California was once a destination for those seeking fortunes in gold and Hollywood fame. Some are still striking it rich—this time, through medical welfare programs. Spending on Medi-Cal, California’s Medicaid program, has exploded. In nominal terms, it is projected to grow nearly four-fold since the Affordable Care Act’s Medicaid expansion took effect—twice the national average among all other states. This new spending diverges from the original purpose of Medicaid to serve the poor, the disabled, and pregnant mothers, with much of the spending increase going to the wealthy; undocumented immigrants; and able-bodied, working-age adults instead.
This rapid increase in spending was initially driven by California enrolling far more people in the Medicaid expansion than expected. By October 2016, more than 3.7 million expansion enrollees had been added. As of federal fiscal year 2023, 5.7 million able-bodied, working-age adults are enrolled in the program—representing 36 percent of total enrollees. These figures far outpace original projections of only 910,000 Californians originally projected to enroll in expansion.
Beyond Medicaid expansion-driven costs, California recently implemented new programs covering undocumented immigrants with Medicaid and eliminating the program’s asset test for long-term care. These initiatives were supported through a legalized money-laundering scheme involving taxes on managed care organizations (MCOs) to draw down $9.5 billion in federal funds without any state contributions. Such schemes fueled spending growth, as both the elimination of the asset test and coverage for undocumented immigrants are projected to cost twice initial estimates. With the passage of the One Big Beautiful Bill last year, the MCO tax scheme was prohibited.
Managed care organizations are among those benefitting from the excess. One analysis notes that California’s MCOs collected $5.4 billion between 2014 and 2016. These corporations benefit even more by participating in the MCO tax scheme above as they get a cut of the looted federal dollars.
California continues to pursue other strategies that shift more costs onto federal taxpayers. The state is leveraging intergovernmental transfers (IGTs) with state-owned ambulance systems to increase Medicaid spending and pull in additional federal matching funds. This scheme, if approved, would set the rates for government ambulance providers five times higher than the rates for private providers for the exact same services. The result will be inflated costs for patients and for federal taxpayers.
This combination of elevated spending and a reduced state share of the cost creates a huge and ongoing incentive for waste, fraud, and abuse. A 2018 audit by the Health and Human Services Office of Inspector General found that half of the 125 non-expansion enrollees they sampled had improper eligibility determinations. They estimate that California made $959 million in payments on behalf of 803,000 ineligible enrollees between 2014 and 2015.
Medi-Cal’s focus on collecting federal funds over cost containment, and enrollment over program integrity drove its significant growth over the last 13 years. Ultimately, taxpayers and the truly vulnerable are the ones who bear the cost.
