California Governor Gavin Newsom in San Francisco, Jan. 29. David Paul Morris/Bloomberg News
Gavin Newsom's press office has been pumping out social-media posts on healthcare fraud in red states. But the California governor's latest budget maintains a Medicaid funding gimmick designed to bilk federal taxpayers of billions of dollars, even though Congress outlawed it months ago.
Mr. Newsom's budget, released last month, assumes that a Medicaid provider tax on managed-care organizations will remain in place through December. In 2026 this assessment taxes insurers covering Medicaid enrollees at $274 a month per enrollee, while the tax for other enrollees is $2.25 a month. The disparate treatment seeks to maximize revenue from Medicaid beneficiaries, for whom California can gain additional federal matching funds, without raising costs for people with other forms of insurance, such as employer-sponsored coverage.
Provider taxes facilitate fraud on multiple levels. The Centers for Medicare and Medicaid Services described the taxes as "money laundering" -- Vice President Joe Biden reportedly called them a "scam" -- because they do little other than increase the share of Medicaid costs paid by federal rather than state dollars. With Washington bearing most of the burden due to these cost shifts, state Medicaid programs have less incentive to focus on program integrity.
Republican and Democratic administrations alike have warned about the abusive nature of this tax, which raises an estimated $7.5 billion a year for California. On two occasions, the Biden administration warned California that CMS intended to eliminate the loophole. In May the Trump administration issued a rule to do so; for states like California, which had received repeated warnings about the issue, CMS proposed ending the loophole immediately on publication of the final rule.
Weeks after CMS issued its proposed rule, Congress closed the loophole through a provision in the Big Beautiful Bill Act. The law provides that the provision became effective "upon the date of enactment . . . subject to any transition period determined appropriate" of up to three fiscal years.
In November, CMS issued guidance suggesting that the transition period would last until the end of the state's current fiscal year; in California's case, until June 30. Yet despite years of warnings that California needed to modify or repeal this abusive tax, and explicit guidance from CMS, Mr. Newsom's budget assumes it can maintain the status quo for all of 2026.
CMS has legitimate policy reasons for closing this loophole as quickly as possible. The proposed rule last May estimated that it would save $33.2 billion in federal costs and an additional $18.8 billion in state spending from 2026 through 2030. Given the repeated warnings states have received about this issue, one might ask why CMS hasn't insisted on enforcing the new restrictions retroactive to the enactment of the Big Beautiful Bill in July.
At a bare minimum, federal officials should reject any attempt by California to extend the transition period beyond June. If Mr. Newsom wishes to couple his continued reliance on this abusive -- and now illegal -- gimmick with online trolling, the Trump administration could respond: Be careful what you wish for in focusing on fraud -- you just might get it.
Mr. Jacobs is founder and CEO of Juniper Research Group.