legislature likely will want to better understand the the low cost-effectiveness of imposing work needed changes, the time line for DHCS to adopt requirements, maximizing the use of H.R. 1’s these changes, and the potential to offset some of flexibilities to minimize the policy’s disenrolling these costs using enhanced federal funding. effects would be reasonable. How a Large, Proportionate Health Plan Tax Could Be Structured Higher Commercial Tax. To make the health plan tax more proportional, the state would have to increase the tax rate on commercial enrollment and decrease the tax rate on Medi-Cal enrollment. In effect, this would place more cost onto private health insurance and, therefore, its consumers. Using the enrollment base of the existing health plan tax, we estimate that an around $30 per-member, per-month tax rate on both Medi-Cal and commercial enrollment would generate around the same net revenue as the current tax. This is higher than the current commercial tax rate ($2.25 per-member, per-month) and lower than the current Medi-Cal tax rate ($274 per-member, per-month). Increased Costs for Health Care Consumers… Though health plans would pay the higher commercial tax, plans likely would try to pass on most or all of the cost of the tax onto their members. They would do so by increasing premiums, which in 2024 averaged over $600 per month. The increase in premiums (around 5 percent, on average) could have a variety of effects. For enrollees with employer-sponsored coverage, much of the cost of higher premiums would fall on employers. Employers in turn might respond in a number of ways, such as offering employees less generous health benefits, shifting costs onto employees, or reducing employment. People who purchase health insurance themselves generally would pay the higher premiums. …But Also Continued Federal Match. While California health care consumers and workers would bear a larger portion of a proportionate health plan tax, some of the cost would still fall on the federal government. We estimate the federal share would be around 35 percent to 40 percent. Put another way, every $1 generated by a California consumer would yield around $0.60 federal funds. While considerably lower than in the existing disproportionate tax, this matching rate is far higher than what the state accomplishes with most other taxes, which do not generally directly draw down more federal funds. www.lao.ca.gov 19 AN LAO REPORT …But Potentially With Added Complexity. How Can the Legislature Weigh in on Adding more flexibilities also could come with These Implementation Decisions? the potential downside of more complexity Recommend Legislature Consider Two for beneficiaries and counties. For example, Key Questions at Oversight Hearings. With exempting high unemployment counties from work key implementation decisions forthcoming, the requirements could create more volatility. This is Legislature likely will want to conduct early and because employment trends vary considerably frequent oversight hearings on H.R. 1 during next month to month. As Figure 7 shows, California’s year’s session. Policy and budget committees likely unemployment rate tends to have larger rises and will want to engage in oversight, given H.R. 1’s fiscal falls than the national rate. At the county level, and policy implications for the Medi-Cal program trends are considerably more volatile, with some and the choices facing DHCS. With this in mind, counties consistently higher than the national rate we recommend the Legislature consider two key but others quite varied month to month. The extent questions regarding implementation: of this issue, however, depends on how often the federal government will require the state to • What Are the Objectives? For any redetermine this exemption. implementation decision, the Legislature could first consider its overarching objectives. State Could Consider Many Ways to Structure For example, on cost sharing, should the Cost-Sharing Requirements. The state also has state aim to minimize costs on beneficiaries? some flexibility to structure the new cost-sharing Or should cost sharing strategically target requirements. While H.R .1 requires states to have lower-value, less-necessary services? cost sharing on certain services up to $35, lower Similarly, for provider taxes, should the amounts are allowable. The state could impose state continue to maximize federal funds relatively minimal copays to mitigate the cost to as much as possible? Or should the state enrollees who are at or near the poverty level minimize costs on providers and private health and could struggle to pay the charges. The state care consumers? also could structure copays in ways that promote high-value care, such as by adopting higher • What Are the Options to Accomplish These charges for less medically necessary services. Objectives? After establishing its objectives, These decision points will affect the impact on the Legislature could work with our office, the utilization and associated savings. administration, and stakeholders to assess the various implementation options. State costs or Figure 7 savings, expected Medi-Cal California's Unemployment Rate disenrollments, and Fluctuates More Than National Rate administrative capacity will Monthly Unemployment Rate be key factors to consider when weighing each option. For example, the Legislature 18% may want to work with 16 the administration and 14 counties to understand the 12 administrative feasibility of 10 California tracking Medi-Cal member 8 incomes for compliance 6 with the community National 4 engagement requirement. 2 1990 1995 2000 2005 2010 2015 2020 2025 20 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Recommend Legislature Set Goals in Statute, for Medi-Cal. All else equal, an increase in Where Possible. Some of the implementation caseload results in higher Medi-Cal spending. actions under H.R. 1 will require the Legislature Certain populations are also costlier to serve than to adopt conforming legislation. In other cases, others, owing to their higher utilization of relatively DHCS may have sufficient authority to act without expensive services and differences in federal changes to statute. For example, DHCS has a fair fund matches. amount of flexibility to adjust the private hospital Some Medi-Cal Eligibility Rules Are fee, pursuant to Proposition 52. Nonetheless, in Required, Whereas Others Are Optional. addition to conducting oversight, we recommend As a condition of receiving federal funds for their the Legislature adopt as many changes as possible Medicaid programs, states must cover services for into statute—even for those cases where such certain populations. Examples of these mandatory action is not legally required. Taking such action will populations include children, parents, seniors, and better ensure that the administration, counties, and persons with disabilities in households at or near providers implement H.R 1’s provisions according the poverty level. As Figure 8 shows, however, to legislative intent. states have the option under federal law to serve more populations and receive federal matching CONSIDERING THE funds for services provided to them. Some of these MEDI-CAL PROGRAM populations, such as childless adults and children from higher-income households, come with larger Legislature Likely Will Need to Revisit federal matches to encourage state coverage. Goals for Medi-Cal. In the last several years, Generally, Medi-Cal Eligibility Has Expanded the Legislature has sought to cover as many Over Time. California has taken advantage low-income people as possible in Medi-Cal, while of optional eligibility rules under federal law to also expanding services and certain reimbursement notably expand Medi-Cal coverage. When it was rates. In light of the state’s tight fiscal situation originally created in the 1960s, Medi-Cal focused and the federal government’s changing policies, it on coverage for people receiving cash assistance is unlikely that the state can continue meeting all and the elderly and disabled. Over time, the state of these objectives at current service levels. As a has made more low-income populations eligible, result, the Legislature likely will need to balance its with the cost in many cases shared with the federal policy goals for Medi-Cal. government. As Figure 9 on the next page shows, Three Key Questions Will Drive Legislative these expansions transformed Medi-Cal from a Decision-Making. In revisiting the Medi-Cal relatively small program into one that serves more program, the Legislature faces three key questions: than one-third of the state’s population. (1) who should Medi-Cal serve, (2) what per-enrollee Eligibility Expansions Focused on Expanding service level should Medi-Cal provide, and (3) what Coverage to More Populations… The Legislature non-General Fund financing options are available? primarily expanded Medi-Cal eligibility to help Of these levers, the state likely has the greatest more low-income people access health care. potential for savings in Medi-Cal eligibility. Given the complexity of these questions, we recommend Figure 8 the Legislature begin early conversations about its priorities during next year’s hearings, even before all Some Medi-Cal Populations Are of the H.R. 1 changes have gone into effect. Below, Optional Under Federal Law we expand upon each of these questions in greater Examples of Key Medi-Cal Populations detail to inform the Legislature’s deliberations over the coming months. Mandatory Optional Children and infants Childless adults Who Should Medi-Cal Serve? Parents and caretakers Higher-income children Eligibility Is a Key Cost Driver in Medi-Cal. Seniors Higher-income people with Persons with disabilities medical need Changes in eligibility—which have a direct effect on caseload—can have substantial fiscal implications www.lao.ca.gov 21 AN LAO REPORT has scaled back some of the Figure 9 most notable and costly recent More Californians Are Now Enrolled in Medi-Cal expansions in the 2025-26 budget. Percent of Californians Enrolled in Medi-Cal Further reductions and associated savings may be achievable in the 40% coming years. Such changes, however, raise key policy trade-offs 35 for the Legislature. 30 25 Four Key Factors to Consider 20 Around Restricting Medi-Cal Eligibility. Were the Legislature 15 interested in pursuing further 10 changes to Medi-Cal eligibility, 5 we recommend it consider four 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2024 key factors: • Need and Cost. Health care utilization is uneven, Absent the current Medi-Cal program, people at with a small share of people or near the federal poverty level would be more driving a majority of the needed services likely to be uninsured or have limited coverage. and associated cost. High utilizers tend to For example, low-income populations that had have chronic diseases, disabilities, or other long been excluded from Medi-Cal, such as factors that require regular interactions with childless adults and undocumented people, were the health care system. These populations historically more likely to lack comprehensive health therefore face the greatest health risks from care coverage. loss of coverage. Reducing coverage for high utilizers, however, also yields the greatest …And Simplifying Rules. The state has also potential for reducing costs. sought to simplify and streamline eligibility rules. Medi-Cal, like most state Medicaid programs, • Relative Access. Some Medi-Cal populations historically had a series of complex pathways for face particular barriers to accessing people to gain eligibility. This historical approach private health insurance coverage. For aimed to prioritize limited resources for the neediest example, undocumented people are legally and most vulnerable populations. However, the ineligible to work—limiting their access many pathways were difficult to navigate. Recent to employer-sponsored coverage—and eligibility expansions helped address this issue, prohibited from receiving federally subsidized enabling more people to access coverage with less coverage in the health insurance exchange. administrative burden. For example, our recent Absent options for access to alternative health publication on the asset test elimination found care coverage, some populations rely solely that the action—which notably simplified eligibility on state-provided care. rules—likely encouraged new seniors who were • Federal Match. Certain populations come already eligible to enroll in Medi-Cal. with different levels of federal matching funds, Given Recent Fiscal Constraints, Rebalancing affecting their overall cost to the state. Some Eligibility Priorities Has Been a Key Focus. populations, such as childless adults and The state’s fiscal constraints have required the higher-income children, come with higher Legislature to turn to ongoing spending reductions. federal matches and therefore less cost to With several discretionary eligibility expansions the state. By contrast, services to the UIS in recent years, Medi-Cal eligibility is a key area population comes with less federal funding of focus. Accordingly, the Legislature already and therefore substantially higher state cost. 22 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT • Complexity. Adding new eligibility rules For example, while prescription drug coverage is inherently adds complexity to Medi-Cal, optional in Medicaid, prescription drugs are central potentially discouraging affected populations to modern medical care delivery. As a result, every from applying and remaining enrolled. More state has elected to cover prescription drugs for rules also can add administrative burden beneficiaries. Eliminating pharmacy or other highly to counties. The Legislature likely will want utilized optional benefits would likely limit enrollees’ to be mindful of this issue as it explores access to quality health care. As another challenge, targeted eligibility changes in the context of some Medi-Cal populations have heightened simultaneous federally required changes. federal requirements that include providing otherwise optional benefits. For example, the state What Per-Enrollee Service Level Should must provide dental services to children, even Medi-Cal Provide? though it is optional for other populations. The ACA also requires minimum coverage for childless Benefits, Utilization, and Provider Rates adults, including some otherwise optional benefits Also Are Key Cost Drivers. After caseload, the (such as pharmacy). other major cost driver in Medi-Cal is spending …Or Often Relatively Inexpensive. Medi-Cal per enrollee. Generally, there are three key also offers a number of smaller optional benefits, factors that contribute to spending per enrollee: many of which the state added to Medi-Cal over the (1) Medi-Cal benefits, (2) enrollee utilization of these last decade. The state has recently turned to some benefits, and (3) reimbursement rates for services. of these optional benefits for savings. For example, Expansions or increases in any of these areas tend the Legislature defunded certain nonemergency to increase Medi-Cal spending. dental benefits for adults during state budget Some Medi-Cal Benefits Are Optional… Much shortfalls, and then resumed funding once the like for eligibility rules, federal Medicaid law includes state’s fiscal situation improved. Continuing this mandatory and optional benefits. As Figure 10 approach, however, likely would yield limited shows, California, like most states, has elected savings. Past optional benefit reductions have to cover many optional benefits for Medi-Cal resulted in a range of savings from millions of beneficiaries. The figure is not comprehensive— dollars to the low hundreds of millions of dollars. many more optional benefits exist in Medi-Cal. This is because these smaller benefits tend to have …But Sometimes Difficult to Modify… In lower utilization. past years of fiscal constraint, the Legislature has State Has Limited Opportunities to Increase considered scaling back certain optional benefits Utilization Management… Another potential to achieve ongoing savings. One key challenge way to limit spending in Medi-Cal is by managing to this approach is that the most utilized optional enrollees’ utilization of services. There are many benefits are major fixtures of the Medi-Cal program. tools that payors use to limit utilization, such as charging copays and requiring prior authorization Figure 10 of expensive services. The state’s ability to further Many Key Medi-Cal Benefits Are constrain utilization in Medi-Cal, however, likely Optional is fairly limited. This is primarily because the Examples of Mandatory and Optional Benefits in state already delivers most Medi-Cal services in Medi-Cal the managed care system, in which health plans already are incentivized to avoid unnecessary care Mandatory Optional and limit utilization. For services that are outside Hospital stays and visits Prescription drugs of the managed care system, such as pharmacy Physician services Dental care benefits, the state already implements substantial Safety net clinic visits Hospice utilization controls and is expanding these controls Nursing facility stays Physical and occupational therapy Home health care Private duty nursing through actions taken in the 2025-26 budget. www.lao.ca.gov 23 AN LAO REPORT …Or Reduce Provider Rates. The state also however, are more likely to be obese has turned to provider rate reductions in past years than the rest of the state. The Legislature to reduce Medi-Cal spending. Reducing provider had to weigh these factors in deciding to rates has the advantage of reducing Medi-Cal eliminate coverage. spending without affecting eligibility or benefits. • Adequacy of Provider Rates. The state However, cutting provider rates could reduce some has tended to take targeted approaches providers’ participation in Medi-Cal, which could, to adjusting provider rates. For example, in turn, limit patient access to certain services recent increases focused on services or in certain regions. Accordingly, federal rules (such as maternity care) where rates were require Medicaid provider rates to be adequate particularly low relative to what the federal to ensure access to care. In recent years, CMS Medicare program pays. This is because less has heightened scrutiny around provider rates, competitive rates can discourage providers including those paid by health plans. For example, from delivering timely care to Medi-Cal the state has agreed to pay specific rates for certain patients. The Legislature could take a similar services as a condition for approval of certain approach to any rate reductions, working with waiver authorities (see nearby box). DHCS to identify services with higher rates Four Key Factors to Consider Around relative to Medicare. Reducing Per-Enrollee Costs. Were the • Short- and Long-Term Effects. Some Legislature interested in pursuing ways to reduce actions conceptually could reduce costs in per-enrollee costs, we recommend it consider four the short run, but lead to higher costs down key factors. the road. For example, the state spends tens • Health Needs of Medi-Cal Beneficiaries. of billions in General Fund dollars annually on Medi-Cal beneficiaries, who are by definition home- and community-based supports (such low income, face particularly acute health care as in-home supportive services), which are needs relative to the rest of the population. optional benefits. These supports, however, These needs can raise key trade-offs for the are in part intended to mitigate the demand Legislature. For example, California recently for more expensive skilled nursing facility stopped covering certain specialized weight services, a mandatory benefit. loss drugs in Medi-Cal to help address the • Feasibility of Savings. Given the many budget problem. As we noted in our recent limitations described earlier, the Legislature publication, The 2025-26 Budget: Medi-Cal will want to ensure that any per-enrollee cost Pharmacy Spending, these drugs are reductions are realistic and the intended relatively costly and are not covered by most savings likely to materialize. private insurance. Medi-Cal beneficiaries, Medi-Cal Provider Rate Requirements in Federal Waivers In recent years, the federal government has conditioned approval for certain Medicaid waivers on California’s commitment to maintain provider rates at specified levels. In 2023, California agreed to pay for primary care, maternity care, and non-specialty mental health services at 87.5 percent of the rate paid in the federal Medicare program to draw down more federal funds. The requirement applied to both the fee-for-service and managed care systems. Accordingly, the state adopted this new rate as part of the 2023-24 budget. In 2024, the federal government tied this rate requirement to its approval of a substantial behavioral health waiver. 24 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT What Non-General Fund Financing new financing approaches is uncertain. To the Options Are Available? extent it considers such approaches, however, we recommend the Legislature consider two Some Key Financing Sources Have Become key factors. Increasingly Infeasible. Over the past two decades, the state has increasingly turned to • Who Bears the Cost? While new financing sources other than the General Fund to help pay for approaches mitigate the need to limit program Medi-Cal. This approach has helped mitigate cost eligibility or reduce service levels, they pressure on the General Fund without reducing typically shift the cost of the program onto underlying service levels in Medi-Cal. California other groups. As such, the Legislature likely is not unique in this regard—most states rely on will want to carefully weigh who bears the cost certain non-General Fund sources to help pay for of any new financing strategies. their Medicaid programs. In recent years, however, • Is the Funding Stable? Medi-Cal’s budget these sources have faced a number of constraints. is fairly uncertain and difficult to predict, Below, we describe these sources. sometimes requiring substantial midyear Provider Taxes Will Become a Smaller Part spending revisions to the program. New of Medi-Cal Budget. Provider taxes have become financing strategies can add to this the most significant source of state financing for uncertainty, particularly if there are substantial Medi-Cal outside of the General Fund. In the last year-to-year swings in available resources. few budget cycles, the Legislature has turned to the The Legislature likely will want to consider health plan tax to help address budget shortfalls. sources that are relatively predictable and However, the interaction of Proposition 35 and likely to be stable over the long term. H.R. 1’s new rules will constrain the state’s ability to maintain the health plan tax at its current level. EFFECTS ON OTHER SOURCES Tobacco Tax Revenues Are Steadily OF HEALTH COVERAGE Declining. When voters approved Proposition 56 Sources of Health Coverage Outside in 2016, it initially provided more than $1 billion Medi-Cal Exist, but Ability to Expand Access annually to Medi-Cal. These funds have declined Is Limited. Medi-Cal is part of a multi-pronged over time, however. This is because tobacco strategy that federal and state policymakers have product consumption has steadily declined in used to expanded access to coverage. With the California—an intended effect of charging tobacco potential for significant Medi-Cal disenrollments taxes. The state has since backfilled much of this in the coming years, the Legislature may want decline from the General Fund. to consider other policy options for preserving Local Governments Likely Face Fiscal access to coverage. California has three key Constraints. The state has also increasingly turned options: (1) rebuilding county indigent health to local governments to help pay for services. programs, (2) expanding access to California’s For example, counties and the University of health insurance exchange, and (3) increasing California have increasingly covered the nonfederal employer-sponsored coverage. Pursuing any of share of cost of their hospital inpatient services. these options, however, would not be simple, Because local governments will also be impacted given that each approach would face major by H.R. 1, it is uncertain whether the state could hurdles. Below, we describe each source and its increase the local government share of cost to associated challenges. mitigate reductions to Medi-Cal without imposing significant fiscal burdens on counties. Can the State Rebuild County Two Factors to Consider Around New Indigent Health Programs? Financing Approaches. Given the above California Could Consider Rebuilding County constraints, whether the Legislature could sustain Health Coverage Programs… One place to the existing size of the Medi-Cal program using turn to for expanded coverage could be county www.lao.ca.gov 25 AN LAO REPORT indigent health programs. These programs, whose This redirection effectively saves the state money origins predate Medi-Cal, have long been tasked each year by offsetting other General Fund with providing health care for low-income and expenditures (see nearby box). Counties have told uninsured populations. Following the creation of our office that they use much of their remaining Medi-Cal in the 1960s, county programs tended to health realignment funding to support their local provide services to nondisabled, childless adults public health programs. Reallocating these funds and (to a lesser extent) undocumented people. back to county indigent health programs would Following the recent Medi-Cal eligibility expansions, come at the expense of these other state and county indigent programs have ramped down local priorities. considerably as individuals shifted to Medi-Cal. …And Increased Local Control. Though state Though statewide enrollment data are not readily law generally requires counties to provide health available, several counties have anecdotally told care to low-income populations, it grants them our office that their indigent health programs are considerable discretion on how to do so. Some now very small. Some indicated that they have no counties do not offer continuous or comprehensive enrollees, while others indicated annual enrollment coverage for eligible individuals, opting instead in the dozens. to cover eligible individuals for a limited time or …But With Considerable Fiscal for specific services (such as certain kinds of Restructuring… While counties have a long history specialty care). Other counties choose not to cover of serving low-income adults, there are obstacles undocumented individuals. As such, if counties to renewing their indigent health programs. Most expanded their current indigent health programs, notably, such an effort would come at considerable it is unclear how many individuals who disenroll cost to the state and counties, both of which are from Medi-Cal due to provisions in H.R. 1 would be already fiscally constrained. Historically, counties eligible for these county programs and have access relied on both local funds and state realignment to similar benefits. That said, counties likely would funds to cover their indigent health programs’ absorb only a portion of those disenrolled from costs. However, most of these funds have been Medi-Cal given their fiscal constraints. Moreover, redirected to other priorities. For example, the state people enrolled in county programs likely would redirected a sizeable portion of health realignment have less coverage relative to the comprehensive funds when it shifted most low-income adults coverage provided in Medi-Cal. onto Medi-Cal as part of the 2014 ACA expansion. How the State Restructured Health Realignment Funds In 1991, the state changed programmatic and fiscal responsibilities for various programs between the state and counties. Known as 1991 realignment, the state helped counties fund their heightened responsibilities by redirecting a portion of vehicle licensing fees and sales tax revenue. As a part of 1991 realignment, the state eliminated previous General Fund support it provided counties for their indigent health programs. Counties were instead expected to cover costs using a portion of their new realignment funds. As a result of these actions, 1991 realignment became a key source of funding for county indigent health programs. This arrangement changed following the Medi-Cal expansion to childless adults in 2014. The expansion, which effectively shifted coverage for childless adults from county programs to Medi-Cal, was expected to yield savings to counties. In anticipation of this effect, the Legislature passed Chapter 24 of 2013 (AB 85, Committee on Budget), which reallocated a share of counties’ 1991 health realignment funding to the California Work Opportunity and Responsibility to Kids (CalWORKs) program. The realignment funding for CalWORKs effectively offset certain General Fund expenditures for the program, resulting in state savings. In 2025-26, CalWORKs is receiving over $700 million from reallocated health realignment funding. 26 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Can the State Expand Access penalty—around $300 million annually—supports to Covered California? supplemental subsidies for consumers in Covered California. In light of the changing landscape, State’s Health Insurance Exchange Also however, the Legislature may wish to weigh a Improves Access to Coverage. Another number of key decisions around the penalty and component of the state’s efforts to expand access associated revenue. We lay these issues out in the to health coverage is Covered California, California’s box on the next page. health insurance exchange. Formed under the ACA, Covered California is a state-formed marketplace Can the State Encourage More where consumers can purchase health insurance. Employer-Sponsored Coverage? Consumers can choose among plans with different State Also Has Sought to Expand levels of monthly premiums and other out-of-pocket Employer-Sponsored Coverage. Expanding costs. Low-income beneficiaries also are eligible employer-sponsored coverage has been another for federal and state subsidies to help cover these part of federal and state health care coverage costs. Participating health plans must also cover a efforts. The ACA in particular included a number minimum list of essential health benefits, such as of provisions to expand coverage for workers. prescription drugs and emergency care. Most notably, the federal legislation mandated Exchange Expected to Face Federal Funding large employers to provide health coverage to their Declines. There are a number of limitations for employees. Much like individuals, employers that do expanding coverage through Covered California. not comply with this mandate must pay penalties. Most notably, the Covered California marketplace is State Provides Large Tax Subsidy to Promote expected to face its own declines in federal funding. Employer-Sponsored Health Insurance. The The largest decline will be from the scheduled state provides about $10 billion in tax subsidies expiration at the end of 2025 of temporary each year to support employer-sponsored health enhanced federal subsidies. (Congress extended insurance. These subsidies come from tax the end of the temporary subsidy enhancements expenditures—specific exemptions from the income once [in 2022], but had not extended them further tax. In this case, the state excludes employer as of the release of this report.) H.R. 1 also includes contributions to employees’ health plans from some restrictions on qualifying for federal subsidies, employees’ personal income tax. (The federal such as by requiring additional verifications and government also includes the same exemption from tightening eligibility rules for certain immigrant its personal income taxes.) In concept, this tax groups. In total, consumers in the exchange are exemption makes health care coverage a relatively expected to lose a few billions of dollars in federal advantageous form of compensation. funding, creating another source of fiscal pressure to the General Fund. Expanding Employer-Sponsored Coverage May Be Limited in Light of Affected Population. Many Disenrolled Adults Likely Would Be Though federal and state efforts in the past have Prohibited From Federal Subsidies. Another successfully expanded employer-sponsored barrier to expanding coverage in the exchange is coverage, whether the state could significantly that most adults disenrolled from Medi-Cal would expand such coverage for people who become not qualify for federal subsidies. This is because disenrolled from Medi-Cal is unclear. Research H.R. 1 explicitly bars people who do not meet suggests that low-income and part-time workers, the community engagement requirements from including those enrolled in Medi-Cal, are less likely accessing these subsidies. to have access to employer-sponsored coverage. State Faces Key Decisions Around Moreover, many people will exit Medi-Cal because Individual Mandate Penalty Revenue. To they do not work at least 80 hours per month, incentivize enrollment in health coverage, the state making them less likely to have employment with imposes a penalty on people (unless exempted) comprehensive health benefits. who do not have minimum coverage for three consecutive months. The revenue from this www.lao.ca.gov 27 AN LAO REPORT Key Decision Points Around Penalty for Not Having Health Coverage Who Should Pay the Penalty? The current penalty applies to California households, with several key exemptions. For example, individuals who are low-income or face certain hardships can receive exemptions. These policies, however, were created before Congress enacted H.R. 1. Those disenrolled from Medi-Cal due to H.R. 1’s requirements likely will face barriers accessing alternative forms of coverage. Given these barriers, the Legislature may wish to consider whether to exempt those people disenrolled from Medi-Cal from the penalty. How Much Should the Penalty Be? The current penalty is at least $900 per adult and $450 per child. The penalty is higher for higher-income households. Given the fiscal constraints facing the state, the Legislature could consider increasing the penalty, thereby generating more revenue. In taking such an action, however, the Legislature will want to consider several key factors. For example, increasing the penalty could place additional financial burdens on households that do not qualify for an exemption. The long-term stability of this penalty revenue also is uncertain. This is because the purpose of the penalty is to encourage participation in health coverage—which necessarily drives down the associated revenue. How Should the State Use the Associated Revenue? In recent years, the Legislature has used the penalty revenue to provide supplemental subsidies (and other forms of financial assistance) to consumers in Covered California. This action was intended to recognize a policy connection between the health coverage mandate and affordability for people who are fulfilling this requirement by purchasing coverage in the exchange. In light of the changing landscape, however, the Legislature could weigh the trade-offs of using the penalty revenue for other health care purposes. For example, the funds could help support Medi-Cal. CONCLUSION Maintaining the state’s health coverage This will erode the state’s efforts to expand the expansions in the midst of fiscal constraints and share of Californians with health coverage. Given the evolving policy landscape will be challenging. these challenges, the Legislature likely will need to More Californians likely will lack coverage, be explore new approaches, pursue creative solutions, underinsured, or face higher out-of-pocket costs. and rebalance its fiscal and programmatic priorities. LAO PUBLICATIONS This report was prepared by Karina Hendren, Will Owens, and Jason Constantouros, with contributions from Min Lee and Ryan Woolsey, and reviewed by Mark Newton and Carolyn Chu. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 28 LEGISLATIVE ANALYST’S OFFICE