What the California Governor’s 2026-27 Budget Proposal Means for Medi-Cal
January 28, 2026 | By Lillian Chen, MPP, MPH
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The January budget for California is here, and it leaves many open questions for Medi-Cal. As discussed in a recent blog, California is facing federal policy changes that restrict Medi-Cal member eligibility and tighten program financing. These changes include work and community engagement requirements and more frequent eligibility redeterminations for Medicaid expansion adults, rollback of provider taxes, and new limits on state-directed payments to providers.
With Governor Newsom’s budget release, we now have the administration’s preliminary stance on how it may respond to these changes. Proposals in this year’s budget would layer onto state policies enacted in last year’s budget, including an enrollment freeze on undocumented adults and reinstatement of the asset test for seniors and people with disabilities, both of which went into effect on January 1, 2026.
Governor’s Budget Largely Maintains Current State
Released on January 9, 2026 the budget proposes about $349 billion in state spending, with $94 billion dedicated to health and human services, and it does not include any new major investments or spending cuts. The budget also maintains $23 billion in reserves, including over $14 billion for the state’s “rainy day” fund.
The Governor’s budget reflects a modest deficit of $2.9 billion, which would be mostly addressed by not depositing into the rainy day fund. This deficit diverges considerably from Legislative Analyst’s Office estimate of $18 billion. This is primarily due to the risk of a stock market decline, which the Governor’s budget notes, but does not incorporate. California Director of Finance Joe Stephenshaw shared that a market downturn of 20% could lead to a $25-30 billion deficit for the budget window.
Budget Reflects Higher Medi-Cal Spending
Medi-Cal spending is expected to grow in 2026-27, with a total budget size of over $222 billion, compared to $197 billion for 2025-26. As shown below, Medi-Cal is estimated to cost the state $2.4 billion more in the coming fiscal year.
H.R. 1 imposes a mix of costs and savings for the Medi-Cal budget. For example:
- Work and community engagement requirements and loss of full-scope Medi-Cal for certain immigrant populations will reduce caseload, which reduces state costs by $102 million and $786 million, respectively, for 2026-27.
- Reduced federal match for emergency services for certain immigrant populations would cost the state an additional $658 million, since the state would need to pick up those costs.
Open Policy Questions Remain
Full Impact of H.R. 1: The California Department of Finance characterized this budget as a “snapshot in time,” with full impacts of federal policies, including H.R. 1, to be addressed through the May Revise process. Thus, the extent to which the state may support county needs in implementing H.R. 1 eligibility changes is currently unclear. In addition, counties are legally required to provide basic, medically necessary health care for uninsured residents, known as indigent care. The budget proposal does not account for the anticipated increase in the uninsured population, with hundreds of thousands at risk of losing Medi-Cal coverage next year.
Transition of Managed Care Organization (MCO) Tax: The MCO tax, the state’s tax on health plans, is an important financing source for Medi-Cal, generating over $7 billion annually in net revenue. It will need to be redesigned by June 30, 2026, in order to comply with H.R. 1 and recent implementation guidance However, the state is reportedly in negotiations with the federal government to approve a longer timeline to redesign the tax, which would allow the state to collect more revenue with the current MCO tax structure. The budget proposal assumes the state will be granted this longer timeline, but if not, this would cost the state an additional $1.1 billion. In the longer term, Proposition 35 parameters and the scale-down of provider taxes required by H.R. 1 also threaten the size of the MCO tax revenue.
CalAIM Waiver Renewal: While the January budget sustains CalAIM investments, the level of funding for the next 1115 waiver remains to be seen. The state plans to submit its renewal application later this year to begin the new waiver in 2027. As the Medi-Cal ecosystem faces increasing constraints, the state has critical decisions ahead on the scope of CalAIM, which will have implications for implementation and planning for sustainability on the ground.
May Revise Will Clarify Next Steps
The last budget of Newsom’s governorship largely punts difficult, potentially unpopular policy choices for Medi-Cal to the May Revise process. In budget briefings last week, state legislators shared the federal and state policies’ negative impacts to their constituents and expressed concern over the budget’s silence on backfilling lost federal funds for Medi-Cal.
Both the governor and the legislature are facing pressure to find revenue solutions, include ongoing calls for a wealth tax, which Newsom has actively opposed. The May Revise will present a clearer roadmap for how legislators will balance the needs of the communities they represent with the state’s fiscal reality, as well as signal the legacy the Governor will leave behind.
The next few months leading up to the May Revise will involve additional analysis, discussions between the administration and legislature, and stakeholder advocacy as updated revenue numbers come in. Our team continues to closely monitor H.R. 1 implications, including county-level impacts and further federal and state guidance.
Follow us on LinkedIn for updates as these policy developments unfold, and keep an eye on our blog later this spring for our analysis of the May Revise.
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