California’s $8.4 billion Medicaid spending on illegal immigrants could completely eliminate the state’s healthcare budget shortfall, yet Governor Newsom continues to drain taxpayer funds while exploiting federal loopholes.
At a Glance
- California is spending $8.4 billion this fiscal year on healthcare for illegal immigrants while facing a $6.2 billion Medicaid shortfall
- The state employs a “money laundering” scheme by taxing Medicaid insurers and using that revenue to claim additional federal matching dollars
- This tax scheme generated $16.7 billion in 2023, allowing California to claim $9.5 billion in federal reimbursements without increasing state costs
- By eliminating coverage for illegal immigrants, California’s entire Medicaid budget crisis would disappear
- Republicans in Congress are targeting this loophole, which could save up to $630 billion nationally
California’s “Money Laundering” Scheme Exposed
California has developed a sophisticated financial mechanism that effectively circumvents federal restrictions on Medicaid spending. The state taxes Medicaid insurance providers and then returns those same tax dollars to the insurers through increased payments. This circular transaction allows California to claim federal matching dollars without actually spending state funds. This tactic has enabled massive expansions of the state’s Medicaid program, including coverage for illegal immigrants and the elimination of asset tests for wealthy individuals seeking long-term care benefits.
“California’s “Money Laundering” Tactics: The state taxes Medicaid insurers and then makes higher payments to those same insurers with that tax revenue.” – Paul Winfree and Brian Blase
In 2023 alone, this scheme generated a staggering $16.7 billion in tax revenue, which California used to claim $9.5 billion in federal matching funds. The Economic Policy Innovation Center and Paragon Health Institute have called this arrangement exactly what it is: a “money laundering scheme” designed to obtain over $19 billion in federal funds through 2026 without any genuine state contribution. This exploitation of legal loopholes diverts federal resources intended for legitimate Medicaid recipients to fund healthcare for those illegally present in the country.
The $8.4 Billion Solution to California’s Budget Crisis
While Governor Gavin Newsom scrambles to address California’s Medicaid shortfall, the solution is staring him in the face. The state is currently spending $8.4 billion this fiscal year providing healthcare to illegal immigrants, while simultaneously announcing the need for a $3.44 billion loan and a $2.8 billion raid on the state’s general fund to cover a $6.2 billion Medicaid deficit. Simple math reveals that eliminating healthcare benefits for those illegally present would not only solve the budget crisis but would actually leave a $2.2 billion surplus in the program.
“States can do these provider taxes to funnel money back to the state, that they are then using to pay for, to put illegal immigrants on Medicaid. That’s quite literally what’s going on.” – Paul Winfree
The cost of covering illegal immigrants has far exceeded initial projections due to the Biden administration’s border policies, which have encouraged unprecedented levels of illegal immigration. California’s decision to provide full Medicaid benefits to all illegal immigrants regardless of age has created a powerful magnet effect, drawing more undocumented people to the state and further straining its resources. This demonstrates the predictable consequences of offering generous taxpayer-funded benefits without requiring legal residency or citizenship.
Now that we know it costs California taxpayers more than $9 billion per year, not $3 billion, to provide full-scope Medi-Cal for all undocumented immigrants, here are two columns from the told-you-so file.
From January 2024:
Can California afford health care for undocumented… https://t.co/S5kO34d84p
— Susan Shelley (@Susan_Shelley) February 16, 2025
Congressional Action and National Implications
Republicans in Congress have identified the Medicaid provider tax loophole as a significant opportunity for federal budget savings. Closing this loophole could potentially save up to $630 billion nationwide, with particular impact on blue states that have exploited it most aggressively. As Congress considers reconciliation bills through the Energy and Commerce Committee and Senate Finance Committee, limiting this tax scheme has emerged as one of the most significant potential offsets within the Medicaid portfolio.
Even Hillary Clinton once understood the fundamental problem with extending comprehensive healthcare benefits to illegal immigrants. As she explicitly stated years ago, such policies inevitably encourage more illegal immigration. California’s experience proves this principle, as its generous benefits have coincided with increased migration to the state. Fundamental Medicaid financing reforms are urgently needed to prevent inappropriate spending and ensure federal funds are used as intended – to help American citizens and legal residents in genuine need, not subsidize illegal immigration at taxpayer expense.
“We do not think the comprehensive health care benefits should be extended to those who are undocumented workers and illegal aliens. We do not want to do anything to encourage more illegal immigration into this country. We know now that too many people come in for medical care, as it is. We certainly don’t want them having the same benefits that American citizens are entitled to have.” – Hillary Clinton
