Trump Demands $1B From California Over Illegal Immigrant Healthcare In Massive Medicaid Audit

Federal health officials have flagged $1.3 billion in questionable Medicaid spending across seven states led by Democratic governors, with California facing the bulk of the scrutiny. This preliminary audit, dwarfing a prior $65 million settlement by twentyfold, has sparked one of the sharpest federal-state clashes over healthcare funding in years.

CMS Administrator Dr. Mehmet Oz launched audits in California, Illinois, Oregon, Washington, Colorado, Washington, D.C., and Minnesota—states that supported opponents of President Trump in 2024. The focus: federal funds allegedly used for non-emergency care of undocumented immigrants, which federal law restricts to life-threatening conditions like heart attacks or labor. Nationwide, such emergency Medicaid comprises a small share of overall spending, amounting to only a few dollars per resident.

California’s Medicaid Methods Under Scrutiny

At issue is California’s “proxy methodology,” a 39.87% rate from early 2000s fee-for-service data applied to managed care payments for undocumented enrollees. Auditors contend this outdated formula inflates claims beyond verifiable emergencies. In September 2025, CMS guidance banned such proxy claims, requiring states to document actual emergency services retroactively.

California pioneered comprehensive coverage for income-eligible undocumented residents, starting with children in 2016, young adults in 2020, seniors over 50 in 2022, and working-age adults by January 2024—all funded by state dollars, officials maintain. Initial projections pegged annual costs at about $3 billion for roughly 1.15 million people. Actual fiscal 2024–2025 spending reached around $9.5 billion, driven by enrollment exceeding forecasts, dropped asset tests boosting senior sign-ups, and population growth.

Fiscal Crisis and Policy Reversal

A roughly $27.6 billion budget gap prompted an enrollment freeze for new undocumented adults in January 2026, mere months after full rollout. Dental benefits are scheduled to end for this group in July 2026, followed by $30 monthly premiums in July 2027—changes expected to save hundreds of millions of dollars annually through disenrollments and reduced use. Oz has criticized California’s managed care organization taxes, which generate revenue that is then used to draw federal matching funds before reimbursing insurers, calling it a way to redirect federal dollars.

Intensifying Political and Legal Tensions

Democrats decry the audits’ focus on their states as retaliation, noting parallels with freezes on other social-service funds later challenged in court. Yet these are preliminary findings; final repayment demands require draft reports, state rebuttals, conferences, formal letters, reconsiderations, and appeals before any money must be returned. As of January 2026, California officials say they have not yet received a formal disallowance notice finalizing the amount owed.

Safety-net hospitals, already closing units or weighing service cuts, face mounting financial pressure, with many operating on very slim or negative margins. Reversing expansion gains could increase uncompensated care by billions, according to research showing that expanding coverage significantly reduces hospitals’ uncompensated care costs. CMS–DHS data sharing has prompted large-scale eligibility checks, spurring voluntary disenrollments among some immigrants fearful of enforcement.

Past federal reviews have identified substantial improper Medicaid claims in multiple states, including New York and Kentucky, in the years following the Affordable Care Act. California, which has repeatedly sued over prior Trump-era health policies, is eyeing the courts again and citing a 1988 Massachusetts case that limited federal efforts to claw back Medicaid funds. Experts note that capitation payments make it difficult to isolate reimbursement for true emergencies, potentially complicating CMS’s retroactive rules.

Broader Federal Changes and Future Implications

Broader changes loom: roughly $900 billion or more in federal Medicaid reductions through 2034, new work requirements beginning in 2027, lower federal matching rates for certain emergency services starting in 2026, and tighter rules on state tax mechanisms used to draw federal funds. California anticipates more than $1 billion in related hits to its Medicaid program over the next decade.

The multi-step resolution could drag on, setting precedents for federal oversight and state innovations. As fiscal realities collide with policy ambitions, California’s retrenchment underscores risks for other states eyeing similar expansions, amid ongoing uncertainty over financing and enforcement.