You hear it all the time:
Federal dollars do not fund health care for undocumented immigrants.
On paper, that is true. Federal law blocks regular Medicaid for undocumented immigrants. The only exception is emergency services and certain pregnancy services that states must cover regardless of status.
But the statement leaves out the middle of the story. Federal health dollars flow into state systems in massive amounts. That federal aid frees up state money. Some states then use the freed-up state dollars to finance state-only programs that do cover undocumented immigrants. Economists call this fungibility. Money in a big budget pot can be swapped across lines. That is how the shell game works.
The mechanics in plain English
Federal rules: Undocumented immigrants are not eligible for full-scope Medicaid or CHIP. States must cover emergency conditions. Pregnancy and certain limited benefits may also qualify under federal regulations.
Federal financing: Medicaid is jointly funded. The federal share is significant and ongoing. In FY2023, the federal government paid about 67% of total Medicaid costs across the states. States paid roughly 33%.
Matching rates matter: A state like Illinois receives roughly 51% federal match for traditional Medicaid and 90% for the ACA expansion group. When Washington covers that much of the bill, the state has more room to spend its own dollars on other things, including state-only coverage for immigrants.
Result: Even if no federal check is labeled “undocumented care,” the flow of federal money enables state programs by backfilling other costs. That is the policy sleight of hand.
Case study: California
California expanded full-scope Medi-Cal to undocumented adults. Current estimates put annual state General Fund costs for that expansion at about $8.5 billion.
The program helped drive a Medi-Cal shortfall that forced the state to borrow about $3.44 billion to plug the gap this year.
Fiscal pressure has been intense enough that Governor Newsom proposed scaling back benefits for undocumented adults starting in 2026 by adding premiums and pausing new enrollment. The administration projected $5.4 billion in savings from these changes through FY2028-2029.
Why this illustrates fungibility: California’s Medi-Cal budget is heavily funded by federal dollars for regular eligibility groups. Those federal funds keep the broader program running while the state uses state-only appropriations to finance coverage for undocumented residents. The line “no federal money was used” focuses on labels rather than how big budgets actually work.
Key facts to remember for California
Full-scope coverage for undocumented adults is paid from the state side, but the federal share of overall Medi-Cal spending is substantial.
The expansion is currently estimated at around $8.5B per year in state costs.
The state had to borrow $3.44B to address Medi-Cal shortfalls in 2025.
Case study: Illinois
Illinois created two state-funded programs:
HBIS: Health Benefits for Immigrant Seniors
HBIA: Health Benefits for Immigrant Adults
A February 2025 performance audit by the Illinois Office of the Auditor General found significant cost overruns versus early estimates. Highlights from the audit:
Costs in multiple cohorts ran 84% to nearly 300% above initial projections.
Aggregate spending on the immigrant programs climbed far beyond what lawmakers were first told.
At the same time, Illinois’ Medicaid program continues to rely on a high federal match: about 51% for traditional Medicaid and 90% for the ACA expansion group. Those federal matches reduce the state's spending on other Medicaid populations, making it easier to support a state-only immigrant program when legislators choose to do so.
Key facts to remember for Illinois
State-funded immigrant coverage exists outside federal Medicaid but sits next to a Medicaid budget that is majority financed by Washington.
The state’s official audit documented significant overruns in the immigrant programs.
Illinois depends on 51% and 90% federal matches across major Medicaid groups.
Why the “no federal money” line misleads
Federal dollars are fungible in large state health budgets. Federal aid accounts for a large share of Medicaid funding. That lets state legislators dedicate state dollars to new priorities, including immigrant coverage. The label on the check does not change the budget reality.
Mandated emergency coverage still uses federal funds when criteria are met. Even where states try to confine benefits, emergency Medicaid is an allowable federal expenditure for undocumented patients who qualify.
Scale matters. Medicaid is the largest line item in many state budgets. Shifts of only a few percentage points translate into billions. That is why the California and Illinois examples are not edge cases. They are how federal-state finance actually works today.
What to watch next
Shutdown negotiations and health riders. Changes to ACA subsidies or Medicaid matching rules will ripple through state budgets almost immediately. States must balance their books each year, so they will move quickly if Washington tightens or loosens the spigot.
State fiscal updates. Keep an eye on California’s Medi-Cal borrowing and any revisions to immigrant coverage in the 2026 plan. Also, watch Illinois for further adjustments after the Auditor General’s findings.
Bottom line
Federal law says undocumented immigrants cannot enroll in full-scope Medicaid. That is true. It is also true that the federal government pays a large share of every state’s Medicaid bill. When Washington pays more of the base bill, states can shift their own dollars to new priorities, including state-only coverage for undocumented residents. That is the budget sleight of hand hiding in plain sight.