California Stole Billions from Medicaid for Health Care for Illegal Immigrants

A new study by the Economic Policy Innovation Center (EPIC), authored by Paul Winfree and Brian Blase, has revealed how California is using a Medicaid loophole to funnel billions of federal taxpayer dollars into its health care system, ultimately funding Medicaid coverage for illegal immigrants.

The study describes California’s strategy as a form of “money laundering,” in which the state manipulates Medicaid provider taxes to secure additional federal funding. While federal law prohibits Medicaid dollars from being spent on illegal immigrants, California has developed a scheme that allows it to sidestep these restrictions by artificially inflating its Medicaid costs, receiving matching funds from the federal government, and then redirecting those funds to programs that would not normally qualify for federal support.

According to the study, “The state of California, colluding with insurance companies who cover Medicaid beneficiaries, has created one of the most outrageous [schemes] yet, a money laundering scheme that results in California obtaining more than $19 billion in federal money without any state contribution over the period from April 2023 through December 2026.” The authors argue that this practice not only increases the federal deficit but also incentivizes illegal immigration, benefits large insurance companies, and places an unfair financial burden on working Americans.

How California is Using a Medicaid Loophole

The foundation of this scheme is California’s Medicaid provider tax, a tax imposed on insurance companies that participate in the state’s Medicaid program, Medi-Cal. The study explains that California is using this tax in a way that allows it to extract additional federal dollars while avoiding the requirement to spend state funds.

1. California imposes a tax on Medicaid insurers – The state significantly raises taxes on health insurers that participate in Medicaid. These companies must pay the tax as a condition of doing business in the state.
2. California increases payments to those same insurers – The revenue collected from the tax is then funneled back to the insurers in the form of higher reimbursement rates.
3. The federal government provides matching funds – Because Medicaid is jointly funded by the federal and state governments, these artificially increased payments qualify for federal matching funds, effectively increasing the total amount of money available for Medicaid.
4. California uses the freed-up money for unauthorized programs – Since federal Medicaid dollars cannot legally be used to provide full coverage to illegal immigrants, California uses this scheme to create extra revenue, which is then redirected to programs like Medi-Cal for undocumented residents.

The EPIC study describes the situation bluntly: “These federal funds leave California with surplus money to spend elsewhere. This scheme effectively allows the state to ‘launder’ federal Medicaid funds without spending any of its own money.”

This system is particularly concerning because it bypasses the traditional federal-state cost-sharing agreement that governs Medicaid. Normally, states must contribute their own funds in order to receive federal support. However, California’s scheme allows it to claim federal money without putting in any state contributions—a strategy that the study warns is unsustainable and unfair to taxpayers across the country.

How Much Money Has Been Spent on Health Care for Illegal Immigrants?

California’s decision to expand Medicaid coverage to illegal immigrants has proven to be far more expensive than initially projected.

In 2020, the state estimated that providing Medicaid to illegal immigrants would cost approximately $3 billion per year and cover around 1.15 million individuals. However, the situation has changed dramatically in just a few years. Today, the Migration Policy Institute estimates that 2.74 million illegal immigrants reside in California, though the true number may be even higher.

The study notes that “the cost of covering all California’s illegal immigrants through Medicaid (and not just the January 2024 expansion to those ages 25 to 49) is much more expensive than initially projected.” While state officials originally projected $3 billion per year, the latest estimates indicate that California will actually spend $9.5 billion on illegal immigrants’ Medicaid coverage in fiscal year 2024-2025 alone.

The EPIC study argues that this funding is directly tied to California’s Medicaid provider tax scheme, stating, “Coincidentally, this is how much funding California has generated since 2023 from the federal government as a result of their enhanced Medicaid insurer laundering scheme.”

What Can Be Done to Stop This?

The study suggests that Congress could take action to close the Medicaid provider tax loophole, a move that could save as much as $630 billion in federal spending. Republican lawmakers have already begun discussing ways to reform Medicaid financing as part of broader budget negotiations.

Paul Winfree, the president of EPIC, emphasized that addressing this loophole is a priority for lawmakers looking to rein in wasteful spending. “One of the things that Congress is looking at right now is limiting the Medicaid provider tax loophole. It’s actually one of the most significant offsets that is within the Medicaid portfolio that the Energy and Commerce Committee and Finance Committee over in the Senate can look at while they’re putting together their reconciliation bill,” he said.

Republicans have also suggested that reducing or eliminating the Medicaid provider tax could be a key part of budget reconciliation negotiations, as Congress seeks $1.5 to $2 trillion in spending cuts. While a full repeal of the loophole may be politically challenging, many lawmakers believe that even partial reforms could save billions in federal spending.

The Debate Over California’s Medicaid Loophole

California’s use of federal Medicaid funds to cover illegal immigrants has sparked heated debate.

Critics argue that this practice is deeply unfair to American taxpayers, as it forces them to fund health care for individuals who are not legally in the country. They also warn that it creates a strong incentive for more illegal immigration, since California offers benefits that many other states do not.

The study describes the broader impact of this practice, stating, “This scheme enriches insurers, attracts illegal immigrants to the United States, and adds mountains to the federal debt, all at the expense of working Americans.”

Supporters of California’s Medicaid expansion argue that providing health care to illegal immigrants is a moral and public health necessity, as it reduces the burden on emergency rooms and ensures that undocumented residents receive preventive care.

However, the study points out that California’s loophole does not just benefit low-income illegal immigrants—it also allows wealthy individuals to take advantage of Medicaid by eliminating asset tests for long-term care. The report states, “Such an expansion extends eligibility for Medicaid, a welfare program, to extremely wealthy households while also discouraging private, responsible planning for long-term care.”

California’s Medicaid provider tax scheme has allowed the state to bypass federal restrictions and use billions in federal taxpayer dollars to fund health care for illegal immigrants. By exploiting a loophole in Medicaid financing, the state has secured extra federal reimbursements that it then redirects to programs that would not normally qualify for federal funding.

The EPIC study, authored by Paul Winfree and Brian Blase, argues that this loophole must be closed to prevent further abuse and protect taxpayer dollars. With California alone expected to spend nearly $10 billion on illegal immigrants’ Medicaid coverage in 2024-2025, the issue is likely to become a major topic of debate in Washington.

PB Editor: One would expect nothing less from Governor Newsom, the blatant fraud involving billions of dollars. Makes one wonder if the Biden Administration was complicit. Can we get these billions of dollars back?