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Budget subcommittee hears how federal HR 1 could reshape Medi‑Cal financing and eligibility
Summary
State budget and health officials told a California Senate subcommittee that federal law changes (HR 1) and provider tax restrictions could reduce federal funding, force difficult tradeoffs on eligibility and provider payments, and push costs to counties and the state. The LAO estimated roughly 1,000,000 potential disenrollments but stressed high uncertainty.
Senate Budget Subcommittee No. 3 convened an informational hearing to examine how state agencies forecast and estimate budgets for California's major health programs and to assess fiscal risks from recent federal changes, including HR 1.
Laurie Walker, chief financial officer for the Department of Health Care Services, said DHCS's 2025-26 proposal reflects a continued push to transform Medi‑Cal and reported a departmentwide total budget of $202,700,000,000 with 4,945 positions, about $1.4 billion in state operations and $201.4 billion in local assistance. "The budget supports DHCS's purpose to provide equitable access to quality care," Walker said.
DHCS staff described the department's local assistance caseload forecasting process, which relies on a system called EMBER and runs thousands of regressions to generate granular caseload projections. A DHCS presenter noted limits when forecasting brand-new eligibility expansions: "The Ember system is using existing data...there was no historical trend that could be utilized in the EMBER system," and cautioned that the estimate is an iterative product that incorporates policy assumptions.
On how rates are set for managed care, DHCS said capitated rates must be actuarially sound and that the department contracts with Mercer to certify those rates. DHCS also described tools to mitigate uncertainty, including risk corridors and a medical loss ratio standard set in state law at 85%.
A central theme was provider taxes and fees the state has used to finance Medi‑Cal. DHCS said California currently projects roughly $12.7 billion annually from its managed care organization tax and about $9 billion from a hospital quality assurance fee pending federal approval. A DHCS official warned that HR 1's changes to provider tax rules and a moratorium on new or increased taxes create significant uncertainty: "We are actively researching options and flexibilities under federal regulations and conferring with leading subject matter experts," the presenter said.
The Legislative Analyst's Office presented the subcommittee with a summary report of potential impacts from HR 1. The LAO highlighted three core challenges for the legislature: provider tax design, eligibility rules (including possible exemptions for high‑unemployment counties) and policies for people who leave Medi‑Cal. The LAO said its report estimates disenrollments could be "around 1,000,000 people," while stressing that the number is highly uncertain and depends on federal guidance and state implementation choices.
Department of Public Health officials described how CDPH forecasts programs such as WIC, the Genetic Disease Screening Program and the AIDS Drug Assistance Program (ADAP). WIC director Faree Hachodhary said CDPH monitored federal cash flow during a recent federal shutdown and secured approval for an $81,000,000 state loan to sustain services through December 2025 if needed. Dr. Dimple Kona, division director for the Genetic Disease Screening Program, said GDSP is fully fee funded and that additions to the Recommended Uniform Screening Panel (RUSP) under federal or national guidance require state program expansions and additional costs.
Officials from the Department of Finance described the budget calendar and noted that the governor's January budget and the May revision are statutory touchpoints. Finance staff said they evaluate department workload and caseload estimates, prioritize mandated programs and use budget language and contingencies when federal uncertainty requires flexibility.
Public commenters from provider associations, county health officials and advocacy groups urged the legislature to avoid cuts that would deepen disparities and strain safety‑net providers. Brian Rutledge of the California Association for Adult Day Services said CBAS rates have not risen in two decades and warned that cuts could increase institutionalization. Hospital and public health groups described multi‑billion dollar revenue risks to safety‑net providers and urged revenue solutions and strong oversight to minimize harm to vulnerable Californians.
The subcommittee did not take formal votes. Members directed agencies to continue interagency coordination, monitor federal guidance closely, and return with additional detail and oversight options as federal rules are clarified. The hearing's presenters and many public commenters urged that early legislative oversight and careful design of provider tax and eligibility rules could reduce harm if federal changes curtail existing Medicaid financing mechanisms.
The subcommittee recessed after closing remarks and said further hearings and briefings will follow as federal guidance and state analyses evolve.
