The Future of Medi-Cal: Federal and State Policy Implications in California
October 9 , 2025 | By Lillian Chen, MPP, MPH
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Since our last California policy update in April, a number of federal and state policy changes have significantly impacted the health care ecosystem. On the heels of resolving a $6.2 billion shortfall in Medi-Cal, the state now finds itself at a crossroads in figuring out how to address the implications of H.R. 1.
H.R. 1 Brings Major Changes to Medicaid
Enacted on July 4, 2025, H.R. 1, otherwise known as the One Big Beautiful Bill Act, brings major changes to Medicaid eligibility and enrollment, financing, and coverage. The Congressional Budget Office (CBO) has estimated almost $990 billion in Medicaid spending reductions over the next decade, including:
- New work/community engagement requirements for Medicaid expansion adults ages 19-64, with some populations exempted, effective Jan. 1, 2027 ($326 billion)
- Rolling back of provider taxes, which is one way that states finance their Medicaid programs ($191 billion)
- New limits on state-directed payments to providers ($149 billion)
- Postponement of implementation or enforcement of federal eligibility and enrollment regulations intended to streamline Medicaid application, renewal, and enrollment — until 2034 ($122 billion)
- More frequent eligibility redeterminations for Medicaid expansion adults ($63 billion)
Medi-Cal Faces Additional Strains
The California Department of Health Care Services (DHCS) has shared that, due to H.R. 1, the state is at risk of over $30 billion annually in lost federal Medicaid funds. An estimated 3.4 million more people would lose coverage, primarily due to the new work requirements.
This places additional burden on the Medi-Cal program, to which policymakers already made cuts in the 2025-26 budget to help close an $11.8 billion deficit. The timeline below shows the forthcoming Medi-Cal policy changes, including an enrollment freeze for undocumented adults and reinstatement of the asset test.
An area that needs further clarity is California’s Managed Care Organization (MCO) tax, which helps support the non-federal share of Medi-Cal and targeted provider increases. The MCO tax, of which $4.2 billion in tax revenue is included in the 2025 state budget, is currently out of compliance with H.R. 1. Bringing the tax into compliance and under the parameters of Proposition 35 could mean a significant drop in MCO tax revenue.
California Faces Tradeoffs
H.R. 1 affects other areas beyond Medi-Cal, which means that the state will also need to determine how to address other impacted programs. State leaders have shared that, because of H.R. 1:
- Up to 660,000 enrollees in Covered California marketplace plans could lose coverage. States are also facing the looming expiration of the enhanced premium tax credits, which have become a central focus of negotiations in the federal appropriations process. These enhanced tax credits help more than 170,000 Californians save about $384 per month in premium costs.
- Up to 395,000 people could lose their CalFresh benefits, which is monthly food assistance provided through the federal Supplemental Nutrition Assistance Program (SNAP). California will also have to bear more of the program cost moving forward. The state is expected to lose $1.7 billion to $3.7 billion in federal funds annually, which includes a $827 million reduction in benefits.
The state has already begun to take action to address some of the impacts from H.R. 1. On Sept. 17, Governor Newsom signed AB 144, which, among other things, establishes the Abortion Access Fund to fund abortion services, including services funded through grants to providers like Planned Parenthood, which is currently not receiving federal Medicaid funding due to H.R. 1.
When California policymakers reconvene in January to begin work on the 2026-27 budget, they will face additional tradeoffs given the widespread impacts of H.R. 1, since states must pass a balanced budget.
Delivering on Whole-Person Care
The state is also looking to preserve its CalAIM initiative that has been piloting innovations that address social drivers of health. This summer, DHCS released its concept paper outlining the state’s vision for renewal of the 1115 and 1915(b) waivers that authorize CalAIM and will require federal approval. The federal administration has expressed that it will be scrutinizing waiver proposals addressing health-related social needs closely. The administration has also reduced flexibility of 1115 waiver financing, such as through its rescission of section 1115 demonstration expenditure authority for designated state health programs (DSHP), which prohibits previously allowable expenses from drawing down federal funds moving forward.
As California looks to stay the course on whole-person care, financial stability and cost-effectiveness evidence will be key factors in sustaining these services amidst a shifting policy environment.
What’s Next
Heading into the last quarter of the year, Transform Health’s Policy Team is closely tracking further guidance related to H.R. 1 and state-level implications. Check back soon for our next policy blog on how states across the country are responding to Medicaid changes, and follow us on LinkedIn for updates from our team as these policy developments unfold.
Transform Health’s staff have been through these cycles time and time again, and we have learned important lessons. Reach out to us today if you would like to work together. Contact us at lisa@transformhc.com and heather@transformhc.com.
Transform Health is an Inc. 5000-ranked national private health care consulting firm with a mission to drive systems change to build healthy communities.