(The Center Square) - California Gov. Gavin Newsom’s Medi-Cal system is seeking a $3.4 billion taxpayer bailout after spending $9.5 billion this year on noncitizen immigrant health care.

A new report also highlighted how California “launders” national taxpayer funding to cover its Medi-Cal bills and is enabled by federal law.

Newsom’s proposed budget for the 2025-2026 fiscal year includes a $7 billion reserve withdrawal. It’s unclear whether this emergency loan request for Medi-Cal either will result in or reflects the need for a higher budget for the taxpayer-funded healthcare program.

“California now spends 22% of its General Fund Medi-Cal budget on healthcare for over 1.6 million illegal immigrants,” said state Senate Minority Leader Brian Jones, R-San Diego. “Legal residents are paying the price — in healthcare access and financially.”

At the time Medi-Cal expanded coverage to all illegal immigrants in the state at the start of 2024, the taxpayer-funded healthcare system was already under strain. Medi-Cal has long suffered from a shortage of doctors and care providers due to the system’s reimbursement rates often being lower than the cost of providing care.

“Many on Medi-Cal are already having a hard time finding doctors to treat them because of low reimbursement rates these doctors receive from the government,” said Sally Pipes, president and Thomas W. Smith Fellow in healthcare policy at the Pacific Research Center. “If those on Medi-Cal can find a doctor, they are facing very long waits for care.”

A new paper from the Paragon Health Institute, a market-based health policy think tank, explained how the state uses federal loopholes to cover its Medi-Cal expansions in a manner that minimizes state taxpayer contributions and maximizes national taxpayer funding.

“The state taxes Medicaid insurers and then makes higher payments to those same insurers with that tax revenue,” wrote PHI. “The higher payments enable the state to claim additional federal matching dollars. These federal funds leave California with surplus money to spend elsewhere.”

PHI says these funds have allowed the state to expand coverage to illegal immigrants and eliminate mean testing of assets to provide costly long-term care to the wealthy.

“California uses this influx of federal money to fund large-scale Medicaid expansions. The most significant of these are extending Medicaid coverage to illegal immigrants and eliminating the asset test so wealthy people can qualify for taxpayer-financed long-term care,” continued PHI. "Because the federal dollars are money laundered, the state circumvents restrictions on federal Medicaid funding for illegal immigrants."

The state Legislative Analyst Office says that it expects corporate and sales tax revenue to come in lower than expected, which could suggest weakness in the broader economy. While taxes from personal income are coming in higher than expected due to stock market returns, the LAO warned the state should be cautious of relying on capital gains taxes if the stock market declines, as it has in recent days.

“Surging income tax collections do not seem to be tied to a clear improvement in the state’s economy. Both the job market and taxable consumer spending remain stagnant,” wrote the LAO. “Instead, the surge appears linked to the strength of the stock market.”

If stock market declines impact state budget projections, and federal legislation passes banning federal funding for illegal immigrant healthcare, the state could soon have to decide between cutting other services or raising taxes to preserve the program, or possibly reducing Medi-Cal coverage.