AI Overview
Reports published in 2025 and an audit by the Office of Inspector General (OIG) have detailed how California used a complex financing scheme to secure additional federal Medicaid dollars to cover costs for undocumented immigrants
. While federal law prevents states from using federal Medicaid funds for undocumented immigrants, California's use of an insurer tax allowed the state to effectively redirect federal money to its state-funded healthcare expansion.
However, legislative changes and increased federal oversight starting in 2025 are ending this practice and rolling back the state-funded expansion.
California's financing scheme
- The insurer tax: In 2023, California expanded an existing tax on managed care health insurers. This allowed the state to increase its Medicaid payments to those same insurers, which enabled California to claim billions in additional federal Medicaid matching funds.
- Redirected funding: Critics described this process as a "shell game" or "money laundering" of federal funds. The federal money came with fewer restrictions, which freed up state funds to pay for California's own healthcare expansions, including coverage for undocumented immigrants.
- Previous OIG audit: A 2024 audit from the U.S. Health and Human Services OIG found that California had improperly claimed $52.7 million in federal Medicaid reimbursement for non-emergency services provided to noncitizens between 2018 and 2019, highlighting an earlier version of the financial maneuvering.
Consequences and recent changes
California's practice is ending due to new federal legislation and heightened oversight.
- Federal rule changes: In 2025, the Centers for Medicare & Medicaid Services (CMS) began increasing oversight and passed a new rule to stop states from misusing federal Medicaid dollars for ineligible populations.
- Legislative rollback: The federal "One Big Beautiful Bill" also included a provision that tightens federal standards for provider taxes, effectively closing the loophole that California had been exploiting.
- California's spending and enrollment caps: Facing significant budget deficits, California's state legislature and Governor Gavin Newsom approved a budget deal in mid-2025 that freezes new enrollment for undocumented adults in Medi-Cal, the state's Medicaid program.
- Costly expansion: The state's expansion of Medi-Cal to all undocumented adults in January 2024 had proven far more expensive than originally estimated. The expansion was initially projected to cost $3 billion annually but was later projected to exceed $8.4 billion in fiscal year 2024-2025.
Future changes to Medi-Cal in California
Starting in 2026, undocumented adults in California will be subject to several new restrictions on their healthcare coverage:
- New enrollment paused: Starting January 1, 2026, new enrollment for undocumented adults aged 19 and older will be paused.
- Asset limits reinstated: Medi-Cal will reinstate asset limits to qualify, setting the limit at $130,000 per person starting January 1, 2026.
- Dental coverage eliminated: Beginning July 1, 2026, dental coverage will be eliminated for undocumented adults, though emergency dental benefits will remain.
- Monthly premiums added: A $30 monthly premium will be imposed on undocumented adults ages 19 to 59 starting July 1, 2027.
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