How Trump Administration Cuts Could Hurt Medi-Cal

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Far from the noise of campaign season, research and interest groups have been quietly assessing the financial impact for California if President-elect Donald Trump and his administration follow through on their threats to reduce federal assistance to states.

It is a more direct concern than it might appear. And it goes right to the heart of the state’s ability to care for its own.

“It’s huge,” said Scott Graves, budget director for the California Budget & Policy Center. “A lot of people, when they think about the California budget, think that it must mean state revenues being used to fund state services. But that’s not how it actually works.”

In reality, California relies on federal funds to help pay for all sorts of programs. That’s especially true of Medi-Cal, the state’s version of Medicaid, which provides health care services to more than 14 million California residents, including low- and moderate-income families, seniors and kids. More than half of all Medi-Cal enrollees are Latino.

Those services are crucial, but they’re also heavily dependent on federal dollars. And they appear to be one of the areas that Trump’s administration may target for reductions — especially if the incoming president makes good on a campaign platform of reducing taxes on corporations and the wealthy, leaving the federal government with less revenue overall.

How deep could those cuts go? Although it’s still a thought exercise, the Budget & Policy Center’s researchers say the potential reduction in federal revenue for California could land in the $20 billion to $30 billion range — a significant chunk of the state’s budget for Medi-Cal.

“The possibilities are chilling,” Graves said. “There is just a broad range of social services that could be at risk of federal funding reduction.”

Medi-Cal Receives $100 Billion in Federal Funds

Medi-Cal covers one in three people living in California — “In some parts of the state, it’s as many as six in 10,” said Laurel Lucia, director of the health care program for the UC Berkeley Labor Center — and it does so with an annual budget of $160 billion.

Nearly $100 billion of that comes from federal funds, part of California’s reliance on federal money to run important social services. That’s common to all states, but the numbers are bigger here.

For fiscal year 2024-25, which began on July 1, California’s enacted budget is $450.8 billion. More than a third of that total, $153 billion, comes via federal funding. And three out of every four of those federal dollars go to support health and human services in California for children, seniors and families living on the margins.

Across the country, federal funding far outstrips state spending on programs like Medicare, Medicaid and Social Security, and it always has done so. These are also popular programs among voters — one reason why Trump said “we’re not touching” Social Security during a recent interview on NBC.

Medicaid, the low-income assistance program known here as Medi-Cal, hasn’t received such an endorsement. During Trump’s first term, congressional Republicans proposed slashing Medicaid funding, though the measure did not clear the US Senate. Had it passed, “California would have lost tens of billions of federal dollars,” Lucia said.

Should the Trump administration go after the program on a similar scale in 2025, Lucia said, California wouldn’t be able to fill the resulting revenue hole with state funds. That could force major budget adjustments in several areas, and a potential reassessment of Medi-Cal and its reach.

Per Capita Caps, Block Grants

There are a number of ways that federal funding to the Medi-Cal program could be reduced, Graves said. One is simply for Congress to lower the percentage of Medicaid costs that the federal government is willing to cover — although that would represent a historic disruption of a program that has been structured the same way for decades.

The basic federal share of Medi-Cal costs right now is 50%, which is what California receives. Other states can qualify for more cost-sharing, up to 80%, depending upon their levels of impoverishment. And those percentages apply to all the Medicaid costs that a state program incurs, so when its expenses rise, so does its federal funding. (Federal money cannot be used for California’s expansion of Medi-Cal to undocumented residents.)

“One part of the conversation happening among Republicans is, why do we set the floor at 50%? Maybe we should go lower than that, to 45% or 40% or even a third,” Graves said. “They’d want to shift more of the cost to the states and reduce the burden on the federal government, which is how they would frame it.”

Another possibility is for legislators to tear up the current federal funding system in favor of block grants or “per capita” caps, in which a fixed number of dollars — or a fixed dollar amount per person enrolled — would go to each state, and no more.

A Trump administration could also tighten an existing waiver process, through which California earns additional federal funding for health care services outside of the strict parameters of Medicaid. And it could push back on the Medicaid expansion that occurred as part of the Affordable Care Act, in which states (like California) that extend coverage to more lower-income residents have to pay only 10 cents on the dollar for those increased costs, with federal money covering the rest.

“We don’t know what they’re going to do, or what they’ll be able to do. No one has a crystal ball,” Graves said. “But there have been many indications going back years — from Republicans, conservative think tanks, President-elect Trump himself — that Medicaid has gotten too big and needs to be rolled back. This is their sense of things.”

How Would California Leaders Respond to Federal Cuts?

Medi-Cal’s importance in California is profound, given the sheer number of people enrolled. But it’s especially critical for children of lower-income families in the state, advocates say.

“While California has made strong commitments to Medi-Cal and to ensuring that kids have health care, the federal funding component is critical to the state budget,” said Kelly Hardy, senior managing director of health and research for the advocacy group Children Now.

Per-capita caps or block grants, Hardy said, “would have a similar impact. By reneging on the open-ended promise of Medicaid, federal cuts would put pressure on the state budget and jeopardize California kids’ health coverage.”

It’s unknown how California leadership would react to funding cuts, in part because that depends upon the extent of the reductions. While the state might consider raising revenue or shifting money from other parts of the budget to bolster some Medi-Cal funding shortfalls, truly deep federal cuts to the program — like the $20 billion to $30 billion that the California Budget & Policy Center says is possible — would force hard conversations about whether the program itself would have to be scaled back.

Of course, federal budget cuts would affect all states. “If they roll back or change formulas,” Graves said, “they’re going to affect Alabama and Georgia in the same way that they will affect California and Oregon.” Legislators from both major parties would likely be hearing from unhappy constituents, doctors, nurses and others heavily involved in the vast Medicaid system.

“The approximately $100 billion in federal Medi-Cal dollars not only directly supports health care jobs, but also supports jobs at suppliers of the health care industry and at local businesses where health care workers spend their income,” said Lucia of the UC Berkeley Labor Center.

California legislators could try to backfill the loss of billions in federal funding by raising revenue, particularly via higher taxes on the wealthiest residents and most profitable corporations. But that’s a tough sell in tight economic times.

In the meantime, state leaders can do little but wait and stay prepared. Trump has not given an indication as to whether going after Medicaid is an early legislative priority.

“These aren’t abstract concepts,” Graves said. “We’re trying to emphasize the real-world impact of these cuts — what it would mean for Californians who are trying to make ends meet and are relying on a program like Medi-Cal to make sure they and their families have access to affordable health coverage.”

This article originally appeared in Capital & Main on January 6, 2024. It is reprinted with permission.

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