The 2026-27 Budget: Medi-Cal Fiscal Outlook

analysis full 2026-27 BUDGET The 2026-27 Budget: Medi-Cal Fiscal Outlook GABRIEL PETEK | LEGISLATIVE ANALYST | NOVEMBER 2025 SUMMARY Medi-Cal Spending Increases in LAO Outlook. The 2025-26 Budget Act provided Medi-Cal $44.9 billion General Fund support, an all-time high for the program. Under our outlook, this level grows to $51.6 billion by the end of the outlook period in 2029-30 (an increase of $6.7 billion). This increase, however, is slower than the growth rate in the rest of the state budget, with Medi-Cal’s share of overall General Fund spending at 19 percent by 2029-30 (slightly lower than the share in the 2025-26 enacted budget). Baseline Spending Drives Increases. The largest driver of growth ($12.8 billion) comes from baseline spending increases (before state and federal policy changes). Increases in enrollee utilization and provider rates cause most of this trend. Most of the remaining growth comes from a rising senior caseload. By contrast, caseload for most other Medi-Cal populations falls over time, continuing recent trends. State Budget Solutions Notably Curb Spending Growth. Beyond baseline spending trends, Medi-Cal is facing a series of upcoming policy changes. The state enacted many of these changes in the 2025-26 Budget Act in June 2025 as budget solutions intended to slow growth in Medi-Cal spending. Our outlook estimates the state’s budget solutions mitigate much ($9.3 billion) of the increase in baseline spending through 2029-30. Federal Policy Changes, in Turn, Drive Up Spending Further. In July 2025, Congress enacted H.R. 1, which significantly changes federal Medicaid eligibility and financing policies. We estimate the new federal legislation will increase state spending (net $3.2 billion) over the outlook period, partially offsetting the savings from state budget solutions. These new costs come from financing policies that result in less provider tax revenue and federal cost sharing ($5.1 billion). Our outlook also estimates that eligibility changes in H.R. 1 will reduce Medi-Cal caseload by 1.6 million people by 2029-30, partially offsetting costs ($1.9 billion). Medi-Cal Outlook Remains Uncertain. As the figure on the next page shows, our outlook suggests that recently adopted state budget solutions will be critical to slowing Medi-Cal spending. That said, Medi-Cal spending probably will rise on net after considering both state and federal policy changes (absent any other future actions by the Legislature or Congress). The timing and size of this net increase, however, is uncertain. General Fund spending in the out-years could be several billion dollars higher or lower than what we project in our outlook. With so many moving pieces, and with the state’s overall fiscal situation still heading in the wrong direction, the Legislature may need to continue considering its Medi-Cal priorities in the coming years. 1 analysis full 2026-27 BUDGET Budget Solutions Slow Growth in Medi-Cal Spending... General Fund Spending in LAO Outlook (In Billions) $70 60 No Policy Changes 50 With State Budget 40 Solutions With State Budget 30 Solutions and H.R. 1 20 10 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 ...And Reduce Medi-Cal's Impact on State Budget Medi-Cal's Share of General Fund Spending in LAO Outlook 25% No Policy Changes 20 With State Budget 15 With State Budget Solutions Solutions and H.R. 1 10 5 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 2 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET INTRODUCTION Brief Is Companion to Two LAO Reports. Landscape—provides more information on many This brief summarizes our annual November of the federal policy changes that drive this year’s outlook for General Fund spending on Medi-Cal, Medi-Cal outlook. California’s Medicaid program. We recommend Brief Consists of Three Sections. First, we reading this brief in conjunction with two other provide background on the Medi-Cal program, recent LAO reports. The first—The 2026-27 recently adopted state budget solutions, and Budget: California’s Fiscal Outlook—summarizes recently enacted federal Medicaid policy changes. our overall outlook for the state’s General Fund. Next, we summarize the key drivers of our outlook. The second report—Considering Medi-Cal We then conclude with risks and uncertainties to in the Midst of a Changing Fiscal and Policy our outlook estimates. BACKGROUND Medi-Cal Is a Key Part of State Budget. Medi-Cal in June 2025. These changes tightened Medi-Cal is a sizable federal-state program, eligibility rules, eliminated certain benefits, and covering health care for nearly 15 million reduced costs in other ways. Many changes are not low-income people. On a total fund basis, Medi-Cal effective yet. Instead, the budget structured most is the largest program in the state budget, with its changes to begin in 2026 and onwards, granting nearly $200 billion budget comprising 40 percent the state and beneficiaries time to adjust to the of spending across all sources (including federal new policies. funds). More than half of this amount comes from Federal Policy Changes Will Impact federal funds. General Fund spending on Medi-Cal Medi-Cal’s Budget, Reducing Funding to the is $44.9 billion in 2025-26, reflecting an all-time State. After the state’s enactment of the 2025-26 high for the program and around 20 percent of Budget Act in June 2025, Congress enacted H.R. 1 overall General Fund spending. Medi-Cal’s share in July. Among other areas, H.R. 1 makes several of General Fund spending historically hovered at significant changes to federal Medicaid policy about 15 percent, but ticked upward recently due to with the aim of reducing federal costs. Much like rising costs in the program. the state budget solutions, many changes are Last Year’s Budget Adopted Many Policy scheduled to become effective in the near future. Changes in Medi-Cal as Budget Solutions. As a result, as Figure 1 on the next page shows, To slow growth in Medi-Cal spending and help Medi-Cal faces a steady flow of major state and address a structural deficit in the state budget, federal policy changes over the coming years. the Legislature enacted several policy changes to 3 analysis full 2026-27 BUDGET Figure 1 Numerous Medi-Cal Policy Changes Are Forthcoming Effective Dates of Key State Budget Solutions and Federal Policy Changes Federal Policy Change State Budget Solution (H.R. 1) (2025-26 Budget Act) Start of reductions End of long-term to certain existing care payment payments Financing Changes New provider tax End of dental Start of lower rules and limit on supplemental provider tax certain new payment revenue limit payments Changes Affecting Adults Asset limit Community New cost reinstatement engagement and sharing redetermination requirement requirements Certain benefit and payment Changes reductions Affecting Persons With UIS Enrollment Lower federal Monthly freeze match and premium expanded UIS definition Pharmacy-related savings Other Changes Prohibition on Prior authorization Long-term care certain family for hospice home equity limit planning providers July January July October January July October January July October 2025 2026 2026 2026 2027 2027 2027 2028 2028 2028 Note: Some dates could be delayed, pursuant to forthcoming federal guidance. UIS = unsatisfactory immigration status. 4 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET LAO FISCAL OUTLOOK In the coming years, Medi-Cal’s budget will be effects of state budget solutions and federal driven by baseline changes (underlying trends policy changes—are the primary drivers of before the impacts of policy changes), the effects of growth ($12.8 billion). New costs under H.R.1 also the state’s budget solutions, and the effects of the contribute to the growth ($3.2 billion). A sizable federal H.R. 1 legislation. Our outlook for Medi-Cal portion ($9.3 billion) is offset by the recently reflects all three factors. Below, we summarize the adopted state budget solutions. overall trends in our Medi-Cal outlook and provide more detail on each of the three contributing factors. Figure 2 Overall Trends Medi-Cal Spending... Medi-Cal Spending Down General Fund Spending on Medi-Cal (In Billions) in Current Year… Under our outlook, General Fund spending $60 on Medi-Cal spending in 2025-26 is $43.9 billion. This amount is 50 $1 billion (2.2 percent) lower than LAO Outlook the amount adopted in the 2025-26 40 Budget Act. …But Up in Multiyear. After 30 the current year, General Fund spending increases steadily each 20 Actual/Enacted Level subsequent year. The amount 10 rises to $47.3 billion in 2026-27, ultimately reaching $51.6 billion by 2029-30. The Medi-Cal growth rate 2019-20 2021-22 2023-24 2025-26 2027-28 2029-30 over the outlook period (averaging 3.5 percent annually) is lower than ...Comprises a Slightly Declining Share of the average annual growth rate State Budget Over Outlook Period for the overall state budget. As a result, as Figure 2 shows, Medi-Cal Medi-Cal's Share of Overall General Fund Spending comprises 19 percent of overall General Fund spending by the 25% end of our outlook period—slightly 20 lower than the 20 percent share in Actual/Enacted Level LAO Outlook the 2025-26 enacted budget. 15 Baseline Changes, State 10 Budget Solutions, and H.R. 1 Have Differing Effects. From 5 the 2025-26 enacted level through 2029-30, General Fund 2019-20 2021-22 2023-24 2025-26 2027-28 2029-30 spending increases $6.7 billion on net. As Figure 3 on the next page shows, baseline changes— underlying factors before the www.lao.ca.gov 5 analysis full 2026-27 BUDGET and federal policy changes also Figure 3 influence caseload and cost trends. As Figure 4 shows, we project Budget Solutions Notably Dampen Spending Growth H.R. 1 policies will particularly General Fund Changes in LAO Medi-Cal Outlook reduce caseload, while costs continue to rise. 2025-26 Enacted $44.9 Billion Effects of Baseline Trends Baseline Spending Falls in Baseline Changes 2025-26 Due to Lower Family $12.8 Billion Caseload. The net growth in State Budget Solutions baseline spending over the $9.3 Billion multiyear ($12.8 billion) is driven by a few factors. Initially, spending Federal Policy Changes falls in 2025-26 ($760 million), $3.2 Billion largely from a reduction of nearly 2029-30 Projected 500,000 people (3.3 percent) in $51.6 Billion Medi-Cal compared to enacted levels. Families and children account for most of this downward Over Time, Medi-Cal Will Enroll Fewer People revision (with childless adults at Higher Cost. Our outlook estimates Medi-Cal comprising most of the remainder). As we noted will enroll fewer people over time, with caseload in May, the administration’s caseload estimates falling from nearly 15 million people in 2024-25 reflected assumptions regarding the unwinding of to nearly 12 million people by 2029-30. Monthly COVID-19-related continuous coverage policies per-enrollee General Fund spending, by contrast, and the resumption of standard redetermination rises from $298 in 2025-26 to $355 in 2029-30, a processes. The state assumed that certain $57 (19 percent) increase. This result is consistent flexibilities (authorized through June 2025) with past LAO outlooks and reflects long-term would mitigate disenrollments during this time. Medi-Cal cost trends. Recently enacted state Figure 4 Caseload Falls... ...And Costs Rise Average Monthly Medi-Cal Caseload in LAO Outlook Base Monthly General Fund Spending Per Enrollee (In Millions) $400 15 350 14 13 300 12 250 11 10 200 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 2025-26 2026-27 2027-28 2028-29 2029-30 No Policy Changes With State Budget Solutions With State Budget Solutions and H.R. 1 6 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Eight months of additional data suggest otherwise The measure made a longstanding provider tax in the case of families, however. As Figure 5 on health plans (known as the Managed Care shows, family caseload continued to fall during Organization [MCO] Tax) permanent in state law. this time, despite the availability of flexibilities. We It also includes rules for how the state is to spend assume this trend continues through the remainder the associated tax revenue. Beginning in 2027, the of 2025-26. measure generally requires the state to allocate Spending Notably Rises After 2025-26, a larger share of health plan tax funds toward Primarily Due to Rates and Utilization… Medi-Cal provider rate increases, rather than After 2025-26, baseline spending rises. Most of using revenues to fund existing Medi-Cal program this increase ($11.1 billion) comes from annual costs. This requires a General Fund backfill to increases in provider rates and beneficiary cover existing program costs previously funded by utilization of services. This reflects annual growth of health plan tax revenues, resulting in an increase in around 4 percent to 5 percent, primarily based on spending over the multiyear ($1.3 billion). past trends. Handful of Other Adjustments Results in Net …And Senior Caseload. While our outlook Reduction. Our baseline outlook includes other anticipates caseload decreases for most Medi-Cal smaller adjustments that, on net, slightly offset populations over the multiyear, the senior caseload some of the spending increases over the multiyear increases. This projection generally aligns with ($1.9 billion). These adjustments include ramped anticipated state demographic changes. Seniors down limited-term spending and increases in the are costlier to cover than most other groups (for state’s private hospital fee that offset General Fund example, coverage for seniors is around three spending, among other factors. times the cost of families and children). As a result, Effects of State Budget Solutions the cost from increased senior caseload more than offsets savings from other declining groups, Most Savings Come From Solutions Based on resulting in net General Fund costs over the Immigration Status… The net multiyear savings from state budget solutions ($9.3 billion) reflect the multiyear ($3.1 billion). combined effect of ongoing and one-time actions. General Fund Backfill Needed Due to Of the ongoing solutions, the largest savings Proposition 35 (2024). Our baseline outlook ($10.6 billion) come from eligibility policy changes also projects costs to rise due to Proposition 35. related to adults with unsatisfactory immigration status (UIS). (The Figure 5 UIS population primarily consists of undocumented immigrants, Family Caseload Has Continued Downward Trend as well as certain documented Monthly Caseload (In Millions) immigrants.) Coverage for this group tends to be more expensive 8.0 to the state, as federal cost sharing is only available for Actual 7.5 limited coverage (emergency 2025-26 Budget Act and pregnancy-related services). 7.0 Accordingly, the state focused many solutions to address this LAO Outlook 6.5 population’s General Fund costs. Most notably, the state will freeze 6.0 eligibility for comprehensive July October January April July October January April July October January April coverage (for undocumented adults 2023-24 2024-25 2025-26 only) and charge monthly premiums 7 analysis full 2026-27 BUDGET on those who remain in comprehensive coverage Savings Are Partially Offset by End of (for all adults with UIS, ages 19-59 years old). Limited-Term Solutions. The ongoing multiyear As Figure 6 shows, we estimate that these policies savings are partially offset by the end of reduce UIS adult participation in comprehensive limited-term solutions ($4 billion). Most of this effect coverage, with 1.5 million (64 percent) fewer people comes from a substantial one-time cash loan to by 2029-30 relative to the baseline. We assume Medi-Cal that helps offset costs in 2025-26. With no those who leave comprehensive coverage remain further loan planned under current law in 2026-27, enrolled in Medi-Cal with limited coverage. Other the General Fund will need to cover costs moving UIS-related solutions include a change in clinic forward (the current state spending plan envisions payments for services delivered to this population gradually paying off this loan over more than a and the end of dental coverage for adults. decade). Our outlook also reflects the phase-down …And Other Ongoing Savings. We estimate of a two-year plan to use additional Proposition 35 that the remaining ongoing budget solution savings funds to offset General Fund spending. ($2.7 billion) over the multiyear will mainly come Ongoing Solutions Dampen Growth in from two key areas. First, the state enacted several Per-Enrollee Costs. In our outlook, the state policy changes to reduce pharmacy spending. budget solutions mostly save money by reducing These include the end of coverage of certain weight per-enrollee costs. This is because, other than the loss drugs, plans to negotiate for higher drug asset limit reinstatement, the solutions generally rebates, and plans to implement new utilization are utilization management strategies, benefit management strategies. Second, as Figure 7 reductions, and provider rate reductions—all shows, the state will reinstate a limit on assets for ways to curtail spending without directly affecting seniors and persons with disabilities. We estimate caseload. (This includes the UIS-related solutions, this reinstatement will result in about 90,000 fewer as those who leave comprehensive coverage seniors (4 percent) in Medi-Cal by 2029-30 relative remain enrolled in Medi-Cal, but with substantially to the baseline. Our estimates are informed by scaled back benefits.) The decrease in monthly previous analyses on the effect of the asset limit General Fund per-enrollee costs relative to the elimination. baseline is substantial, resulting in an $83 reduction (21 percent) by 2029-30. While this amount might appear small in isolation, it yields significant savings when applied Figure 6 over 12 months to millions of Budget Solutions Drive Down Immigrant enrollees. We estimate that every Enrollment in Comprehensive Coverage $1 reduction in the monthly per-enrollee cost represents Adults With Unsatisfactory Immigration Status Enrolled in Comprehensive Medi-Cal Coverage in LAO Outlook between $150 million and $180 million in General Fund 2,500,000 savings, depending on the year. Without Budget Solutions 2,000,000 Effects of Federal Policy Changes 1,500,000 General Fund Backfill Needed 1,000,000 Due to Lower Health Plan With Freeze and Premium Tax… Four key factors drive the 500,000 net increase in spending from H.R. 1 policies ($5 billion). The 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 largest factor ($3.3 billion over the multiyear) is a sizable reduction Note: Caseload estimates are imprecise due to limited data. to the state tax on health plans. 8 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET As the nearby box explains, this Figure 7 reduction is due to an interaction between H.R. 1’s new rules and a Asset Limit Is Returning in Medi-Cal for limit required by Proposition 35. Seniors and Persons With Disabilities For the purposes of our outlook, Effective Dates for Limits Over Time we assume this change takes effect in January 2027, when the Each Additional state must renew its federal waiver Individual Couple Household Member authority for the tax. As Figure 8 Prior to on the next page shows, annual net $2,000 $3,000 $150 July 2022 revenue from the tax plummets to around tens of millions of dollars in July 2022 $130,000 $195,000 $65,000 our outlook. The sizable reduction means that very little tax revenue January 2024 No Limit will be available to help cover existing Medi-Cal costs, requiring a substantial General Fund backfill January 2026 $130,000 $195,000 $65,000 to maintain existing spending levels (excluding provider rate increases supported by the existing tax). Why Does the Health Plan Tax Decline Under H.R. 1? Existing Health Plan Tax Disproportionately Taxes Medi-Cal Enrollment. The existing tax on health plans (also known as the Managed Care Organization Tax) charges rates on every monthly Medi-Cal and commercial enrollee. The current rate on Medi-Cal enrollment ($274 per month in 2025) is more than 100 times larger than the rate on commercial enrollment ($2 per month in 2025). This rate structure is intended to draw down substantial federal funds while imposing a small cost on the taxpayers themselves. This is because the cost of the Medi-Cal tax effectively falls on the federal government, whereas the cost of the commercial tax effectively falls on health plans and their consumers. Federal Law Now Further Limits Disproportionality. Under H.R. 1, states are prohibited from charging higher tax rates on Medicaid services than on non-Medicaid services. This means that, moving forward, the state’s health plan tax will no longer be able to charge such a disproportionate tax. H.R. 1 states that the new prohibition is effective July 2025, though states can qualify for an up to three-year transition period at the discretion of the federal Department of Health and Human Services. Proposition 35 (2024) Limits Tax Rates, Necessitating a Proportionate Tax to Be Smaller. In concept, the state could adjust to H.R. 1’s new rule by decreasing the Medi-Cal rate, increasing the commercial rate, or a combination of the two actions. Proposition 35, however, limits the state’s ability to increase the commercial rate. This is because the measure limits the commercial tax rate at about its existing level. That is, to make the health plan tax more proportionate under Proposition 35, the state will need to notably reduced the Medi-Cal tax rate. (As we note in our report on the changing landscape for Medi-Cal, the Legislature could consider amending Proposition 35 to potentially allow for a large, proportionate tax, thereby mitigating some of the General Fund cost pressure.) 9 analysis full 2026-27 BUDGET …And Private Hospital Figure 8 Fee. The second key factor is a reduction to another sizable Health Plan Tax Revenue Plummets state provider tax—a fee on As a Result of H.R. 1 and Proposition 35 private hospitals (known as the Net Revenue in LAO Outlook (In Billions) Hospital Quality Assurance Fee). Similar to the health plan tax, we $10 assume H.R. 1’s relevant policies Actual/Enacted Level 9 also begin to affect this fee in Without H.R. 1 8 January 2027. The ways that 7 federal policy changes will affect the private hospital fee, however, 6 are even more uncertain than for 5 the health plan tax. As the nearby 4 box explains, this is because three 3 different H.R. 1 policies could 2 affect its size in the coming years. 1 Also, there are fewer legal limits With H.R. 1 on the state to restructure the fee. 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 Keeping these factors in mind, our outlook reflects a decline in the private hospital fee, with What H.R. 1 Policies Will Affect the Private Hospital Fee? Proportionality Rule. Similar to the tax on health plans, the private hospital fee (also known as the Hospital Quality Assurance Fee) charges higher rates on Medicaid services than on non-Medicaid services. H.R. 1’s new proportionality rule could put pressure on the state to reduce the size of the fee. This effect is not certain, however. The current fee is not nearly as disproportionate as the health plan tax. Moreover, state law provides more leeway to adjust the fee levels. Lower Revenue Limit. Federal law currently limits the overall revenue generated by provider taxes to 6 percent of providers’ overall net patient revenue. This limit is intended to prevent states from adopting very high taxes and placing more cost on the federal government. Under H.R. 1, this limit will be gradually reduced beginning in Federal Fiscal Year 2028, reaching 3.5 percent by Federal Fiscal Year 2032. Our understanding is that California’s hospital fee, which is pending federal approval for 2025, is at around 5 percent. This means that the state will need to gradually reduce the hospital fee in the future to comply with the new limit. Lower Payment Limit. Prior to H.R. 1, federal rules limited managed care payments to hospitals at the average rate paid in the commercial market. H.R. 1 reduces this limit down to the rates paid in the federal Medicare program. For new payment programs, this limit became effective July 2025. For existing payments, H.R. 1 allows states to gradually ramp down to the new limit beginning in January 2028. Much of the hospital fee program supports additional managed care payments to private hospitals, and some of these payments were anticipated to exceed the Medicare limit in the 2025 fee program. Thus, as the state ramps down to the new payment limit, it likely will need to correspondingly reduce the fee. 10 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET annual revenue falling from nearly $10 billion to from the baseline. This disenrollment represents several billion dollars. Pursuant to state law, most a 4 percentage-point reduction in the share of of the decline in revenue will affect supplemental California residents who participate in Medi-Cal payments to private hospitals, with only a portion (from 35 percent to 31 percent). (around 25 percent) resulting in less money for …But Caseload Reductions Yield Relatively existing Medi-Cal costs. In our outlook, the latter Limited State Savings. The savings from this effect results in higher General Fund costs to substantial reduction in caseload reflect the fourth backfill the lost revenue in Medi-Cal ($600 million). key H.R. 1-related driver in our outlook. We estimate General Fund Backfills Lower Federal Cost the associated savings to be limited, however, Sharing for Immigrant Emergency Services. relative to the size of the caseload reduction The third key H.R. 1-related effect over the multiyear ($1.9 billion over the multiyear). This reflects is from reduced federal funding for emergency the fact that the childless adult population is a services provided to undocumented immigrants relatively inexpensive population for the state, ($1.2 billion). Under H.R. 1, the federal match for as the federal match is much higher for childless these services will decrease from 90 percent to adults (90 percent) relative to most other groups 50 percent for certain undocumented adults, (50 percent in most cases). As such, most of the requiring a backfill from the General Fund to savings from these disenrollments will accrue to the maintain existing services. federal government, rather than the state. New Eligibility Requirements Notably Reduce Childless Adult Caseload… Programmatically, Figure 9 some of the most substantial Federal Policy Changes Notably changes to Medi-Cal in H.R. 1 are Reduce Childless Adult Enrollment from two new eligibility policies Average Monthly Caseload in LAO Outlook largely targeted at childless adults. The first is a new community engagement requirement, which 6,000,000 conditions Medi-Cal eligibility on completing 80 hours of work, 5,000,000 Without H.R. 1 school, or community service each month. The second is an increase 4,000,000 in the frequency of required 3,000,000 eligibility determinations from every With H.R. 1 12 months to every 6 months. Both 2,000,000 changes likely will notably reduce the number of childless adults 1,000,000 enrolled in Medi-Cal. As Figure 9 shows, we estimate these 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 changes will bring the childless adult caseload to 2.7 million people by 2029-30, a 1.6 million reduction (around 40 percent) 11 analysis full 2026-27 BUDGET RISKS AND UNCERTAINTIES Budget Solutions Likely Will Slow—but currently in effect. Most will begin in the coming Probably Not Fully Offset—Spending Growth. years, pursuant to starting dates specified by the Our outlook suggests that the budget solutions legislation. In some cases, however, the legislation adopted by the Legislature this year will help slow allows the federal Department of Health and Medi-Cal spending growth. As Figure 10 shows, we Human Services to grant states more time for estimate that baseline Medi-Cal spending—without implementation. Whether or not California qualifies the budget solutions in place—would outpace for this additional time will depend on federal overall General Fund spending, with Medi-Cal’s guidance, much of which is still emerging. share of state spending rising to 23 percent in 2029-30, 4 percentage points higher than with the solutions in Figure 10 effect. That said, baseline cost increases, coupled with new costs Budget Solutions Slow Growth in Medi-Cal Spending... associated with H.R. 1, probably General Fund Spending in LAO Outlook (In Billions) will exceed these savings from state budget solutions. $70 Timing and Size of Effects Is 60 Uncertain. Though increased net No Policy Changes spending is probable, the size and 50 timing of the increase are highly With State Budget 40 Solutions uncertain. Due to this uncertainty, With State Budget General Fund spending in the 30 Solutions and H.R. 1 out-years could be several billion 20 dollars higher or lower than what 10 we project in our outlook. Two Key Questions Drive 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 Uncertainty. In last November’s Medi-Cal outlook, we noted a ...And Reduce Medi-Cal's Impact on State Budget number of issues that caused Medi-Cal's Share of General Fund Spending in LAO Outlook heightened uncertainty around Medi-Cal’s budget. While some of 25% these issues remain, new factors No Policy Changes are also at play. Specifically, both the timing and size of effects from 20 state budget solutions and H.R. 1 With State Budget will help shape Medi-Cal spending 15 With State Budget Solutions Solutions and H.R. 1 in the coming years. Below, we describe each area of uncertainty. 10 When Will Federal Policy 5 Changes Take Effect? Timing of Some Effects 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 Depends on Forthcoming Federal Guidance. Very few policy changes under H.R. 1 are 12 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Timing of Provider Tax Changes Are Unclear. requirements of demonstrating compliance with the From a fiscal perspective, the most significant new limit also could discourage participation among uncertainty is around the timing of new rules for those who would otherwise still qualify. As such, our the health plan tax and private hospital fee. We outlook attempts to capture a mix of disenrollments assume that the state has until January 2027 (when from both asset values and administrative it must renew federal approval of the health plan requirements. The latter effect is not certain, tax) to make the required adjustments. However, however. Moreover, it is difficult to disentangle H.R. 1 allows for other potential starting times, the effects of the asset test elimination from other ranging from as early as July 2025 to as late as factors occurring at the same time, such as the 2028. This timing will affect when the state incurs unwinding of continuous coverage and approved higher General Fund costs. (Shortly before the federal flexibilities. This makes our assessment release of our outlook, federal administrators issued of its effects—which informs our projection of its preliminary guidance suggesting the state would reinstatement—somewhat imprecise. have until July 2026 to adjust the health plan tax Pharmacy-Related Savings Depend on and July 2028 for all other provider taxes.) Several Factors. As we have noted in previous State Could Have More Time to Implement publications, predicting pharmacy spending is New Federal Eligibility Requirements. The inherently uncertain given the dynamic nature H.R. 1 legislation also allows a transition period of of the prescription drug market. Many of the up to two years for states to implement the new pharmacy-related budget solutions are subject to community engagement requirement. California this uncertainty. Some solutions also rely on the would have to demonstrate a good faith effort state’s ability to negotiate higher rebates, which toward complying with the new requirement to could be more or less successful than assumed in qualify for such a period. Were this flexibility our outlook. granted, California could have until January 2029, Community Engagement Requirement Will rather than January 2027 (as assumed in our Be New to Medi-Cal. Medi-Cal has not previously outlook), to fully implement the requirement. Were required adults to demonstrate employment to California to qualify, the two-year extension could remain eligible, making the effect of the new shift the associated savings from disenrollments community engagement requirement uncertain. over a longer period of time. Experience in other states suggests—much like for the asset limit—that the new requirement will How Large of an Effect Will State and disenroll some working adults due to administrative Federal Policy Changes Have? burden. As such, our outlook includes disenrollment Savings Are Particularly Sensitive to Effects effects from lack of employment as well as of UIS-Related Solutions. Of the state budget administrative burden. These effects, however, solutions, the most notable uncertainties concern depend on the way that the state and counties the immigrant-related solutions. This is because will implement the new requirements, which is relatively small changes to our assumptions unknown today. yield billions of dollars in higher or lower savings, Spending on Emergency Care for Immigrants particularly over the multiyear. As the box on Has Fluctuated Notably. As part of a broader the next page explains, there are many potential reporting requirement, the state annually reports reasons that the effects of budget solutions could to the federal government on the cost of covering be different than assumed in our outlook. emergency care for undocumented immigrants. Administrative Requirements of Reinstated This reporting provides a reasonable basis to Asset Limit Could Increase Disenrollments. estimate the effects of a decreased federal match The exact savings from reinstating an asset limit under H.R. 1. As Figure 11 on the next page on seniors and persons with disabilities also shows, however, the trend in spending has been is uncertain. At a minimum, the new policy will quite volatile. Most of this trend is likely due to disenroll affected beneficiaries who possess assets federally required changes to the state’s reporting in excess of the new limit. The administrative processes. These recent changes in reporting 13 analysis full 2026-27 BUDGET What Are the Key Unknowns Around Immigrant-Related Budget Solutions? Immigrant Caseloads and Costs. Until recently, the Department of Health Care Services provided little data on caseloads and costs for people in Medi-Cal with unsatisfactory immigration status (UIS). In recent years, the department began reporting monthly caseloads of undocumented people with comprehensive coverage in Medi-Cal. The cost of services to this population, however, is difficult to track with existing data sources. Moreover, data generally are not readily available to estimate monthly caseloads and costs of other UIS populations. Without better data at hand, projecting costs for adults with UIS is inherently imprecise. Short- and Long-Term Effect of Freeze. The freeze on comprehensive coverage for undocumented adults, slated to begin in January 2026, also has uncertain effects. In the short run, the policy could encourage more adults with UIS to enroll in comprehensive coverage before enrollment closes. This effect is uncertain, however, as take-up of comprehensive coverage may have already been quite high before the state enacted this solution. In the long run, the freeze’s effect will depend on the number of remaining enrollees that exit from comprehensive coverage over time. Effect of Premiums. Previous research on the disenrollment effects of premium increases in Medicaid and the Children’s Health Insurance Program informs our assessment of California’s impending policy change. That said, we are not aware of research that has examined the impacts of premium changes specifically on the undocumented population. This population could be particularly sensitive to higher costs, yielding larger exits than suggested by available research. On the other hand, the freeze could incentivize some undocumented adults to pay the premium to avoid being permanently locked out of comprehensive coverage. The interplay between these two budget solutions is challenging to predict. Implementation of New Clinic Finance Change. Another large solution, expected to save just over $1 billion General Fund annually, reduces payments to safety-net clinics for serving adults with UIS. At the time this solution was adopted, however, stakeholders raised key implementation hurdles that could potentially erode savings. For example, this change might require clinics to track their patients’ immigration status—a practice that many clinics generally do not undertake. Any implementation challenges resulting from such hurdles could delay the timing of savings or reduce the long-term effect altogether. resulted in much higher estimates compared to Figure 11 past years. Our outlook is based on the more Reported Spending on Emergency Care for recent, higher estimates of emergency care Undocumented Immigrants Has Been Volatile spending. While this higher level likely is more indicative of future spending, there is a chance that Annual Spending Based on Federal Reports (In Billions) utilization of emergency services might also be somewhat volatile in the future, particularly given $7 the forthcoming changes affecting eligibility for 6 undocumented adults in full coverage Medi-Cal. 5 State Share As a result, the cost to the state due to the change 4 in the federal cost-sharing ratio is subject to some 3 uncertainty. 2 1 Federal Share Flexibilities Could Mitigate Some Effects of Federal Changes. H.R. 1 grants states some 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 flexibility to implement its policy changes. For Federal Fiscal Year example, states can choose to exempt additional groups from certain eligibility changes, such 14 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET as the community engagement requirement. private hospital fee changes, eligibility changes, and Adopting these exemptions could mitigate some federal cost sharing for emergency care) will be the disenrollments and associated savings. most fiscally significant. However, given the breadth Effects of Federal Policy Changes Yet to Be of H.R. 1, it likely will take years before the associated Fully Understood. The federal H.R. 1 legislation net fiscal effects are fully understood. At this time, contains dozens of policy changes to Medicaid we cannot rule out the possibility that other H.R. 1 programs. In our estimation, the four core changes provisions will have noteworthy fiscal effects. The included in our outlook (health plan tax changes, nearby box describes other key H.R. 1 changes. What Are Some Other Key Changes in H.R. 1 to Track? Change in Unsatisfactory Immigration Status (UIS) Definition. Under H.R. 1, more immigrant groups (such as refuges and asylees) will have UIS beginning October 2026. This means that federal cost sharing will only be available for limited coverage (emergency and pregnancy-related care). With federal cost sharing no longer available for remaining services (such as primary care and mental health), the state will either need to reduce coverage for these groups or backfill the lost federal funds from the General Fund. Data on Medi-Cal members with UIS are currently too limited to estimate the potential fiscal effects of this policy. New Home Equity Limit. California asset limit policies historically disregarded someone’s primary residence and vehicle from the calculation. Under H.R. 1, California will now need to include a home equity limit of $1 million for certain members accessing long-term care beginning January 2028. Our outlook does not incorporate the effects of this new policy. Were it to further drive down caseload relative to our outlook, the policy could yield additional savings. Family Planning Payment Prohibition. From July 2025 through June 2026, H.R. 1 prohibits Medicaid payments on certain family planning providers that also provide abortion services. The policy likely bars Planned Parenthood from drawing down federal funds. Other providers could be affected too. This policy has already placed some budget pressure on the state to help backfill the lost federal funding. For example, budget-related legislation in August 2025 (Chapter 105 of 2025 [AB 144, Committee on Budget]) created a new Abortion Access Fund to support abortion providers, with funds coming from certain excess monies in Covered California plan accounts. Cost Sharing for Childless Adults. H.R. 1 requires states to impose cost sharing, not to exceed $35 per service, on most benefits to childless adults with incomes above the federal poverty level. The new requirement becomes effective October 2028. In concept, cost sharing could limit utilization, resulting in more savings than estimated in our outlook. As the federal government pays for the cost of most services to this population, however, the savings to the state likely would be limited. Moratorium on Certain New Rules. H.R.1 places a ten-year enforcement moratorium on two recently finalized federal rules aimed at streamlining Medicaid eligibility practices and policies. This moratorium comprises a substantial portion of the estimated federal savings in Congressional fiscal scoring sheets. These savings occur because not implementing the new rules limits Medicaid caseload growth. How much of these savings accrue to California, however, is uncertain. California could choose to continue streamlining eligibility policies, even absent federal enforcement of the new rules. Recoupments for Excess Payments. Under current federal law, federal administrators must recoup funds from states when more than 3 percent of Medicaid payments are in error. Federal administrators, however, can waive recoupments if a state makes a good faith effort to reduce its error rate. Beginning October 2029, H.R. 1 prohibits such waivers. This policy could lead to more repayments to the federal government, depending on California’s error rate in the future. This effect is uncertain, however, and would not occur until the end of the outlook period. 15 analysis full 2026-27 BUDGET CONCLUSION Our outlook projects that the spending this uncertainty, the full fiscal and programmatic reductions adopted as part of the 2025-26 Budget implications of H.R. 1 are still emerging as the Act will slow the growth in Medi-Cal spending, federal government releases its guidance. With so which otherwise would have grown far above many moving pieces, and the state’s overall fiscal average rates. The extent of these savings, situation still heading in the wrong direction, the however, are fairly uncertain, and could be bigger Legislature may need to continue considering its or smaller relative to our outlook. Compounding Medi-Cal priorities in the coming years. LAO PUBLICATIONS This report was prepared by Karina Hendren, Will Owens, Min Lee, Ryan Woolsey, and Jason Constantouros, and reviewed by Mark C. 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. 16 LEGISLATIVE ANALYST’S OFFICE