Rising Healthcare Costs Are Coming: How Employers Can Prepare for Medi-Cal Cuts and Avoid Higher Benefit Expenses

California’s Medicaid program, known as Medi-Cal, faces an uncertain future as the federal government prepares to roll back enhanced funding and introduce significant policy shifts. Medi-Cal currently provides health coverage to over 14 million low-income residents, but proposed changes under the Trump administration and the automatic expiration of federal aid in 2026 could create financial instability for the program.

The Expiration of Enhanced Federal Funding in 2026

Medi-Cal operates through a federal-state partnership, with federal contributions covering a significant portion of program costs. During the COVID-19 pandemic and other crises, California received additional federal support to manage rising healthcare needs. However, without an extension, this extra funding will end in 2026, leaving the state with significant financial challenges:

• Increased State Spending: California will have to cover a larger share of Medi-Cal costs, which could increase the state’s financial burden by billions of dollars. Projections indicate that Medi-Cal General Fund spending could rise to $39 billion in the 2025–26 fiscal year, reflecting a net increase of $1.2 billion from the previous year.

• Potential Coverage Reductions: Reduced federal contributions may force the state to limit eligibility, benefits, or provider payments, affecting millions of beneficiaries.

• Economic and Employment Impact: Medicaid reductions can lead to job losses in the healthcare sector and decreased economic activity, potentially affecting California’s GDP. Studies suggest that reductions in Medicaid and Supplemental Nutrition Assistance Program (SNAP) funding could result in over 1 million lost jobs nationwide and a $113 billion reduction in state GDPs by 2026.

Trump Administration’s Policy Shifts and Their Impact on Medi-Cal

Beyond funding cuts, the Trump administration has proposed several changes to Medicaid that could significantly impact Medi-Cal, including:

• Transition to Block Grants or Per Capita Caps: This would limit federal Medicaid contributions, forcing states to manage healthcare costs with a fixed budget rather than an open-ended funding system. This shift could drastically reduce the federal share of Medi-Cal spending, leaving California to make up the difference or cut services.

• Tighter Eligibility Rules: Stricter requirements could result in coverage losses for low-income families, seniors, and people with disabilities. Additionally, concerns about immigration policies have led some parents to consider withdrawing their children from Medi-Cal, even though state laws allow access regardless of immigration status.

• Potential Restrictions on State Programs: Innovative programs like California’s CalAIM, which integrates healthcare with social services for homeless populations, may lose federal waivers, threatening their continuation. If these waivers are not renewed, thousands of vulnerable individuals could lose access to critical support services that address both health and housing needs.

Broader Economic and Social Implications

California’s Medicaid program not only provides essential healthcare but also plays a crucial role in the state's economy. Cuts to Medi-Cal funding could:

• Strain Healthcare Providers: Hospitals and clinics that serve Medi-Cal patients could experience financial difficulties, leading to reduced services and potential closures.

• Increase Uncompensated Care Costs: As more people lose Medicaid coverage, hospitals may face higher rates of uncompensated care, driving up costs for insured patients and the healthcare system as a whole.

• Weaken Public Health Efforts: Medi-Cal plays a significant role in preventive care, disease management, and public health initiatives. Funding cuts could hinder efforts to address chronic illnesses, mental health services, and substance abuse treatment.

How California Businesses Can Support Employees Losing Medi-Cal Coverage

With the government planning to remove employees from Medi-Cal, thousands of California workers will face the challenge of finding new health insurance. Many will struggle with rising premiums, limited employer options, or even the risk of going uninsured. Employers now have a unique opportunity to step in, offering cost-effective solutions that benefit both their workforce and their business.

The Impact of Losing Medi-Cal Coverage

Employees removed from Medi-Cal will face several challenges, including:

• Loss of Coverage: Many employees rely on Medi-Cal as their primary health insurance and may struggle to find affordable alternatives.

• Higher Costs with Covered California: While Covered California provides options, employees will likely face higher premiums, deductibles, and out-of-pocket expenses.

• Limited Employer Plans: Many small businesses do not offer traditional group health plans, leaving employees with fewer choices.

• Increased Financial Strain: Without affordable options, some employees may go uninsured, leading to delayed medical care and financial hardship.

Without any changes, employers will experience higher benefit costs as many employees currently on Medi-Cal will start shifting over to employer medical plans, requiring businesses to make contributions that they were previously not making. With medical plan costs increasing in 2024 and 2025, this shift could significantly impact employer expenses. However, if employers are proactive and look for better plans, they can get ahead of the inflow of new employee enrollment and rising employer medical plan costs.

Without proactive measures, employers are likely to face increased healthcare costs as many employees currently enrolled in Medi-Cal transition to employer-sponsored health plans. This shift will necessitate employer contributions for individuals who were previously covered by Medi-Cal. Compounding this issue, health insurance premiums have been on the rise, with Covered California announcing an approximate 8% increase for 2025, following a 9.6% hike in 2024—the highest since 2018. To mitigate the financial impact of these changes, employers should proactively explore and secure more cost-effective health insurance plans, thereby managing the anticipated surge in employee enrollments and associated expenses.

Solutions for Businesses

1. Implement an Individual Coverage Health Reimbursement Arrangement (ICHRA)

Instead of offering a costly traditional group plan, businesses can set up an ICHRA, which allows employees to choose their health plan through Covered California or other private options. Employers can:

1. Contribute tax-free dollars toward employees’ health insurance premiums.

2. Avoid liability for rate increases or underwriting.

3. Allow employees to pick a plan that fits their individual needs.

4. Offer Supplemental Insurance to Cover Gaps

Many employees will still face high deductibles and out-of-pocket costs even with Covered California or employer-sponsored plans. Affordable supplemental benefits can help fill these gaps:

1. Hospital Indemnity Insurance – Provides cash benefits for hospital stays and medical emergencies.

2. Accident & Critical Illness Insurance – Covers unexpected injuries or severe illnesses.

3. Guaranteed Issue Life Insurance – Ensures employees can get life insurance without medical underwriting.

4. Provide No-Cost Benefits to Support Employees

Employers can enhance their benefits package with zero-cost offerings, improving retention and employee morale:

1. Estate Planning Services: Employees can set up a Family Revocable Trust for free, helping them avoid costly probate fees.

2. Pet Insurance: Affordable coverage up to $25,000 for employees' pets, easing financial burdens.

3. Monthly Educational Updates: Help employees stay informed about benefits, financial planning, and healthcare options.

4. Simplify Open Enrollment with a Custom Benefits Portal

Holistic Employee Benefits offers a custom online enrollment page, streamlining the process for HR and employees. Features include:

1. One-click enrollment in health, supplemental, and no-cost benefits.

2. Easy access to plan information to help employees make informed decisions.

3. HR efficiency with automated enrollment and termination processing.

Why Employers Should Take Action Now

Businesses that proactively address this shift can reduce employee turnover, improve satisfaction, and enhance recruitment efforts. With rising healthcare costs, offering flexible and affordable benefits can set companies apart as leaders in employee well-being.

Schedule a consultation with Holistic Employee Benefits today to learn how you can provide cost-effective solutions that protect your workforce without increasing your budget.