As part of the 2012-13 budget, the Governor proposes to reduce the negotiated rates paid to Healthy Families Program (HFP) managed care plans and shift the children enrolled in HFP to Medi-Cal over a nine-month period. In this report, we provide background information on HFP and Medi-Cal and how they will be affected by implementation of federal health care reform. We discuss the potential merits of the Governor’s proposal, but raise several implementation issues and concerns. Specifically, the savings in the budget year may be less than the administration’s estimates, and the proposal will disrupt healthcare services for some HFP enrollees and may impact access to providers. Finally, we make recommendations that encourage the consideration of alternatives to the Governor’s plan.