The Medicaid Boom and a Chance for Reform

Last week, California Governor Gavin Newsom released the state’s annual budget proposal. It included $349 billion in expenditures for next fiscal year (July 2026 to June 2027). The $349 billion would be a record—more than double what it was a decade earlier. The state’s long-term budget challenges are well known. The state’s Department of Finance now projects the state will run out of its general fund reserves by FY2027–2028—perhaps fortunate timing for Governor Newsom, who will exit office in January 2027.

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Amid these dire budget forecasts is an effort by California unions and other progressive groups to enact a “one time” wealth tax on billionaires. A key objective of the tax is to help fund Medi-Cal, the state’s Medicaid program. While nearly all parts of the state’s budget have grown, Medi-Cal is a key driver of state spending growth. In FY2012–13, the state spent $22.1 billion on the program—15.7 percent of that year’s state spending.¹ The governor’s proposal calls for $81.7 billion next fiscal year, or 23.4 percent of the total state budget.²

California isn’t alone. Across the country, state Medicaid budgets have exploded since 2013. Spending on Medicaid is up 25 percent among state and local governments—after adjusting for medical inflation and population growth.³ This week’s plot point explores a key reason for this rapid growth in Medicaid spending: booming enrollment.

The plot

Our plot examines Medi-Cal enrollment growth since 2013.

Historically, Medicaid covered medical spending for low-income seniors, the disabled, children, and some parents. The Affordable Care Act (ACA) expanded eligibility to low-income able-bodied adults. The ACA’s Medicaid expansion allowed states to offer coverage to these able-bodied adults beginning in 2014, with the federal government picking up most of the tab. California was, unsurprisingly, quick to jump at the opportunity. That is evident from the dramatic increase in the state’s adult Medicaid population in 2014. In 2013, 35 percent of California Medicaid recipients were adults under age sixty-five; it is now more than half.

The Medicaid expansion was sold to states as a cost-effective way to provide health coverage to low-income state residents. The federal government would pay 100 percent of the expense for newly eligible from 2014 to 2016, then 90 percent permanently after that. In comparison, the state’s official Medicaid match is only 50 percent. But the boom in Medicaid enrollment wasn’t just among newly eligible individuals; the state experienced an increase in enrollment across eligibility groups far larger than mere population growth. Those enrollment increases come with much larger state payments. In 2013, 22 percent of Californians were enrolled in Medicaid. In 2025, the state reported 37 percent of its population was enrolled.

The point

The Congressional Budget Office (CBO) projects the recently enacted One Big Beautiful Bill Act (OBBBA) will reduce projected Medicaid spending by $910 billion over the next decade. Since California receives the most Medicaid funding, it will see the biggest reduction in federal Medicaid funds.

Despite what California’s wealth tax supporters argue, that doesn’t necessarily mean that California will be left with an even bigger budget hole. OBBBA’s effects on the state budget may not be nearly as painful as expected. The law’s new work requirements for able-bodied adults and six-month redetermination requirement (down from one year) will reduce enrollment. California’s proposed budget notes that these provisions will reduce state Medi-Cal general fund spending by more than $4 billion in FY2029–30.⁴ These savings could be offset by other OBBBA provisions.⁵

In short, OBBBA’s eligibility reforms have given California—and many other states—an opportunity to ease the growing strain Medicaid enrollment growth has had on its budget over the past fifteen years by reducing enrollment and therefore required state expenditures.

Further reading

As we’ve noted elsewhere, the baseline matters when discussing any policy changes to Medicaid. CBO expects OBBBA’s Medicaid changes will reduce the country’s Medicaid population by about 7.5 million in 2034.⁶ That 7.5 million figure was often highlighted by OBBBA’s detractors. If CBO is correct, Medicaid enrollment will decline slightly over the next ten years relative to 2025 levels. But, like California, Medicaid enrollment had ballooned over the decade. Nationwide, average monthly Medicaid enrollment went from 18.1 percent of the US population to 22.6 percent in 2025. ⁷CBO projects the OBBBA Medicaid reduction will mean 21.3 percent of the population will be on Medicaid. In other words, even after OBBBA is fully implemented, the share of the population on Medicaid will be 18 percent larger than it was in 2013.

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