Governor’s 2025-26 May Revision Proposes Major Cuts to Healthcare and Undermines Medi-Cal Expansion Commitments

On May 14, 2025, Governor Gavin Newsom released the revised 2025-26 state budget to address a projected $12 billion deficit, a sharp contrast to the modest surplus anticipated in January. The reversal is largely driven by declining state revenues, higher-than-expected Medi-Cal expenditures, and economic uncertainty caused by newly imposed federal tariffs.

The May Revision proposes a $321.9 billion budget, which includes $226.4 billion from State General Fund and $15.7 billion in State reserve funds. Given a projected decrease in revenue, the administration is relying heavily on reductions in health care spending, particularly within the Medi-Cal program, and does not include any new investments in the health care workforce.

Key Health Care Budget Proposals:

Proposed Medi-Cal Cuts and Enrollment Changes

Medi-Cal, California’s Medicaid program, is typically funded through a partnership between the state and the federal government. However, for individuals who do not qualify for federal Medicaid funding—such as most undocumented immigrants—the federal government does not provide matching funds, even when those individuals meet income eligibility requirements.

To fill that gap, California has chosen to use state-only funds to provide certain Medi-Cal benefits to undocumented Californians. This means the full cost of coverage, services, and provider payments for these individuals is borne entirely by the state without federal matching funds. State-only Medi-Cal has allowed California to expand access to health care for populations excluded by federal policy.

However, the Governor’s proposed cuts to the Medi-Cal program—particularly those that freeze enrollment, impose monthly premiums, and eliminate key benefits for undocumented adults—undermine these goals.

Proposed Changes to Medi-Cal Coverage for Undocumented Individuals

Enrollment Freeze for Full-Scope (State-Only) Medi-Cal Expansion to Undocumented Adults– Freezes new enrollment for undocumented adults aged 19 and older, effective January 1, 2026.

• Imposes New (State-Only) Medi-Cal Premiums for Undocumented Adults – Implements $100 monthly premiums for undocumented adults aged 19 and older, effective January 1, 2027.
• Elimination of (State-Only) Prospective Payment System Rates to Federally Qualified Health Centers and Rural Health Clinics for Undocumented Immigrants– Eliminates Prospective Payment System rates to clinics for state-only-funded services provided to undocumented Individuals. Clinics would receive reimbursement at the applicable Medi-Cal Fee Schedule rate in the fee-for-service delivery system and at the applicable negotiated rate between a Medi-Cal managed care plan and the clinic in the managed care delivery system.
• Elimination of (State-Only) Long-Term Care for Individuals with Undocumented Immigration Status – Eliminates state-only long-term care benefits for undocumented individuals, effective January 1, 2026.
• Elimination of (State-Only) Dental Benefits for Undocumented Adults– Eliminates full-scope state-only dental coverage for Medi-Cal members with undocumented immigration status aged 19 and older, effective July 1, 2026. This population will continue to have access to restricted-scope emergency dental coverage.

Other Proposed Medi-Cal Changes and Cost Controls

• Medi-Cal Asset Test Limits – Reinstates the Medi-Cal asset limit to consider resources, including property and other assets, when determining Medi-Cal eligibility for some Medi-Cal enrollees. The asset limit for a household would be $2,000 for an individual and $3,000 per couple. The policy would be effective January 1, 2026.
• Medi-Cal Minimum Medical Loss Ratio – Increases the minimum medical loss ratio for managed care plans, commencing January 1, 2026.
• Elimination of Acupuncture Optional Medi-Cal Benefit – Eliminates acupuncture as an optional benefit for all beneficiaries.

Proposed Changes to Prescription Drug Coverage

• Prescription Drug Utilization Management- Implements utilization management and prior authorization for prescription drugs.
• Step Therapy Protocols– Implements a step therapy strategy to promote utilization management and control prescription drug costs,
• Prior Authorization for Continuation of Drug Therapy: Eliminates the "continuing care" status for pharmacy benefits under Medi-Cal Rx, effective January 1, 2026. This means patients will no longer be automatically grandfathered in for medications that are not on—or are removed from—the Medi-Cal Rx Contract Drug List (CDL). Instead, they will be required to obtain prior authorization to continue receiving those medications, regardless of previous usage. This change ends the current practice of allowing continued access based solely on prior drug use and may result in treatment delays or disruptions in care.
• GLP-1 Drugs for Weight Loss: Ends coverage for GLP-1 medications used for weight loss starting January 1, 2026.
• Over-the-Counter Drug Coverage Eliminated: Ends coverage for certain over-the-counter medications, including-COVID-19 antigen tests, vitamins, certain antihistamines including dry eye products.
• Pharmacy Drug Rebates: Establishes a rebate aggregator to secure state-negotiated rebates for Medi-Cal beneficiaries with undocumented immigration status. Additionally, establishes minimum rebate requirements for HIV/AIDS and cancer drugs.

Pharmacy Benefit Manager (PBM) Oversight:
To address rising drug costs and improve transparency, the May Revision proposes new statutory requirements to license and regulate Pharmacy Benefit Managers (PBMs):

• Current law requires PBMs to register with the Department of Managed Health Care (DMHC)to exercise good faith and fair dealing, and to disclose, upon a purchaser's request, information with respect to prescription product benefits, as specified. This proposal requires that a PBM must also be licensed by the Department of Managed Health Care (DMHC).
• They must report audited financial data, operational details, and uphold a fiduciary duty to clients.
• DMHC will review PBM contracts and conduct regular financial audits.
• PBMs must also submit detailed drug pricing data to the Department of Health Care Access and Information (HCAI).
• DMHC will have enforcement authority to penalize violations and ensure accountability.

Expansion of CalRx for Brand-Name Drugs:

To maintain access to essential medications, the May Revision proposes expanding CalRx to include brand-name drug purchases. This expansion would enable the state to:

• Secure an affordable and stable supply of both generic and brand-name drugs,
• Respond effectively to supply chain disruptions or politically motivated access restrictions,
• Protect access to medications such as mifepristone and other drugs threatened in other states.

Proposition 56 Reductions

California Proposition 56, also known as the California Healthcare, Research and Prevention Tobacco Tax Act of 2016, was a ballot initiative passed by voters in November 2016 to increase the tobacco tax. The revenue from this tax has been used to fund key Medi-Cal services, such as supplemental payments for family planning and reproductive health care services and dental care. Additionally, Prop 56 dollars provide funding for loan repayment for physicians and dentists who agree to a service obligation, primarily to serve Medi-Cal beneficiaries. The May revision proposes eliminating and suspending much of this funding.

• Proposition 56 Supplemental Payments – Eliminate approximately $504 million in 2025-26 and $550 million ongoing for Proposition 56 supplemental payments to dental, family planning, and women’s health providers.
• Suspension of the Proposition 56 Loan Repayment Program – Suspends a final cohort of the CalHealthCares loan repayment program, a key support for recruiting and retaining clinicians in underserved areas.

No New Workforce Investments

Despite the ongoing need for a robust family physician workforce, the May Revision includes no new investments in workforce programs like Song-Brown. However, it does not cut existing investments, maintaining $109 million for the Song Brown Program, to ensure the state keeps its promise to those already awarded funding for residences and other pathways programs.

The depletion of Proposition 56 revenues and the elimination of General Fund backfill has also impacted the CalMedForce program’s ability to support existing residency programs. The state ended the General Fund backfill during the 2024-25 budget cycle, and did not allocate investments in the May revision, so the total amount of program support dropped to $24.6 million As a result, many existing programs will have to absorb the cost of previously funded residency positions, putting additional financial strain on institutions and threatening the sustainability of training pipelines in underserved areas.

CAFP is actively advocating to preserve critical workforce funding that trains and sustains family physicians across the state.

Other Noteworthy Proposals

• Additional Support for Adverse Childhood Experiences (ACEs) Provider Training – The budget includes an additional $2.9 million total funds ($1.46 million behavioral health services fund (BHSF ), and $1.46 million federal funds) in 2025-26 to support additional ACEs provider training.
• Program of All-Inclusive Care of the Elderly (PACE) Organization Capitation Payments – Limit the payments for PACE providers to the midpoint of actuarial rate ranges, except for newly enrolled providers receiving enhanced rates for the first two years.
• Skilled Nursing Facilities – Eliminate the Workforce and Quality Incentive Program (WQIP) and suspend the requirement to maintain a backup power system for no fewer than 96 hours
• Utilization Management Efficiencies – Implement prior authorization requirements for hospice services, resulting in estimated General Fund savings of $25 million in 2025-26 and $50 million ongoing.

CAFP’s Response

The California Academy of Family Physicians (CAFP) is deeply concerned about the long-term consequences these proposed budget cuts will have on our most vulnerable patients. Family physicians are uniquely trained to provide comprehensive, whole person, and continuous care from birth through end-of-life, across generations and identities—including for patients regardless of immigration status, gender identity, or sexual orientation.

Cuts to Medi-Cal and other safety net programs threaten to destabilize access to care at a time when communities need it most. Reducing investments in primary and preventive care will not save money—it will shift costs downstream, leading to higher rates of emergency department use, worsened health outcomes, and greater financial strain on our health care system.

CAFP strongly supports access to health care for every Californian. We remain committed to preserving Medi-Cal coverage, maintaining fair and timely payments for clinicians, and protecting vital workforce development programs like Song-Brown and Proposition 56 that strengthen our primary care infrastructure.

Every individual deserves care delivered in an environment of respect, collaboration, and evidence-based practice. As such, we will continue to advocate fiercely for a health system that supports the dignity and health of all people, especially those historically marginalized.