The 2026-27 Budget: Medi-Cal Analysis

analysis full 2026-27 BUDGET The 2026-27 Budget: Medi-Cal Analysis GABRIEL PETEK | LEGISLATIVE ANALYST MARCH 2026 www.lao.ca.gov 1 analysis full 2026-27 BUDGET 2 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Executive Summary Medi-Cal Spending Continues to Rise. Over the last decade, spending in Medi-Cal, California’s Medicaid program, has more than doubled both on a General Fund and total funds basis—faster than the growth in the overall state budget. Spending continues to grow under the Governor’s budget, with estimated Medi-Cal spending reaching an all-time high of $49 billion General Fund ($222 billion total funds) in 2026-27. More Information Needed to Fully Assess Drivers of Base Spending Growth. Base spending (spending on core services to enrollees) has been the primary driver of spending growth in Medi-Cal over the last decade. We estimate most of the spending growth has been driven by per-enrollee cost increases, with a much smaller share coming from changes in the caseload level and composition. These per-enrollee cost increases have been due to greater utilization of services, higher service costs, and recent state benefit expansions. These trends, however, are difficult to fully assess without better data on key expenditures, such as managed care costs and costs for undocumented beneficiaries. We recommend the Legislature enhance its oversight by directing the administration to provide richer data on the Medi-Cal program moving forward. Provider Taxes Are Ramping Down. In recent years, the state has turned to certain taxes on health care providers to help cover growing Medi-Cal costs. Under new rules in the recently enacted federal H.R. 1 legislation, however, the state will need to notably reduce two large provider taxes—a tax on health plans and a fee on private hospitals. The reductions will result in billions of dollars of lost revenue. The state appears to have limited ability to pursue a higher private hospital fee under the new federal rules. However, the state may have more options to pursue a larger health plan tax if it shifted more costs onto private health plans and their consumers. This change would require amending Proposition 35 (2024). We recommend weighing the policy trade-offs of pursuing a larger health plan tax in light of the state’s fiscal challenges. Legislature Faces Choices to Implement H.R. 1’s Eligibility Changes. The administration has released a plan to implement H.R. 1’s changes to Medicaid eligibility rules. The plan includes a number of key policy choices—most notably, ending comprehensive coverage for certain immigrant groups and applying work requirements to others. These proposals come amid a challenging fiscal backdrop, so the administration’s concern about the feasibility of backfilling lost federal funding for certain groups is understandable. At the same time, the proposals would apply different rules across immigrant groups, raising equity concerns and implementation challenges. The Legislature may want to consider whether alternative approaches such as income-based eligibility or modified benefit designs could achieve comparable savings while preserving access to high-priority services. Limiting Cost Growth in Medi-Cal Could Raise Key Trade-Offs. In response to rising Medi-Cal costs and the state’s tight fiscal situation, the Legislature enacted a number of budget solutions in Medi-Cal in the 2025-26 budget. The amount of savings ramps up in 2026-27 under the Governor’s budget, largely as planned. The feasibility of these estimated savings is subject to a fair amount of uncertainty. Even if the savings materialize as intended, however, the state budget is still projected to have sizable structural deficits in future years. As such, the Legislature may need to begin considering more ongoing solutions across the budget. Options exist in Medi-Cal to further limit spending growth, but most raise key trade-offs around access to health care for low-income people. www.lao.ca.gov 3 analysis full 2026-27 BUDGET 4 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET INTRODUCTION This report analyzes the Governor’s proposals implementation of recent federal legislation (H.R. 1), in the 2026-27 budget for Medi-Cal, California’s and budget solutions enacted in 2025. Throughout Medicaid program. It first provides an overview of this brief, we discuss General Fund spending Medi-Cal and its proposed budget. We then analyze growth in Medi-Cal over the last several years, the Governor’s proposals regarding base program including information on the cost drivers of this spending (spending driven by caseload, service growth and the levers available to the Legislature to utilization, and provider rates), provider taxes, further contain it. OVERVIEW In this section, we provide key background on the Medi-Cal Delivers Services in Many Ways. Medi-Cal program, analyze recent programmatic The primary way Medi-Cal delivers services to spending trends, and describe Medi-Cal spending beneficiaries is by contracting with health plans in the Governor’s proposed budget. (also known as managed care plans). The state provides health plans monthly payments to enroll Background Medi-Cal beneficiaries, while the plans in turn Medi-Cal Provides Health Coverage for are required to arrange for the health care of their Low-Income Californians. Medi-Cal, the state’s enrollees. While most services are delivered in Medicaid program, provides health care coverage the managed care system, some are delivered in for low-income Californians. Health care services other ways. For example, Medi-Cal pays for some covered by Medi-Cal include visits to the doctor’s health care services, such as pharmacy benefits, office, stays at the hospital, prescription drugs, by reimbursing providers directly; this arrangement behavioral health services, long-term care, is known as the “fee-for-service” delivery system. and dental services, among many other areas. County governments also play a key role in The Governor’s budget estimates an average delivering certain services, particularly behavioral monthly Medi-Cal caseload level of 14.5 million health care. people in 2025-26, about one-third of Californians. Many Sources Support Medi-Cal’s Budget. Medi-Cal Is a State-Federal Partnership. The federal government and the state also share The state and the federal government share fiscal responsibilities for Medi-Cal. The federal programmatic and fiscal responsibilities for share of Medi-Cal cost varies by service—it is Medi-Cal. The federal government created Medicaid 50 percent in most cases, but higher or lower and imposes program requirements on states, such for some populations and services. As Figure 1 as covering a minimum set of services for certain on the next page shows, these varied formulas populations. The state, in turn, is responsible for result in a net federal share that is more than half implementing Medi-Cal. California has chosen to of cost. The state is responsible for covering the go beyond the minimum federal requirements, such remaining share. The primary source of support as by covering optional services and expanding is the state’s General Fund. The second largest eligibility to additional populations (many of which source is a handful of taxes and fees specifically come with matching federal funds). California has on certain health care providers (such as health also received waivers from certain federal rules plans and hospitals). Many other sources also help over the years, generally to test new approaches for cover the state share of cost, including funds from serving beneficiaries and delivering care. local governments. www.lao.ca.gov 5 analysis full 2026-27 BUDGET Figure 1 Federal Government Provides Majority of Funding, Managed Care Majority of Spending $197 Billion in Medi-Cal Spending in 2025-26 By Fund Source By Spending Area Local Administration Other State and Provider Local Taxes Other Servicesª Managed General Care Fund Federal Fee For Service a Includes federal Medicaid funding for certain social service programs, as well as county behavioral health services, dental services, and Medicare-related costs in Medi-Cal, among other areas. Managed Care Comprises Just Around Fund basis, currently comprising around 20 percent Half of Spending. Though managed care is of all General Fund spending. This makes Medi-Cal’s primary delivery system, it comprises Medi-Cal the second largest program in terms just around half of overall programmatic spending. of General Fund spending (after Proposition 98 Fee-for-service comprises around one-quarter, [1988], the state’s minimum spending requirement with other services and county administrative for K-14 education). costs comprising the remainder. Fee-for-service’s Medi-Cal Spending Has Outpaced Overall relatively outsized portion of spending is largely State Budget in Recent Years. Medi-Cal is from pharmacy benefits being paid for all Medi-Cal not simply a large program—it also is growing. members—including those in the managed care As Figure 2 shows, Medi-Cal spending has more system—on a fee-for-service basis. Much of the than doubled over the last ten years, both on a funding for other services reflects federal Medicaid General Fund and total funds basis. Spending funding for certain social service programs in the across the overall state budget also grew over this Department of Social Services and Department time, nearly doubling. Because Medi-Cal grew at a of Developmental Services. The federal funds faster rate, its share of the state budget increased, are initially reflected in Medi-Cal’s budget, but particularly following the COVID-19 pandemic. ultimately transferred to the other departments. Medi-Cal’s spending growth is due to underlying programmatic trends, as well as policy changes Recent Medi-Cal Spending Trends expanding eligibility, benefits, and provider rates. Medi-Cal Is a Sizable Portion of State Budget. Growth in Per-Enrollee Spending Has Medi-Cal is one of the largest programs in the state Driven Most of Spending Growth. Virtually all of budget. On a total funds basis, it is the largest, the growth in General Fund spending has come comprising nearly 40 percent of spending from all from changes in the number and composition of sources (including federal funds to California) in enrollees, as well as spending per enrollee. (On a recent years. Its share is smaller just on a General total funds basis, other unrelated factors, such as 6 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Recent Fund Shifts Have Figure 2 Helped Limit General Fund Spending Growth. In recent Medi-Cal Spending Growth… years, the Legislature has sought (In Billions) to offset a portion of General Fund spending growth by using $200 other fund sources. Most notably, 180 the state significantly increased 160 a tax on health plans (known as 140 the managed care organization 120 100 tax) to help cover costs. In the 80 2025-26 budget, the Legislature Other Funds 60 also approved a loan from state 40 cash reserves to temporarily 20 cover costs. We estimate these General Fund combined actions offset over 2015-16 2017-18 2019-20 2021-22 2023-24 2025-26 $6 billion in General Fund spending growth over the last ten years. …Has Outpaced State Budget Over Time Growth Prompted Legislature Medi-Cal's Share of State Budget to Enact Ongoing Budget Solutions in Medi-Cal. 40% The sizable growth in Medi-Cal 35 spending, coupled with a structural Total Funds 30 deficit in the state budget, prompted the Legislature to enact 25 several ongoing budget solutions 20 in Medi-Cal in the 2025-26 budget. 15 The solutions cover several General Fund 10 areas, including limiting some 5 of the undocumented immigrant expansions and imposing new 2015-16 2017-18 2019-20 2021-22 2023-24 2025-26 approaches to limit drug utilization. These solutions are scheduled to ramp up over time. As a result, most of the savings likely will be growth in federal Medicaid funding for certain social realized in future years. service programs, also are key drivers.) We estimate Recent Federal Legislation Likely Will that growth in the number of enrollees and shifts in Drive Up Some Medi-Cal Costs. Subsequent the population mix—generally, relatively more costly to the Legislature enacting the 2025-26 budget seniors becoming a larger share of the caseload— in June 2025, federal policymakers passed in account for around 10 percent to 20 percent of the July 2025 H.R. 1—titled the One Big Beautiful Bill growth. This means that per-enrollee spending— Act. This legislation includes about $1 trillion in reflecting changes in benefits, service utilization, federal Medicaid reductions nationwide over ten and service costs—have driven most of spending. years, representing the most significant changes (We further describe the key drivers of this growth to federal Medicaid policy since the Patient in the “Base Spending” section.) Protection and Affordable Care Act. Only a handful of changes under H.R. 1 took effect immediately. www.lao.ca.gov 7 analysis full 2026-27 BUDGET The legislation sets out a schedule for the remaining to the federal government. These repayments changes to be implemented over the next few generally reflect corrections to erroneous federal years. These changes will drive up state spending claiming for state-only services provided to on Medi-Cal, likely offsetting some of the savings enrollees with unsatisfactory immigration status anticipated from the state’s enacted budget (UIS). A few other smaller factors also drive the solutions. We describe H.R. 1 provisions in our increase, such as lower-than-projected savings 2025 report, Considering Medi-Cal in the Midst of in 2025-26 for certain budget solutions the state a Changing Fiscal and Policy Landscape. enacted last year. General Fund Spending, on Net, Up in Budget Governor’s Budget Year for Several Key Reasons. As Figure 4 Estimates Continued Growth in Medi-Cal shows, several factors drive the net increase in Spending. As Figure 3 shows, the Governor’s General Fund spending in 2026-27 over 2025-26 budget estimates total Medi-Cal spending from all levels. The largest driver is base spending increases fund sources to be nearly $200 billion in 2025-26, from caseload, service utilization, and service the same amount assumed at budget enactment costs. Additionally, a one-time loan to Medi-Cal in in June 2025. From this level, it increases to over 2025-26 ends in 2026-27, requiring a backfill from $220 billion in 2026-27. While spending grows the General Fund. (The budget anticipates repaying across all of Medi-Cal’s fund sources, there is the loan over time beginning in 2027-28.) Other less growth in General Fund spending compared key drivers include new costs associated with the to federal and other sources. Medi-Cal spending federal H.R. 1 legislation, as well as the winding growth continues to equal or exceed spending down of the state’s provider tax on health plans. growth in the state budget as a whole, with Some savings, such as the ramp up of enacted Medi-Cal comprising about 20 percent of overall budget solutions in 2026-27 and proposed new state General Fund spending and over 40 percent budget solutions, partially offset some of these of the state’s total funds spending in 2026-27. spending increases. General Fund Spending Is Up in Current Year, In Budget Year, Timing of Certain Provider Primarily From One-Time Repayments. Though Payments Drives Some of the Increase in Other overall 2025-26 spending for Medi-Cal remains Fund Sources. The factors driving the growth in unchanged, General Fund spending is $1.4 billion General Fund base spending also drive the growth higher, with equivalent downward revisions from in spending from non-General Fund sources in federal and other sources. Much of the increase in 2026-27. Aside from base spending factors, the General Fund spending is due to higher repayments growth in spending from non-General Fund sources Figure 3 Medi-Cal Spending Continues to Rise in Governor’s Budget (Dollars in Billions) 2025-26 2026-27 Change From 2025-26 Revised Enacted Revised Proposed Amount Percent Total Spending $196.7 $196.7 $222.4 $25.7 13.1% By Fund Source Federal funds $119.7 $119.4 $137.5 $18.0 15.1% General Fund 44.9 46.4 48.8 2.4 5.2 Other funds 29.7 28.3 36.1 7.8 27.6 By Program Managed care $100.4 $99.0 $123.2 $24.2 24.5% Fee for service 45.6 44.8 43.5 -1.4 -3.1 Other programs 43.3 44.8 48.0 3.2 7.2 Local administration 7.5 8.0 7.7 -0.3 -3.9 8 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET appears to be due to a Figure 4 change in timing for certain supplemental provider Several Costs Drive Net Increase in Medi-Cal Spending payments. Most notably, General Fund Spending the administration projects a $16 billion (154 percent) 2025-26 Enacted $44.9 Billion increase in supplemental payments in 2026-27 through Base Spending Increase the state’s fee on private $3.2 Billion hospitals. The administration End of Medi-Cal Loan $2.3 Billion states that it expects to H.R. 1 Costs disburse payments to $1.4 Billion private hospitals on an Health Plan Tax Wind Down accelerated timeline, resulting $1.1 Billion in 24 months of payments Ramp Up of Enacted Budget Solutions $2.6 Billion being released in the budget Proposed New Budget Solutions year. Additionally, a lag in the $1 Billion implementation of provider Other payments funded by the $490 Million state’s health plan tax also 2026-27 Proposed $48.8 Billion results in payments occurring in 2026-27, rather than in 2025-26 as initially expected. BASE SPENDING In this section, we analyze key trends and on average. As Figure 5 on the next page shows, estimates around base spending (core spending seniors and persons with disabilities have average on services to beneficiaries) in Medi-Cal. We first costs that are more than double those of families provide background on the key drivers of base and childless adults. Consequently, shifts in spending. Next, we analyze recent trends around caseload toward higher-cost groups can increase each driver. We then describe the estimates total spending even when overall enrollment is in the Governor’s budget. We conclude by stable or declining. assessing these trends and estimates and offering …Benefits… What benefits are offered associated recommendations. to beneficiaries also influences costs. This is because some services—such as hospital BACKGROUND inpatient stays and long-term care—are much Base Spending Is Driven by Size of costlier than others. Many key Medi-Cal benefits Caseload… Medi-Cal base spending is the are mandatory, meaning that the state must offer product of (1) the number of enrollees served and them under federal law. States have the option to (2) the average cost per enrollee. As a result, even add more benefits above the mandatory minimum. modest changes in caseload can have sizable In recent years, for example, Medi-Cal added budget effects. new benefit components including enhanced care management, community supports, and …Composition of Caseload… Base spending coverage for wellness coach services. In addition, is also affected by the mix of enrollees across many undocumented adults have moved from populations. This is because some populations restricted-scope coverage (limited to certain use more services or rely on more costly services services) to full-scope coverage. (such as long-term care), resulting in higher costs www.lao.ca.gov 9 analysis full 2026-27 BUDGET • Pharmacy Costs. Unit Figure 5 costs in pharmacy are driven by the underlying State Costs Per Enrollee Are price of drugs, as well as Higher for Seniors and Persons With Disabilities the amount of rebates Average Cost Per-Enrollee, Per-Month Estimated in 2025-26 connected to the drugs. (Rebates are negotiated State Share Federal Share savings drug makers Seniors and Persons pay to Medi-Cal after With Disabilities the drug is purchased.) Tracking pharmacy spending over time is Childless Adults somewhat challenging because Medi-Cal’s method of paying for Families outpatient prescription drugs shifted from a combination of managed 200 400 600 800 1,000 1,200 1,400 1,600 $1,800 care and fee-for-service to Note: Shares reflect average for U.S. citizen and people with satisfactory immigration status. Average state share is fee-for-service only in 2021 much higher for people with unsatisfactory immigration status. (known as Medi-Cal Rx). • Medicare-Related …And Utilization and Unit Costs, Primarily in Costs. For beneficiaries Four Key Areas. In addition to benefits covered, who are dually eligible for Medicare and per-enrollee costs depend on how often enrollees Medi-Cal, Medi-Cal generally pays their use these services and the unit cost per service. Medicare premiums (in addition to certain Most changes in underlying utilization and unit other cost sharing). Medi-Cal also incurs the costs show up in one of the following: Part D “clawback,” which is a state payment to the federal government for a portion of • Managed Care Capitated Rates. Most prescription drug costs of dual eligibles who Medi-Cal enrollees receive services through receive drug coverage through Medicare managed care plans that are paid fixed instead of Medicaid. As a result, growth in monthly amounts per enrollee (capitation). the number of dual eligibles or in Medicare Capitation rates are intended to cover premiums and the Part D clawback can the projected cost of providing covered increase Medi-Cal spending. benefits for a defined population and period. In general, these rates reflect past spending Federal Cost Sharing Also Affects General data, adjusted using actuarial assumptions Fund Costs. Finally, growth in General Fund about future utilization and costs. spending can arise from not only higher total costs, • Fee-for-Service Payments. The state but also changes in how costs are financed. Federal directly pays for a smaller share of Medi-Cal matching rates vary across eligibility groups; services on a fee-for-service basis, where for example, childless adults generally receive a spending is driven by utilization and unit costs. 90 percent federal match, whereas individuals Like capitation, fee-for-service spending with UIS do not receive federal matching funds for can grow even when program enrollment or most nonemergency services. As a result, shifts in benefits remain the same, due to changes in enrollment toward groups with lower federal cost prices, service intensity, and service mix. sharing can increase General Fund costs even when total spending is unchanged. 10 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET RECENT TRENDS AND COST Per-Enrollee Costs Appear to Account for Most of the Recent General Fund Growth. We DRIVERS estimate General Fund base spending in Medi-Cal Section Looks at Key Recent Trends in increased by about $25 billion from 2017-18 to Caseload and Per-Enrollee Costs. In this 2025-26—an average annual increase of about part, we describe trends in Medi-Cal enrollment 8 percent. As Figure 6 on the next page shows, and per-enrollee costs from 2017-18—the first our estimates suggest that growth in per-enrollee year for which some of our data are available— costs accounts for a larger share of this spending through 2025-26, and highlight the factors that increase than changes in caseload (level and appear to be driving spending growth. As the composition). Due to data limitations, however, nearby box explains, our methodology aims our analysis was not able to account fully for the to isolate the effect of a given component by growth in per-enrollee costs. As we discuss later, holding all other components constant. Given the remainder is likely from major policy changes significant data limitations, however, our estimates enacted since 2017-18, the effects of which are should be interpreted as rough and subject to difficult to disentangle from underlying trends. measurement error. We describe each component driving base spending growth further below. How Did We Analyze Base Spending Trends? Analyzes Key Department Data. Most of our trend analyses utilize data from the Department of Health Care Services. For example, our caseload analysis considers monthly caseload data that is publicly available, coupled with limited data on costs from past department estimates. We also analyze managed care rate trend data that the department generally provides our office annually. We used similar sources for fee-for-service, pharmacy, and Medicare data. Holds Certain Factors Constant to Isolate Effects. To isolate the effects of different factors, we aimed to hold other factors constant. For example, to assess the fiscal impact of caseload changes, we hold per-enrollee costs constant over the time period. Similarly, to analyze the effects of utilization changes over time, we hold unit costs constant. Has Three Key Limitations. Three key factors limit the conclusions we could draw. • Data Limitations. Most notably, most data on utilization and costs in managed care— Medi-Cal’s primary delivery system—are confidential. As such, we had to rely on very limited data provided by the department to analyze trends. In some cases, we also had to make certain assumptions about trends in later years when the department’s data ended before 2025-26. • Effects of Policy Changes. Our analysis was not able to fully disentangle the effects of certain policy changes. This is partly due to data limitations, which do not allow us to capture many policy changes after 2023. Many of our analyses also hold the General Fund share of spending within aid categories constant over time, which means that financing shifts—such as the increased state-only financing associated with expansion of full-scope coverage to undocumented adults—are generally not captured in the estimates of individual spending drivers. • Shifts Between Delivery Systems. Over time, the state has shifted certain populations and services from fee-for-service to managed care. These shifts can influence cost trends within each delivery system. For example, having fewer beneficiaries in fee-for-service likely results in higher costs per beneficiary over time, as those who remain in fee-for-service tend to be costlier populations with significant medical needs. www.lao.ca.gov 11 analysis full 2026-27 BUDGET Caseload Level and Composition Figure 6 Pandemic Notably Changed Caseload Trends. Prior to the Per-Enrollee Costs Drove Most of COVID-19 pandemic, Medi-Cal Medi-Cal’s Base Spending Growth caseload showed signs of a Around $25 Billion in Base General Fund sustained, gradual decline, Spending Growth From 2017-18 Through 2025-26 especially among childless adults and families. This changed beginning in March 2020, when the federal continuous coverage requirement prohibited states from Caseload disenrolling most beneficiaries. With new enrollees continuing Otherª to enter the program but very few exiting, Medi-Cal’s caseload reached an all-time high of nearly Managed Care 16 million people by mid-2023, as Figure 7 shows. Per-Enrollee Caseload Has Remained Costs Medicare Above Pre-Pandemic Levels Fee-for-Service During Unwinding Period. The Pharmacy continuous coverage requirement expired in the second half of 2023, causing states to resume ª Primarily consists of certain state policy changes, such as benefit enhancements. 12-month redeterminations. However, caseload continued at somewhat elevated levels. At least some of this phenomenon Figure 7 could be attributed to temporary Medi-Cal Caseload Remains Above Pre-Pandemic Levels federal approval of streamlining certain renewal processes to Monthly Caseload (In Millions) help mitigate disenrollments. This federal approval expired in 2025, Continuous Before Continuous Coverage Coverage Unwinding potentially setting the stage for 16 further declines than observed 15 to date, although the pace and magnitude remain uncertain. 14 Caseload Mix Has Become 13 More Expensive. Over time, seniors and persons with 12 disabilities have increased as a 11 share of Medi-Cal enrollment, from about 16 percent in 10 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2017-18 to 18 percent in 2025-26. This pattern primarily reflects robust growth in the senior population both before 12 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET and after the pandemic. Because seniors and A little more than half of this increase is attributable persons with disabilities have substantially higher to seniors and persons with disabilities, followed per-enrollee costs than the average Medi-Cal by adults with children (about a quarter). By service beneficiary, relatively modest shifts in caseload category, inpatient hospital services account for mix can still translate into meaningful increases in the largest estimated increase (about 35 percent), overall spending. followed by other services (28 percent), which Caseload Growth and Changes in Caseload include laboratory and radiology, transportation, Mix Have Had Distinct Fiscal Effects. We and home- and community-based services, estimate that the increase in Medi-Cal caseload among others. from about 13.3 million enrollees in 2017-18 to Higher Service Use and Unit Costs Appear 14.5 million in 2025-26 (with a somewhat different to Be Driving Managed Care Cost Growth. caseload mix) increased General Fund base As Figure 9 on the next page shows, both spending in 2025-26 by about $4 billion. The fiscal utilization and unit costs appear to be rising across impact of the change in caseload mix on its own most service areas of managed care. We estimate is relatively modest. This is because the increased that roughly 60 percent of the increase in capitation costs from a rising share of seniors and persons spending is attributable to higher utilization, with with disabilities are partially offset by compositional the remaining 40 percent attributable to higher shifts among other groups, including a declining unit costs. The relative importance of these share of higher-cost families and a rising share of factors varies across populations and services. lower-cost childless adults. For example, the 60-40 percent split holds for seniors and persons with disabilities, whereas unit Managed Care Capitated Rates costs account for nearly 90 percent of the spending Managed Care Rates Have Risen, With growth among children. Particularly Rapid Growth for Higher-Cost Populations. As Figure 8 shows, managed care Figure 8 capitated rates have risen since Managed Care Costs Have 2017-18, with increases evident Increased Across All Major Service Areas across all major service areas. On a General Fund basis, the Average Per-Enrollee, Per-Month Costs in Medi-Cal Managed Care, Excluding Pharmacy average per-enrollee cost grew $250 by about 4.6 percent annually through 2023 (the most recent 200 year available). Growth varied by population, with the highest 150 rate for seniors and persons with disabilities (7 percent) 100 and the lowest for childless adults (3 percent). 50 Rising Per-Enrollee Costs Translate Into Several 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 Billion Dollars of Additional Hospital Inpatient Physician and Professionals Other Facilities Other General Fund Spending. We estimate that higher Notes: Other facility-based services include outpatient, emergency room, and long-term care facilities. Other includes laboratory and radiology, transportation, and home- and community-based services, managed care per-enrollee among other areas. costs increase General Fund spending by roughly $5 billion in 2025-26 over 2017-18 levels. www.lao.ca.gov 13 analysis full 2026-27 BUDGET Figure 9 notably payments to safety net clinics (which tend to grow over Utilization Has Been Increasing Across All Service Areas... time based on medical inflation). Cumulative Growth in Utilization in Medi-Cal Managed Care Pharmacy Has Been a Major Driver of Per-Enrollee Cost 40% Growth. Across both managed care and fee-for-service, we Other 30 estimate that General Fund pharmacy costs per enrollee have 20 Other Facilities increased by nearly 13 percent per Hospital year since 2017-18. The estimate Inpatient 10 Physicians and reflects net pharmacy costs after Professionals accounting for federal and state drug rebates. This per-enrollee growth translates to nearly -10 $4 billion in additional General 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 Fund spending in 2025-26. We have limited data to fully assess ...As Have Unit Costs the drivers, but they likely reflect Cumulative Growth Unit Costs in Medi-Cal Managed Care a combination of increased utilization and higher costs 20% for some existing drugs. (Our 2025 publication on Medi-Cal prescription drug spending 10 provides more information on recent trends.) Medicare-Related Payments -10 Also Contribute to Cost 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 Growth. As Figure 10 shows, Note: Reflects actuarially assumed utilization and costs. Actual trends, which are not readily available, may have differed. Medicare-related costs also Other facility-based services include outpatient, emergency room, and long-term care facilities. Other includes laboratory and radiology, transportation, and home- and community-based services, among other areas. have grown steadily over time— 4.8 percent per year for premiums and 5.2 percent for Part D Other Per-Enrollee Cost Trends clawback costs. We estimate this growth translates to $1.6 billion General Fund, of Fee-for-Service Costs (Other Than which more than half is from the Part D clawback. Pharmacy) Also Have Increased, With Growth Driven Largely by Higher Unit Costs. Although Other Key Policy Changes Likely Drove fee-for-service now represents a smaller share Per-Enrollee Spending. Under our analysis, of Medi-Cal spending than managed care, about $8 billion of base spending growth—roughly we estimate that average monthly costs per one-third—remains unaccounted. This remainder user—excluding pharmacy—have increased by is likely explained by major policy changes 5.4 percent per year since 2017-18. This growth enacted since 2017-18, such as the expansions of translates to around $2.5 billion in additional comprehensive coverage to undocumented adults General Fund spending. In contrast to managed and the creation of enhanced care management care, where rising utilization appears to play a and community supports benefits. Disentangling larger role, we attribute 86 percent of this spending these policy changes from underlying trends is increase to the growth in unit costs. Growth has challenging. Moreover, limited data make it difficult been particularly rapid in certain areas, most to precisely estimate their fiscal effects. 14 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET is projected to grow by around Figure 10 4 percent. Net pharmacy spending per Medi-Cal member Medicare-Related Costs Have Steadily Risen (after accounting for drug Monthly Medicare-Related Costs for Medi-Cal Dual Eligibles rebates) is projected to increase by about 12 percent. Based on $200 federal projections, average Medicare premium costs are 150 Part B Premiums projected to increase by about Part D Clawback 8 percent, and the Part D 100 clawback by 5 percent. 50 ASSESSMENT 2017 2018 2019 2020 2021 2022 2023 2024 2025 Administration’s Estimates Appear Reasonable, but Uncertain GOVERNOR’S BUDGET ESTIMATES Caseload Projections Are Largely in Line with Projects Continued Increase in Base Recent Trends. To assess the administration’s Spending. Based on the administration’s budget caseload assumptions, we developed an documentation, we estimate the Governor’s budget independent caseload forecast based on recent reflects an overall General Fund base spending trends. Our baseline estimates are very similar to increase of about $3.2 billion (6 percent) in 2026-27 the administration’s—nearly identical in 2025-26, over the enacted 2025-26 level. Nearly all of this and only slightly lower in 2026-27 (14 million versus increase occurs in 2026-27, with revised 2025-26 14.3 million). The difference in 2026-27 largely base spending levels only slightly higher than stems from our assumption of a somewhat stronger enacted levels. downward trajectory for the family and childless Caseload Costs Down on Net, Primarily From adult caseloads. Given uncertainty about how Decline in Lower-Cost Populations. We estimate enrollment will respond to the recent renewal and caseload-related General Fund base spending eligibility changes, the administration’s assumption in 2026-27 is slightly lower than the enacted appears reasonable at this time. 2025-26 level. This reflects an overall reduction in Per-Enrollee Cost Assumptions Are Generally baseline caseload (excluding the effects of budget Consistent With Recent Experience, With Higher solutions and H.R. 1, discussed later) of nearly Growth in a Few Areas. The administration’s 300,000 enrollees. The reduction is concentrated assumed per-enrollee cost growth for pharmacy among childless adults and families, while seniors and non-pharmacy fee-for-service appears and persons with disabilities are projected to slightly below recent historical trends. By contrast, increase slightly. assumed growth rates appear to exceed historical Increase Largely From Per-Enrollee Cost averages for (1) Medicare premiums (about Growth. Consistent with the projected decline in 3 percentage points higher) and (2) managed caseload, we estimate that most of the increase care capitation rates (about 2 to 2.5 percentage in base spending is due to higher per-enrollee points higher). Medicare premium growth mostly costs. The assumed rate of growth varies by reflects federal assumptions, whereas managed component. In managed care, the administration care rate growth more directly reflects conditions projects capitated rate growth of around 6 percent in California. Given substantial uncertainty in the to 7 percent (varying by managed care model). In trends, however, the administration’s projections non-pharmacy fee-for-service, the cost per user also seem plausible. www.lao.ca.gov 15 analysis full 2026-27 BUDGET Legislature Will Have More Information in oversight. The need for better information on May. By the May Revision, additional months Medi-Cal base spending is particularly important of caseload data should allow a clearer read on given the state’s fiscal constraints. Without such underlying enrollment trends and the pace of recent data, the Legislature faces the challenge of making disenrollments associated with policy changes. targeted decisions to slow spending growth without These include not only changes to renewal clear information on the fiscal effects, including flexibilities and the asset limit, but also the freeze anticipated savings, of various options. on new full-scope enrollment for certain adults with UIS. The May Revision should additionally RECOMMENDATIONS include updated fee-for-service spending estimates Withhold Action on Base Spending Until including pharmacy, providing more recent data May. Given the uncertainty that remains around on enrollment, utilization, and cost trends to help both caseload and per-enrollee costs, the evaluate the administration’s assumptions. administration’s estimates of base spending generally provide a reasonable basis for preliminary Better Data Needed to Assess Base budget planning. At the same time, we recommend Spending Growth the Legislature avoid making final budget decisions Data Limitations Significantly Hamper Trend on base Medi-Cal spending assumptions until the Analysis. Medi-Cal spending growth can reflect May Revision, when additional months of data many overlapping factors—such as changes in should provide a clearer picture of caseload and enrollee and provider behavior, technology, prices, cost trends. delivery system arrangements, and other policy Direct Administration to Provide Richer Data. changes—making it difficult to isolate specific To strengthen legislative oversight of Medi-Cal drivers even with detailed data. In practice, spending growth, we recommend the Legislature however, data are very limited in many cases. direct the administration to provide more recent, For example, information on enrollment and costs granular information for legislative evaluation for the UIS population remains sparse, even though during each year’s budget process. At a minimum, coverage for this population has significant General such information should include: (1) more recent Fund implications. Likewise, consistent and recent managed care rate trend information; (2) more data trend information on managed care capitated on caseload, costs, and utilization for members rates and pharmacy spending—two of Medi-Cal’s with UIS; and (3) more detailed pharmacy data on largest cost drivers—is limited. Without better data, users, utilization, and net unit costs by therapeutic it is difficult to refine estimates of what is driving class and drug. Together, these data improvements Medi-Cal cost growth. would help the Legislature better identify the Better Information Would Support Budget underlying drivers of cost growth and evaluate Planning. More timely and detailed data would policy options with greater specificity. improve transparency and strengthen legislative 16 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET PROVIDER TAXES In this section, we provide background Medicaid and non-Medicaid services and to limit on provider taxes in Medi-Cal, summarize how much funding providers receive back from assumptions about these taxes in the Governor’s Medicaid to cover the cost of the taxes. States can budget, assess these assumptions, and provide receive waivers to the proportionality rules under our recommendation. certain conditions. Waivers are for limited periods of time, often requiring states to periodically renew Background their federal approval. Most States Help Support Medicaid California Has Two Large Provider Taxes. Programs by Taxing Health Care Providers. As Figure 12 on the next page shows, California Provider taxes—also known in federal law as “health has four provider taxes or fees that it uses care-related taxes”—are taxes and fees specifically to help support Medi-Cal. Two of them are on health care providers that states typically use particularly large: to help pay for their Medicaid programs. According • Health Plan Tax. Also known as the to Kaiser Family Foundation, all but one state has “managed care organization tax,” the tax at least one provider tax, and most have three is levied on each health plans’ Medi-Cal or more. States most commonly impose taxes and commercial enrollment. Nearly all of on hospitals and long-term care facilities. Other the revenue comes from taxing Medi-Cal examples include charges on health plans and enrollment, as the Medi-Cal tax rate is more ambulance providers, among other areas. than 100 times larger than the commercial tax. Provider Taxes Typically Draw Down More Accordingly, California has needed to request Federal Funding. Because states typically use a waiver from federal proportionality rules. provider taxes to support their Medicaid programs, the associated revenue results in federal matching funds. States can Figure 11 use the resulting federal funds to help pay for their existing Medicaid Two Key Concepts Underpin Federal Rules programs or expand them. States Federal Rules for Provider Taxes Before H.R. 1 Was Enacted also often use their Medicaid programs to pay providers back for some or all of the cost the tax, sometimes even providing them net funding increases through supplemental payments. As a result, much of the net cost of Proportionality Hold Harmless provider taxes tends to fall on the Requires charges: Prohibits direct guarantees to pay • To be equal between Medicaid and providers back for the cost of tax. federal government, rather than non-Medicaid services. states or providers. • To broadly apply to all relevant providers. Allows Medicaid to indirectly cover tax for providers, so long as either: Federal Rules Regulate Can be waived if tax redistributes funds • Tax revenue is below specified limit Provider Taxes. Because provider from non-Medicaid services toward (6 percent of providers’ net patient taxes result in higher costs to the Medicaid services, as measured by revenue). mathematical tests. • Medicaid does not cover a certain federal government, federal law amount of cost (75 percent or more) regulates how states structure for a certain number of taxed providers (75 percent or more). their taxes. As Figure 11 shows, the rules generally aim to make the taxes proportionate between www.lao.ca.gov 17 analysis full 2026-27 BUDGET Figure 12 California Has Four Provider Taxes and Fees Approximate Tax or Fee Charged Providers Annual Revenue General Use Managed Care Organization Health plans $7.5 billion (net)a Increased Medi-Cal provider rates and Tax General Fund savings. Hospital Quality Assurance Private hospitals Over $5 billion Supplemental Medi-Cal payments to Fee private hospitals and General Fund savings. Long-Term Care Quality Long-term care facilities $650 million to Portion of state cost of long-term care Assurance Fees $700 million 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. Gross revenue is over $12 billion annually. The current tax generates between $7 billion California Recently Pursued Increases to Two and $8 billion in net revenue annually, Largest Provider Taxes. Federal rules include an with most of the funding to date (around overall limit on how much revenue provider taxes 75 percent) offsetting General Fund spending can generate. California historically has set its in Medi-Cal. The smaller remaining share of provider taxes and fees well below this revenue funding (around 25 percent) supports certain limit. In recent years, however, California pursued programmatic augmentations, primarily notably larger taxes, getting much closer to the Medi-Cal provider rate increases. (These federal limit. The current health plan tax, enacted in estimates net out funds that are redirected 2023 and expanded in 2024, generates more than back to the health plans to help cover the three times the revenue of previous versions. This cost of the tax on Medi-Cal enrollment. higher revenue level is essentially at the maximum Annual gross revenue is over $12 billion.) of the current federal revenue limit. In 2025, the Prior to H.R. 1, the current tax, including the state also submitted a one-year private hospital waiver from federal proportionality rules, was fee, generating around $11 billion in revenue, for approved through the end of December 2026. federal approval. The federal government has not • Private Hospital Fee. Also known as the yet approved this higher fee. “hospital quality assurance fee,” the fee is Voters Have Made Largest Provider Taxes levied on each private hospital’s inpatient Permanent in State Law. California voters have days and outpatient visits. (Public hospitals, made the state’s two largest provider taxes such as those owned by counties, are exempt permanent in state law. Proposition 52 (2016) from the fee.) Like the health plan tax, the fee made the private hospital fee permanent, while charges higher rates on Medi-Cal services Proposition 35 (2024) made the health plan than on non-Medi-Cal services, requiring tax permanent. The two provider taxes are not a waiver from federal proportionality rules. permanent in federal law, however—periodic The most recently approved version of the federal approval is still required to draw down fee was in effect through 2024, generating federal funds. The two measures also include rules $5.9 billion in fee revenue in that year. Relative around how to structure the taxes and spend their to the health plan tax, a smaller share of associated revenues. For example, Proposition 35 revenue (around 25 percent) offsets General generally limits the tax rate on commercial Fund spending in Medi-Cal, with a larger enrollment at roughly its current levels. share (75 percent) used for rate increases to private hospitals. 18 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Federal H.R. 1 Legislation Makes Three Key Proposal Changes to Provider Tax Rules. Among other Assumes Current Version of Health Plan changes, H.R. 1 prohibits states from adopting new Tax Expires at End of 2026… The Governor’s provider taxes or increasing their existing ones. budget assumes the current structure of the health The legislation also includes changes to federal plan tax remains in effect through the end of approval rules, requiring states, including California, December 2026. This assumed timing reflects state to adjust their existing provider taxes. There are law and federal approval prior to H.R. 1. three key changes, described further below: …With a Much Smaller Tax Beginning in 2027. • Proportionality. H.R. 1 tightens the existing The Governor’s budget assumes there will still be rules around proportionality, generally a health plan tax in 2027, but at a much smaller prohibiting states from charging higher rates revenue level than before. The administration has on Medicaid services than non-Medicaid not provided detailed information on its assumed services. This notably limits states’ ability to new tax, but we understand it would generate obtain a waiver from proportionality rules. net revenue in the mid-tens of millions of dollars. The new rules are already technically in The smaller tax is due to an interaction with the new effect, though the federal Department of H.R. 1 rules and the commercial enrollment tax Health and Human Services can grant states limits established in Proposition 35. additional time to comply with the new rules. Adjusts Health Plan Tax Spending Plan. Initial federal guidance released late last The administration also adjusts its spending year suggested that California might have to plan for a portion of health plan tax funds. Under restructure its health plan tax in June 2026, Proposition 35, the state must spend $300 million with potentially more time available for other each in 2025 and 2026 on behavioral health-related kinds of provider taxes. More recent final services. As part of the 2025-26 budget, the guidance released earlier this year, however, administration developed an initial spending plan suggests California can keep its existing focused on data sharing and housing subsidies. health plan tax in place until its current waiver Under the new plan in the 2026-27 budget, much expires at the end of December 2026. of the funds would instead be spent on certain • Revenue Limit. H.R. 1 gradually reduces previously approved Medi-Cal initiatives, such as the federal revenue limit on provider taxes transitional rent supports and community-based beginning in federal fiscal year 2028 (roughly mobile crisis services. corresponding to California’s 2027-28 Downgrades Planned Increase to Private fiscal year), until the limit reaches nearly Hospital Fee. The Governor’s budget assumes half its current level by federal fiscal year the state receives retroactive approval for a private 2032 (roughly corresponding to California’s hospital fee for 2025, but that the fee is about equal 2031-32 fiscal year). The reduction will require to its level in 2024, rather than the much larger level states that are near the current revenue originally submitted for approval. The Department limit, like California, to gradually reduce their of Health Care Services (DHCS) says it based its provider taxes. assumption on recent communication with federal • Limit on Directed Payments. H.R. 1 also administrators. Most of the decrease in fee revenue reduces an existing limit on payments directed would result in fewer supplemental payments to to certain providers through Medicaid private hospitals. There also will be less revenue managed care plans. These payments will available to fund existing service levels in Medi-Cal, now be set at the comparable rate paid which the administration estimates will cost by Medicare, rather than the average rate $652 million General Fund in 2026-27 to backfill. paid by private health plans. This lower limit indirectly affects certain provider taxes, as some states—including California—use their provider taxes to help pay for these directed payments. www.lao.ca.gov 19 analysis full 2026-27 BUDGET Assessment State’s Options on Private Hospital Fee, by Contrast, May Be More Limited. In concept, Administration’s Assumptions Generally similar trade-offs exist for the private hospital fee— Appear Reasonable in Light of Federal whether to pursue a large fee with higher costs Guidance and State Law. Under H.R. 1, California imposed on some private hospitals, or a lower fee will need to adjust the structure of its health plan with less revenue available for Medi-Cal. According tax and private hospital fee. The administration’s to DHCS, however, federal administrators have assumptions generally appear to reflect the state’s communicated that there are fairly limited options best understanding to date of federal rules and the to structure the private hospital fee in 2025 (see associated transition periods. Most notably, the the nearby box). Given these limited options, the administration’s assumed expiration of the existing administration’s assumptions around the private health plan tax at the end of 2026 appears aligned hospital fee appear to be reasonable. with the most recent federal guidance. Federal Rules Continue to Emerge, Creating State Could Contemplate Larger Health Plan Some Uncertainty for Structuring Provider Tax Revenues in Short Term. The reduction to the Taxes. H.R. 1 grants the federal Department state’s health plan tax revenue is not necessarily of Health and Human Services a fair amount of required by H.R. 1 in the short term. Rather, the flexibility to implement its new provider tax rules lower revenues are due to the interaction of H.R. 1’s and provide transition periods for states. As such, new proportionality rules with Proposition 35’s the state’s understanding of the new federal rules, limit on taxing commercial enrollment. As we as well as when conforming changes will need to noted in our recent report Considering Medi-Cal happen, is evolving. While some key rules appear in the Midst of the Changing Fiscal and Policy to have been finalized, continued caution likely is Landscape, the state likely could amend warranted when exploring different approaches to Proposition 35 with a three-fourths vote in each restructure the health plan tax, the private hospital house, so long as the changes are consistent with fee, or other provider taxes. the purpose and intent of the measure. Amending the limits in Proposition 35 could allow for a more Recommendation proportionate, large tax—albeit with potentially Treat Administration’s Assumptions as higher costs for commercial health plans and their Starting Point, but Begin Considering Other consumers. For example, we estimated that a Approaches for Health Plan Tax. In light of more proportionate tax netting around $7 billion in what is known to date about the new federal revenue could cost around $30 per member, per rules, we recommend the Legislature treat the month—about a 5 percent increase on average administration’s assumptions around the health to commercial health plan premiums. Aside from plan tax and private hospital fee as a reasonable this short-term option, any changes over the starting point. That said, given the magnitude long term may need to comply with the gradual of the fiscal challenges facing the state, we also reduction to the federal revenue limit, generally recommend the Legislature begin weighing the beginning 2027-28. What Have Federal Administrators Indicated About the Private Hospital Fee in 2025? According to the Department of Health Care Services (DHCS), federal administrators have requested changes to the state’s submitted fee for 2025. This is because the submitted 2025 fee is much larger than the 2024 version, and H.R. 1 prohibits states from increasing their existing provider taxes. (The 2025 fee was submitted for approval in March 2025, a few months prior to Congress enacting H.R. 1, but it has not yet been approved.) DHCS also states that complying with this federal request may qualify California for an up to three-year transition period to make the fee more proportionate. 20 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET merits and trade-offs of pursuing a larger health The Legislature also will want to keep in mind the plan tax. In considering these trade-offs, the changes in the revenue limit, which may constrain Legislature likely will want to weigh the additional the state’s ability to rely on these taxes in the revenue generated against the higher cost to coming years. commercial health plans and their consumers. H.R. 1 IMPLEMENTATION BACKGROUND among otherwise eligible individuals, due to the increased frequency of needing to submit required H.R. 1 Will Affect Medi-Cal Beyond Provider documentation. Like community engagement Taxes. In addition to affecting how states can finance requirements, more frequent renewals are also Medicaid through provider taxes, H.R. 1 introduces expected to increase administrative workload for several changes to Medi-Cal eligibility and enrollment county eligibility systems, at least in the short run. rules that will affect caseload and administrative Federal Changes for Certain Immigrant workload beginning in 2026-27. This section focuses Groups Create State Fiscal Pressure. Beginning on (1) new community engagement requirements, October 1, 2026, H.R. 1 eliminates federal funding (2) the new six-month renewal requirement, and for full-scope Medicaid coverage among certain (3) changes that eliminate federally funded full-scope lawfully present immigrants, such as refugees, (comprehensive) Medi-Cal coverage for certain asylees, and battered noncitizens. Affected immigrant groups. (Our 2025 report, Considering individuals generally remain eligible for federally Medi-Cal in the Midst of a Changing Fiscal and funded emergency and pregnancy-related services. Policy Landscape, provides more information on In addition, lawfully residing individuals who are other H.R. 1 changes.) pregnant or under age 21 can retain eligibility for Community Engagement Requirements federally funded full-scope Medi-Cal coverage Increase Risk of Coverage Loss Among Certain through the state option under the Children’s Health Adults. Beginning January 1, 2027, H.R.1 requires Insurance Program Reauthorization Act. states to implement a community engagement requirement for certain able-bodied adults between GOVERNOR’S BUDGET ages 19 and 64 (mostly childless adults). Individuals must generally work, study, or volunteer at least Projects Disenrollment Due to Community 80 hours per month, or meet an earnings threshold Engagement Requirements and Six-Month (about $580 per month, equivalent to 80 hours Renewals. The administration estimates the at the federal minimum wage) unless they qualify community engagement requirement would result for certain exemptions (such as having young in about 233,000 fewer enrollees by June 2027 and children or being medically frail). While states are reduce General Fund spending by $102 million expected to use available administrative data to in 2026-27. The caseload estimate is developed determine compliance and exemptions, otherwise by identifying current enrollees subject to the eligible individuals could lose coverage if they fail to requirement, removing those expected to be document or report required information. exempt or compliant, and then assuming that half of those remaining would be disenrolled due to Six-Month Renewals Are Expected to Further noncompliance. The administration has indicated Increase Disenrollment. H.R. 1 also requires that it is still refining exemption estimates for eligibility to be redetermined every six months certain categories that are not currently reflected rather than every year (as currently is the case) in the disenrollment total (such as medical frailty), for many nonelderly childless adults beginning and therefore the projected disenrollment may January 1, 2027. More frequent renewals will be adjusted downward in the future. Beyond the likely increase the risk of disenrollment even www.lao.ca.gov 21 analysis full 2026-27 BUDGET budget year, the administration estimates that total “maintain parity” across the nonelderly, childless coverage losses could reach about 1.4 million by adults who are receiving full-scope Medi-Cal June 2028. Separately, the administration estimates benefits. At the same time, the administration has that the new six-month renewal requirement stated that verifying compliance for UIS adults would result in about 289,000 fewer enrollees by using existing income data sources may be more June 2027 and lower General Fund spending by challenging and that it would rely on information about $74 million in 2026-27, with total coverage provided by the individual when available data are losses reaching about 400,000 by June 2028. All of insufficient. The administration has not provided a these estimates incorporate the administration’s clear estimate of the disenrollment or General Fund proposal to apply the community engagement and savings attributable to this proposal. renewal requirements to adults regardless of their Administration Also Proposes to Move Newly immigration status (as discussed later). UIS Immigrant Groups to Restricted-Scope Administration Identifies Several Strategies Medi-Cal. Beginning October 1, 2026, the to Mitigate Disenrollment Impacts. The administration proposes to transition the immigrant administration has indicated it will prioritize groups losing eligibility for federally funded using administrative data to automatically full-scope Medi-Cal under H.R. 1—such as identify individuals who are excluded or exempt refugees, asylees, and battered noncitizens—from from the community engagement requirement. full-scope coverage to restricted-scope coverage. For example, the administration proposes The administration estimates this would affect using multiple data sources—including state about 200,000 Medi-Cal enrollees and reduce wage records, Internal Revenue Service data, General Fund spending by about $786 million and third-party employment and income data in 2026-27 and $1.1 billion in subsequent years. (such as Equifax’s The Work Number)—to verify The savings would be a result of not backfilling income and work activity, and using diagnosis or the loss of federal funding to maintain full-scope utilization information to help identify medically frail benefits for this population. individuals. The administration also plans to apply optional exemptions for short-term hardship that ASSESSMENT are allowed under federal law, such as residing in high-unemployment counties. Finally, federal Budget Estimates of H.R. 1 Caseload guidance provides states discretion in setting the Impacts number of months over which enrollees are required Administration’s Estimates Appear to document compliance with qualifying activities Reasonable. Overall, the administration’s (such as working 80 hours per month) at application estimates of caseload impacts from the community and renewal. To mitigate disenrollment impacts engagement requirement and six-month renewals of the H.R. 1 requirements, the administration appear reasonable. Using survey and administrative generally plans to require enrollees to demonstrate data together with available literature, we developed a single month of qualifying activities at application an independent estimate and found a similar share and renewal. of already-enrolled nonelderly, childless adults Administration Proposes to Extend could disenroll due to the community engagement Community Engagement Requirements requirement (about 26 percent, compared to the and Six-Month Renewals to Adults With administration’s estimate of about 30 percent). Unsatisfactory Immigration Status (UIS). Looking at the combined effects of the two policy Although H.R. 1 does not require states to changes over time, we estimate total coverage apply the community engagement requirement losses could reach about 2.1 million by June and six-month renewals to adults with UIS 2028, compared to the administration’s estimate (whose Medi-Cal full scope coverage is entirely of about 1.8 million. One possible reason for our state-funded), the administration proposes to higher estimate is that our model reflects not only do so. The administration’s stated rationale is to disenrollment among current enrollees, but also 22 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET reduced enrollment flows over time and a persistent extending the H.R. 1 requirements to this group. risk of disenrollment among eligible individuals due As a result, the Legislature lacks a complete picture to added administrative burden. of how much savings these policy choices would Significant Uncertainty Remains Around generate. It is also unclear to what extent these the Magnitude and Pace of Caseload Impacts. savings may be reduced by costs associated Though our estimates are broadly comparable with increased administrative workload on county to the administration’s, the magnitude and pace eligibility systems. of caseload changes remain uncertain and Governor’s Discretionary Proposals Involve likely will depend on behavioral responses and Access-Related Trade-Offs… Both discretionary implementation choices. Key drivers include how proposals achieve savings largely by reducing burdensome beneficiaries find the new reporting enrollment in full-scope Medi-Cal coverage, and documentation requirements, the extent to which could reduce access to care for affected which the administration can leverage existing individuals. Newly UIS individuals also will lose data sources for automated determinations, and access to Covered California premium tax credits the readiness of county eligibility systems to starting January 2027, limiting affordable options implement new processes in a clear and consistent for those who lose Medi-Cal coverage. Some of manner. Pending federal guidance on issues such the newly UIS groups include refugees and certain as definitions of specific exemptions (for example, victims of human trafficking or domestic violence, medical frailty), acceptable verification methods, who may have relatively acute health care needs. and self-attestation standards could also materially …And Raise Other Issues. Beyond the affect the number of individuals who receive access-related implications noted above, exemptions or who lose coverage for procedural the discretionary proposals could also affect reasons. Finally, the timing of caseload reductions different groups in different ways, raising equity is also uncertain and has important implications considerations and potentially introducing for the budget year. Our estimate of total additional complexity for beneficiaries and county coverage losses by June 2027 is higher than the eligibility systems. We discuss these issues below. administration’s by about 280,000, largely because Extending H.R. 1 Requirements to UIS Adults we assume most disenrollment among existing Could Have Different Practical Effects. The enrollees would occur within roughly 12 months of administration’s proposal seems intended to apply implementation rather than 18 months. a consistent set of requirements across nonelderly adults, regardless of immigration status. In practice, Governor’s Policy Choices Affecting UIS though, adults with satisfactory and unsatisfactory Population immigration status may experience the UIS-Related Proposals Come Amid a requirements differently. Some UIS adults face legal Challenging Fiscal Backdrop, but Some Fiscal barriers to employment, which can narrow the set Effects Remain Unclear. The proposals to extend of pathways to meet the community engagement the H.R. 1 requirements to adults with UIS and to requirement. In addition, certain UIS adults who transition newly UIS groups to restricted-scope lose full-scope coverage for noncompliance could coverage are policy choices. At the same time, have more limited options to regain coverage, given these proposals come in the context of the state’s the state’s freeze on new full-scope enrollment for projected structural budget deficits. As such, the groups like undocumented adults. At the same administration’s view that backfilling the loss of time, UIS adults who cannot satisfy community federal funding for the newly UIS groups would engagement requirements may generally remain be fiscally difficult is understandable. When it eligible for restricted-scope Medi-Cal coverage, comes to the existing UIS population, however, the an option not available to adults with satisfactory administration has not provided a breakout estimate immigration status. for the caseload and General Fund impacts of www.lao.ca.gov 23 analysis full 2026-27 BUDGET Transitioning Newly UIS Groups to Legislature May Wish to Consider Whether Restricted-Scope Coverage Would Create a Alternative Approaches Could Better Balance Patchwork of Full-Scope Eligibility. Under the Savings, Consistency, and Access. Given administration’s proposal, newly UIS adults such as the trade-offs described above, the Legislature refugees, asylees, and battered noncitizens would may want to take time to consider any proposed be shifted to restricted-scope Medi-Cal coverage, Medi-Cal changes alongside alternative ways while other UIS adults such as undocumented of achieving budgetary savings. Even under the individuals and some with interim or pending premise that budgetary actions should focus statuses would continue to qualify for full-scope on UIS populations whose coverage does not Medi-Cal coverage (barring the enrollment freeze draw federal funding, other approaches may be for new undocumented individuals). As a result, available. For example, the income threshold eligibility for full-scope benefits could differ across for state-funded full-scope coverage could be relatively similar groups and, in some cases, reduced to better target higher-need populations change based on a person’s immigration status. while applying a more consistent rule across For example, an individual with a pending asylum immigrant groups. Another option could be to application may remain eligible for full-scope adopt a modified state-funded benefit package coverage but could lose that eligibility if approval that is more comprehensive than restricted-scope results in being classified as an asylee subject to (such as certain primary care, outpatient services, the restricted-scope transition. This interaction and generic drugs) but less comprehensive than could be difficult to navigate for beneficiaries full-scope coverage. Exploring alternatives could and complicate administration of the program, help identify options that achieve savings more especially given that existing policies (such as efficiently, apply more consistently across groups, the full-scope enrollment freeze and premium and preserve access to high-priority services. requirements) already apply differently across immigrant groups. OVERSIGHT AND DEVELOPMENT OF BUDGET SOLUTIONS In this section, we first provide an update on the UPDATE ON 2025-26 SOLUTIONS package of Medi-Cal budget solutions enacted in the 2025-26 budget and assess the status Background of those enacted solutions. We then discuss Medi-Cal Expenditures Greater Than the levers available to the Legislature to further Anticipated Last Year. The 2025-26 Medi-Cal contain future cost growth in the Medi-Cal budget budget changed significantly over the course (and the trade-offs those solutions may entail) of the budget development process due to in an overall effort to help address the state’s higher-than-anticipated costs in the Medi-Cal projected structural deficits. (Separately, in the program as well as the state’s worsening fiscal “H.R.1 Implementation” section of this brief, we condition. In April 2025, the Legislature took discuss the Governor’s proposals that we consider early action to provide cash flow support and to be of a budget solution nature.) supplemental appropriations to Medi-Cal in 2024-25. The administration stated that increasing Medi-Cal costs were due to several factors, including increased utilization of high-cost anti-obesity drugs, increased enrollment of seniors and persons with disabilities following 24 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET the elimination of the state’s asset test, and the increased savings from the end of coverage for higher than anticipated costs associated with anti-obesity drugs, asset limit reinstatement, and a the state’s expansion of full-scope Medi-Cal one-year acceleration of assumed savings from a coverage to all individuals regardless of immigration third-party contract intended to achieve operational status. While the administration did not propose efficiencies. We discuss this last item below. any significant solutions in Medi-Cal as part of Almost Half of Savings From Enacted Budget the Governor’s January budget last year, the Solutions Focused on Adults With UIS. Over Governor’s May Revision proposed several new the past several years, the state has expanded solutions totaling nearly $5 billion General Fund access to comprehensive Medi-Cal coverage to all in response to higher cost estimates. Medi-Cal’s individuals regardless of immigration status, but share of General Fund expenditures was the actual costs of this expansion have significantly increasing, contributing to the budget problem exceeded original estimates. In light of the state’s that had emerged between the Governor’s budget budget deficit and to address growing costs in and May Revision. Medi-Cal, the Legislature enacted several budget 2025-26 Enacted Budget Included Several solutions. After updates in the Governor’s proposed Solutions in Medi-Cal Program. The Legislature budget, these solutions total $55 million in 2025-26 ultimately adopted, revised, or rejected budget and $1.9 billion in 2026-27. These savings are solutions that had been proposed by the Governor. estimated to grow to nearly $5.5 billion by 2028-29. We discuss the enacted solutions in detail in The solutions include a freeze on undocumented The 2025-26 California Spending Plan: Health. adults enrolling in full-scope Medi-Cal, a The majority of solutions focused on limiting $30 monthly premium for undocumented individuals coverage for individuals with UIS. Other solutions who remain in full-scope coverage after the freeze, included partially restoring the asset test for seniors a reduction in payments to safety net clinics for and persons with disabilities, ending coverage services provided to individuals with UIS, and of anti-obesity drugs, and ending supplemental elimination of most dental coverage for UIS adults. payments for dental services in Medi-Cal. In June, Solutions Related to Prescription Drugs the ongoing reductions associated with these Have Lower Estimated Savings in 2025-26. solutions was estimated to be nearly $9 billion when The Legislature also enacted solutions targeted fully implemented by 2028-29. at reducing increasing pharmacy expenditures in Medi-Cal and generating additional drug rebates. Governor’s Proposal Reflects Updated The Governor’s 2026-27 proposal estimates around Savings Estimates $350 million in savings in 2025-26 (only half of the Updated Estimates. As shown in Figure 13, savings estimated at the time of the enacted budget on the next page, the Governor’s proposed budget in June 2025) and about $1.2 billion in 2026-27. updates the estimated savings for several budget Nearly one-third of the savings are based on the solutions enacted in the 2025-26 Budget Act. state negotiating rebates with drug manufacturers The total savings across all budget solutions is for drugs provided to UIS members (a population lower, with a $400 million reduction in savings that has not previously received rebates). in 2025-26 and a $200 million net reduction in The Legislature also ended coverage for certain 2026-27. The savings reductions are concentrated drugs, with most savings resulting from the end of in a few solutions, with lower estimated savings coverage for drugs used to treat obesity. from newly collected drug rebates (a $400 million Governor’s Proposed Budget Assumes total reduction in savings across 2025-26 and Additional Savings From Operational 2026-27) and the end of coverage for most Efficiencies in 2026-27. The administration is adult dental services for individuals with UIS currently contracted with third party to develop (a $170 million reduction in savings in 2026-27). a number of recommendations across three The Governor’s budget also reflects a few upward departments (including DHCS) to improve adjustments in savings estimates which include department operations and realize savings from www.lao.ca.gov 25 analysis full 2026-27 BUDGET operational efficiencies. The potential workstreams Assessment of Updated Savings associated with DHCS include strengthened Estimates oversight over managed care organizations, Most Updated Estimates Appear Reasonable, enhanced fraud and improper claims detection, and Though Uncertainties Remain. While we find improved hospital payment methodologies. While at most of the administration’s updated savings budget enactment savings from these operational estimates generally to be reasonable, many of the efficiencies were not anticipated to begin until largest enacted budget solutions carry significant 2027-28, the Governor’s proposed budget includes uncertainty. This is due to unknown behavioral an additional $120 million in General Fund savings responses among affected parties, potential in 2026-27 for this item. (The estimated savings in administrative implementation challenges, and 2027-28 and 2028-29 have been revised downward interactions with other policies. The rest of this to $435 million in each year.) Figure 13 Estimated Savings From Budget Solutions Enacted Last Year (In Millions) 2025-26 2026-27 2025 Governor’s 2025 Governor’s Budget Budget Budget Budget Act (January 2026) Difference Act (January 2026) Difference Medi-Cal Financing Medi-Cal loan repayment delay $1,291 $1,291 — — — — Proposition 35 support of program 1,289 1,214 -$75 $264 $339 $75 growth Additional Medi-Cal loan 1,000 1,000 — — — — BHSF offset 100 100 — — — — Adults With Unsatisfactory Immigration Status Enrollment freeze and premiums $78 $55 -$23 $713 $715 Clinic finance changes — — — 1,037 1,011 -26 End of adult dental coverage — — — 308 135 -173 Prescription Drugs New aggregator to increase rebates $370 $123 -$247 $600 $435 -$165 End of anti-obesity coverage 85 86 1 215 364 149 Prescription Drug Utilization 25 19 -6 50 41 -9 Management Pharmacy step therapy protocols 88 66 -22 175 145 -30 HIV/Cancer drug rebates 75 — -75 150 150 — Prior authorization for continuation of 63 47 -16 125 104 -21 drug therapy End of over-the-counter drug coverage 3 2 -1 6 5 -1 Other Asset limit reinstatement $45 $47 $2 $343 $349 $7 Operational efficiencies — — — — 120 120 PACE capitation rate limit — — — 13 13 — Long-term care directed payment 70 70 — 140 140 — elimination Skilled nursing facility back-up power 98 98 — 140 140 — requirement suspension End of dental supplemental payments — — — 362 311 -51 Prior authorization for hospice services — — — 50 50 — Reduction to Proposition 56 Loan 26 26 — — — — Repayment Program Totals $4,706 $4,245 -$461 $4,690 $4,567 -$123 BHSF = Behavioral Health Services Fund and PACE = Program of All-inclusive Care for the Elderly. 26 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET section highlights some of the solutions for which with drug manufacturers for drugs provided to UIS the Legislature may consider closer oversight to individuals (a population that has not previously track implementation and ultimate budget savings. received rebates). There is an interaction between Savings From Enrollment Freeze and these estimated savings and the Governor’s Premiums for UIS Adults Are Inherently proposed H.R. 1 budget solutions related to the UIS Uncertain. The amount of savings from the population. To the extent the UIS population eligible enrollment freeze depends on the extent to which for comprehensive coverage decreases, then the what would otherwise be new enrollment is limited assumed savings from applying drug rebates to this (this is hard to predict). The amount of savings population correspondingly would decrease. from the premiums depends on the extent to Unclear How Operational Efficiencies Would which the premiums cause disenrollment (which Result in Savings. At the time of this analysis, is a hard-to-predict behavioral response). It is the administration has not released details on the possible that the healthiest individuals are more specific changes in DHCS processes that would likely to disenroll, which could reduce the savings result in the estimated savings under its third-party realized. Accordingly, estimating these savings contract to identify operational efficiencies. We is inherently uncertain, confounded by the fact recommend the Legislature seek concrete details that full implementation of these budget solutions from the administration to assess the feasibility of is several years out. As disenrollment and new achieving these savings before accounting for them enrollment data become available, the state may in budget deliberations. need to significantly revise the cost savings from Elimination of Dental Supplemental the solutions. Payments Contingent Upon Federal Approval. Implementation Challenges Exist for The 2025-26 Budget Act eliminated the General Changes to Clinic Reimbursement Rates Fund backfill of supplemental dental payments for UIS Members. The spending plan reduces established under earlier Proposition 56 (2016) Medi-Cal payments to safety net clinics (Federally spending plans. (See the box on the next page Qualified Health Centers and Rural Health Clinics) for a description of the supplemental payments for state-only-funded services to individuals with established under Proposition 56.) This change will UIS. Clinics have expressed concerns over the go into effect beginning in 2026-27 for estimated implementation of the changes to payment rates annual savings of about $300 million General Fund. for UIS members, indicating they could face The estimated savings will only be achieved if the administrative challenges because they typically federal government approves the elimination of do not collect information on the immigration the supplemental payments. This is because the status of patients. This could pose challenges in Ensuring Access to Medicaid Services Final Rule, realizing savings from the enacted budget solution. enacted in 2024, requires states to demonstrate The administration has stated that it is working that access to services will remain sufficient even with clinics and a fiscal intermediary to address after reducing rates. If the federal government these issues, and that it anticipates a start date of determines that the state does not meet the July 2026. The Legislature could request updates requirements, the state must perform an additional, from the administration on implementation of this more extensive analysis. The department budget solution as well as feedback from clinics on indicated that it plans to post a Public Notice of its any challenges in implementation. proposed submission to the federal government Proposed 2026-27 Budget Solutions by June 2026. The department must then submit Related to H.R. 1 May Limit Savings From Drug its final request to CMS by September 2026. Rebate Aggregator for UIS Population. Nearly The Legislature could direct DHCS to report on one-third of the estimated total savings from the the status of its submission to track whether the pharmacy-related budget solutions enacted last estimated savings are likely to be achieved. year are based on the state negotiating rebates www.lao.ca.gov 27 analysis full 2026-27 BUDGET Proposition 56 (2016) Revenues and Spending in Medi-Cal Proposition 56 Allocates Funding for Medi-Cal, but Revenues Have Declined. Proposition 56 raised state taxes on tobacco products and dedicates most revenues to Medi-Cal. Funding from Proposition 56 for Medi-Cal is intended to improve payments to ensure timely access, limit geographic shortages of services, and ensure quality care. Medi-Cal began receiving Proposition 56 funding in 2017-18. Because tobacco purchases have declined on an ongoing basis—partially as a result of the new taxes put in place under Proposition 56—revenues from Proposition 56 have declined on a year-over-year basis. As the figure below shows, revenues for Medi-Cal have declined steadily since 2017. This creates a budgetary challenge: Proposition 56 revenues have decreased over time while Medi-Cal spending has increased over time. Supplemental Payments Established Under Proposition 56 Were Initially Considered Limited Term. In 2017-18, the Legislature and the administration reached a two-year agreement on the use of Proposition 56 funding in Medi-Cal. Under this agreement, Proposition 56 funding for provider payment increases in Medi-Cal was limited term. Additionally, most of the Proposition 56 provider payment increases were initially structured as supplemental payments. Supplemental payments are paid on top of base provider rates, as opposed to increases in base provider rates. Supplemental payments provide flexibility as they are easier to reduce or eliminate in the event, for example, of an economic downturn. Proposition 56 (2016) Annual Revenue Allocations to Medi-Cal Have Declined (In Millions) $1,200 1,000 800 600 400 200 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 Note: Amounts for 2017-18 through 2023-24 are actuals. Amounts for 2024-25 and 2025-26 are estimated. The amount for 2026-27 is proposed. LEGISLATIVE CONSIDERATIONS expenditures, particularly as savings ramp up over time. However, as discussed above, per-enrollee FOR DEVELOPING ADDITIONAL costs continue to be a major driver in increased BUDGET SOLUTIONS program expenditures. Additionally, changes in Medi-Cal Expenditures Expected to Continue Medi-Cal due to H.R. 1 will result in significant Increasing. The Legislature took significant reductions in federal funds for the program. These action in the 2025-26 budget to help reduce the factors are likely to increase pressure on the state’s growth of Medi-Cal expenditures. These solutions General Fund. result in savings that will result in lower Medi-Cal 28 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Continued... 2019 and 2020 Spending Plans Made All Proposition 56-Funded Provider Payment Increases Subject to Suspension Due to Projected Deficits. In January 2019, the Governor’s budget proposed making most of the Proposition 56-funded supplemental payments permanent. At that time, our 2019 report found that Proposition 56 provider payment increases might not be sustainable based on projected revenues and spending. By May 2019, the Governor’s multiyear budget projections showed a General Fund operating deficit arising before the end of 2022-23. As a preventive measure, the final budget agreement for 2019-20 adopted provisional suspension language that applied to selected health and human services (HHS) augmentations, including Proposition 56-funded provider payments increases. If the Department of Finance determined that expenditures exceeded revenues, the selected HHS augmentations would be automatically suspended. The state then repeated this action by adopting similar provisional suspension language for 2020-21. While these suspensions did not ultimately occur, the spending plans recognized underlying risk in the level of Proposition 56-funded supplemental payments relative to available revenues. Since 2022-23, Proposition 56 Revenues Insufficient to Cover Costs of Supplemental Payments. Starting in the 2022-23 fiscal year, Proposition 56 did not provide enough revenue in Medi-Cal to cover the costs of supplemental payments established in previous budgets. To continue these payment increases, the state chose to use General Fund to backfill reductions in Proposition 56 funds, which had the effect of raising General Fund spending in Medi-Cal. The original language of Proposition 56 does not require this General Fund backfill. Budget Act of 2025 Eliminated Supplemental Payments for Dental Services. The Governor’s 2025 May Revision proposed to eliminate supplemental payments for dental services, family planning, and women’s health originally established as part of earlier Proposition 56 spending plans. The final budget agreement eliminated dental supplemental payments but preserved supplemental payments for family planning and women’s health, in part because family planning services receive a 90 percent federal match. The administration estimates that Proposition 56 revenues in Medi-Cal are $470 million in 2025-26 and $462 million in 2026-27. The Department of Health Care Services states that all Proposition 56 revenues in 2025-26 and 2026-27 would be allocated to physician services base rate increases, and that any funding for supplemental payments in family planning and women’s health would come from the General Fund. Given Projected Structural Deficits, of solutions—including potential increases in Legislature May Need to Consider Potential revenue and reductions in spending—to bring the Options for Ongoing Savings. In recent years budget into balance. As the second largest state of budget deficits, the Legislature has enacted program in terms of General Fund spending after solutions in Medi-Cal that eliminated limited-term spending on schools and community colleges, it is funding, utilized alternative fund sources, reduced reasonable that policymakers look to Medi-Cal for certain optional benefits, and capped certain containing costs or identifying solutions. To that enrollment. These solutions helped address the end, this section discusses the high-level levers state’s budget deficits while trying to minimize available to the Legislature should it wish to weigh impacts to the existing Medi-Cal program. While the further changes to Medi-Cal. Governor’s proposed budget solutions may be While limited by the joint federal-state nature sufficient to balance the budget in 2026-27, of the program, the Legislature has some the scope of future structural deficits likely will discretion over components of Medi-Cal such as require the Legislature to identify a combination eligibility, benefits, utilization management, and www.lao.ca.gov 29 analysis full 2026-27 BUDGET provider rates. That said, solutions that would yield optional benefits total in the hundreds of millions larger savings also could be associated with the of dollars. (Some of these recently added optional trade-off of further altering the scope and benefits benefits include coverage for doula services, offered by the program, potentially reducing access community health workers, and dyadic services.) to health care services. As such, the Legislature will Accordingly, the elimination of optional benefits want to take time to consider any potential changes would probably achieve limited savings relative against alternative types of budget solutions. to making eligibility changes. That said, there are State Could Realize Savings by Restricting longer standing optional benefits (like pharmacy) Eligibility but Would Need to Consider Access that would yield much greater savings, but with to Care. The state has significantly increased the larger trade-offs. Additionally, certain optional scope of individuals eligible for comprehensive benefits such as Enhanced Care Management and Medi-Cal coverage over the course of the Community Supports are intended to reduce use program’s history. Two more recent expansions in of other, higher-cost, services over the longer term, particular have significantly increased General Fund potentially reducing the fiscal benefit of this savings expenditures in the program: expanding eligibility option over time. for comprehensive coverage to all individuals Uncertain if Additional Utilization regardless of immigration status (as a state-only Management Would Result in Significant program) and eliminating the asset test for seniors Savings. There are limited opportunities for the and persons with disabilities (federal approval was state to realize significant savings through utilization required for this change). These two expansions management under the current system. Through had a relatively large General Fund impact due the managed care system, health plans have some to the lack of a federal match for undocumented incentive to avoid unnecessary care as a form of individuals and higher utilization of more costly utilization management. The state also enacted services by seniors and persons with disabilities. pharmacy utilization controls in the 2025-26 budget. Eligibility is an area where the Legislature has That said, the implementation of H.R. 1 may offer relatively greater discretion to make changes within some opportunities to pursue additional utilization current federal rules. As previously discussed, management. Under H.R. 1, states must institute the state has already partially pulled back on the copayments or other forms of enrollee cost sharing eligibility of these two groups through budget for certain services up to $35. While the Legislature solutions enacted in 2025. To find significant could pursue a policy of minimizing the amount of savings on the eligibility front, the Legislature likely these required copays, it could choose to use the would need to revisit these recent expansions or required copays to manage utilization of certain other optional populations (such as the childless services. For example, the Legislature could adults and those covered by the Children’s Health work with DHCS to structure copays to promote Insurance Program). Revisiting eligibility for high-value care, such as adopting higher charges these optional populations, absent other actions, for less medically necessary services. however, would reduce health care access to State Is Limited by Federal Rules From those populations. Reducing Certain Provider Rates. Historically, Elimination of Recently-Enacted Optional the state has looked to reducing provider rates Benefits May Offer Limited Savings. During to address budget challenges without affecting previous periods of budget challenges, the state eligibility or benefits, although recent federal has limited certain optional benefits. However, rules now require states to demonstrate that these optional benefits often cost less compared any proposed changes to provider rates will not to mandatory benefits in the Medi-Cal program. negatively impact enrollees’ access to care. Enhanced Care Management and Community Additionally, in recent years, the state has used Supports are the only recently added benefits with alternative funding sources to supplement an annual General Fund cost of over $1 billion. certain provider rates in such a way as to require In comparison, the cost of other recently added federal review if those rates were to be changed. 30 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET This required review may limit the ability to reduce Efforts to Address Underlying Cost Growth these rates. The Legislature could work with the in Medi-Cal Are Warranted, but Savings Highly administration to identify whether there are any Uncertain. In recent years, the state has initiated relatively higher rates that could be reduced without efforts to address the major health care cost drivers a significant risk of access-related challenges, as that contribute to the growth in expenditures in well as the associated fiscal impact the Medi-Cal program (for example, the creation of Limited Capacity of Existing Alternative the Office of Health Care Affordability or CalRx’s Fund Sources to Support Nonfederal Share efforts to create biosimilar versions of more of Medi-Cal Costs. The state has utilized costly drugs). There may be opportunities for the non-General Fund funding sources (provider taxes, Legislature to work with state departments to find tobacco taxes, and local government contributions) more efficiencies in the Medi-Cal program that to cover the nonfederal share of costs in the would maintain health outcomes for enrollees Medi-Cal program. However, these sources while providing savings for the state. However, likely do not have additional capacity to take on given the size and complexity of the Medi-Cal additional General Fund costs. As previously noted, program, identifying these options would require H.R. 1 (along with Proposition 35) constrains the significant analysis. Even if identified, they state’s ability to use provider taxes as an alternative likely would take time to generate measurable funding mechanism. In addition, tobacco taxes savings and be subject to significant uncertainty. are a naturally declining revenue source (such As such, the Legislature likely will want to continue that the General Fund has been used to backfill focusing on addressing underlying cost growth in lost revenues to maintain program levels). Local Medi-Cal in the long term alongside any potential governments will also face fiscal constraints due budget solutions. to changes in H.R. 1, and therefore have limited fiscal capacity to take on other additional costs. Accordingly, given the limits on turning to the alternative financing sources it has used in the past to support the Medi-Cal program, the Legislature will likely need to consider new and creative funding sources. www.lao.ca.gov 31 analysis full 2026-27 BUDGET CONTACTS Jason Constantouros Provider Taxes Jason.Constantouros@lao.ca.gov (916) 319-8322 Karina Hendren Overview Karina.Hendren@lao.ca.gov Oversight and Development of Budget Solutions (916) 319-8352 Min Lee Base Spending Min.Lee@lao.ca.gov H.R. 1 Implementation (916) 319-8315 Will Owens Oversight and Development of Budget Solutions Will.Owens@lao.ca.gov (916) 319-8341 LAO PUBLICATIONS This report was 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. 32 LEGISLATIVE ANALYST’S OFFICE