California Governor Gavin Newsom recently announced that the state is considering stiff penalties for hospitals and healthcare entities that fail to rein in rising healthcare costs. On its face, the move seems like a reasonable response to an alarming trend: health insurance rates in California are projected to jump 9.5% next year, following increases of 6.4% (2023-24), 7.2% (2024-25), and 8.8% (2025-26) — even as overall inflation has cooled to 2.9%.
But according to Dr. Deane Waldman, a physician and former healthcare policy director, this is not a story of a governor fighting for consumers. It’s a story of an arsonist offering to fight the fire he started.
The $19 billion ‘legal fraud’
Waldman, writing for American Thinker, argues that California’s approach to Medicaid funding amounts to a multibillion-dollar “legal fraud” that is a primary driver of rising insurance costs. While national headlines have focused on a $9 billion Medicaid fraud scandal in Minnesota involving Somali immigrants, Waldman points out that California’s Medicaid fraud netted an estimated $19 billion — and it has gone largely unnoticed by the media.
Here’s how the scheme works, according to Waldman:
All state Medicaid programs are jointly funded by the state and the federal government. Washington’s contribution is determined by the Federal Matching Assistance Percentage (FMAP), which was established in the original Medicaid enabling legislation of 1965. Under federal law, the Centers for Medicare and Medicaid Services (CMS) must match what any state budgets for its Medicaid program at least dollar-for-dollar. Wealthy states like California receive one dollar for each dollar budgeted. Poorer states get a multiplier — as much as 3.4-to-1 for Mississippi.
Crucially, CMS is legally required to send whatever amount the state budgets. There is no wiggle room. For the 2026-27 fiscal year, MediCal (California’s Medicaid program) requested $226.3 billion. In past years, that request was simply honored with no follow-up on where the money went — and no enforcement of the federal prohibition against using Medicaid funds to cover undocumented residents.
This year, however, funds are being withheld pending a forensic accounting of MediCal by CMS and criminal investigations by the Department of Justice. Both efforts are being “successfully stonewalled” by California officials, Waldman writes, adding a sardonic aside: “Maybe they had a warehouse fire and the records were destroyed?”
The shell game
The alleged fraud involves a new tax California imposed several years ago on Medicaid insurance sellers operating in the state. That tax raised insurers’ costs, which they passed on to consumers — or, more precisely, they raised the rates they charged MediCal. Higher MediCal costs inflated the MediCal budget, which in turn increased California’s demand on CMS. The result: California received a windfall of $19 billion to spend however it pleased.
Taxpayers got ripped off, Waldman says. MediCal enrollees got nothing.
He spells out the hypocrisy: California forced insurance rates up with its new tax, defrauded CMS out of billions, and now says it will punish insurers because their rates are too high.
Is it legal?
Waldman acknowledges the legal ambiguity. What California is doing is “obviously wrong — unethical, immoral, and fraudulent — but is it illegal?” California claims it is using the money to provide Medicaid coverage to undocumented immigrants. That is illegal under federal law, but legal under California statute.
Fraud can be defined as “wrongful or criminal deception intended to result in financial or personal gain.” Note the word “or,” Waldman emphasizes. “A fraud is always wrong but not necessarily criminal or against the law.” That is the genesis of the ambiguity and the legality of what California is doing.
A matter of smell
Forget the word games and legal technicalities, Waldman writes. The simplest test is the smell test. California’s legal fraud, followed by blaming insurers for the fallout, fails it miserably. “It stinks,” he concludes.
As the debate over healthcare costs and Medicaid funding heats up, this story raises questions about accountability, the limits of state versus federal power, and how much of the healthcare affordability crisis is actually self-inflicted by the states themselves.
Source: www.americanthinker.com — https://www.americanthinker.com/blog/2026/09/healthcare-fraud-in-california-reaches-new-low/