Q&A: What’s Behind California’s Rising Medi-Cal Spending?

Spending for Medi-Cal, California’s Medicaid program, has come in higher than expected this year, prompting state leaders to take early budget action. Estimating costs for a program of this scale is increasingly difficult, especially as health care services and prescription drug prices rise nationwide. Key cost drivers this year include the growing use of high-cost medications, extended COVID-era protections to help keep people insured, and expanded eligibility for undocumented adults, who contribute billions in taxes and are essential to California’s economy. Health care spending is complicated and cannot be attributed to a single factor. State leaders should focus on long-term, sustainable solutions, including protecting Medi-Cal from harmful federal cuts to ensure that all Californians, regardless of immigration status, have access to health care, which keeps all communities healthy and reduces long-term costs for the state.

What’s Going On with Medi-Cal Spending This Year?

On March 4th, the California Department of Finance activated a $3.44 billion medical provider interim payment loan to manage Medi-Cal cash flow and ensure timely payments to providers and plans. Such adjustments are typical for a program as large and complex as Medi-Cal, which is estimated to cost around $188 billion in the 2025–26 fiscal year.

A few weeks later, on April 10th, the state Legislature passed AB 100, an early action “Budget Bill Junior” that amends the 2023 and 2024 Budget Acts. One of the many changes AB 100 makes is it increases Medi-Cal’s 2024-25 General Fund appropriation by $2.8 billion and its federal funds appropriation by $8.25 billion for the current fiscal year. The governor signed the bill into law on April 14th.

During a public hearing, the California Department of Finance clarified that the $2.8 billion from AB 100 is separate from the $3.4 billion loan. Together, these two budget actions are intended to help the administration manage Medi-Cal expenditures through the end of the year.

Additional details on the state’s fiscal outlook, including updated revenue projections and spending estimates, will be available when the governor releases the May Revision. These updates will offer a clearer picture of whether the current budget actions are sufficient or if further adjustments will be needed.

These budget actions underscore the challenges of accurately estimating Medi-Cal costs and reflect broader trends in rising health care spending that are affecting state budgets across the country. Medi-Cal provides free or low-cost health coverage to over one-third of the state’s population and represents one of the largest and most complex components of the state budget. Its cost is influenced by a wide range of factors, including enrollment fluctuations, rising medical costs, and shifts in federal policy and funding. And California is not alone. States across the country are facing similar pressures as they work to sustain Medicaid programs and ensure access to care amid rising costs.

Why Did State Leaders Underestimate Medi-Cal Spending?

The 2024 Budget Act was based on enrollment and expenditure data through January 2024, but at that time, the California Department of Health Care Services had only one month of actual data reflecting major policy changes, including:

• Eliminating the asset test for non-MAGI (non–income-based) Medi-Cal.
• Extending coverage protections during the COVID-19 unwinding period.
• Expanding full-scope Medi-Cal to adults ages 26-49, regardless of immigration status.

Another reason why estimating Medi-Cal spending is challenging in any given year is because of its accounting method. Medi-Cal operates on a cash accounting basis, meaning spending is recorded when payments are made, not when services are delivered. This approach makes the timing of revenue receipts and reconciliations a critical factor in budgeting, as they directly affect cash flow and financial planning.

The Legislative Analyst’s Office notes that Medi-Cal spending estimates can vary significantly between the Governor’s January budget proposal, the May Revision, and final budget enactment. Even after the budget is approved, significant adjustments are common.

Are Budget Adjustments for Medi-Cal Normal?

Yes. Budget adjustments are a routine part of managing a program as large and complex as Medi-Cal. Since 2012–13, the Legislature has been formally notified six times that Medi-Cal would exceed its budgeted amount.

Typically, these adjustments happen during the May Revision, when updated data is available. The state then uses loan authority to maintain program operations and adjusts funding through the Budget Act. What’s different this year is the timing and size of the shortfall. The March request came earlier than usual and exceeded the previous loan cap of $2 billion. In 2023, lawmakers raised the cap to 10% of the Medi-Cal General Fund appropriation to reflect the growing scale of the program.

What Is Contributing to Recent Medi-Cal Cost Increases?

In a public hearing on March 17th, the California Department of Health Care Services identified several key reasons for rising Medi-Cal costs:

• Health care is getting more expensive nationwide. Health care costs are increasing across the board, affecting Medicaid, Medicare, and private insurance. From 2022 to 2023, total U.S. health care spending grew to $4.87 trillion, significantly exceeding the 4.1% average annual growth rate of the 2010s. Other states are experiencing similar cost increases.
• Pharmacy costs are rising, especially due to anti-obesity medications. Pharmacy costs have risen sharply, which is consistent with what a lot of other states are experiencing. A major factor is the increased utilization of high-cost GLP-1 medications (e.g., Ozempic and Wegovy) for obesity treatment. Across the states that cover GLP-1s for obesity treatment for Medicaid enrollees, spending on GLP-1s have soared. According to the Kaiser Family Foundation, the number of GLP-1 prescriptions increased by more than 400%, while gross spending increased by over 500% from 2019 to 2023. In addition, the US pays significantly more for these drugs than peer nations, such as Japan, Switzerland, and Canada.
• More people are staying enrolled in Medi-Cal due to a pandemic-era federal policy that allowed people to keep their coverage. State leaders extended this policy through June 2025 to increase automatic Medi-Cal renewals and reduce coverage disruptions. When the state initially resumed Medi-Cal renewals after pausing them during the pandemic, many people lost coverage due to administrative barriers. By extending these flexibilities, more people have remained enrolled than expected, ensuring continued access to care.
• The expansion to undocumented adults added new costs — but also major benefits. The expansion of full-scope Medi-Cal to undocumented adults has resulted in higher-than-anticipated enrollment and pharmacy costs. Undocumented Californians contribute significantly to the state, paying nearly $8.5 billion to state and local communities. Expanding coverage not only improves individual health outcomes but also moves California closer to universal health coverage, which plays a crucial role in reducing poverty and promoting economic stability. Without health insurance, people are more likely to face high medical costs or debt and are less likely to receive preventive care or treatment for chronic conditions.
• There is less Managed Care Organization (MCO) tax revenue to “offset” General Fund spending on Medi-Cal. The passage of Proposition 35 in November 2024 reduced the amount of MCO tax revenue available to offset General Fund spending on Medi-Cal. While Prop. 35 allows policymakers to continue using a portion of MCO tax for this purpose, the amount has been reduced and will decrease further starting in 2027. Instead, Prop. 35 directs MCO tax revenue toward specific health care investments, including increasing reimbursement rates for primary care providers and expanding access to specialty care services.

In short, it’s misleading to blame any single factor for the rise in Medi-Cal spending. Attempts to single out immigrants, particularly undocumented Californians, as the cause ignore the whole picture and reinforce harmful narratives. The reality is that cost increases stem from a combination of factors, including national trends in health care spending, higher pharmacy costs, and policy choices aimed at keeping California families insured. Focusing on any one factor ignores the broader, systemic drivers behind the budget challenges and undermines the importance of affordable health care for all Californians.

Why Is It Important for Everyone to Have Health Coverage?

When all Californians — regardless of race, age, disability, or immigration status — have access to comprehensive health care, the entire state benefits through improved health, stronger communities, and reduced long-term costs.

The cost of providing full-scope Medi-Cal coverage to income-eligible undocumented Californians is a small part of overall program spending, but the benefits are significant. State leaders should maintain access to Medi-Cal for undocumented Californians because it improves health outcomes, strengthens public health, supports families, and reduces long-term costs.

Ultimately, it is far more costly — both financially and socially — to exclude people from health coverage. Ensuring broad access to Medi-Cal improves lives, protects public health, and builds a healthier California for everyone.

What Are the Real Threats to Medi-Cal’s Future?

California’s current Medi-Cal shortfall is solvable. But federal proposals to cut Medicaid funding would take away health coverage for millions in California and across the country.

Congressional Republicans and the Trump administration are pushing for Medicaid cuts in favor of extended tax breaks for the wealthy. These cuts threaten critical health care for millions of people across the state, including children, pregnant individuals, seniors, and people with disabilities. Without access to health coverage, Californians would face impossible choices that put their health and livelihood at risk while also driving up long-term costs for the state.

How Can State Leaders Protect and Strengthen Medi-Cal?

To protect and strengthen Medi-Cal, state leaders should increase revenues by making the tax system more equitable to support programs, like Medi-Cal, that millions of Californians depend on. One way to increase revenues is to re-evaluate tax breaks that benefit wealthy individuals and large corporations. As the demand and costs for services grow, so too must the resources to meet those needs.

With federal leaders poised to cut Medi-Cal in order to help pay for cutting taxes for wealthy individuals and corporations, it is imperative for state leaders to use all of the tools at their disposal to protect Californians’ access to health care.

As California’s population ages and health care costs continue to rise, the state must pursue long-term, sustainable funding solutions, not just short-term budget fixes, to protect Medi-Cal for future generations.