Commentary

Congressional Republicans are searching for spending cuts to comply with their new budget blueprint, and California’s Medi-Cal program is a target. There is little doubt that the federal government can reduce its support for the state’s version of Medicaid without jeopardizing essential health care for poor Americans living in California.

The state’s Department of Health Care Services has a $193 billion budget for 2025–26, of which $119 billion is expected to come from the federal government. California is on track to claim more than one-sixth of all federal funds devoted to Medicaid (based on a Congressional Budget Office estimate of $656 billion in nationwide program costs for 2025) despite having only 12 percent of the national population.

California’s health care spending has several irregularities that should attract federal attention.

Aggressive Effort to Cover Illegal Immigrants

California is one of a handful of states that have extended their Medicaid programs to illegal immigrants. While New York and Illinois have limited their Medicaid extensions to certain age groups, California (along with Oregon) makes benefits available to all individuals irrespective of age and legal status.

Medi-Cal has an estimated 1.6 million illegal immigrant beneficiaries accounting for more than 10 percent of program enrollment, according to CalMatters. Recently, state finance officials projected that such benefits would cost California’s general fund $8.5 billion, well above forecasts.

State spending would not normally be a federal concern, but California and other states can bill the federal Medicaid program for a share of the emergency and pregnancy care they provide to illegal immigrants.

Since most Medi-Cal beneficiaries are in managed care arrangements, California does not typically bill the federal government for each emergency or pregnancy care encounter. Instead, it bills federal Medicaid for a percentage of the capitation payments (i.e., insurance premiums) that it pays to its managed care providers. However, in 2024, California was found to have overbilled the federal government for capitation payments made on behalf of noncitizens by $52.7 million and was asked to pay it back.

Heavy Emergency Room Use by Homeless

California has a disproportionate share of homeless people, many of whom have substance abuse issues. Some of these drug users make frequent emergency room visits to deal with the effects of overdoses.

One study isolated a sizable group of “frequent” ER users in San Francisco, who made between four and 17 visits per year, and “superfrequent” ER users, who made 18 or more visits per year. Both groups were disproportionately homeless.

Although homeless people may not be on Medi-Cal at the time they show up at the ER, California allows someone to enroll in the program up to three months after receiving a medical service as long as that person met eligibility requirements at the time of service provision.

According to the latest available state data, homeless Medi-Cal beneficiaries made 419,000 emergency room visits in the 2021–2022 fiscal year.

Expanded Benefits for Seniors

Medicaid covers nursing home care or home-based alternatives for needy seniors. To determine whether a senior is eligible for Medicaid benefits, states typically apply both income and asset tests.

While a senior may lack the income to pay for his or her nursing home stay, the practice has been that the prospective beneficiary would exhaust savings and investments before relying on government benefits. But in 2024, California eliminated its asset test, so now affluent seniors needing skilled nursing care can bequeath their millions to heirs rather than using them to pay steep nursing home fees.

Unsurprisingly, senior enrollment in Medi-Cal has risen rapidly. The state’s legislative analyst estimates that 165,000 seniors have enrolled in Medi-Cal because of the eligibility expansion. With each beneficiary costing more than $15,000 per year on average, the expansion is costing nearly $2.5 billion annually, split between the state and federal governments.

Reliance on Provider Taxes

Like most states, California taxes medical providers for the purpose of spending the money on Medicaid services and attracting federal matching funds in the process. But California’s use of provider taxes is especially aggressive.

One particularly aggressive practice involves taxing government-owned Medi-Cal managed care providers such as L.A. Care Health Plan, which covers 2.3 million beneficiaries. Government entities are usually exempt from taxes, but in California, they are being actively targeted to maximize federal funding.

Although the Biden-era Department of Health and Human Services (HHS) expressed concerns about the state’s managed care provider tax, it still allowed California to increase the tax to plug a budget hole in 2024. More recently, California voters approved Proposition 35, which makes the Medi-Cal Managed Care provider tax permanent.

Supplemental Ambulance Payments

California worked out a special arrangement with the HHS to pay local fire departments extra to provide emergency ambulance transportation to Medi-Cal beneficiaries. This supplemental fee was most recently set at $1,050 per ride and is additional to the base rate of $118 paid to both private and public ambulance providers.

As Ryan Ellis, president of the Center for a Free Economy and a senior tax adviser at the Family Business Coalition, recently wrote in an opinion article in The Washington Times, these large supplemental charges help California fire departments pay uniformed personnel salaries that sometimes exceed $200,000 annually plus generous pension benefits.

Use of Funds for Purposes Other Than Health Care

California has also taken the lead in a Biden-era initiative to extend Medicaid into covering so-called “social determinants of health,” which are non-medical factors that influence health outcomes.

Federal waivers allow Medi-Cal to pay up to six months of rent for beneficiaries who are homeless, at risk of becoming homeless, or transitioning out of institutional settings and to cover the cost of sports equipment, music and art lessons, and therapeutic summer camps for children on Medi-Cal. The state has also launched an extension to Medi-Cal targeted at “justice-involved individuals,” offering services to prison inmates up to 90 days prior to release.

Conclusion

California has found a variety of ways to obtain increased federal Medicaid funding with benefits going to illegal immigrants, medical and non-medical service providers, firefighters, and even the heirs of affluent seniors.

The six issues explored here are likely just a subset of the techniques that California officials and bureaucrats have employed. Because most details of Medi-Cal spending are unavailable even on the state’s fiscal transparency platform, it’s hard for independent researchers to identify the many irregularities in this enormous program.

A state-level Department of Government Efficiency effort could unravel more of the complexities and unnecessary spending in Medi-Cal. But even with the information that we already have, we can be quite confident that federal Medicaid cuts need not jeopardize health care for Americans of limited means living in the Golden State.