The Source Blog

In January, Governor Newsom released his proposed budget for the 2025-2026 fiscal year with hopes of a strong fiscal position and a surplus for California that has not been seen in recent years.  However, in the face of multiple federal and state spending decisions, the final budget bill signed on June 27, 2025, although balanced, as required in California, is comprised of several solutions to close a $12 billion deficit.  Governor Newsom cited the Trump Administration's funding cuts as the main culprit for this deficit, also noting significant financial drawbacks resulting from tariff policies.  Additionally, the Governor is pointing to "faster-than-expected growth in Medi-Cal costs" resulting from last year's decision to cover all undocumented immigrants, which led to a $2.8 billion shortfall that necessitated a bill in April to cover the ballooning cost of the program.  Furthermore, the Los Angeles Wildfires and the resulting expenses and loss of revenue only added pressure to the once rosy outlook for the upcoming fiscal projections.  Yet, some analysts are wary of the quoted $12 billion deficit and the reasons provided for it, claiming instead that the state has been spending beyond its means for over three years, despite the Governor's inaccurate declaration of a near $100 billion surplus.  Compounding these claims are confessions from the administration last year that they had previously "overstated projected revenues by $165 billion" a few years ago.

Nevertheless, many other commentators are predicting the harmful effects the passage of Trump's "Big Beautiful Bill" will have on a variety of federally funded programs, including Medi-Cal and Cal-Fresh.  Fiscal analysts are predicting that the state may experience further funding issues soon, which may require special legislative sessions in the fall as the impact of Trump's federal budget is felt.  Furthermore, the state is also facing an economic downturn due to an increase in ICE raids, leaving "immigrant-heavy industries" with multiple low-wage labor positions open.  Many of these positions exist within services and sectors that Americans rely on, such as labor jobs in food production.  Experts also note that the loss of such jobs can further harm economies by shrinking local economies, resulting in a decrease in job opportunities available to residents.

Further complicating matters are the new tariffs enacted by the Trump Administration.  California's three largest ports are experiencing a significant decrease in the number of jobs and hours available for longshore workers and truck drivers due to a decline in the number of imports arriving.  Cancellations of vessels entering ports are higher than they were during COVID-19; the Port of Oakland experiencing a staggering 15% decrease in "container activity" in April.  In general, this downturn in imports and jobs will lead to a reduction in revenue for the state, further limiting funds to draw from in current and future budgetary bills.  Kimberly Ritter-Martinex, Long Beach Ports' Manager of Economics and Funding, remarked that "[w]hen workers and business owners earn income from working at the port or as one of our suppliers, they spend those dollars on groceries, entertainment, travel… and all of that activity supports the broader economy”.

The passage of this year's budget bill was further complicated by the Governor's demand for the passage of housing bills SB 131 and AB 130, stating that the budget "shall be inoperative and repealed" if the bills were not included in the final budget.  SB 131 and AB 130 are intended to help make California housing more affordable by eliminating documents required and environmental reviews for the construction of new homes and rezoning projects under the California Environmental Quality Act, much to the chagrin of environmental advocates and protection groups.  The legislature passed both SB 131 and AB 130 on June 30, 2025.

The final budget bill outlines a $321 billion package with solutions that include current and ongoing reductions totaling over $15.5 billion, $7.8 billion in funds borrowed from the state’s rainy day fund (and other internal borrowing), and $1 billion in other solutions, such as fund shifting, deferrals, and delays.  Furthermore, the Governor has also issued an Executive Budget Emergency Proclamation, which allows the administration to access state reserves due to reduced revenue projections over the next two fiscal years by $5.2 billion.  Such a proclamation is issued when the Governor determines that estimated resources are inadequate for expenditures to be covered by the general fund.  With its issuance, not only can money be transferred from the Budget Stabilization Account (BSA), but it also allows for transfers from the general fund to the BSA to cease.  Additional solutions and savings utilized include closing another prison, the fifth since the beginning of Newsom's administration, a $7 billion withdrawal from the rainy-day fund, and a $6.5 billion withdrawal from other state reserves, which collectively balance the 2025-26 budget.

While the May Revise proposed numerous cuts to critical social programs, the final budget retains several fiscal allocations to support these programs.  Notable programs to be maintained include cost-of-living caregiver wage increases, In-Home Supportive Service Provider overtime & travel reimbursement, tax cuts for veterans, smaller class sizes & free school meals, lowered prescription prices; expansion of abortion medication access; immigration legal services, and film industry protections.  Similarly, the Senate will delay the Governor's proposal to slash over $1 billion in support of rural health clinics until July 1, 2026.  Below is a review of notable healthcare proposals included in the Joint Legislative Budget Plan, along with a closer examination of the projected impacts of the federal budget bill.

Pharmacy Benefit Manager Oversight, Prescription Drugs, & Asset Limits

Included in the budget bill is SB 41 – a new piece of legislation that paves the way for state oversight and regulation of pharmacy benefit managers (PBMs).  The bill requires licensure of PBMs through the Department of Insurance, effective in 2027.  In addition, PBMs will be expected to comply with new measures, such as annual audits of pricing, which will result in penalties if not followed.  Furthermore, the practice of spread pricing will be prohibited beginning in 2026, requiring full transfer of manufacturer rebates to be passed on to those insurers.  Similarly, SB 41 mandates transparency of drug prices and minimum reimbursement standards by requiring costs of drugs to be at or below the National Average Drug Acquisition Cost (NADAC).

The bill also obligates PBMs to produce public data on the highest-costing drugs, rebate amounts, and administrative payouts.  Specifically, it prohibits discriminatory pricing practices in which pharmacies not affiliated with the PBM’s own pharmacy are required to join preferred networks and offer delivery services at rates that are not provided to currently affiliated pharmacies.

Relatedly, to proactively respond to "politically motivated supply chain disruptions," CalRx will have expanded authority to acquire brand-name drugs, such as Mifepristone, to maintain and grow access to reproductive health options.  This will be achieved through securing plentiful drug supplies while simultaneously maintaining consistent access to such medications in the face of federal and out-of-state reproductive health options.  While acupuncture will continue to be covered under Medi-Cal, it will no longer cover pharmacy benefits for specific drug classes, including COVID-19 tests.

Coverage through Medi-Cal itself may also face some challenges for Californians as the state has decided to reinstate an asset limit that will be implemented beginning January 1, 2026.  Initially, Governor Newsom sought to return to the previous limits of $2,000 per individual and $3,000 per couple per month but was rejected.  Instead, the legislature has opted for a more generous threshold limit of $130,000 for individuals and $195,000 for couples.  Advocates argue that the implementation of such tests could result in barriers to access to care for older adults and those with disabilities.  As multi-year revenue decreases plague the state's budget, the state may rely on more of these types of threshold criteria in the hopes of increasing savings.

Undocumented Immigrants

As mentioned previously, the administration's decision to expand Medi-Cal coverage to all undocumented immigrants in 2024 resulted in significant financial difficulties.  Initially, Governor Newsom added undocumented children in 2015, followed by undocumented seniors over the age of 50 in 2022.  These changes in coverage, however, quickly inflated fiscal projections and created a $6.2 billion deficit, prompting an accompanying $2.8 billion emergency appropriation in April of this year to keep the program afloat.  To stem this financial hemorrhage, the budget bill will implement a monthly $30 premium for undocumented adults aged 19-59, beginning July 1, 2027.  While this new cost appears high, it is a reduced figure from the $100 premium that Governor Newsom initially proposed in the May Revise.

Additionally, California will expand its drug rebate program to undocumented populations.  Typically, when  Medi-Cal pays for prescriptions, it usually receives a rebate from the manufacturer to help reduce costs.  The benefit of adding undocumented Medi-Cal recipients to the drug rebate program is that it can expand the money the state is able to recoup in purchasing prescription drugs by an estimated $370 million in the coming fiscal year.  To further cut costs, full dental coverage for this population will be cut in July 2026, and coverage for weight loss drugs will cease except for those who require it as a treatment for diabetes and those who need it as "medically necessary on a case-by-case basis".  Those who are already enrolled in Medi-Cal will maintain coverage.

Advocates for undocumented immigrants are sounding alarms in response to the new coverage requirements, claiming too many individuals who are already at greatest risk will not be able to retain coverage with a $30 monthly premium, including refugees, people seeking asylum, survivors of domestic abuse, and victims of trafficking.

Mental Health

The budget maintains multiple mental health initiatives with a combined $668,000 over the next two fiscal years to create a statewide program focusing on the risks associated with social media usage on youth.  Furthermore, over $17 million is being utilized to maintain the 988 suicide and Crisis Lifeline.  In the May Revise, Governor Newsom proposed shifting funds from the Behavioral Health Services Fund to the General Fund for a behavioral health housing program, which was rejected by the Assembly Health Subcommittee.  The elimination proposal for the Behavioral Health Services Fund that supports the Mental Health Wellness Act for $20 million was also rejected by the Subcommittee.

Conversely, several programs will face reductions and eliminations.  A school-based behavioral health program that Governor Newsom once supported, the Children and Youth Behavioral Health Initiative (CYBHI), will experience a funding reduction of $130 million, as well as any further funding in future fiscal years.

Reimbursement Rates

As we discussed in our blog post on the May Revise, the 2025-26 budget has introduced a significant funding shift from voter-backed Prop 35 funds for provider reimbursements.  A major source of controversy lies in the proposed $1.3 billion diversion from Proposition 35 funds to various other budgetary programs.  Proposition 35 was intended to enhance reimbursement rates for primary care, specialty care, hospital outpatient services, and ground emergency medical transportation providers, as these providers are essential in expanding and maintaining care for Medi-Cal enrollees.  Governor Newsom's opposition to the measure was well publicized as he was critical of the lack of flexibility in spending that would be tied to such a bill.  Healthcare provider advocates across the state argue that the $1.3 billion redirection of funds completely undermines the proposition's effort to stabilize a system of providers that is already under extreme pressure from operating costs and the demand for services.  Particularly for providers in rural areas, the loss of such funding will continue to put a strain on their ability to provide critical care to already underserved populations, which may result in closures.  The legality of such a move is also being questioned, as it would appear to be in opposition to the approved measure that received 68% backing from voters in November 2024.  In May, the Governor contended such a redirection of funds was "absolutely consistent" with the initiative as it would still be going towards Medi-Cal base rates.

Further compounding provider rate increases are federal policy changes that will effectually limit how states can receive federal funding for Medicaid.  Several states, including California, which successfully expanded access to care under the Affordable Care Act, have substantially relied on the provider tax that permits a tax on providers' wages to match federal funding.  However, with the passage of the Trump Administration's new federal budget, the tax is capped at 3.5%, which is a nearly fifty percent cut that will undoubtedly put a strain on one of the state's most effective funding tools for leveraging Medicaid funding.  Policy and financial analysts are claiming that this cap will dramatically reduce fiscal maneuvering to cover costs, as these and other social safety programs continue to face threats to their existence.  Experts warn the repercussions of such funding changes could result in loss of staff, closures of hospitals and clinics in the most needed areas, and an overall lack of healthcare provider infrastructure in California.

Federal Funding Impacts

As noted, one of the most significant alleged difficulties in funding the 2025-26 budget is the impending effects of federal funding on Medicaid and the Supplemental Nutrition Assistance Program (SNAP).  Analysts in California predict that the funding cuts could result in a loss of over $28.4 billion in funding and a loss of coverage for nearly 3.4 million Californians.  While the loss of funding is a significant hurdle, new federal provisions relating to eligibility redeterminations are also a concern.  Whereas current federal redeterminations are annual, the Trump Administration is mandating redeterminations every six months for those covered under Medicaid.  While seemingly simple on the surface, experts predict such a change could result in a loss of coverage for approximately 400,000 Californians and a further loss in federal funding.  Furthermore, new federal mandates in the form of work requirements will begin in 2027, which require beneficiaries to prove they are working, attending school, or volunteering at least 80 hours per month.  Experts warn that many individuals and families receiving support under such programs are already working and that these new requirements will disproportionately harm those who are unable to navigate the complex reporting and redetermination systems.

These program modifications are expected to have the most significant impact in areas that are already underserved, where Medi-Cal enrollment is highest, and access to care is minimal at best.  State estimates forecast that 14 hospitals in rural counties, which heavily rely on Medi-Cal funding, are substantially vulnerable to closure with these new mandates.  At a time when it is needed the most, nearly 200 Planned Parenthood centers would also face potential closures with the new federal funding plan, resulting in loss of reproductive healthcare, cancer screenings, and abortion care for over one million Californians.

The budget faced opposition on both sides of the aisle due to the controversial cuts and trade-offs that have left many legislators feeling uninformed.  Republicans and Democrats are claiming secretive deliberations and a lack of legislative input, especially with the Governor's last-minute contingency on the passage of SB 131 and AB 130.  Notwithstanding the addition of a monthly premium for undocumented immigrants, conservatives continue to condemn the state's decision to provide coverage to this population in the face of a growing and consistent budget deficit.  However, immigrant rights advocates are calling for continued free coverage due to the particular vulnerability of the community in the current pollical climate: “At a time when immigrant communities are facing relentless attacks by the federal government… we need the governor and state leaders to chart a different course,” said Carlos Alarcon of the California Immigrant Policy Center, urging the state to adopt a budget reflecting “equity and inclusion for all, regardless of immigration status”.

In summary, the budget includes continued and new investments in critical healthcare fields that will sustain mental health and social safety net programs.  Novel oversight and regulation of PBMs and drug pricing will undoubtedly play a significant role in making healthcare costs more transparent and affordable moving forward despite several sobering fiscal hurdles.  However, the budget also introduces a number of controversial cuts, questionable fund shifts & deficit estimates, causing political turmoil.  As California braces for the impact of federal funding and provisionary changes to social programs, we will continue to report on healthcare access, consolidation, and the state's commitment to equity for the communities most affected.

Download PDF