The 2014-15 Budget: Analysis of the Health Budget

The 2014-15 Budget: Analysis of the Health Budget MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • FEBRUARY 20, 2014 2014-15 BUDGET CONTENTS Executive Summary ..................................................................................................3 Overview ...................................................................................................................5 Medi-Cal ....................................................................................................................7 Overview ...........................................................................................................................................8 Caseload .........................................................................................................................................10 ACA Implementation .................................................................................................................11 Medi-Cal Payment Reductions and Access to Care ......................................................25 Medi-Cal Eligibility Data System (MEDS) ..............................................................39 Covered California Fiscal Outlook .........................................................................42 Background ...................................................................................................................................42 Exchange’s Plans to Meet Financial Self-Sufficiency Requirement ...........................44 Current Exchange Outlook: LAO Assessment ...................................................................47 Analyst’s Recommendations...................................................................................................48 Department of Public Health .................................................................................49 Governor Proposes Elimination of MRMIB ...........................................................52 Department of State Hospitals ..............................................................................57 Overview ........................................................................................................................................57 Population and Personal Services Adjustments ..............................................................58 Patient Management and Bed Utilization Unit ................................................................61 Statewide Enhanced Treatment Units .................................................................................63 2 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET EXECUTIVE SUMMARY Overview of Health Budget. The Governor’s budget proposes $18.8 billion from the General Fund for health programs—a 3.9 percent increase over 2013-14 estimated expenditures. For the most part, the year-over-year General Fund changes reflect caseload changes, technical adjustments, and the implementation of previously enacted policy changes as opposed to new policy proposals. While the Governor’s budget includes two government reorganization proposals—the elimination of the Managed Risk Medical Insurance Board (MRMIB) and the transfer of the Drinking Water Program (DWP) from the Department of Public Health (DPH) to the State Water Resources Control Board (SWCRB)—neither of these two proposals would have a significant General Fund effect. ACA Implementation Raises New Issues for the Legislature to Consider. The budget assumes a couple of major fiscal effects associated with various provisions of the Patient Protection and Affordable Care Act (ACA) that were enacted as part of the 2013-14 budget. The budget assumes about $400 million in net General Fund costs in 2014-15 largely associated with the implementation of simplified Medi-Cal eligibility and enrollment processes that are expected to increase enrollment among individuals who are eligible for the program—often referred to as the “mandatory” Medi-Cal expansion. In addition, the budget assumes General Fund savings of $300 million in 2013-14 and $900 million in 2014-15 from implementation of the optional Medi-Cal expansion due to the state’s sharing of county savings from reduced county costs for indigent care. We find that the major ACA fiscal estimates included in the Governor’s budget are generally reasonable, although subject to considerable uncertainty. We note that the budget omits some potential ACA-related fiscal effects and recommend that the Legislature direct the administration to report on them as well as clarify certain details of its Medi-Cal pregnancy-only proposal. Medi-Cal Payment Reductions. In 2011, budget-related legislation authorized reductions in certain Medi-Cal payments by up to 10 percent. The Governor’s budget proposes to exempt certain, but not all, classes of providers and services from retroactive recoupments of these reductions and includes $36 million General Fund expenditures in 2014-15 associated with this exemption proposal. Payment reductions—unless exempted legislatively or administratively—will continue prospectively, resulting in ongoing General Fund savings of $245 million in 2014-15. We withhold recommendation on making further changes to Medi-Cal payment reductions and describe our concerns with the administration’s process for monitoring fee-for-service (FFS) access to providers and deciding which providers to exempt from the reductions. While we understand the Legislature’s interest in FFS rates and how these rates will affect access for some Medi-Cal beneficiaries, we recommend the Legislature focus the majority of its oversight on access issues in managed care because the bulk of Medi-Cal beneficiaries currently receive their care through managed care. Department of State Hospitals (DSH) Proposals Have Merit, but Require Additional Action. The Governor’s budget includes several proposals to address various workload and policy issues within the DSH. Specifically, there are proposals related to increasing the number of referrals for treatment, the referral process, and the increasingly forensic makeup of the DSH population. The administration’s proposed changes include funding for an increase in capacity statewide, the www.lao.ca.gov Legislative Analyst’s Office 3 2014-15 BUDGET development of a statewide patient management program, and a study of the implementation of enhanced treatment units. While we find that the Governor’s proposals have some justification, they require either additional justification or statutory changes before they are funded. For example, the Governor’s proposal to increase capacity requires additional information about the department’s need for additional patient beds and its ability to implement the expansion. In addition, DSH does not currently have the statutory authority necessary to fully implement the proposals to develop a patient management program and design enhanced treatment units. Covered California Representatives Should Report to the Legislature on its Fiscal Outlook. We recommend the Legislature ask representatives of the California Health Benefits Exchange (known as Covered California or the Exchange) to report on its fiscal outlook at budget hearings as soon as practicable after the March 31, 2014 enrollment deadline. This will allow the Exchange sufficient time to evaluate its enrollment and financial projections after the open enrollment period ends, thereby providing a better sense of the Exchange’s fiscal outlook in 2014-15. Governor Proposes to Eliminate MRMIB. The Governor proposes to transfer three health insurance programs from MRMIB to the Department of Health Care Services (DHCS) and eliminate MRMIB effective July 1, 2014. We recommend the Legislature evaluate the proposal in terms of whether it maintains or improves the efficiency, effectiveness, and accountability of the programs and is based on a policy rationale. Governor Proposes to Transfer DWP From DPH to the SWCRB. The administration proposes to transfer $200 million in all funds ($5 million General Fund) and 291 positions for the administration of DWP from DPH to SWCRB. For our analysis of this proposal, please see our report, 2014-15 Budget: Resources and Environmental Protection, which is forthcoming. 4 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET OVERVIEW Background on Health Programs services provided through state programs takes place at the local level and is carried out by Several state departments administer health local government entities, such as counties, and care programs and some departments administer private entities such as commercial health plans. more than one program. For example, DHCS (Funding for these types of services delivered administers the state-federal Medicaid Program— at the local level is known as “local assistance.”) known as Medi-Cal in California—as well as Most health services are provided through the the California Children’s Services Program and local service delivery model. other programs. Similarly, DPH administers the AIDS Drug Assistance Program (ADAP) and Expenditure Proposal by Major Programs other programs aimed at protecting California’s Overview of Health Budget Proposal. The population from infectious diseases. The health Governor’s budget proposes $18.8 billion from programs administered by state departments the General Fund for health programs. This is an provide a variety of benefits to California’s increase of $714 million—or 3.9 percent—above citizens, including purchasing health care services the revised estimated 2013-14 spending level, for qualified low-income persons and performing as shown in Figure 1. The net increase reflects various public health functions. increases in caseload and changes in utilization Most major state health programs are of services as well as the impact of major ongoing administered by one of the following three initiatives. departments: (1) DHCS, (2) DPH, and (3) DSH. Summary of Major Budget Proposals and (Funding for state employees to administer Changes. The budget plan reflects the fiscal health programs at the state level and/or provide effects of a major Medi-Cal provider payment services is known as “state operations.”) The proposal and two proposals to make state-level actual delivery of many of the health care organizational changes. Regarding the latter, the Figure 1 Major Health Programs and Departments—Budget Summary General Fund (Dollars in Millions) Change From 2013-14 2012-13 2013-14 2014-15 Actual Estimated Proposed Amount Percent Medi-Cal—Local Assistance $14,862 $16,230 $16,900 $670 4.1% Department of State Hospitals 1,277 1,505 1,515 10 0.7 Healthy Families Program (HFP)—Local Assistancea 176 22 — -22 — Department of Public Health 129 115 111 -4 -3.5 Department of Alcohol and Drug Programs (DADP)b 34 — — — — Other Department of Health Care Services programs 110 87 141 54 62.1 Emergency Medical Services Authority 7 7 7 — — All other health programs (including state support) 149 165 171 6 3.6 Totals $16,744 $18,131 $18,845 $714 3.9% a The HFP was eliminated and enrollees were shifted to the Medi-Cal Program. b The DADP was eliminated effective July 1, 2013, and its programs and functions were shifted to other departments. www.lao.ca.gov Legislative Analyst’s Office 5 2014-15 BUDGET administration proposes to transfer $200 million Summary of Major Ongoing Initiatives. The in all funds ($5 million General Fund) and budget plan reflects the fiscal effects of major health 291 positions for the administration of DWP from policy initiatives that are under implementation. DPH to SWRCB. The administration also proposes First, the budget assumes a couple of major fiscal to transfer three health insurance programs from effects associated with various provisions of the MRMIB to DHCS and eliminate MRMIB effective ACA that were enacted as part of the 2013-14 July 1, 2014. This would continue the shift of health budget. For example, the budget assumes about insurance programs from MRMIB to DHCS that $400 million in net General Fund costs in 2014-15 began with the transfer of the Healthy Families largely associated with the implementation of Program (HFP) in January 2013. As shown simplified Medi-Cal eligibility and enrollment in Figure 1, General Fund spending for HFP processes that are expected to increase enrollment decreases from a revised estimate of $22 million in among individuals who are eligible for the 2013-14 to no expenditures in 2014-15 to reflect the program—often referred to as the mandatory completed transfer of children in HFP to Medi-Cal Medi-Cal expansion. In addition, the budget in November of 2013. assumes General Fund savings of $300 million In 2011, budget-related legislation authorized in 2013-14 and $900 million in 2014-15 from reductions in certain Medi-Cal payments by up to implementation of the optional Medi-Cal 10 percent. Until recently, federal court injunctions expansion. These savings are realized through prevented the state from implementing many of changes to the 1991 health realignment that were these reductions. In June 2013, the injunctions authorized as part of the 2013-14 budget and result were lifted, giving the state authority to: (1) apply in lower state General Fund costs in the California the reductions to current and future payments to Work Opportunity and Responsibility to Kids providers on an ongoing basis and (2) retroactively (CalWORKs) budget. recoup the reductions from past payments that The budget plan also assumes a General were made to providers during the period in which Fund cost of $173 million from beginning the injunctions were in effect. The Governor’s implementation of the Coordinated Care Initiative budget proposes to exempt certain (but not (CCI) in 2014-15. (The CCI is scheduled to begin all) classes of providers and services from the no sooner than April 2014 in eight counties.) retroactive recoupments, and includes $36 million Once fully implemented, CCI is estimated to save in increased General Fund expenditures in 2014-15 hundreds of millions of General Fund dollars associated with this exemption proposal. Because annually. The CCI is intended to better serve the recoupments were otherwise scheduled to take seniors and persons with disabilities through place over several years, the total General fund improved integration of long-term care, behavioral cost of the proposal over this multiyear period health, and medical services. Specifically, the is estimated to be $218 million. (We note that CCI includes two main components: (1) a the budget assumes that the provider payment three-year demonstration project, known as Cal reductions—unless exempted legislatively or MediConnect, for individuals—often referred to as administratively—will continue prospectively, “dual eligibles”—who are eligible for both Medi-Cal resulting in ongoing General Fund savings of and Medicare and (2) integration of long-term $245 million in 2014-15.) services and supports (LTSS) into managed care 6 Legislative Analyst’s Office www.lao.ca.gov Graphic Sign Off Secretary Analyst MPA Deputy 2014-15 BUDGET and a requirement for nearly Figure 2 all Medi-Cal beneficiaries Budget Forecasts Medi-Cal to be enrolled in managed Caseloads Exceeding Ten Million care to receive these Average Monthly Enrollees (In Millions) benefits. Implementation 12 of CCI involves several Enrollment Associated With the ACAa departments, including 10 Targeted Low-Income Children's Program DHCS, the Department 8 Seniors and Persons With Disabilities of Social Services, and the Department of Aging. 6 Caseload Trends 4 Families and Childrenb Caseload trends are 2 one important factor influencing state health care 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 est. proj. expenditures. Below, we a Includes optional Medi-Cal expansion, mandatory expansion, hospital presumptive eligibility, expansion to newly qualified immigrants, and Express Lane enrollment. highlight the caseload trends b Includes refugees and certain undocumented immigrants. ACA = Patient Protection and Affordable Care Act. assumed in the Governor’s budget for Medi-Cal—by far the largest state-administered children categories include estimated underlying ARTWORK #140038 health program. caseload trends for these populations, absent the Medi-Cal Caseload. The Governor’s budget plan Temeffpelcattse o_f LrAecOenRte mpaojrotr_ pmoliidcy.a cithanges. These two projects an average monthly Medi-Cal caseload of underlying caseload categories are projected to grow 9.2 million in 2013-14 and 10.3 million in 2014-15— by about 1 percent between 2013-14 and 2014-15. The an 11.6 percent year-over-year increase. This increase TLICP enrollment is projected to grow by 2.7 percent is mainly the result of implementing various between 2013-14 and 2014-15. The remaining ACA-related provisions. Figure 2 illustrates past year-over-year caseload increase is largely the Medi-Cal caseloads and the Governor’s projected result of ACA implementation, including expanded caseload trends for Medi-Cal in 2013-14 and 2014-15, eligibility for certain adult populations that began divided into four groups: (1) seniors and persons January 1, 2014, and various changes to the eligibility with disabilities (SPDs), (2) families and children, determination process that are expected to increase (3) the Targeted Low-Income Children’s Program, the proportion of eligible individuals who enroll. We or TLICP (including children formerly in HFP), and discuss the Governor’s Medi-Cal caseload estimates, (4) individuals who will enroll as a result of various including estimated caseload increases associated ACA-related changes. The SPDs and families with with the ACA, in more detail below. MEDI-CAL In California, the federal-state Medicaid (Medi-Cal). Medi-Cal is by far the largest Program is administered by DHCS as the state-administered health services program in California Medical Assistance Program terms of annual caseload and expenditures. As www.lao.ca.gov Legislative Analyst’s Office 7 2014-15 BUDGET a joint federal-state program, federal funds are and pharmacy services—and are responsible available to the state for the provision of health for ensuring enrollees are able to access covered care services for most low-income persons. health services in a timely manner. Until recently, Medi-Cal eligibility was mainly Overview restricted to low-income families with children, SPDs, and pregnant women. California generally The Governor’s budget proposes $16.9 billion receives a 50 percent Federal Medical Assistance General Fund in 2014-15 for local assistance under Percentage (FMAP) (federal share of costs) the Medi-Cal Program, including the provision for these populations—meaning the federal of health care services and administrative government pays one-half of Medi-Cal costs for costs. This is a $670 million net increase, or these populations. As part of the ACA, beginning 4.1 percent, over estimated 2013-14 expenditures. January 1, 2014, the state expanded Medi-Cal Generally, the level of expenditures and changes eligibility to include additional low-income in year-over-year spending are driven by various populations—primarily childless adults who factors, including: did not previously qualify for the program. The • The total enrollment of beneficiaries in the federal government will pay 100 percent of the program and per-person cost of providing costs of providing health care services to this health care services, which is affected by newly eligible Medi-Cal population from 2014 both the price and level of utilization for through 2016; the federal matching rate will individual services. phase-down to 90 percent by 2020 and thereafter. There are two main Medi-Cal systems for the • Technical changes that result from the delivery of medical services: FFS and managed timing of receipt or payment of funds. care. In a FFS system, a health care provider • Implementation of various state and receives an individual payment from DHCS for federal policy changes enacted in recent each medical service delivered to a beneficiary. years. Beneficiaries in Medi-Cal FFS generally may obtain services from any provider who has Major Policies Affecting Year-Over-Year agreed to accept Medi-Cal FFS payments. In Spending Changes. The Governor’s 2014-15 managed care, DHCS contracts with managed budget reflects recent implementation and care plans, also known as health maintenance planned implementation of major programmatic organizations, to provide health care coverage for changes enacted in recent years, including: Medi-Cal beneficiaries. Managed care enrollees • ACA Implementation. The budget may obtain services from providers who accept includes a variety of significant fiscal payments from the managed care plan, also effects related to ACA implementation. known as a plan’s “provider network.” The plans Changes related to the ACA result in are reimbursed on a “capitated” basis with a both costs and savings to the Medi-Cal predetermined amount per person, per month Program that are hundreds of millions of regardless of the number of services an individual dollars annually in some instances. We receives. Medi-Cal managed care plans provide discuss the major ACA-related changes in enrollees with most Medi-Cal covered health the “ACA Implementation” section below. care services—including hospital, physician, 8 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET • CCI. The budget assumes a General Fund reflect reduced savings due to a temporary cost of $173 million from beginning exemption from the payment reduction implementation of CCI no sooner than for primary care services in 2013 and April 1, 2014. This is because the state will 2014, as required by the ACA.) We discuss incur upfront costs from making both the implementation of these payment managed care payments and retroactive reductions in the “Medi-Cal Payment FFS payments as beneficiaries and Reductions and Access to Care” section services transition to Medi-Cal managed later in this analysis. care. (Once fully implemented, CCI is • Tax on Medi-Cal Managed Care Plans. estimated to save hundreds of millions The budget assumes General Fund of General Fund dollars annually.) The offsets of $256 million in 2013-14 and administration recently announced $462 million in 2014-15 from a tax on that one of the demonstration plans, Medi-Cal managed care organizations CalOptima in Orange County, was (MCOs), known as the MCO tax, that subject to a federal audit of its existing was authorized as part of the 2013-14 Medicare Special Needs product for dual budget. These estimates exclude eligibles. As a result of this audit, the additional MCO tax General Fund offsets Cal MediConnect portion of CCI will associated with a significant increase not proceed in Orange County—which in Medi-Cal managed care enrollment represents about 14 percent of the under the ACA—$51 million in 2013-14 estimated 456,000 beneficiaries eligible for and $233 million in 2014-15—which are enrollment in Cal MediConnect—until accounted for as General Fund offsets in CalOptima takes corrective actions to the “ACA Implementation” section later in address the deficiencies uncovered by the this analysis. audit. At the time of this analysis, the administration had not released updated • Hospital Fee. The budget assumes fiscal estimates to reflect anticipated General Fund offsets of $155 million in changes in CCI enrollment resulting from 2013-14 and $713 million in 2014-15 from CalOptima’s temporary removal from the the recently enacted hospital quality demonstration. assurance fee. These estimates reflect a delay in implementation as the state seeks • Payment Reductions. The budget assumes federal approval of the new fee program. that the state will continue to implement The administration has indicated that it reductions to payments, enacted in 2011, expects to receive this approval no sooner to certain providers and managed care than June 2014. plans for certain services. (Some providers have been legislatively or administratively Managed Care Enrollment Continues to exempted from the payment reductions.) Increase. Managed care is increasingly becoming The budget assumes net General Fund the dominate delivery system in the Medi-Cal savings of $100 million in 2013-14 and program as both the number and the percentage $246 million in 2014-15. (These estimates of Medi-Cal beneficiaries enrolled in managed www.lao.ca.gov Legislative Analyst’s Office 9 2014-15 BUDGET care continues to grow. Roughly 65 percent of expansion, hospital presumptive eligibility, beneficiaries were enrolled in managed care in and Express Lane enrollment. (Please see our 2012-13. The Governor’s budget projects that, on “ACA Implementation” section below for a more average, 70 percent of beneficiaries will be enrolled detailed description of these changes.) We have in managed care in 2013-14 and 73 percent—about reviewed the administration’s caseload estimates 7.5 million Medi-Cal beneficiaries—will be and, accounting for the significant amount enrolled in managed care in 2014-15. The increase of uncertainty about how the ACA will affect in managed care enrollment reflects transitions of Medi-Cal caseload, we find the estimates to be beneficiaries from FFS to managed care, as well as reasonable. If we receive additional information additional enrollees associated with the transfer of that causes us to change our assessment, we will HFP and implementation of the ACA. provide the Legislature with an updated analysis at the time of the May Revision. Caseload High TLICP Caseload Projection Raises Baseline Caseload Estimates Reasonable. Questions. The HFP provided health coverage The administration projects baseline caseload—or to children in households with incomes too high program caseload absent changes associated with to qualify for Medi-Cal, but below 250 percent recent major policy changes, such as the shift of of the federal poverty level (FPL). The transition HFP and implementation of the ACA—will be of children from HFP to Medi-Cal generally about 7.7 million average monthly enrollees in did not change the eligibility criteria. Children 2013-14 and 7.8 million in 2014-15—a 1 percent transferring from HFP were enrolled in the newly year-over-year increase. We have reviewed the created Medi-Cal TLICP, which provides coverage administrations baseline caseload projections and to children in families with incomes too high we do not recommend any adjustments at this time. to qualify for Medi-Cal, but below 250 percent If we receive additional information that causes FPL. (Beginning January 1, 2014, state Medicaid us to change our assessment, we will provide the programs converted to the new Modified Adjusted Legislature with an updated analysis at the time of Gross Income method for counting income for the May Revision. ACA Estimates Are Figure 3 Generally Reasonable. Major ACA Caseload Estimates As shown in Figure 3, Average Monthly Enrollees (In Thousands) the budget assumes that 2013-14 2014-15 various ACA provisions Optional expansiona 330 779 will result in nearly Mandatory expansionb 130 509 1.5 million additional Express Lane enrollmentc 17 151 Hospital presumptive eligibilityd 25 32 average monthly Totals 502 1,471 enrollees in 2014-15. a Includes certain newly qualified immigrants. b The caseload increase Several ACA provisions will likely encourage individuals who were eligible for Medi-Cal prior to January 1, 2014, but not enrolled, to enroll in the program—also referred to as the “mandatory expansion.” includes additional c California exercised the option to implement “Express Lane” enrollment whereby—based on information already available to the state—a streamlined process is used to enroll certain persons that are likely to enrollment associated be eligible for Medi-Cal without completing a full application. d States are required to give qualifying hospitals the option to make presumptive eligibility determinations with the optional for most Medi-Cal beneficiaries on the basis of preliminary information provided by individuals. expansion, mandatory ACA = Patient Protection and Affordable Care Act. 10 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET most beneficiaries and the new converted standard the administration’s projections, the Legislature for the TLICP is 261 percent FPL.) When the can assess whether the amount budgeted for transition began in January 2013, approximately the TLICP caseload is the appropriate amount 850,000 children were enrolled in HFP. and whether the higher caseload reflects any The Governor’s budget estimates that about unintended changes in children’s health coverage 995,000 beneficiaries will be enrolled in the TLICP associated with the HFP transition to Medi-Cal. in 2014-15—representing a nearly 17 percent ACA Implementation increase in caseload over roughly a two-year period. This is a large increase in caseload, The budget assumes a wide variety of fiscal compared to the relatively stable HFP caseload in effects—some major and some minor—associated the years before the transition began. According with implementing various provisions of state to the administration, there has been a significant and federal law related to the ACA. Many of the increase in TLICP enrollment that appears to be ACA provisions that affect the Medi-Cal Program driven by a large number of children shifting from went into effect in 2013 or early 2014 and the existing Medi-Cal categories to the new TLICP effects of many of these changes are still highly categories—possibly caused by increasing incomes uncertain. In this section, we: (1) summarize the as the economy improves. major ACA state fiscal effects that are estimated in In our view, it is unlikely that the economic the Medi-Cal budget and provide our assessment recovery alone would explain such a significant of them, (2) identify some potential fiscal effects increase in TLICP caseload. This is because rising that are omitted from the budget, (3) provide our incomes associated with the economic recovery assessment of the Governor’s proposal to modify could serve to both increase and decrease the coverage offered to pregnant women in Medi-Cal, TLICP caseload. For example, individuals who were (4) raise issues that the Legislature may want to previously eligible for Medi-Cal who experience consider in light of recent ACA changes, and an increase in income may become eligible for the (5) provide recommendations that are generally TLICP, thereby increasing caseload. On the other intended to enhance legislative oversight of ACA hand, individuals who were previously eligible for implementation. the TLICP whose families’ experience an increase Summary of Major ACA Fiscal Effects in income may have incomes that are too high Assumed in the Medi-Cal Budget to qualify for the program, thereby decreasing caseload. While the degree to which these two Figure 4 (see next page) summarizes the factors offset each other is uncertain, it is unlikely major ACA-related fiscal effects (over $10 million that changing economic conditions alone would General Fund in a year) that are included in the cause such a significant and rapid net increase in 2014-15 Medi-Cal local assistance budget. Figure 4 caseload. also includes estimated General Fund savings Recommend Legislature Direct DHCS to (in the CalWORKs budget) from the changes to Report on TLICP Caseload. We recommend the 1991 health realignment that were enacted as part Legislature direct the administration to report at of the 2013-14 budget. These changes reflect the budget hearings on all the factors contributing to decreased county indigent care responsibilities as the significant increase in TLICP caseload. With a result of the expansion of Medi-Cal under the more comprehensive information on the basis for ACA. Some of the major ACA fiscal effects are the www.lao.ca.gov Legislative Analyst’s Office 11 2014-15 BUDGET result of complying with federal requirements, The state budget will continue to be affected by such as the costs associated with the so-called ACA implementation in the future. The estimates mandatory Medi-Cal expansion. Other major included in the budget plan generally do not reflect ACA fiscal effects are the result of choices made future state costs and savings associated with by the Legislature, such as the decision to adopt ACA implementation that will occur after 2014-15. the optional Medi-Cal expansion. We note that For example, the enhanced federal cost share for Figure 4 excludes some other major ACA fiscal the newly eligible Medi-Cal optional expansion effects assumed in the 2014-15 budget, such as population will begin to phase down in 2017, additional General Fund offsets gained through resulting in increased state costs. However, the increased hospital fee revenue (no estimates of this federal cost-share for the Medi-Cal population that amount were available at the time of this analysis) was formerly enrolled in HFP—now referred to as and additional federal funding that is used to TLICP—will temporarily increase in October 2015, offset state General Fund spending in other state resulting in state savings. departments. Figure 4 Selected Major Fiscal Effects of the Patient Protection and Affordable Care Act on Medi-Cala (In Millions) 2013-14 2014-15 Federal General Federal General Funds Fund Funds Fund Additional Enrollment Optional expansion $2,618 -$43 $6,622 -$198 Changes to 1991 health realignmentb — -300 — -900 Mandatory expansion 119 104 448 419 Express Lane enrollment 70 1 676 12 Hospital presumptive eligibility 13 10 43 39 County Administration Additional county administration funding 72 72 65 65 Enhanced federal match for certain eligibility 124 -124 248 -248 determination functions Changes to Benefits Enhanced mental health services 45 28 181 119 Enhanced substance use disorder services 51 33 127 79 Shift certain pregnant women to Covered California — — -17 -17 Other Changes Temporary rate increase for primary care services 1,628 34 575 27 Health insurer fee — — 67 55 Collect managed care drug rebates -194 -194 -146 -179 One percent increase in federal match for preventative 40 -40 27 -27 services a Excludes the following: (1) effects less than $10 million General Fund annually, (2) certain fiscal effects in other state departments, and (3) General Fund offsets associated with additional hospital fee revenue. b General Fund savings are realized in the CalWORKs budget. 12 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET In the next section of this analysis, we and stemming from the optional Medi-Cal describe eligibility expansions, changes to county expansion are estimated separately. administration of eligibility determinations, changes Historically, counties have had the fiscal and to Medi-Cal benefits, and other major ACA-related programmatic responsibility for providing health changes that affect the Medi-Cal budget. care for low-income populations without public or private health coverage—also known as indigent Expansions Result in Both health care. As part of 1991 realignment, the state State Costs and Savings provided a dedicated funding stream to counties for Additional enrollment in Medi-Cal resulting indigent health care and public health activities— from ACA implementation will result in both hereafter referred to as health realignment funds. state costs and savings. Much of the additional The optional Medi-Cal expansion shifts much enrollment is a result of expanded Medi-Cal of the responsibility for indigent health care to eligibility. Other ACA changes—such as penalties the state and federal governments, and counties for not obtaining coverage (also known as the are likely to experience significant savings. In individual mandate), increased outreach activities, recognition of the shifting responsibilities for and new enrollment pathways—will increase indigent health care, the 2013-14 budget established enrollment above the levels that would otherwise a complex structure under which a portion of have occurred in the absence of these changes. county health realignment funds will be redirected We first describe the major fiscal effects related to to help pay CalWORKs grant costs previously increased Medi-Cal enrollment under the ACA that borne by the state—thereby offsetting state General are included in the Governor’s budget. Fund costs. The methods used to determine the Optional Expansion. Effective January 1, redirected amount differ among counties and some 2014, Medi-Cal eligibility expanded to include counties will have the option to choose between previously ineligible adults with incomes up to two general approaches: (1) the so-called “60/40” 138 percent FPL—largely childless adults. The option, whereby a predetermined percentage of administration estimates that nearly 700,000 health realignment funds will be redirected from newly eligible beneficiaries will enroll in 2013-14, the county each year, or (2) the so-called “formula” growing to over 800,000 newly eligible beneficiaries option whereby 80 percent of the estimated savings in 2014-15. (Newly eligible persons who enroll counties realize under the ACA is redirected through new enrollment pathways such as Express to the state. The amount that can be redirected Lane enrollment or hospital presumptive eligibility in 2013-14 is capped at $300 million. For more are estimated separately and discussed in more detail on the different methods for determining detail below.) The federal government is paying for the redirected amount, see our November report, 100 percent of the health care costs for the newly The 2013-14 Budget: California Spending Plan. eligible population through 2016. Fiscal estimates The administration projects $300 million will be of the optional expansion incorporate savings redirected in 2013-14 and $900 million will be achieved from higher General Fund offsets from redirected in 2014-15. the MCO tax and costs for providing services to Mandatory Expansion. Several federal ACA certain newly qualified immigrants who are eligible requirements will result in additional Medi-Cal for state-only Medi-Cal coverage under state law. enrollment and state costs. For example, the ACA Savings from changes to 1991 health realignment includes requirements that will likely encourage www.lao.ca.gov Legislative Analyst’s Office 13 2014-15 BUDGET individuals who were eligible for Medi-Cal prior Express Lane Enrollment. States have the option to January 1, 2014, but not enrolled, to enroll in to implement “Express Lane” enrollment, whereby a the program (hereafter referred to as previously streamlined process is used to enroll certain persons eligible populations). These requirements include who—based on information already available to streamlining and simplifying the eligibility states—are likely to be eligible for Medicaid, but not determination process and a penalty for certain yet enrolled. California is scheduled to implement individuals who do not obtain health coverage (also an Express Lane enrollment option in February 2014 known as the individual mandate). The ACA also for persons who are enrolled in the Supplemental requires Medi-Cal to expand eligibility to include Nutrition Assistance Program, also known as former foster youth up to age 26. Collectively, the CalFresh in California. The state is targeting its administration refers to these changes as as the Express Lane enrollment process toward adults “mandatory expansion.” Generally, the state will who are likely newly eligible for Medi-Cal and, continue to be responsible for 50 percent of the thus, most of the costs associated with providing costs of providing services to these new enrollees. coverage to the new enrollees would be eligible for A small portion of the state costs will be offset by a 100 percent federal match. In the future, the state savings from higher MCO tax General Fund offsets also plans to implement an Express Lane process for that result from the additional enrollment. The parents with children in Medi-Cal and enrollees in administration assumes net mandatory expansion other state health programs, such as the Genetically costs of $104 million General Fund in 2013-14 and Handicapped Persons Program (GHPP), Every $419 million General Fund in 2014-15. Women Counts, and the Prostate Cancer Treatment Hospital Presumptive Eligibility. Prior Program. The administration estimates that over to ACA implementation, some Medi-Cal 300,000 individuals will enroll through the new providers have been able to grant temporary Express Lane enrollment process in 2014, roughly presumptive eligibility to a limited group of 50 percent of whom would not have otherwise individuals, including pregnant women and enrolled in the program through one of the other children. Beginning January 1, 2014, under the enrollment pathways. Implementation of Express ACA, hospitals now have the option to make Lane enrollment will result an estimated partial-year presumptive eligibility determinations for most General Fund cost of $1 million in 2013-14 and Medi-Cal applicants on the basis of preliminary a full-year General Fund cost of $12 million in information provided by individuals, generally 2014-15. when they seek care at the hospital. Individuals County Administration of who are determined presumptively eligible may Eligibility Determinations Will Change receive full-scope Medi-Cal for up to two months, at which point the individual will need to complete The ACA will increase the number of Medi-Cal a full Medi-Cal eligibility application in order to applicants and require counties to make changes continue to qualify for coverage. Implementation to how they carry out eligibility determinations of hospital presumptive eligibility will result in for Medi-Cal applicants. In addition, under new an estimated partial-year General Fund cost of federal rules related to the ACA, a significant $10 million in 2013-14 and a full-year General Fund portion of state General Fund costs for Medi-Cal cost of $39 million in 2014-15. eligibility determinations may be offset by an enhanced federal match for specified functions. 14 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET County Administration Funding for Eligibility the state, which in California is called Covered Determinations. The ACA contains several California. (The federal guidance is not solely provisions that will affect county administration related to ACA implementation, but the regulations costs for conducting Medi-Cal eligibility are, in part, related to changes in Medicaid determinations. Certain provisions of the ACA— eligibility determination systems and processes such as those that significantly increase the number under the ACA.) The DHCS must secure federal of Medi-Cal applications and enrollees—will approval prior to receiving the enhanced federal increase costs for counties conducting Medi-Cal match. The budget assumes the state currently eligibility determinations. On the other hand, meets federal requirements and will be eligible to ACA provisions that simplify the eligibility receive the enhanced federal funding for roughly determination process will likely reduce the average 70 percent of county eligibility determination costs cost of conducting eligibility determinations and incurred after January 1, 2014. redeterminations. The Governor’s budget provides Changes to Benefits Would Result in $65 million of additional General Fund support for Both State Costs and Savings counties in 2014-15 to fund costs related to ACA implementation—slightly less than the $72 million Enhanced Mental Health and Substance Use of additional General Fund provided in the 2013-14 Disorder Services. As part of ACA implementation, budget because it removes one-time costs for California is providing all Medi-Cal-covered training county eligibility workers and county/ nonspecialty mental health services through state-level planning and implementation. (These managed care, including some new mental health costs do not reflect the ongoing $15 million General services that are included in the benefits package Fund cost-of-living adjustment that was provided that is covered by plans offered through Covered for county eligibility determination activities in California. These services will be available for 2013-14.) both the previously and newly eligible Medi-Cal Enhanced Federal Funding for Certain populations. The state will also provide an Eligibility Determination Functions. Generally, enhanced set of substance use disorder services payments to counties for making Medi-Cal for previously and newly eligible populations. The eligibility determinations for both the previously budget assumes General Fund costs of $198 million and newly eligible populations are eligible for in 2014-15 to provide these additional services. a 50 percent federal match. However, federal Shift Certain Pregnant Women to Covered guidance released in 2011 allows states to receive California. The Governor’s 2014-15 budget a 75 percent federal match for certain eligibility proposes to shift pregnant women between determination functions, including costs for 109 percent and 208 percent FPL who qualify for processing applications, case maintenance, and Medi-Cal pregnancy-only coverage to plans offered renewals. (Activities classified as policy, outreach, through Covered California. The administration or post-eligibility are not eligible for the 75 percent also proposes to provide full-scope coverage— match.) In order to qualify for the enhanced federal rather than pregnancy-only coverage—to all funding, states must meet certain minimum pregnant women below 109 percent FPL who eligibility system requirements outlined by the receive coverage from Medi-Cal. The budget federal government, including coordinating assumes General Fund savings of $17 million in with the health insurance Exchange operating in 2014-15 related to this proposal. We discuss the www.lao.ca.gov Legislative Analyst’s Office 15 2014-15 BUDGET Governor’s pregnancy-only proposal and our beginning January 2014. The nationwide fee will assessment of it in more detail below. initially generate $8 billion annually and grow to Similar proposals were discussed last year in $14.3 billion annually by 2018. The fee is allocated budget subcommittee and policy committees. For to qualifying health insurers based on their relative example, the administration proposed a similar market share and exempts certain insurers such as shift of pregnant women to Covered California nonprofit insurers that receive a substantial share of and the associated savings were adopted as part of their premium revenue from public programs, such the 2013-14 budget under the assumption that the as Medicaid and Medicare. The budget includes costs details of the proposal would be worked out through associated with higher state payments to Medi-Cal policy committees. However, the statutory language managed care plans that are subject to the fee. authorizing such a shift was never enacted. Managed Care Drug Rebates. The ACA extended the federal drug rebate requirement to Other ACA Changes Affect Medi-Cal Budget outpatient drugs covered by all Medi-Cal managed Temporary Primary Care Physician Rate care plans. Previously, drug rebates were collected Increase. The ACA requires states to increase for drugs provided through FFS and certain Medicaid primary care physician service rates to managed care plans. The fiscal estimates provided 100 percent of Medicare rates for services provided in Figure 4 include $33 million savings from a new from January 1, 2013 through December 31, proposal in the Governor’s budget that would allow 2014. The rate increase applies to services the state to collect additional MCO supplemental provided in both FFS and managed care. The drug rebates. Many of the details associated with federal government will pay for 100 percent of this proposal are still unclear so we are unable to the incremental increase above the Medi-Cal comment on the merits of the proposal at this time. rates that were in effect as of July 1, 2009. Since FMAP Increase for Preventative Services. the state enacted a 9 percent payment reduction Effective January 1, 2013, the ACA established a for Medi-Cal primary care services in 2011, it 1 percentage point increase in the federal matching must temporarily pay for the state share of the rate for preventative services and adult vaccines incremental difference between existing Medi-Cal in states that meet certain requirements. In order rates and the rates that were in effect on July 1, to qualify for the increase, a state must cover all 2009. The budget includes foregone General Fund preventative services assigned a Grade A or B by savings associated with not implementing the the United States Preventative Services Task Force scheduled payment reduction for primary care (USPSTF) and all approved vaccines recommended services in 2013 and 2014, as well as additional by the Advisory Committee on Immunization administrative costs associated with implementing Practices and cannot impose beneficiary the rate increase in managed care. The budget cost-sharing on such services. California opted assumes the higher rates for primary care services to provide the preventative services necessary to sunset at the end of 2014 and the 9 percent qualify for the enhanced match and to not impose reduction to primary care services that was beneficiary cost-sharing for these preventative postponed for 2013 and 2014 will go into effect at services. The budget includes $26.4 million General the start of 2015. Fund costs from adding screening and counseling Health Insurer Fee. The ACA established a services for alcohol and substance use—services nationwide fee on the health insurance industry that were recently assigned a Grade A or B by 16 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET the USPSTF—to the existing benefits package in Figure 5. In addition, based on information effective January 1, 2014. With this addition, the submitted by counties, DHCS determined the state will provide all services assigned Grade A historical percentage of health realignment or B; although we note that, at the time of this funds that has been spent on indigent health analysis, it is unclear whether these preventative care which, among other things, will be used to services would have been added in the absence establish a cap on the amount of realignment of the enhanced FMAP for preventative services. funds that can be redirected from counties that The budget assumes General Fund savings of select the shared savings formula. (Counties have $27 million in 2014-15 associated with the 1 percent until February 28, 2014 to formally dispute these increase in the federal match for preventative percentages.) services. While the newly available information helps inform estimates of the amount of health Major ACA Fiscal Estimates in Budget Are Generally Reasonable, Subject to Considerable Uncertainty Figure 5 County Health Realignment Decisions We have reviewed the major ACA-related County Decisiona fiscal estimates included in the Governor’s budget, Counties With County Hospitals including the major underlying assumptions Alameda Formula upon which these estimates are based. There is a Contra Costa Formula significant amount of uncertainty surrounding Kern Formula many of the estimates, generally due to limited Los Angeles Formulab Monterey Formula available data and actual experience as many Riverside Formula ACA changes were only recently implemented. San Bernardino Formula Based on currently available information, we find San Francisco Formula San Joaquin Formula the administration’s ACA-related fiscal estimates San Mateo Formula to be reasonable. However, more reliable data Santa Clara Formula and actual experience from the initial months of Ventura Formula ACA implementation should become available Counties Without County Hospitals in the next several months to better inform Fresno Formula Merced Formula future ACA-related fiscal estimates. We highlight Orange Formula two major areas of uncertainty below: health Placer 60/40 realignment savings and mandatory expansion Sacramento 60/40 San Diego Formula costs. San Luis Obispo Formula Health Realignment Savings. In recent weeks, Santa Barbara 60/40 information has been released that helps inform Santa Cruz Formula Stanislaus 60/40 estimates of the amount of health realignment Tulare Formula savings that will be achieved in 2013-14 and Yolo 60/40 2014-15. For example, counties have made decisions a The amount redirected from the remaining 34 counties in the County Medical Services Program is not subject to counties’ about which method they are using to determine decisions. b The formula used to determine the amount redirected from Los realignment savings: the shared savings formula Angeles County is slightly different from the formula used in other or the 60/40 option. These decisions are shown counties with county hospitals. www.lao.ca.gov Legislative Analyst’s Office 17 2014-15 BUDGET realignment funds that will be redirected to offset is highly uncertain. For example, some previously General Fund costs in CalWORKs, the state and eligible individuals who enroll in Medi-Cal in counties are still in the process of collecting and response to the individual mandate, may have analyzing data that will be used to project savings otherwise enrolled through the new Express Lane in counties that selected the shared savings enrollment process. The degree to which caseload formula. It is in these counties where the projected changes associated with the various ACA policy savings are subject to the most uncertainty because changes overlap is highly uncertain. savings will depend on a variety of ACA impacts Last year, we conducted a detailed analysis that remain highly uncertain. For example, of the administration’s mandatory expansion the amount of realignment funds that will be cost estimates. At the time of that analysis, the redirected from counties that elect the shared administration estimated mandatory expansion savings formula and operate county hospitals will costs would be roughly $650 million General depend on uncertain factors such as how the ACA Fund in 2014-15. Our analysis concluded that affects the number of patients who will receive care the administration’s mandatory expansion cost from county hospitals and whether these patients estimates, while plausible, were significantly have Medi-Cal or other sources of health coverage. higher than what we considered most likely (about Our office’s November Fiscal Outlook assumed $300 million General Fund in 2014-15). $930 million in General Fund savings from health The Governor’s 2014-15 budget now estimates realignment. Based on our initial review of the just over $400 million in General Fund costs in additional information that has become available 2014-15 for the mandatory expansion. This estimate since that projection, our revised savings estimates is similar to our office’s most recent estimate of are similar to what we projected in November. slightly more than $350 million General Fund. We Given the uncertainty discussed above, we consider believe the administration’s mandatory expansion $900 million—the January budget’s assumed cost estimate is reasonable. Somewhat more savings—a reasonable “placeholder” number reliable mandatory expansion cost estimates may until more detailed and reliable data becomes be available in a few months, after more data are available. When the administration provides collected and analyzed and the effects of ACA revised projections of health realignment savings, implementation are better understood. When we will provide the Legislature with an updated the administration provides updated mandatory assessment. expansion estimates in May, we will provide the Mandatory Expansion Costs. Mandatory Legislature with an updated assessment. expansion costs largely depend on behavioral Budget Omits responses that are very difficult to predict, such Some Potential ACA Fiscal Effects as responses to the individual mandate, and the degree to which the new simplified eligibility Budget Does Not Include an Estimate of processes serve to facilitate enrollment and thereby Savings Related to Claiming Enhanced Federal increase caseload. In addition, the degree to which Funds, as Required by State Law. Under some changes in caseload among the previously eligible of the new ACA eligibility rules and the optional population are attributable to factors related to the expansion, the state may be able to claim a mandatory expansion versus some other recent 100 percent federal match for some enrollees who policy changes, such as Express Lane enrollment, would have previously qualified for a 50 percent 18 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET match. Chapter 23, Statutes of 2013 (AB 82, complete understanding of the factors affecting Committee on Budget), requires DHCS to report expected General Fund spending. to the Legislature, each January and May, the Recommend Legislature Direct projected General Fund savings attributable to Administration to Report on Estimates of claiming enhanced federal funding for previously Enhanced Federal Funding for Previously Eligible eligible Medi-Cal beneficiaries. The law also Beneficiaries. We recommend the Legislature required DHCS to confer with applicable fiscal direct the administration to report at budget and policy staff of the Legislature by no later than hearings on the reasons it failed to confer with all October 1, 2013 regarding the potential content and of the relevant legislative staff and provide a fiscal attributes of the information provided in its savings estimate of enhanced federal funding available for estimate. previously eligible beneficiaries, as required by state The administration has not complied with law. In addition, we recommend the Legislature either of these requirements. The DHCS did not direct the administration to describe: (1) the confer with all of the relevant fiscal staff of the previously eligible populations that may now be Legislature by October 1, 2013. Furthermore, eligible for the 100 percent federal match, (2) the the Governor’s January budget does not include total amount of General Fund that was spent on the required fiscal estimate. According to the these populations in previous years, (3) the major administration, the details of the federal claiming sources of uncertainty that led to the decision to process are still being discussed with the federal not include a fiscal estimate in the budget, and government and the administration did not provide (4) the administration’s timelines for providing its an estimate because it has no basis on which to fiscal estimate. With this additional information, estimate savings. the Legislature can begin to assess the potential In our view, preliminary fiscal estimates of magnitude of the fiscal effects and account for these factors that will likely have significant effects on the effects as it discusses the 2014-15 budget. amount of General Fund spending in the Medi-Cal Budget Does Not Assume Caseload Decreases Program should be included in the budget—even for Some Smaller State Health Programs. Some if these estimates are highly uncertain and subject state health programs, such as certain programs to change in the coming months. The Medi-Cal that are optional under federal Medicaid law—such budget frequently contains preliminary estimates as the Breast and Cervical Cancer Treatment and assumptions that are based on limited data Program (BCCTP)—or funded primarily with state and experience. For example, many of the other funds (also known as state-only programs)—such ACA-related fiscal estimates discussed above are as the GHPP—have traditionally provided coverage subject to substantial uncertainty and are based to individuals who may not qualify for full-scope on assumptions that are based on limited actual Medi-Cal and who may not have private health experience, yet these estimates are included in insurance. Figure 6 (see next page) lists the major the budget. Such estimates serve as placeholders optional and state-only health programs. Under until more refined estimates can be completed the ACA, some of the individuals who would have and allow for more informed budget deliberations otherwise enrolled in these programs will likely because the Legislature has an opportunity obtain coverage through the optional Medi-Cal to assess the administration’s estimates and expansion or Covered California—thereby likely assumptions and discuss the budget with a more decreasing caseload in these programs. In some www.lao.ca.gov Legislative Analyst’s Office 19 2014-15 BUDGET Figure 6 State Health Programs Affected or Potentially Affected by the ACAa Program Major Eligibility Criteriab Description of Services Prostate Cancer • Age 18 or older. Prostate cancer treatment, patient education, and Treatment Program • Income up to 200 percent FPL. case management/patient navigation. • No other health coverage. Every Woman Counts • Female. Comprehensive breast and cervical cancer • Income up to 200 percent FPL. screening and diagnostic services, clinical follow- • Services not covered by health coverage or up, and tailored health eduction. coverage has high deductible/copayment. Breast and Cervical • In need of treatment for breast or cervical cancer. Full-scope coverage for individuals who meet Cancer Treatment • Income up to 200 percent FPL. federal eligibility criteria; cancer treatment and Program • No other health insurance. cancer-related services for individuals in state-only • State-only program for individuals: (1) without portion of the program. satisfactory immigration status, (2) with high cost health insurance, and (3) females 65 years or older. Genetically Handicapped • Generally over age of 21. Medically necessary services, including case Persons Program • Diagnosis of an eligible genetic condition. management services, regardless of whether • No income limit. services are related to qualifying medical • State-only program for Medi-Cal-ineligible persons. condition. Major Risk Medical • Persons unable to obtain private health insurance Health coverage, including preventative care, Insurance Program because of a pre-existing medical condition. hospital care, physician visits, and drugs. Access for Infants and • Pregnant women. Comprehensive benefits, including pregnancy and Mothers Program • Income 200 percent to 300 percent FPL. non-pregnancy related services. • No health coverage or coverage has maternity-only deductible or copay greater than $500. AIDS Drug Assistance • HIV-infected. HIV/AIDS medications. Program • Over age 18. • Income up to $50,000. • Lack health coverage that covers the medications. Medi-Cal 200 Percent • Pregnant women. Pregnancy related and 60-day post partum FPL Pregnant Women • Income at or below 208 percent FPL. services.e Medi-Cal Medically • Pregnant women, parent/caretaker relatives, and Full-scope Medi-Cal once share-of-cost has been Needy Share-of-Cost children. met. Families • No income limit, but income determines share-of- cost amount. • Asset test. Family Planning, Access, • Income up to 200 percent FPL. Family planning and reproductive health services. Care, and Treatment • No other source of health care coverage for family planning, or meet other specified criteria. California Children’s • Under age 21. Pediatric specialty and subspecialty health care, Services (CCS)c • Diagnosed with CCS-eligible medical condition. case management, and care coordination; school- • State-only program for children ineligible for Medi- based therapy services available regardless of Cal with family income less than $40,000 per year family income. or estimated annual cost of care that exceeds 20 percent of family income. Qualified aliens inside • Qualified aliens who otherwise meet Medi-Cal Full-scope Medi-Cal . the five-year bard eligibility requirements, but who have been legally residing for less than five years and, thus, do not qualify for federal matching funds. a Includes programs that provide services to individuals who became newly eligible for Medi-Cal or federally subsidized coverage on Covered California beginning January 1, 2014. b Citizenship and immigration status requirements may also differ between programs, but are generally not included in this Figure. c Reflects spending for state-only portion of the program. d Qualified aliens inside the five-year bar from 0 percent to 400 percent FPL are eligible for federally subsidized coverage on Covered California. e Certain qualified aliens inside the five-year bar qualify for federal matching funds. This spending number reflects costs for qualified aliens inside the five year bar who do qualify for the match and those who do not. TF=total funds; GF=General Fund; and FPL=Federal Poverty Level. 20 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET programs, such as the ADAP, the budget adjusts the ACA and potentially adjust the budgets for these for savings associated with reduced caseload under programs accordingly. the ACA. In other programs, the budget does not Pregnancy-Only Proposal Has Merit, adjust for likely caseload declines. but Some Details Remain Unclear Many of the major ACA changes only recently went into effect and the magnitude of their effects Currently, certain pregnant women up to on caseloads in these optional and state-only health 208 percent FPL qualify for pregnancy-only programs are highly uncertain. Some of these Medi-Cal coverage—which includes only programs serve populations that are ineligible for services related to a woman’s pregnancy, Medi-Cal or subsidized insurance offered through rather than full-scope Medi-Cal coverage. The Covered California. However, there will likely be Governor’s pregnancy-only proposal has two at least minor caseload reductions in many of these main components: (1) shifting certain pregnant programs that are not accounted for in the budget women between 109 percent and 208 percent plan. The Department of Finance (DOF) indicated in FPL from Medi-Cal pregnancy-only coverage meetings with legislative staff that it intends to review to coverage offered through Covered California the impact ACA has on caseload and utilization and paying for “wrap-around” coverage and levels for these programs in the fall of 2014 as part (2) providing full-scope coverage to pregnant of its 2015-16 budget development process. The DOF women up to 109 percent FPL who currently also indicated that more complete caseload and receive pregnancy-only coverage. Pregnant utilization data will be available in the latter half of women with incomes between 109 percent FPL 2014 that will better inform any proposals DOF puts and 208 percent FPL would have the option to forward to modify these existing state-only programs enroll in federally subsidized coverage from to account for the impact of ACA implementation. plans through Covered California that provide Under this approach, 2014-15 caseload and budgeted broad benefits, and Medi-Cal would pay for their funds would be the basis for future discussions about premiums, cost-sharing, and certain pregnancy- whether to modify these programs. related supplemental services—also known as wrap Recommend Legislature Direct Administration around coverage. The proposal caps the amount to Report on Effects of ACA on Other State Health of wrap-around premiums and cost-sharing that Programs. We recommend the Legislature direct Medi-Cal would pay to the amount that would the administration to report in budget hearings cover all beneficiary premiums and cost-sharing for on the following: (1) the existing state health the second lowest cost “silver” plan. Thus, women programs that are likely to experience caseload in this income band would have the option to declines under ACA; (2) factors that would limit choose any plan on the Exchange, but Medi-Cal any potential decline in caseload and costs in these would not cover all of the costs of more expensive programs, such as a substantial portion of enrollees plan options. who continue to be ineligible for Medi-Cal or In our view, both components of the subsidized coverage through Covered California; Governor’s proposal have merit, but some aspects and (3) the administration’s timeline for making of the proposal remain unclear. Below, we discuss adjustments to the budgets of these programs. With the primary merits of the proposal and identify this information, the Legislature can better assess some key aspects of the proposal that remain potential caseload decreases in these programs under unclear at the time of this analysis. www.lao.ca.gov Legislative Analyst’s Office 21 2014-15 BUDGET Shift Would Likely Reduce General Fund scope of covered services for pregnant women in Spending, While Potentially Providing More Medi-Cal consistent, regardless of whether the Generous Benefits. The proposal to shift certain woman became pregnant before or after applying pregnant women from pregnancy-only Medi-Cal for Medi-Cal. The administration assumes to Covered California would potentially enhance no additional cost associated with providing the scope of services available to these pregnant full-scope—instead of pregnancy-only—coverage women. Pregnant women would have the option to to pregnant women below 109 percent FPL. receive comprehensive coverage from plans offered Some Details of Proposal Remain Unclear. The through Covered California, while maintaining Governor’s proposal has merit in concept because certain wrap-around services that are available it would expand the scope of coverage available to in Medi-Cal, such as dental services and access certain pregnant women in Medi-Cal, make the to certain perinatal specialists. In addition, since scope of coverage more consistent for pregnant the women would qualify for federally subsidized women who enter the program at different times, coverage through Covered California, the proposal and at the same time reduce state General Fund would generate state General Fund savings by costs. However, some details of the Governor’s leveraging federal subsidies to pay for a large proposal remain unclear at the time of this analysis, portion of costs that were previously covered including: by Medi-Cal. For example, most of the costs for • Differences in Covered Services and Costs these pregnant women—such as costs for most Between Full-Scope and Pregnancy-Only perinatal visits and labor and delivery—would be Coverage. The specific differences in covered by the plan obtained through Covered covered services between full-scope and California, instead of the Medi-Cal Program. The pregnancy-only coverage are still unclear. state would only pay the relatively minor costs The administration estimates no additional of the wrap-around coverage for these women. costs associated with providing full-scope The administration estimates that the shift would coverage instead of pregnancy-only reduce state General Fund spending by about coverage—an estimate that is based on the $17 million in 2014-15. assumption that there are no significant Full-Scope Coverage Would Eliminate differences in coverage. However, it has Coverage Inconsistencies for Pregnant Women. not provided the basis for this assumption. Under current law, some childless women applying While it is likely that the differences in for Medi-Cal would qualify through the optional covered services are relatively minor, expansion and receive full-scope Medi-Cal full-scope coverage may result in the coverage. If a woman becomes pregnant while state paying for some additional services enrolled in Medi-Cal, she would be allowed to for pregnant women and, thereby, result remain in the new adult group and continue to in additional costs that have not been receive full-scope coverage. However, a woman accounted for in the Governor’s budget. with the same income who applies for Medi-Cal at the time she is pregnant would be eligible • Continuity of Coverage and Plan Choice. for pregnancy-only coverage. The Governor’s The specific options that would be proposal to provide full-scope coverage to pregnant available to women to remain in the same women below 109 percent FPL would make the plan and continue to receive care from 22 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET the same physician under this proposal for Medi-Cal or subsidized coverage through are uncertain. Covered California. The Legislature may want to consider the Recommend the Legislature Direct future of some of these programs and how they the Administration to Clarify Details of fit into the broader system of coverage established Pregnancy-Only Proposal. While we believe under the ACA. Last year, the administration the Governor’s pregnancy-only proposal has publicly indicated its interest in discussing merit, there are some details that remain potential changes to some of these programs. unclear. We recommend the Legislature direct As a result, options to restrict individuals from the administration to clarify the details of this enrolling in programs such as ADAP, GHPP, and proposal, including (1) the differences in covered BCCPT if they were also eligible for Medi-Cal or services between full-scope Medi-Cal and subsidized coverage through Covered California pregnancy-only Medi-Cal, and (2) continuity of were discussed in a budget subcommittee last coverage and plan choice for individuals moving year. While these changes were never officially between Medi-Cal and Covered California. With proposed by the administration or adopted by the more complete information, the Legislature can Legislature, in our view, the Legislature should more accurately: (1) assess how this proposal will consider similar or alternative options to leverage affect coverage for certain pregnant women on new sources of coverage to reduce costs in some of Medi-Cal, (2) evaluate whether the administration’s these programs. For example, the Legislature may estimated fiscal effects are appropriate, and want to consider opportunities to shift individuals (3) identify potential modifications to the proposal. into subsidized Covered California plans while Issues for Legislative Consideration offering wrap-around coverage—similar to the Governor’s pregnancy-only proposal discussed The ACA has resulted in major changes to above. the Medi-Cal Program and many other aspects Any potential modifications to these programs of health care in California. Now that many of should be thoroughly vetted, as many of the the major changes are being implemented, the programs serve vulnerable populations with acute Legislature will still need to provide oversight of health care needs. Some key issues the Legislature ACA implementation, as well as shift its attention may want to consider as it weighs the future of to the future of Medi-Cal and other state health these programs include: programs. Below, we discuss some of the issues that we believe should be priorities for future legislative • Need for Services. The Legislature should consideration. seek to clarify which services and benefits The Future of Other State Health Programs being provided by these programs are also Under the ACA. As shown in Figure 6, the provided in Medi-Cal or through Covered state currently administers several other health California plans and which services are programs that are relatively small compared only available in these programs. The to the Medi-Cal Program. Many of these other specialized services offered by these programs provide health care to targeted groups of programs may not be available elsewhere, individuals, often with specific medical conditions. and enrollees who are not eligible for full- Some of the individuals who currently qualify scope Medi-Cal or Covered California for these other programs would be newly eligible plans, such as undocumented immigrants, www.lao.ca.gov Legislative Analyst’s Office 23 2014-15 BUDGET may not be able to obtain these services if increase managed care payments to those hospitals. the programs are eliminated. At the time of this analysis, it is still unclear whether the remaining 25 percent of the rate range • Federal Requirements. The Legislature will be paid to plans in public hospital counties and should seek to clarify federal requirements whether any of the rate range will be paid to plans and restrictions that limit the state’s in other counties. The administration is currently options for modifying these programs. in discussions with plans about whether and how For example, several of these programs are the remaining rate range will be used. subject to federal maintenance-of-effort The Legislature should begin to identify requirements that limit the state’s ability to key activities and outcomes that it would like to modify the programs. achieve in Medi-Cal managed care and explore Once these factors were well understood, the opportunities to use the rate range flexibility Legislature could identify options to modify some to promote those activities and outcomes. For of these programs in ways that leverage federal example, there may be opportunities to leverage the funding to offset state costs and comply with rate range to promote improvements in managed federal requirements. This process would also help care quality, access, and/or data reporting that identify the key benefits and services provided by are priorities for the Legislature. The Legislature these programs that the Legislature would like to should also bear in mind that the 100 percent preserve or possibly enhance. federal match is temporary. Therefore, any ongoing Opportunities to Leverage Federal Funds to commitment to activities financed through the rate Improve Program Outcomes. The state’s actuaries range flexibility would be partially financed with develop a range of potential capitation rates that state funds in future years as the federal match for could be paid to Medi-Cal managed care plans the newly eligible population phases down. that reflect various assumptions about factors Measuring and Monitoring Access to Care affecting future plan costs—also known as the in Medi-Cal Managed Care. Access to care and “rate range.” Generally, the state pays Medi-Cal provider network adequacy in the Medi-Cal managed care plans at the lower bound of the Program is an important issue for the Legislature rate range. However, through 2016, the state can to monitor and oversee. The significant increase leverage the 100 percent federal match to pay rates in Medi-Cal enrollment under the ACA creates for newly eligible populations at the upper bound additional demand for health care services from of the rate range. This gives the state flexibility to providers treating Medi-Cal patients. Most of the pay higher rates to managed care plans for certain additional services will be provided by managed beneficiaries at no additional cost to the state. care plans and their contracted provider networks. As part of the changes made to 1991 health If these provider networks do not have sufficient realignment last year, the Legislature determined capacity to meet the increased demand, then how it would like to use a portion of the rate range beneficiaries may have difficulty accessing necessary flexibility—higher payments to county hospitals. health care services in a timely manner. We believe The Legislature required that plans in counties with the Legislature should focus a significant amount county hospitals use 75 percent of the difference of its oversight and monitoring efforts on access to between the lower bound and the upper bound care in Medi-Cal managed care. We provide more of the rate range for newly eligible populations to information on issues related to monitoring access 24 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET to care in the “Medi-Cal Payment Reductions and Chapter 3 reductions, including the Governor’s Access to Care” section that immediately follows. 2014-15 budget proposal. We next evaluate this approach taking into account (1) the quality and Conclusion relevance of access monitoring information that We do not recommend any specific adjustments is presently available, and (2) the distinction to ACA-related fiscal estimates included in the between—and relative significance of—access budget at this time. However, we recommend in managed care versus FFS. Lastly, we lay out the Legislature direct the administration to issues for the Legislature to consider when report on certain fiscal effects associated with the deliberating over whether to restore funding that ACA that are not accounted for in the budget. was reduced with the payment reductions, as well We also recommend the Legislature direct the as recommendations for how the Legislature should administration to clarify certain details of the proceed on the broader subject of access to care in Medi-Cal pregnancy-only proposal. Finally, we Medi-Cal. identify a few fiscal and policy issues that we think Overview of Chapter 3 Payment Reductions should be priorities for the Legislature to consider as the state implements the ACA. These issues Chapter 3 authorizes (1) reductions in include the future of other state health programs, certain Medi-Cal FFS provider payments by up opportunities to leverage federal funds to improve to 10 percent and (2) a roughly proportionate program outcomes, and measuring and monitoring decrease to managed care capitation payments access to care in Medi-Cal managed care. known as “actuarially equivalent” reductions. These reductions originally applied to a wide range Medi-Cal Payment Reductions of providers and services, including (1) outpatient And Access to Care services provided by physician and clinics, (2) institutional providers such as distinct-part Introduction nursing facilities and intermediate care facilities for Chapter 3, Statutes of 2011 (AB 97, Committee the developmentally disabled, (3) ancillary services on Budget), authorizes DHCS to reduce Medi-Cal such as laboratory tests and medical transportation, FFS payments to providers for certain services by and (4) retailers of medical goods such as up to 10 percent, and to reduce capitation payments pharmacies and medical equipment suppliers. to Medi-Cal managed care plans by a related Chapter 3 allows DHCS discretion to adjust these amount. The Legislature adopted Chapter 3 as reductions as necessary to comply with federal part of a package of expenditure-related solutions Medicaid requirements, including those related to address the state’s 2011-12 budget problem. to beneficiary access that we discuss later. Until However, the Legislature has expressed concern recently, federal court injunctions prevented the that these reductions may impede beneficiaries’ state from implementing many of these reductions. access to services, and—as the state’s fiscal In June 2013, the injunctions were lifted, giving the condition improves—has shown interest in state authority to (1) apply the reductions to current restoring Medi-Cal payments that were reduced and future payments to providers on an ongoing under Chapter 3. basis and (2) retroactively recoup the reductions This analysis begins by summarizing the from past payments that were made to providers state’s current approach to implementing the during the period in which the injunctions were www.lao.ca.gov Legislative Analyst’s Office 25 2014-15 BUDGET in effect. Since the 2013-14 budget was enacted, exempt specific providers from the reductions, several types of providers and services have been including the decisions reflected in the Governor’s exempted from the ongoing payment reductions budget. Below we describe the federal requirements through either administrative decisions by the for analyzing and monitoring FFS access with DHCS or recently enacted legislation. respect to Chapter 3. Federal “Equal Access” Provision Governs FFS Governor’s Proposal Provider Payments. Generally, states are required The Governor’s budget proposes to exempt to obtain federal approval for reducing provider certain classes of providers and services from the payment rates in their FFS Medicaid programs. retroactive recoupments, and includes $36 million The Centers for Medicare and Medicaid Services in increased General Fund expenditures associated (CMS) reviews states’ proposed reductions to ensure with this proposal. Specifically, the budget they comply with federal Medicaid law—including proposes that the following providers and services the requirement that FFS payments be sufficient to be exempted from the retroactive recoupments: enlist enough providers so that care and services (1) physicians and clinics, (2) certain high-cost are available to Medicaid beneficiaries to at least the drugs, (3) dental services, (4) intermediate care same extent that they are available to the general facilities for the developmentally disabled, population in a geographic area. This requirement, and (5) medical transportation. Because the often referred to as the equal access provision, only recoupments are otherwise scheduled to take place applies to provider payments and services in the FFS over several years, the total General Fund cost of system—it does not apply to managed care. (Later, the proposal over this multiyear period is estimated we discuss separate requirements that govern access to be $218 million. The administration has stated considerations in Medi-Cal managed care.) that while federal approval is required to forgive the Proposed Federal Regulations to Implement recoupments, no statutory changes are necessary. Equal Access Provision. Until 2011, the federal The budget assumes that the state will continue government provided little regulatory guidance to implement reductions to payments to providers on how states should comply with the Medicaid and services that have not been legislatively equal access provision. Shortly after passage of or administratively exempted from ongoing Chapter 3, CMS proposed new regulations that, if reductions. The budget assumes that these ongoing adopted, would require states to conduct reviews of reductions will result in General Fund savings of beneficiary access to services in their FFS systems. $245 million in 2014-15. Under the draft regulations, a state seeking to reduce FFS provider payment rates for a service is Federally Required Baseline Analyses required to submit the following materials to CMS. And Monitoring Plan for FFS Reductions • A baseline analysis of FFS access to The state required federal approval to the affected service, conducted within implement the FFS reductions specified in 12 months prior to submitting the Chapter 3. As part of the conditions of this proposed reductions. approval, DHCS agreed to analyze and regularly monitor access to care in the FFS system. The • A plan for continually monitoring FFS administration has indicated that its FFS access access to the service after implementing the monitoring continues to inform its decisions to proposed reductions. 26 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET There is no state law explicitly specifying the For most services, the analyses concluded measures that DHCS must collect and analyze (1) FFS access was adequate for all enrollees to monitor access to care provided through FFS. throughout the study period, and therefore (2) the Moreover, rather than prescribe specific metrics or state could reduce FFS payments for these services activities to implement the equal access provision, without negatively impacting access. There were CMS’ proposed rule gives states flexibility to several exceptions. For example, the ambulatory develop their own approaches to conducting FFS care analysis reported that in FFS Medi-Cal, only access reviews in their Medicaid programs. States’ half of children above the age of five received an approaches can take various forms, as long as they annual physician visit, leading DHCS to exempt conform to a broad framework that addresses three pediatric services from the payment reductions. main criteria: (1) enrollee needs, (2) availability of DHCS Monitoring Plan. The DHCS’s care and providers, and (3) utilization of services. monitoring plan outlines 23 specific measures As a result, the administration’s efforts to monitor related to FFS access that the department would FFS access—per its agreement with CMS for collect and report on an ongoing basis. Under the implementing the Chapter 3 reductions—have plan, DHCS would report four of these measures proceeded within a loose regulatory structure at quarterly as part of an “early warning” system the federal level. To meet CMS’ expectations as for detecting and responding to access problems reflected in the proposed rule, DHCS produced in the FFS system. The four quarterly measures baseline analyses and a monitoring plan for are: (1) provider participation rates, (2) service Medi-Cal services that would be subject to FFS utilization rates, (3) beneficiary calls to a FFS provider payment reductions under Chapter 3. helpline established by DHCS, and (4) changes DHCS Baseline Analyses. The DHCS in FFS enrollment. The DHCS would report the submitted six baseline analyses of utilization remaining 19 measures—which relate variously to and provider availability for different categories provider availability, service use, and health care of services in the FFS system. (For example, one outcomes—annually or biannually. analysis focused on ambulatory care provided by At the time of this analysis, DHCS had made physicians and clinics.) The analyses generally public the following sets of documents related to relied on (1) FFS claims data, and (2) DHCS’s Chapter 3 access monitoring for the FFS system: “provider master file”—a record of providers (1) the baseline analyses originally submitted to who have billed Medi-Cal for services provided CMS and (2) quarterly monitoring reports of the through FFS—to measure utilization and provider four early-warning system measures. availability respectively. Most of the analyses DHCS Does Not Report on FFS Access to reported annual summary statistics from these Dental Services. Neither the provider participation administrative data for the period of 2007 through reports nor service utilization reports issued each 2009. To varying degrees, the analyses stratified quarter contain any information on dental services these data by geography (such as counties and provided through FFS Medi-Cal. We note Medi-Cal urban regions versus rural regions) and enrollee dental services are (1) targeted by the Chapter 3 category (such as families and children versus reductions, (2) are still mostly provided through FFS SPDs). For some services, DHCS also compared (as discussed later), and (3) have been the subject of utilization rates with statewide or national statistics recent legislative concerns over access. and/or benchmarks. www.lao.ca.gov Legislative Analyst’s Office 27 2014-15 BUDGET DHCS Has Not Published Annual Measures physicians are nearly equal to the total number of Outlined in Monitoring Plan. Although two- medical licenses in the state. and-a-half years have transpired since CMS’ These figures are implausibly high. The DHCS’s approval of DHCS’s FFS monitoring plan, the counts are based on the number of “enrolled” administration has yet to report on any of the physicians listed in the provider master file. (Before plan’s 19 proposed annual or biannual measures Medi-Cal will reimburse for FFS physician services on provider availability, service use, or health provided to a beneficiary, the physician rendering care outcomes. Among these annual measures are the services must first apply for a Medi-Cal enrollee-to-dentist ratios and the percentage of provider number. Once the physician receives this children with at least one dental visit. Again, these number from DHCS, the physician is entered into are measures that are potentially of interest to the the provider master file as an enrolled physician.) Legislature, given the preponderance of dental care Researchers have pointed out that the provider that is still covered under FFS Medi-Cal. master file likely includes physicians who have left the state, stopped practicing, or passed away. Baseline Analyses and Although DHCS (1) screens the provider master Monitoring Reports of Limited Value file for known physicians with inactive status and We have reviewed DHCS’s baseline analyses (2) claims that it periodically evaluates the file and quarterly monitoring reports and come away for accuracy and completeness, it is unclear how with numerous concerns about the quality of the frequent or thorough the data cleansing process data, the soundness of the methodologies, and actually is. the assumptions underlying the administration’s There are also questions regarding the internal findings on access. In our view, these concerns consistency of DHCS’s approach. The DHCS’s are sufficient to render the administration’s public most recent quarterly count of physicians has reporting of very limited value for the purpose of dropped sharply from prior quarters. Instead understanding beneficiary access in the FFS system. of listing around 100,000 physicians enrolled as There are a multitude of issues that we Medi-Cal providers—the rough number reported encountered during our review of the baseline in the baseline analysis and previous quarterly analyses and quarterly monitoring reports.We reports—the latest report now lists about 75,000 highlight our most serious concerns below. enrolled physicians for the most recent quarters. Inflated Estimates of Available FFS The report does not provide an explanation for Physicians. It is likely that the DHCS’s baseline this 25-percent downward revision. The DHCS has analysis and quarterly monitoring reports broadly indicated that the adjustment was due to overestimate the number of physicians who “updates and modifications” to the provider master currently participate in FFS Medi-Cal. The file, although it has not clarified the exact nature of baseline analysis’s statewide count of physicians these changes. The revision suggests the baseline who are “potentially accessible” to FFS Medi-Cal analysis’ count of 100,000 enrolled physicians beneficiaries actually exceeds the total number of available to FFS Medi-Cal-only beneficiaries— active and in-state physician and surgeon licenses which were used to justify Chapter 3 reductions to as reported by the Medical Board of California. payments for physicians services—was overstated. In all but the most recent quarterly reports on provider participation, the counts of FFS Medi-Cal 28 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET Flawed Construction and Interpretation inference on patient access from the per-capita of Enrollee-to-Physician Ratios. The DHCS supply of providers, it is important to have some uses the raw count of enrolled physicians as the notion of the average willingness and capacity denominator in calculating FFS enrollee-to- of these providers to serve additional patients. physician ratios. This approach implicitly assumes This is why per-capita ratios typically specify that every physician who has ever billed Medi-Cal full-time equivalents as the unit of measurement for a service is a full-time equivalent who actively for provider availability. It is possible that many provides services to FFS Medi-Cal beneficiaries. enrolled physicians on the provider master file may The resulting statewide ratios are as low as have treated and billed for the occasional Medi-Cal 15 Medi-Cal FFS beneficiaries to every enrolled patient in the past—and/or agree to continue physician. By comparison, the ratio of all state seeing the Medi-Cal patients who are already part residents—more than half of whom have private of their current practice—yet generally choose health insurance—to the total number of licensed not to open their practice regularly to additional physicians in the state is around 377 to 1. The Medi-Cal patients. reason behind this disparity is simple. Because A 2008 study conducted by researchers at the (1) DHCS’s reported count of enrolled physicians University of California, San Francisco (UCSF) is close to the total number of state-licensed reported that about 70 percent of physicians in the physicians, and (2) the number of FFS Medi-Cal state currently have at least one Medi-Cal patient enrollees is less than three percent of the total state (FFS or managed care) in their practice, and about population, the ratio for FFS Medi-Cal enrollees 60 percent were accepting new Medi-Cal patients. is arithmetically much lower than the ratio for the The corresponding figures were 92 percent and state population as a whole. 90 percent for private insured patients, and The DHCS concludes that the FFS enrollee 80 percent and 70 percent for Medicare patients. ratio compares “favorably” to the statewide Moreover, the study found Medi-Cal patients were population-to-provider ratio—implying that FFS concentrated within a small share of practices, Medi-Cal beneficiaries enjoy equal or perhaps with 25 percent of physicians providing care for better access to care than the general population. 80 percent of Medi-Cal patients. Taken together, Yet, for the purpose of measuring access to these findings seriously question the validity of physician services, any attempt to make an (1) treating each enrolled provider in the master “apples-to-apples” comparison between these two file as a full-time equivalent and (2) using the ratios is highly misleading. In its discussion of resulting ratios to compare beneficiary access with the proposed rule to implement the equal access other populations—particularly privately insured provision, CMS states that “in order to contribute patients. (For information on the UCSF study to beneficiary access, it is significant to know methodology, see the box on page 31.) whether enrolled providers have ‘open panels’ The DHCS’s quarterly monitoring reports which means that they are accepting Medicaid for provider participation only cover physician patients.” supply. The reports state that physicians represent The DHCS’s reports do not attempt to the “epicenter” of the health care delivery account for the portion of enrolled providers system—for example, providing a gateway to who have open Medi-Cal panels. Yet CMS makes other services through prescriptions and referrals. a compelling point. To draw any meaningful While we agree with the concept of prioritizing www.lao.ca.gov Legislative Analyst’s Office 29 2014-15 BUDGET physician availability in an early warning system invoices showing that the reductions would lower for monitoring access, we are troubled by the FFS reimbursement for these drugs to less than administration’s execution of this concept. The the drugs’ acquisition cost for many pharmacies. DHCS’s data sources for participating physician Yet the administration’s reasoning for other counts do not appear fully credible, and the services has been more nebulous. For example, department’s analyses and interpretation of that when asked about the most recent decision to data are highly problematic. As a result, the exempt dental pediatric surgery centers, DHCS baseline analysis and monitoring reports convey has referenced an internal tracking system that little useful information to the Legislature about captures more “granular” measures than the physician availability in the FFS system. public quarterly monitoring system. Chapter 3 declares DHCS has “unique DHCS Provides Little Explanation expertise that can inform decisions that set or for Some Exemption Decisions adjust reimbursement methodologies and levels Figure 7 displays a subset of the FFS provider consistent with requirements of federal law.” categories that—by administrative decision or Because the FFS monitoring results that DHCS statute—have been partially or fully exempted has made public have proven both unreliable and from ongoing Chapter 3 reductions. (The of limited if any value for the actual decisions exemptions for dental pediatric surgery centers being made, it is unclear how the administration are still pending federal approval.) interprets and implements its requirement to For a few of the services exempted after June meet the equal access provision under Chapter 3. 2011, the administration has provided relatively Simply stating—as the administration has clear explanations for its decisions to grant done—that there is no single factor or formula in exemptions. For example, in its decisions to determining whether to exempt providers does exempt certain specialty drugs from the pharmacy not clarify DHCS’s decision process. reductions, DHCS cited its review of provider Figure 7 Subset of Provider Categories Exempted From Ongoing Chapter 3 Reductions Effective Date of Baseline Analysis or Quarterly FFS Monitoring Exemption Provider/Service Category Cited in Decision to Exempt? 1-Jun-11 Pediatric services. Yes—baseline analysis found only half of children in FFS Medi-Cal received recommended annual pediatric visit. 1-Jun-11 Adult day health care outside Southern Yes—baseline analysis found that supply of providers was California and San Francisco metropolitan relatively low outside these areas. areas. 1-Jun-11 Hospital outpatient services. No. 31-Mar-12 Certain drugs and pharmacy providers. No—DHCS cited study of pharmacy invoices indicating that cuts would reduce FFS payments to below providers’ acquisition cost for drugs. Rural/frontier Distinct-part nursing facilities. No. 1-Sep-13 All others 1-Oct-13 Nonprofit 1-Sep-13 Dental pediatric surgery centers. No—DHCS cited “significant volume” of pediatric patients served For-profit 1-Dec-13 by centers. Chapter 3 = Chapter 3, Statutes of 2011 (AB 97, Committee on Budget); FFS = fee-for-service; and DHCS = Department of Health Care Services. 30 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET Debate Has Mainly Focused further developments in Chapter 3—including On FFS Reductions . . . the Legislature’s interest in revisiting the reductions—extensively cited flaws in the FFS To date, the state’s approach to overseeing baseline analyses, and only applied to specific FFS Chapter 3 implementation has concentrated on reductions. the effect it has had on access to providers and whether to exempt specific categories of providers . . .While Access Issues in Managed Care from reductions. For some services that are still Are Gaining More Importance mainly provided through FFS—such as dental Managed care has overtaken and surpassed FFS services and long-term care—this approach as the primary Medi-Cal service delivery system. generally encompasses the relevant set of issues. The amount of attention devoted to FFS issues However, as discussed later, this approach only related to Chapter 3 is understandable. However, directly addresses access issues within the FFS it is increasingly important to exercise oversight system, and does not address access issues in over access to services in Medi-Cal managed care, Medi-Cal managed care where the majority of given the state’s growing reliance on managed care beneficiaries receive services. to cover more complex groups of beneficiaries and Early Stages of Chapter 3 Implementation services. Focused on FFS Issues. Only the FFS reductions Majority of Medi-Cal Beneficiaries Are under Chapter 3 required direct approval Mandatorily Enrolled in Managed Care . . . from the federal government. As a result, Presently, the vast majority of Medi-Cal DHCS’ baseline analyses and monitoring plan beneficiaries with full-scope coverage are only covered the state’s FFS system to meet mandatorily enrolled in managed care to receive conditions for federal approval. Despite their most medical benefits, including primary and various problems outlined earlier, the baseline specialty care. (Beneficiaries with full-scope analyses and monitoring reports remain the most coverage are entitled to receive all medically recognizable components of the administration’s necessary services that are included in the state’s response to access concerns under Chapter 3. The benefit package.) These populations include: court injunctions that formed the backdrop for Study of Physicians’ Willingness to Accept New Medi-Cal Patients The findings from the University of California, San Francisco study were based on physicians’ written responses to survey questions that asked about their patient mix. The researchers received permission from the Medical Board of California to append their survey questionnaire to the regular application that physicians are required to complete to renew their medical licenses biannually. The response rate for the survey was 60 percent, and the researchers weighted the responses in proportion to the characteristics of the total physician population. The Department of Health Care Services has previously held the position that its administrative data are more reliable than self-reported survey responses. However, the discussion of the draft regulations issued by the Centers for Medicare and Medicaid Services indicates that surveys may be the only practical means of estimating the number of providers with open Medicaid panels. www.lao.ca.gov Legislative Analyst’s Office 31 2014-15 BUDGET • Families and children in all 58 counties. Other incoming populations—beneficiaries in the 28 rural counties, Medi-Cal-only SPDs in 16 • Newly eligible individuals under the counties, and dual eligibles in the 8 CCI counties— optional expansion—mostly childless previously received their Medi-Cal benefits through adults—in all 58 counties. FFS. Finally, the optional expansion accounts for 46 percent of the expected managed care influx • Medi-Cal-only SPDs in 30 counties. during 2013-14 and 2014-15. Overall, enrollment During 2014-15, Medi-Cal-only SPDs will in Medi-Cal managed care is projected to have also be mandatorily enrolled in managed care in increased by around 60 percent between 2011-12 the 28 rural counties where managed care has and 2014-15. most recently been established. In the eight CCI . . .And Increasing Complexity of Beneficiary demonstration counties—which are among the Needs and Services. Medi-Cal managed care most populous in the state, such as Los Angeles plans will contend with the access implications County—all SPDs, including dual eligibles, will be of (1) extending coverage to populations who face enrolled in Medi-Cal managed care to receive LTSS greater challenges obtaining medically necessary such as In-Home Supportive Services and skilled services and (2) providing many new benefits to nursing care. Altogether, managed care enrollees meet the needs of SPDs and dual eligibles that will account for more than 70 percent of the entire the plans generally did not previously provide. Medi-Cal caseload projected for 2014-15. For instance, the Medi-Cal-only SPDs have a . . .With Significant Enrollment Growth in high prevalence of complex medical conditions Recent and Coming Years. . . Figure 8 indicates that require referrals to specialists—a category that approximately 2.7 million, or 36 percent of of providers whom historically have been harder Medi-Cal managed care enrollees in 2014-15 will for Medi-Cal plans to recruit and retain in their be relative newcomers who (1) have transitioned networks. Due to the low supply and geographical to Medi-Cal managed care within the past dispersion of providers in many rural areas, plans three years, (2) are currently in the process of that begin providing coverage in the 28 rural enrollment, or (3) will begin to transition over the counties may encounter difficulties building next several months. A large portion of the recent networks with sufficient providers in general, arrivals are children formerly covered under HFP. and specialists in particular. While beneficiaries Figure 8 Recent and Upcoming Transitions to Medi-Cal Managed Care Through 2014-15 Transition Approximate Enrollment Time Frame Medi-Cal-only SPDs 240,000 June 2011 - May 2012 HFP to Medi-Cal 850,000 January - November 2013 Rural county expansion 400,000a September - November 2013 ACA optional expansion 780,000 Beginning January 2014 CCI dual eligibles 450,000b Beginning April 2014 Total 2,720,000 a Medi-Cal-only SPDs in 28 rural counties will transition to managed care after April 2014. b Dual eligibles in CCI demonstration counties will be mandatorily enrolled in Medi-Cal managed care to receive LTSS. SPDs = seniors and persons with disabilities; HFP = Healthy Families Program; ACA = Affordable Care Act; CCI = Coordinated Care Initiative; and LTSS = long-term supports and services. 32 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET who gain coverage under the optional expansion expected to grow as coverage for adult dental benefits are expected to be healthier on average than the is partially restored toward the end of 2013-14 and as existing Medi-Cal population, the earliest enrollees Medi-Cal eligibility is expanded through ACA. As are likely to be disproportionately represented by with the current population of children who receive the higher-needs segment of the newly eligible, such dental coverage under Medi-Cal, the vast majority of as individuals with complex and urgent medical these adult beneficiaries will be served by Denti-Cal. conditions who formerly received county indigent Managed Care Access a Key Area health care. Finally, in 2014-15, Medi-Cal managed for Legislative Oversight care plans are required to cover additional services and meet new network standards for contracting In concept, shifting beneficiaries and services with providers of these services, including: from FFS to managed care should also improve (1) enhanced mental health and substance use the state’s monitoring of access to care in the disorder services in all 58 counties, and (2) LTSS in Medi-Cal Program. As discussed earlier, there the 8 CCI counties. are no state statutory guidelines for interpreting Remaining FFS Population. The remaining adequate access in FFS Medi-Cal, other than population who receive most of their Medi-Cal compliance with the broad equal access provision benefits through FFS will consist primarily of of federal Medicaid law. Even if FFS access (1) undocumented immigrants eligible for only standards were well-developed, no outside entities restricted-scope coverage of emergency and such as managed care plans exist for the state to pregnancy-related services, (2) dual eligibles outside hold accountable to such standards. The DHCS the CCI counties who are primarily covered under is responsible for both directly purchasing and Medicare for their medical benefits, and (3) the ensuring access to services in FFS Medi-Cal. small portion of beneficiaries who are granted In contrast, under Medi-Cal managed special medical exemptions from mandatory care, the state delegates to managed care plans managed care enrollment. the responsibility for making covered services available and accessible to Medi-Cal beneficiaries, Dental Services Still Mainly thereby imposing a set of enforceable obligations Provided Through FFS on specific outside entities. Moreover, the state Medi-Cal provides dental services through draws much of its monitoring framework from two service models: FFS, also known as Denti-Cal, an existing and comprehensive body of rules, as and dental managed care (DMC). Currently, only described below. two counties—Sacramento and Los Angeles—offer Two Departments Monitor Statutory and DMC while all other counties offer Denti-Cal. In Contractual Access Requirements for Medi-Cal Sacramento, beneficiaries are mandatorily enrolled Managed Care. Medi-Cal managed care plans in DMC whereas in Los Angeles, enrollment into are overseen by two departments: DHCS and the DMC is voluntary, and if beneficiaries do not Department of Managed Health Care (DMHC). enroll in DMC, they are automatically enrolled in The DMHC is responsible for ensuring plans Denti-Cal. Currently, about 6.5 million beneficiaries comply with the Knox-Keene Health Care are enrolled in Denti-Cal and about 500,000 Service Plan Act of 1975 (Knox-Keene Act)—the beneficiaries are enrolled in DMC. The number regulatory structure for most managed care of Medi-Cal beneficiaries with dental coverage is plans in California, including Medi-Cal plans. www.lao.ca.gov Legislative Analyst’s Office 33 2014-15 BUDGET The DHCS contracts with the plans to provide expansion of their provider networks to coverage to Medi-Cal enrollees. Accordingly, accommodate incoming enrollees. DHCS is responsible for ensuring plans meet • Transition Monitoring. The state the Medi-Cal contractual requirements, which monitors the actual process of enrollment include Knox-Keene Act standards and additional with an emphasis on “continuity-of-care” requirements that are usually based on federal and issues, such as the ability of beneficiaries state Medicaid standards. For more information to access their preferred providers. on the state’s system for monitoring access in Medi-Cal managed care, see the box below. • Ongoing Monitoring. After the transition Three Stages of Managed Care Access is complete and enrollment has stabilized, Monitoring. Generally, when a new population of the state monitors each plan for continuing beneficiaries is mandatorily enrolled in Medi-Cal compliance with statutory and contractual managed care, the state’s activities to ensure requirements to provide accessible care, adequate access for those beneficiaries occur in and in doing so may investigate issues such three main stages. as substantial changes to plans’ provider • Readiness Review. Prior to enrolling any networks. beneficiaries in managed care plans, the For Medi-Cal managed care to deliver on its state assesses the plans’ preparations to conceptual promise enabling the state to better meet access requirements, including the Medi-Cal Managed Care Access Monitoring Both the Knox-Keene Act and Medi-Cal contracts contain a variety of requirements intended to ensure that managed care plans are providing enrollees with adequate access to care. For example, regulations implementing the Knox-Keene Act establish three main categories of standards that plans must follow to demonstrate adequate access. These are (1) minimum ratios of full-time equivalent providers to enrollees, (2) maximum distances between primary care providers and enrollees’ residences and workplaces, and (3) limits on enrollee wait times for appointment and referrals. (The first two categories of requirements are often referred to as “network adequacy” standards and geographic standards, while the third category is a set of recently developed regulations known as “timely access” standards.) The Department of Health Care Services monitors additional contract-specific requirements related to access, often with the Department of Managed Health Care’s assistance under interagency agreements. These additional requirements may account for—among other areas—the number of network providers who are not accepting new patients, the location and types of specialists within the network (with specific requirements that depend on the characteristics and health needs of the plan’s enrollees), and coverage of out-of-network services that the plan may be unable to provide. Both departments conduct various activities to monitor access to care, including quarterly reviews of provider network data submitted by plans, help lines that may identify early access problems through beneficiary complaints, and periodic on-site audits of plans’ operations. 34 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET monitor access to care, two layers of accountability only basic descriptions of how they are necessary. First, contracting plans are monitor plan contract provisions that accountable to DHCS in providing accessible care extend beyond basic Knox-Keene Act to their enrollees. Second, the administration must requirements, such as the adequacy of itself be accountable to the Legislature in executing specialist networks to meet the care needs legislative intent to ensure adequate access in of SPDs. managed care. Specifically, at each of the above three stages, the Legislature needs evidence that State’s Approach to Chapter 3 Does Not (1) the administration is carrying out monitoring Directly Address Managed Care Access activities in good faith and (2) the access measures Under Chapter 3, reductions to FFS trigger themselves are meaningful. actuarially equivalent reductions to managed care Questions About Ongoing Monitoring rates. (Actuarially equivalent reductions are decreases of Managed Care Access Remain. Since the to managed care capitation payments that are documentation of various problems that occurred roughly proportionate to FFS reductions to provider during the Medi-Cal-only SPD transition, the payments.) If the administration or the Legislature Legislature has increased its oversight presence exempts a provider category from a FFS reduction, at the readiness review stage, such as the recent then managed care plans are also exempted from hearing on pre-implementation issues in CCI. the actuarially equivalent reduction. In other words, The Legislature has also made efforts to become the state’s finding that an access problem exists for more involved during the transition stage, such as some service in FFS implies—without a separate requesting DHCS to provide network adequacy assessment—that a commensurate problem exists for updates during each phase of the HFP transition. the same services in managed care. This assumes that While access monitoring at these first two stages under managed care, reductions that are actuarially is important for the well-being of new enrollees, equivalent to FFS rate cuts are also practically ongoing monitoring is crucial for long-term success equivalent in terms of their impact on particular in ensuring beneficiary access in managed care. provider categories. A detailed evaluation of the state’s current While the state administratively sets capitated efforts to monitor ongoing access in Medi-Cal rates paid to Medi-Cal managed care plans, it managed care is beyond the scope of this analysis. generally does not dictate the amount or structure However, we highlight two areas that we believe are of payments from plans to their contracted deserving of greater legislative oversight. providers. (An important exception is the ACA • Statutory Access Requirements. There requirement that plans pay Medicare-level rates are questions regarding DMHC’s for primary care services through the end of 2014.) implementation of Knox-Keene Act This makes it difficult to determine whether or standards, such as (1) how plans how plans pass through actuarially equivalent demonstrate timely access and (2) whether reductions to particular providers in their current provider-to-enrollee ratios networks. Consequently, there is no guarantee that meaningfully reflect network adequacy. exempting specific providers from Chapter 3 would prevent plans from passing through some portion • Contractual Access Requirements. So of the remaining cuts onto these providers. far, DHCS and DMHC have provided www.lao.ca.gov Legislative Analyst’s Office 35 2014-15 BUDGET On the other hand, plans may choose to absorb reductions that have not already been exempted certain actuarially equivalent reductions. Our by statute or administrative decision. As explained review of several memoranda composed by plans earlier, the only provider payments directly affected shortly after passage of Chapter 3 suggests that by these reductions are those administered in plans may apportion cuts to different providers the FFS system. We do not have a clear picture of after considering various factors—such as their FFS access to any of these providers to make an existing contracts and concerns about network analytical case for further restoring their payments. adequacy—rather than strictly emulate the FFS In 2001, we observed that FFS Medi-Cal reductions that are reflected in their capitated rates. physician rates were roughly 60 percent of those Plans may refrain from cutting contract payments, of Medicare, and in many cases well below the but instead attempt to weather the reductions by rates paid by other health purchasers. However, tightening utilization controls or more frequently the fact that FFS Medi-Cal paid lower rates than denying treatment requests. This highlights the other payers was not per se a problem requiring importance of the state’s ongoing monitoring legislative action. Rather, our concern was whether system for both network adequacy and timely the state’s FFS payment policy was consistent with access in managed care. the Legislature’s goal of ensuring reasonable access The Chapter 3 language on “actuarially to care. Due to the lack of objective data about equivalent reductions” is simply a vehicle that beneficiary access, we did not have a basis for enables actuaries to certify managed care recommending further changes to FFS physician rates reflecting an overall budget target—one rates in 2001. (For more information, see our proportionate to total savings from FFS reductions. 2001 report, A More Rational Approach to Setting Capitation, which is designed to move the state Medi-Cal Physician Rates.) away from reimbursing for individual services, With regard to Chapter 3, we are in many ways rolls the actuarially equivalent reductions into confronted by the same data deficiencies as in 2001. a single rate cut to each plan. There is no clear While the administration has since established evidence that the effects of this aggregate cut, either a FFS monitoring system, the public reporting on provider payments or on beneficiary access, from this system has been unsuitable for drawing will closely mirror the effects of individual FFS meaningful conclusions about beneficiary access. reductions. Even as the Legislature recognizes the We recognize that the administration has turned growing significance of Medi-Cal managed care, to other information to guide implementation of the state’s main response to managed care concerns Chapter 3. However, without being privy to the under Chapter 3—reversing actuarially equivalent details of the administration’s internal decision reductions on a piecemeal basis—does little to process, we can neither assess its quality and directly address access to specific services in the relevance, nor apply it to our own independent managed care system. evaluation of FFS access. If the administration provides these details to the Legislature—for Issues to Consider for example, the invoice-based cost studies that were Remaining Reductions used to exempt certain specialty drugs from the At this time, we withhold recommendation pharmacy reduction—we may be able to give on whether the Legislature should restore funding recommendations on the remaining reductions in a with respect to any or all of the Chapter 3 payment future analysis. 36 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET At the same time, we understand the access from exercising these options will mainly be Legislature’s continuing concern about access to felt by beneficiaries, providers, and services in the care and how it may relate to provider payment receding FFS system. levels. To the extent the Legislature wishes—despite Analyst’s Recommendations the absence of reliable data on FFS access—to continue pursuing the question of whether to The Legislature’s future plans for addressing restore payments reduced under Chapter 3, we the broader subject of access should prioritize would suggest it keeps the following points in issues that are (1) most material to the Medi-Cal mind. Program, (2) within the proper scope of legislative Reductions and Restorations Only Directly oversight, and (3) potentially amenable to policy Affect Payments in FFS. There is a widely solutions. With these principles in mind, we held notion that FFS rate-setting strongly and lay out an oversight agenda that—based on our persistently influences capitated rate-setting for findings—aims to make the most efficient use of Medi-Cal managed care. If provider rates are too the Legislature’s availability to work on access- low to support adequate access in FFS, the thinking to-care issues in Medi-Cal. goes, then so must be the case for managed care. Limit Oversight of FFS Access Monitoring on However, we are unaware of any compelling Services Like Dental Care. To make any progress evidence to support this claim. According to our toward raising the quality of the administration’s discussions with DHCS, the state’s provider fee public FFS access reporting, the Legislature would schedule for FFS—which may not be regularly need to address the present lack of state standards updated for many categories of providers and to govern this reporting. The Legislature could services—has little if any direct bearing on the cost take an informal approach to building greater assumptions used to construct managed care rates, accountability from the administration, such as which are updated annually. While state budgetary requesting DHCS to report at budget hearings on considerations certainly do impact capitated rate strategies to improve its FFS access monitoring. development, the overall process relies mostly However, without the force of law to guide the on historic utilization and cost data specific to administration in developing such strategies, managed care plans. Finally, as discussed earlier, prospects for meaningful improvements in public the structure of capitation makes the degree of FFS monitoring would remain dim. plan-to-provider pass-through of reductions or Thus, the Legislature would have to codify FFS restorations ambiguous. access measures and monitoring requirements in Reversing Chapter 3 reductions will statute—requiring, for instance, DHCS to monitor not necessarily translate into managed care the number of full-time equivalent providers plans increasing their contract payments to per capita who are accepting new FFS Medi-Cal corresponding network providers. By the same patients. Crafting this legislation would be a token, keeping reductions in place will not complex and lengthy undertaking, given the overall necessarily lead to lower managed care payments breadth and scope of access-to-care issues. To for the same services. Therefore, as the Legislature enforce these standards credibly, the Legislature weighs any options for undoing versus maintaining would also need to become an active and informed some of the remaining Chapter 3 reductions, it consumer of the administration’s improved should recognize that any potential effects on monitoring, by studying reported trends regularly www.lao.ca.gov Legislative Analyst’s Office 37 2014-15 BUDGET and comparing its own interpretation of those care plan, as the object of its efforts to ensure trends with the administration’s. beneficiary access. Moreover, with the benefit of the When deciding where to invest its resources state’s existing regulatory structure for managed with respect to access-to-care issues, we encourage care as a starting point, it should be easier for the the Legislature to carefully consider (1) the time- and Legislature to pursue lasting improvements within a labor-intensive steps involved in producing and shorter period for managed care access monitoring overseeing meaningful standards for FFS access as compared to FFS. monitoring, and (2) the fact that for a growing The growth of Medi-Cal managed care over majority of Medi-Cal beneficiaries, medical and the past three years has been rapid in pace, vast ancillary services are provided through managed in scale, and complex in scope. Compared with care rather than FFS. To the extent the Legislature populations that have been enrolled in Medi-Cal wishes to address FFS access monitoring, we suggest managed care for decades—such as families and that it focus on the services that remain FFS benefits children in metropolitan areas—many of the for most beneficiaries, such as certain long-term care newest managed care enrollees will (1) demand services, prescription drugs that are “carved out” costlier and harder-to-find services (including of managed care, and especially dental services, as benefits that are new to Medi-Cal managed care), described immediately below. (2) pose greater challenges to plans in making these Dental care will remain primarily a FFS benefit services available and accessible, and (3) depend for the foreseeable future—for children who are more crucially upon timely access to care to currently covered, as well as adults who will see the maintain or improve their health. Simply put, the benefit partially restored near the end of the current stakes for beneficiary access have become much year. Accordingly, we recommend the Legislature higher in managed care. enact legislation that would create meaningful To assist the Legislature in making its oversight standards for monitoring Denti-Cal access. As the task manageable and its efforts more productive, Legislature takes up this issue, it should require the we recommend two main areas of managed care administration to present at budget hearings on its access for the Legislature to concentrate on during current internal efforts for Denti-Cal monitoring. 2014-15. Moreover, the final legislation should direct the • Ongoing Monitoring. Most major administration to consult experts and stakeholders transitions to managed care will be in implementing the new dental reporting standards. complete by the end of 2014-15. We Focus Majority of Oversight on Managed Care recommend the Legislature take a Access. We recommend the Legislature refocus longer-term view on access and focus on its future oversight priorities on monitoring the ongoing monitoring of managed care managed care system, with the exception of certain plans. services like dental care as discussed above. While we understand the Legislature’s concern about • Existing Access Standards. Within the adequacy of individual FFS rates, the state ongoing monitoring, we advise the has delegated much de facto control over provider Legislature to narrow its focus to working payment policy to Medi-Cal managed care plans. on the most immediate and tractable As such, we recommend that the Legislature turn problems: the meaningfulness of existing toward the state’s monitoring system for managed access standards and the administration’s 38 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET performance in monitoring plans’ Finally, as the Legislature reorients its compliance with those standards. In future priorities to align with the reality of the expanding and more detailed analyses, we will outline managed care system, it may wish to ask whether concrete steps to guide the Legislature’s the administration has similarly modernized its work in these areas. management of state resources—such as the relative number of positions at DHCS currently dedicated to activities related to managed care versus FFS. MEDI-CAL ELIGIBILITY DATA SYSTEM (MEDS) Background public benefits from Medi-Cal and other health and human services-related programs. The The ACA. In order to make health care MEDS consolidates case information, including coverage more accessible and affordable, the utilization and benefits data, in an environment ACA establishes entities called Health Benefit where eligibility is determined in a decentralized Exchanges. Through these exchanges, individuals manner—through county-based eligibility and small businesses can now obtain information systems. The MEDS serves as the “system of about health insurance and purchase coverage. record” for various programs, including Medi-Cal, The California Health Benefit Exchange (also CalWORKS, CalFresh, and the cancer detection known as Covered California) funds the California programs. Data maintained in MEDS originates Healthcare Eligibility, Enrollment and Retention from California’s 58 counties, state and federal System (CalHEERS) project—primarily through agencies, health plans, and most recently from federal grants—to build a web-based portal Covered California. The MEDS currently supports designed to be a streamlined resource from which records for about eight million beneficiaries. individuals and small businesses can research, The ACA is expected to add up to two million compare, check their eligibility for, and purchase additional beneficiaries in 2014, whose data would health coverage. The CalHEERS was designed be stored in MEDS. The state currently receives to interface with various federal, state, and local 75 percent federal funding for MEDS maintenance information technology systems to perform and operation (M&O). The MEDS is over 30-years the administrative functions necessary for the old and relies on old technology that is difficult purchase of health insurance. For example, and time-consuming to modify. CalHEERS is required to interface with a federal Medicaid Information Technology data hub—a database that consolidates data from Architecture (MITA). The MITA is an initiative the Internal Revenue Service, Social Security of the federal CMS intended to foster a national Administration, and other federal entities—to framework to support improved systems assess income, citizenship, and other data development and health care management for necessary to determine eligibility for various ACA the Medicaid program (Medi-Cal is California’s health coverage options. Medicaid program). The standards established The MEDS. The MEDS is a statewide by MITA set a blueprint consisting of models, automated database—administered by DHCS— guidelines, and principles for states as they that stores information on individuals receiving implement technology systems to support the www.lao.ca.gov Legislative Analyst’s Office 39 2014-15 BUDGET administration of Medicaid. In 2011, CMS MEDS Modernization. The Governor’s budget issued a new rule that limits enhanced federal proposes 16 two-year limited-term positions funding—at the 75 percent level—for M&O to and $3.5 million ($528,000 General Fund) to eligibility determination systems that meet MITA support the planning and identification of system standards by December 31, 2015. Noncompliant requirements for an IT project intended to systems would be supported at the standard federal modernize MEDS. The DHCS indicates that some funding rate of 50 percent for M&O. The CMS of MEDS functionality is duplicated in existing also indicated federal funding would be enhanced or planned systems, such as the Los Angeles to 90 percent for the design, development, and Eligibility, Automated Determination, Evaluation implementation (DD&I) of modernized Medicaid and Reporting Replacement System. The DHCS eligibility determination systems achieving plans to develop the modernized MEDS project MITA standards. The enhanced DD&I federal in a way that reduces duplication of functionality funding is scheduled to expire on December 31, in existing or planned systems. The project to 2015. The CMS has subsequently indicated it modernize MEDS is expected to begin in July 2014 will consider extending the enhanced federal and continue through June 2020. funding for DD&I if a state submits a plan to LAO Findings achieve MITA compliance that CMS approves but where the system development is not complete by Interface Between MEDS and CalHEERS December 31, 2015. Necessary. The ACA requires a seamless experience for individuals seeking health insurance coverage Governor’s Proposal through Health Benefit Exchanges. For California, The Governor’s budget for DHCS includes two that means Covered California’s CalHEERS must proposals regarding MEDS. interface—share data—with MEDS, the statewide MEDS Interface With CalHEERS. The database that consolidates case information for Governor’s budget proposes a two-year extension of recipients of Medi-Cal and other programs. Given 12 limited-term positions and $1.8 million ($314,000 the complexity of the ACA rules, DHCS expects General Fund) for the continuing DD&I and M&O to review the need for eligibility and enrollment of the interface between MEDS and CalHEERS for process changes with program and legal staff over the implementation of ACA. The MEDS interface the next several years. Technical modifications with CalHEERS is not an independent IT project— to MEDS would be made subsequently. The rather, it is a task necessitated by the ACA and implementation of the ACA also requires identified within the CalHEERS project plan. The changes to the county-based welfare automation proposal requests three positions in the Medi-Cal systems—the three systems that collectively Eligibility Division (MCED) that will identify form the Statewide Automated Welfare System needed simplification and streamlining of Medi-Cal (SAWS) consortia. Each of the consortia systems eligibility and enrollment processes as required has its own eligibility determination and benefit by ACA. The remaining nine positions would be calculation functionality built into its system. The designated within the Information Technology MCED resources would provide direction to the Services Division (ITSD) and be responsible for consortia systems on necessary changes specific designing and implementing the changes to MEDS to each system, while the ITSD resources would identified by MCED staff. ensure SAWS changes were compatible with 40 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET MEDS. Failure to make the technical changes to budget proposal takes a new approach to IT the MEDS and build the interface with CalHEERS development by focusing on the planning phase would prevent the state from implementing the of the project. Typically, departments absorb the programmatic changes to Medi-Cal required by the cost of planning a project and instead submit the ACA. completed plan to the Legislature for the review Modernization of MEDS Worthwhile. The and approval of funds to support the DD&I phase modernization of MEDS is a worthwhile objective of a project. Departments that absorb the cost of given the antiquated nature of the technology the planning phase may not be able to allocate the system and the increasing difficulty in maintaining resources necessary to develop a robust plan. There the system caused in part because of the decline are potential longer-term consequences of not in staff skilled in the outdated technology. The allocating sufficient resources at the front-end of aged technology is time-consuming and costly a project, including costly replanning and rework to maintain and update. The MEDS has other during the DD&I phase when additional resources deficiencies that warrant the modernization of the have been allocated towards the project and the system. Information is difficult to query, especially state’s technology needs are better understood. The in real time; reporting capabilities are not met; Legislature, by approving this proposal, would not and there are concerns about the security of data be approving the MEDS modernization project maintained in MEDS. A modernized system could in totality. Rather, the Legislature would still have provide a more efficient querying of data and the opportunity to review and approve the project address privacy and security concerns. when a project plan was submitted. Given the Failure to Modernize MEDS Could Also criticality of this project, this new planning-focused Jeopardize Continued Enhanced Federal Funding. approach has merit. The current MEDS does not meet CMS’ MITA Analyst’s Recommendation standards. Failure to comply with CMS’ MITA standards jeopardizes the state’s ability to secure We recommend approval of the Governor’s enhanced federal funding for maintenance and proposal for a two-year extension of 12 operation of MEDS. (Federal funding for MEDS limited-term positions and $1.8 million for would revert to a standard 50 percent federal the ongoing DD&I and maintenance of the contribution from the enhanced 75 percent interface between MEDS and CalHEERS for the contribution.) Delaying the modernization project implementation of the ACA. The proposal positions would also compromise the state’s ability to the state to comply with ACA-related streamlining leverage enhanced federal funding for the DD&I and simplification of Medi-Cal eligibility and of a modernized MEDS, which is scheduled to enrollment processes. expire on December 31, 2015. Modernizing MEDS We also recommend approval of the Governor’s to achieve MITA compliance would enhance the proposal for 16 two-year limited-term positions functionality of the system and position the state to and $3.5 million to support the planning and maximize federal funds for the DD&I and M&O of identification of system requirements for the a modernized MEDS. modernization of the MEDS project. Approval of Budget Proposal’s Focus on MEDS the planning phase of the MEDS modernization Modernization Planning Seems Reasonable. proposal would position the state to leverage The MEDS modernization component of the continued enhanced federal funding while working www.lao.ca.gov Legislative Analyst’s Office 41 2014-15 BUDGET towards MITA compliance. Given the criticality the status of the planning and identification of of the MEDS modernization project, we also system requirements effort. Specifically, DHCS recommend the Legislature direct DHCS to report should report on information gleaned through the to the Legislature at 2015-16 budget hearings on planning phase and share details regarding the modernization project’s scope, timeline, and cost. COVERED CALIFORNIA FISCAL OUTLOOK The ACA, also known as federal health care create a health coverage purchasing continuum that reform, establishes entities, called Health Benefit makes it easier for persons to access, purchase, and Exchanges, where individuals can purchase maintain health coverage. As individuals’ incomes health coverage. The California Health Benefit rise and fall; as they become employed, change Exchange—also known as the Exchange or Covered employers, or become unemployed; and as they California—provides access to nonemployer- age, they are to have access to different sources of based health coverage, small-employer-based coverage along the coverage continuum. Creating coverage, federal subsidies for health coverage, and this continuum requires the modification of Medi-Cal eligibility referral to counties. The first existing government programs and integration of open enrollment period for purchasing individual these programs with new coverage options created market health coverage through the Exchange by ACA. began October 1, 2013 and runs through March 31, Imposes Individual Mandate. The ACA 2014. The Exchange’s performance during this imposes an individual mandate requiring most initial open enrollment period will provide insight U.S. citizens and legal residents to have health into the Exchange’s fiscal outlook going forward. coverage or pay a penalty. There are exceptions Summary of Analysis. In this analysis, we to the mandate for financial hardship, religious begin by providing an overview of ACA and the objections, and certain other specified reasons. operation of the Exchange in California. We then In 2014, persons signing up for health coverage summarize the Exchange’s fiscal forecast and by the March 31st enrollment deadline will not be discuss its fiscal outlook based on the results from penalized for being without health insurance prior the open enrollment period to date. Finally, we to the coverage start date. recommend that representatives of the Exchange Establishes Exchanges Where Individuals Can report at budget hearings on its fiscal outlook Purchase Health Coverage. Chapter 655, Statues of after the conclusion of the initial open enrollment 2010 (AB 1602, J. Pérez), and Chapter 659, Statutes period. of 2010 (SB 900, Alquist and Steinberg), established the California Health Benefit Exchange along Background with a governing board. Through the Exchange, individuals and employees of small businesses Overview of ACA (50 employees or less) that choose to offer The ACA is far-reaching legislation that makes coverage through the Exchange are able to enroll significant changes to health coverage and delivery in subsidized and unsubsidized health coverage. in California. The ACA is, in part, designed to Coverage offered through the Exchange must 42 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET include a minimum set of benefits, known as the ineligible adults with incomes up to 138 percent “essential health benefits.” of the FPL—largely childless adults. For more Provides Federal Subsidies for Certain information on the Medicaid expansion and its Individuals Purchasing Exchange Coverage. impacts in California, please see our analysis of Citizens and legal residents with incomes between ACA Implementation in the “Medi-Cal” section of 100 percent and 400 percent of the FPL who are not this report. offered affordable coverage by their employer and California Opted to who do not qualify for other public health insurance Administer Its Own Exchange programs, such as Medi-Cal or Medicare, are eligible for federal subsidies to help them to purchase As discussed above, California decided to coverage through the Exchange. In addition, certain operate its own Health Benefit Exchange rather newly qualified resident aliens may also be eligible than participate in the federally facilitated for federal subsidies. The amount of federal subsidies health exchange. This gives the state increased vary based on income, with greater federal subsidies flexibility and control over the implementation available to households with lower incomes. and ongoing operations of the Exchange, which is Establishes Small Business Health Options a nexus for nonemployer-based health coverage, Program (SHOP). The ACA established SHOP small-employer-based coverage, access to federal to allow employers with up to 50 full-time- subsidies, and Medi-Cal eligibility referral. equivalent (FTE) employees to purchase health Exchange Is the Only Place to Purchase coverage for their employees. This service Subsidized Health Coverage Under ACA. While will expand to employers with up to 100 FTE health coverage in the individual market is employees beginning January 1, 2016. In available for purchase both inside and outside California, the Exchange is also operating the Exchange, federal subsidies are only available SHOP, which is projected to account for only through the Exchange. It is estimated that about 10 percent of total enrollment through the 2.6 million people are eligible for subsidized Exchange. health coverage in California. Requires That Only Qualified Health Exchange Is a Gateway for Medi-Cal Plans (QHPs) Be Sold Through Exchanges. The Enrollment. The Exchange provides initial Exchange certifies the QHPs offered through the screening for Medi-Cal eligibility and refers Exchange. Certification is based upon the plan’s individuals likely-eligible for Medi-Cal to ability to meet federal requirements regarding: county eligibility workers for final eligibility (1) benefit design; (2) marketing practices; determination. Applicants are also able to indicate (3) provider networks, including community interest in learning more about social services providers; (4) plan activities related to quality programs, including CalFresh and CalWORKs. improvement; and (5) the use of standardized Medi-Cal Bridge Plans Are Only Available formats for consumer information. Through Exchange. Pending federal approval, Authorizes Medicaid Expansion up to the Exchange will offer health coverage through 138 Percent of the FPL. California chose to Medi-Cal Managed Care plans that have been participate in ACA’s optional Medicaid expansion. certified as QHPs. These Medi-Cal Managed Effective January 1, 2014, California expanded Care QHPs will be available to: (1) individuals Medi-Cal eligibility to include previously with incomes below 250 percent of the FPL www.lao.ca.gov Legislative Analyst’s Office 43 2014-15 BUDGET who are transitioning from Medi-Cal coverage Counties Must Utilize Savings to Support to subsidized coverage offered through the CalWORKs, Thereby Offsetting General Fund Exchange due to an increase in income and Expenditures. In recognition of the shifting (2) parents or caretaker relatives of Medi-Cal responsibility for indigent health care, the 2013-14 enrolled children who themselves do not qualify budget established a complex structure under for Medi-Cal. Family members who are living which a portion of county health realignment in the same household as individuals enrolled funds will be redirected to pay CalWORKs grant in Medi-Cal Managed Care Plans may also be costs borne by the state—thereby offsetting eligible. These plans will provide continuity of General Fund costs. care to individuals who experience a disruption in Exchange’s Plans to Meet Medi-Cal eligibility and will provide families with Financial Self-Sufficiency Medi-Cal-eligible children and subsidy-eligible Requirement parents the option to be covered by the same insurer. During the initial start-up and implementation phase, the Exchange is funded Exchange Enrollment Could Have through federal grants, but due to federal Positive State Fiscal Impacts requirements, the Exchange cannot be supported Exchange Enrollment Can Reduce County- by federal funds after December 31, 2014. The Funded Care for the Medically Indigent. Using Exchange is also prohibited in state statute from funds received from 1991 realignment, counties receiving General Fund support. To support its have fiscal and programmatic responsibility for operations beyond 2014, the Exchange will charge providing health care for low-income populations insurance carriers a per-member, per-month without public or private insurance—also known (PMPM) fee based on enrollment into the carriers’ as indigent health care. However, under ACA, QHPs offered through the Exchange. While the counties will realize savings because ACA shifts Exchange is authorized by Chapter 655 to charge much of the responsibility for indigent health care the level of fee necessary to support its operations, to the state and federal governments as individuals it can only set the fee amount once annually when enroll in Medi-Cal or federally subsidized it enters into contracts with the insurers, usually health coverage. While the majority of savings in August. The Exchange is, therefore, subject to counties will be realized through the optional to financial risk because it must determine the Medi-Cal expansion, there may also be savings amount of assessment fee to charge based on its to counties from individuals enrolling in health projected enrollment for health coverage through coverage through the Exchange. For example, the Exchange and operating costs for the year. some adults with incomes above 138 percent of To the extent that enrollment does not meet the the FPL who previously may have been eligible projection, the Exchange will generate less revenue for indigent health care services in some counties than anticipated. This is particularly important will now be eligible for federally subsidized health during the early years of the Exchange’s operation coverage through the Exchange. To the extent when there is the most uncertainty surrounding these adults enroll in subsidized coverage offered the number of individuals who will enroll in through the Exchange, it will relieve the counties health coverage through the Exchange. from paying for their medical care. 44 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET Overview of Exchange’s Financial potentially eligible individuals aware of Sustainability Plan (FSP) their coverage opportunities. Background. The Exchange’s FSP is a • The Base Enrollment Projection (BEP). comprehensive financial plan developed to The BEP is lower than EEP and relies determine whether the Exchange’s revenue streams on different assumptions than EEP. For would support its operations in the long term example, this projection assumes that given the requirement for financial self-sufficiency. English proficiency could present a barrier The FSP is based on a multiyear analysis of the to enrollment. Exchange’s activities, estimated operating costs, projected enrollment, and estimated revenues. The • The Low Enrollment Projection (LEP). Exchange Board adopted the FSP in November The LEP sets enrollment at 20 percent 2012. The FSP’s projections were updated in the below BEP. Board’s 2013-14 Exchange budget, which was Our Analysis Focuses on Exchange approved in June 2013 prior to the Exchange’s first Enrollment in the Individual Market. In this open enrollment period. The projections include analysis, we focus on the fiscal outlook for the estimates for Exchange enrollment, revenues, and individual market segment of the Exchange operating costs for each of three enrollment-level because enrollment, operating costs, and revenues scenarios. The Exchange relies on enrollment for SHOP are small—less than 7 percent of the estimates for the scenarios from the California Exchange’s total operating budget for 2013-14— Simulation of Insurance Market (CalSIM) model, relative to the individual market. The Exchange which was developed jointly by the University of individual market open enrollment period occurs California, Los Angeles Health Policy Research annually beginning in the fall (the first open Center, and the University of California Berkeley enrollment period began in October 2013 to Labor Center. The three enrollment level-scenarios allow individuals to enroll in coverage beginning are defined as follows: January 1). Only individuals undergoing a • The Enhanced Enrollment Projection specified change in circumstance (for example, (EEP). The EEP is the highest of the a change in income) may enroll outside of the potential enrollment levels calculated by open enrollment period. Figure 9 shows CalSIM CalSIM and assumes English language estimates for three potential levels of enrollment proficiency is not a barrier to enrollment, over four state fiscal years. that eligibility and enrollment Figure 9 processes and Individual Market Enrollment Projectionsa systems are As of Fiscal Year End simplified, and Enrollment that the Exchange Projection Level 2013-14 2014-15 2015-16 2016-17 implements a Enhanced 894,000 1,478,000 1,942,000 2,308,000 robust outreach Base 629,000 999,000 1,281,000 1,578,000 Low 274,000 587,000 940,000 1,258,000 and education a As estimated in June 2013. effort to make all www.lao.ca.gov Legislative Analyst’s Office 45 2014-15 BUDGET PMPM Fee Assessed on QHPs Linked to Revenue Driven by Individual Market Enrollment. The Exchange projects that the fee Enrollment. As the Exchange’s revenue generation assessed on QHPs in future years will be higher relies on PMPM fees assessed on QHPs, it is highly under BEP and LEP relative to the fee charged dependent on enrollment. During the first few under EEP. The higher fee levels that would be years of the Exchange’s operations, its revenue is assessed under BEP and LEP are necessary to projected to increase steadily as enrollment ramps generate enough revenue to pay for Exchange up to a level where revenues will be sufficient operations and ensure a sufficient reserve. (The to cover all of the Exchanges operating costs. fee is likely to be passed on to consumers in the However, initially revenues will be insufficient to form of higher premiums.) The projected fees cover operating costs. The Exchange accounts for under each enrollment scenario are summarized this in its projections by building up a reserve using in Figure 10. PMPM fee revenues collected during 2014 while Exchange Budget Projections Under Three operations are supported by federal grants. During Scenarios. The Exchange forecasted its operating 2015-16 and 2016-17, the Exchange anticipates budget from 2013-14 through 2016-17 under the drawing on this reserve to cover part of its three enrollment-level scenarios. Each of these operating expenses. scenarios include estimates of total annual revenues Exchange Operating Costs. The Exchange will and total annual operating costs (explained in have the following broad categories of operating more detail below). We summarize the Exchange’s costs: individual market operating budget projections for • Exchange Staffing, Service Center Staffing, 2013-14 through 2016-17 under each of the three and Ongoing Operations. As of November enrollment scenarios in Figure 11. 2013, the Exchange reported a staffing level Exchange Revenues. The Exchange has of 725 FTE positions, with plans to increase received over $1 billion in federal grants to support the number of service center staff to meet its operations through December 31, 2014. This demand during open enrollment. includes a $155 million grant that was awarded in January 2014 (as this grant was recently awarded, it • IT Infrastructure. The Exchange has is not included in the Exchange’s fiscal projections contracted with an independent vendor to presented in this report). In 2014, the Exchange is design, develop, and implement CalHEERS assessing a PMPM fee of $13.95, or 4.4 percent of to determine eligibility and manage the the average monthly premium of $320, for products population enrolled by the Exchange. offered on the Exchange. • Marketing Outreach and Education. The Exchange has Figure 10 implemented a broad Exchange Individual Market PMPM array of marketing, Assessment Fee Projections outreach, and education Enrollment Projection Level 2014 2015 2016 2017 activities and believes that Enhanced $13.95 $10.46 $9.94 $9.44 it will require considerable Base 13.95 12.83 12.83 12.83 resources going forward Low 13.95 16.04 20.86 12.51 to effectively reach PMPM = per member, per month. 46 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET a culturally and linguistically diverse that enrollment is ongoing until March 31, 2014 target population spread over a large and this is the first year of Exchange enrollment, geographic area. there is significant uncertainty surrounding the final enrollment of individuals into health coverage PMPM Fees Would Be Increased and for 2014. Operating Costs Would Be Decreased Under Number of Enrollees Paying Premiums to Date BEP and LEP. In addition to raising the PMPM Unknown. According to the Exchange, over 625,000 fee assessed on QHPs, the Exchange will also individuals had selected a health plan through the consider other mechanisms to bring revenues in Exchange as of January 14, 2014. At the time of line with expenses if enrollment falls below EEP, this analysis, the number of individuals who made including reducing its operating costs. The BEP their first premium payment was not available. The and LEP scenarios reflect reductions in operating distinction between individuals who select a plan expenses to bring them in line with revenues and to through the Exchange and then make a premium maintain a sufficient reserve. payment versus those individuals who select a plan The Exchange’s Goal Is to Maintain a Reserve and never make a premium payment (such that they of at Least Three Months of Operating Expenses. are not actually enrolled in a plan) is important In the statutes which established the Exchange, the board of the Exchange is directed to maintain Figure 11 a prudent operating Exchange Individual Market Operating Budget Projectionsa reserve. The Exchange (In Millions) has determined that it Enrollment Projection Level 2013-14 2014-15 2015-16 2016-17 will maintain a reserve Enhanced equivalent to three to Total revenues $411 $400 $212 $248 six months of operating Federal grants (351) (227) — — PMPM assessment revenue (60) (172) (212) (248) expenses. Under all Less operating costs 358 288 280 279 three of the scenarios Net Income $52 $112 -$69 -$31 described in this analysis, Fiscal year-end reserve balance 52 164 95 65 the Exchange maintains Base Total revenues $394 $365 $178 $223 a reserve roughly equal Federal grants (351) (233) — — to or greater than three PMPM assessment revenue (43) (132) (178) (223) months of operating costs Less operating costs 358 255 247 245 Net Income $36 $111 -$69 -$22 in all years. Fiscal year-end reserve balance 36 146 78 56 Low Current Total revenues $370 $311 $175 $219 Exchange Federal grants (351) (234) — — Outlook: LAO PMPM assessment revenue (19) (78) (175) (219) Less operating costs 358 226 218 216 Assessment Net Income $11 $85 -$43 $3 Fiscal year-end reserve balance 11 96 53 56 On October 1, 2013, a Numbers may reflect rounding. the Exchange began Note: Reserve balance is roughly three months of operating costs or greater under all three scenarios for enrollment into health all years shown except 2013-14. PMPM = per member, per month. coverage for 2014. Given www.lao.ca.gov Legislative Analyst’s Office 47 2014-15 BUDGET because the Exchange only receives PMPM fee Analyst’s Recommendations revenues when individuals pay premiums. Enrollment Rate Likely to Increase Prior Exchange Should Report at to Mandate Penalty Deadline. The Exchange Budget Hearings Regarding Fiscal Outlook may experience an uptick in enrollment prior to The Legislature should ask representatives the March 31 deadline for one to either obtain of the Exchange to report on its fiscal outlook at health coverage or face the individual mandate budget hearings as soon as practicable after the penalty. Massachusetts implemented state-level March 31 open enrollment deadline. This will health care reform in 2007 including an individual allow the Exchange sufficient time to evaluate mandate penalty for not having health coverage its enrollment and financial projections after the and subsidies for individuals below 300 percent open enrollment period ends, thereby providing of the FPL. An analysis of enrollment trends in a better sense of the Exchange’s fiscal outlook Massachusetts found an uptick in enrollment as the Legislature nears the May Revision. We leading up to the mandate penalty deadline. In recommend that the Exchange report on the California, a similar increase may occur prior to following: the mandate penalty deadline in March. • Final Enrollment Numbers. The Exchange Exchange Will Have to Reevaluate Fiscal should provide updated Exchange Projections Based on Enrollment. After the end enrollment numbers for the first open of open enrollment, the Exchange will have to enrollment period including the number reevaluate and adjust its fiscal projections in order of individuals who (1) selected a health to prepare its 2014-15 budget for approval by the plan through the Exchange and (2) made board. If the EEP is not reached, the Exchange their first premium payment. The is likely to need to adjust its operating budget as Exchange should also report on any issues shown under EEP. If the Exchange determines encountered by consumers in paying their it needs to charge higher-than-projected PMPM premiums. fees, the fees may still be less than the current fee of $13.95, although, potentially not as low as the • Continued Marketing and Outreach $10.46 fee for 2015 projected under EEP shown in Efforts. The Exchange should report on Figure 10. which marketing and outreach efforts Future Enrollment Considerations. We were successful, where it has identified note that Latinos represent only 18 percent of issues, and how it plans to modify total enrollment through mid-January despite its marketing and outreach efforts to representing 57 percent of the uninsured improve enrollment among hard to reach population as of 2012. In order to reach enrollment populations, including Latinos and young targets going forward, the Exchange will likely adults. need to achieve higher levels of enrollment among Latinos, as well as among other populations with • Integration Efforts With Counties. The high rates of the uninsured, such as young adults. Exchange should also provide an update on the status of federal approval for Medi-Cal bridge plans. The Exchange should report on any barriers or issues 48 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET it has faced in working with counties to report at budget hearings during the May Revision determine Medi-Cal eligibility and enroll on its updated fiscal forecast for 2014-15 through eligible individuals. 2017-18. The updated fiscal forecast should include projections of enrollment, PMPM fee amounts, Updated Fiscal Projections for Next Four Years operating costs, and revenues. at May Revision. We recommend the Exchange DEPARTMENT OF PUBLIC HEALTH Overview of DPH. The DPH administers is mainly attributable to the Governor’s proposal and oversees a wide variety of programs with to transfer DWP from DPH to SWRCB. (For our the goal of optimizing the health and well-being analysis of this proposal, please see The 2014-15 of Californians. The DPH is organized into Budget: Resources and Environmental Protection several offices and centers, including the Center report, which is forthcoming.) for Chronic Disease and Health Promotion, the Analyst’s Overall Assessment of Center for Infectious Diseases, the Center for Budget Proposal Family Health, the Center for Environmental Health, and the Center for Health Care Quality. The Governor’s budget for DPH reflects The department’s programs address a broad range technical budget adjustments due to changes in of health issues, including maternal and child caseload and costs for some programs, such as health, chronic diseases, communicable disease ADAP and the Women, Infants, and Children control, injuries, environmental health, food and program. It also reflects the proposed transfer of drug safety, emergency preparedness, and oversight DWP from DPH to SWRCB (which we recommend of health facilities. Many public health programs in our aforementioned analysis) and seven other and services are delivered at the local level, while budget change proposals. Overall, we find the the state provides funding, oversight, and overall Governor’s budget proposal generally to be strategic leadership for improving public health. reasonable. However, later in this analysis, we The state also directly administers certain public discuss issues identified with ADAP and Licensing health programs, such as licensing and certification and Certification (L&C) Program estimates. We of health facilities. have analyzed the following seven budget proposals Overall Budget Proposal. The budget proposes and have not identified any issues. However, if $3 billion (all funds) for support of DPH programs we receive additional information that causes in 2014-15—$683 million for state operations and us to reassess our findings, we will apprise the $2.3 billion for local assistance—which is a net Legislature. The seven proposals are as follows: decrease of $472 million, or 14 percent, below revised • Increase Resources for L&C Program 2013-14 expenditures. General Fund expenditures Evaluation. Increase expenditure for 2014-15 are proposed at $111 million, a net authority by $1.4 million (special funds) decrease of $4 million, or 3.5 percent, below the to expand work related to the L&C revised estimate of 2013-14 expenditures. The net Program evaluation. The first phase of the decrease in General Fund and total expenditures program evaluation is ongoing and will www.lao.ca.gov Legislative Analyst’s Office 49 2014-15 BUDGET provide a high-level program assessment essential program services. Assumes to identify issues and barriers to a timely savings of $46,000 (special funds). fulfillment of state and federal certification • Increase Resources for the Infant Botulism workload. As a next step, DPH will hire a Treatment and Prevention Program contractor to provide quality improvement (IBTPP). Increase expenditure authority recommendations and an implementation for IBTPP by $3 million in 2014-15 and plan to address the issues identified in the $951,000 in 2015-16 (special funds) in first phase of the evaluation. order to sustain production, distribution, • Increase Resources for L&C Program regulatory compliance, and other activities Review of State Licensing Standards. for BabyBIG (a drug used to treat infant Increase expenditure authority by $201,000 botulism). (special funds) in 2014-15 to contract with • Convert 45 Nutrition Education and the University of California, Davis to Obesity Prevention Branch (NEOPB) conduct an independent research analysis Contract Positions. Convert 45 contract that assesses the extent to which federal positions within NEOPB to full-time, certification standards for chronic dialysis, permanent positions to eliminate reliance rehabilitation, and surgical clinics are suffi- on contracting for essential program cient as a basis for state licensing standards, services. Assumes savings of $9.3 million in as required by Chapter 722, Statutes of 2013 2014-15 and $12.7 million (federal funds) in (SB 534, Hernandez). subsequent years which will be reinvested • Increase Resources for the Center for into direct services provided by local lead Health Care Quality’s Medical Breach agencies to increase nutrition education. Privacy Enforcement. Increase expen- • Increase Resources for the Office of Health diture authority by $251,000 (special Equity’s (OHE) Health in All Policies funds) and shift three positions from the (HiAP) Task Force. Increase DPH’s budget California Office of Health Information by $458,000 (federal and special funds) and Integrity to DPH to combine two existing add four positions to staff HiAP Task Force programs charged with enforcing medical within OHE. privacy violations. This proposal requires statutory changes to allow DPH to take Below, we provide a summary of the issues enforcement actions against individuals identified in ADAP and L&C estimates and give who commit medical privacy breach our recommendations. violations. DHCS Medi-Cal Estimate Does Not • Convert Two Division of Communicable Reflect ADAP Estimate Adjustment Disease Control Contract Positions. Background on ADAP. The ADAP is Convert two contract positions within the administered by the Office of AIDS (OA) within Division of Communicable Disease Control DPH. The ADAP helps to ensure that people living to full-time, permanent state positions with Human Immunodeficiency Virus (HIV) and to eliminate reliance on contracting for Acquired Immunodeficiency Syndrome (AIDS) 50 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET have access to HIV medication. The federal for Designated State Health Programs, government has mandated that certain federal including ADAP, California Children’s funds which support ADAP must be the payer of Services, Genetically Handicapped Persons last resort; therefore, all ADAP applicants must be Program, and other specified programs. screened to determine if they have private insurance 2014-15 Budget Proposal. The budget proposes or are eligible for other government programs $412 million (all funds) for the support of ADAP that provide HIV medications before they can be in 2014-15, which is a net decrease of $9 million, enrolled in ADAP. Eligibility for ADAP is currently or 2 percent, below revised 2013-14 expenditures recertified every six months. Over 36,000 people of $421 million. General Fund expenditures are will receive ADAP services during 2013-14. proposed at $411,000—the same level as revised The ADAP receives funding from the 2013-14 expenditures. following sources: ADAP Is Returning $58 Million in SNCP • Federal Health Resources and Services Funds to DHCS in 2013-14. In 2013-14, Administration (HRSA) Ryan White $66.3 million in SNCP funds were allocated to Grant. In 2013-14, ADAP estimates using ADAP in DHCS’s Medi-Cal estimate. The ADAP $104 million in HRSA funds. The OA estimates using only $8.3 million of the available receives federal funding from an annual SNCP funds because there is a new federal HRSA Ryan White HIV/AIDS Program requirement to spend all available rebate funds grant, part of which is earmarked for before spending federal funds. Pursuant to this ADAP-related services. requirement, ADAP is spending all rebate funds received in 2013-14 and all rebate funds built up • Drug Rebates. The ADAP also receives in its reserve. Accordingly, the November 2013 funding through mandatory and ADAP estimate shows that ADAP is returning voluntary supplemental rebates from drug the remaining $58 million in SNCP funds to manufacturers for drugs dispensed to DHCS. Due to timing issues, DHCS was unable ADAP clients. In 2013-14, ADAP estimates to incorporate the $58 million in returned SNCP using $308 million in rebate funding. funds into the Medi-Cal estimate. The department • General Fund. The ADAP receives has indicated that it will make appropriate $411,000 in General Fund support in adjustments at the time of the May Revision. 2013-14 for state operations only. Analyst’s Recommendation. We recommend the Legislature recognize in its budget deliberations • Federal Safety Net Care Pool (SNCP) that $58 million in federal SNCP funds are Funds. In 2013-14, ADAP estimates using unallocated in 2013-14. We further recommend $8.3 million in SNCP funds. (The Medi-Cal DHCS to report in budget hearings on options for estimate reflects ADAP using $66.4 million allocating these funds so that the Legislature can in SNCP funds; we discuss this discrepancy ensure that their allocation best reflects legislative below.) The SNCP is established under priorities. We have reviewed the ADAP estimate California’s “Bridge to Reform” Medicaid and do not have any issues to raise. We will review 1115 Demonstration waiver. Two billion the ADAP estimate at the time of the May Revision dollars ($400 million annually over five and advise the Legislature whether we recommend years) of SNCP funds are to be utilized any adjustments. www.lao.ca.gov Legislative Analyst’s Office 51 2014-15 BUDGET L&C Program Estimate The majority of this $9.2 million adjustment is made up of funds from fees imposed on facilities Background. The L&C program, within DPH’s regulated by L&C (there is no adjustment to Center for Health Care Quality, is responsible General Fund support). The DPH would like for ensuring that health care facilities comply to maintain current funding levels for 2013-14 with state and federal laws and regulations. The and 2014-15, because L&C is undergoing a CMS contracts with L&C to ensure that facilities comprehensive program evaluation which aims accepting Medicare and Medi-Cal payments to help L&C understand its staffing requirements meet federal requirements. The L&C program and improve the reliability of its estimate (part also oversees the licensing of nursing home of this program evaluation is subject to approval administrators and the certification of nurse of a budget proposal for 2014-15). This program assistants, home health aides, and hemodialysis evaluation is projected to be completed by the fall technicians. of 2016. L&C Estimate Includes a $9.2 Million Analyst’s Recommendation. We find that Adjustment to Avoid a Decrease in Funding there is insufficient workload justification to From the Current Level. The November 2013 maintain the current level of funding for L&C L&C estimate projects a $9.2 million decrease in in 2013-14 and 2014-15. We recommend that the its funding requirement in 2013-14 and 2014-15 Legislature reject L&C’s proposed $9.2 million resulting from a decrease in overall surveyor adjustment to maintain funding at the current workload hours and staffing requirements. level. The administration should request the Staffing requirements for 2013-14 were level of funding it believes necessary to fund overestimated in prior estimates partially due to the current projected workload for L&C. Once a technical calculation error. Despite the decrease the results of the L&C program evaluation are in staffing requirements, the estimate includes available, funding should be adjusted to reflect a $9.2 million adjustment in order to maintain any new information regarding staffing levels and funding at current levels in 2013-14 and 2014-15. workload. GOVERNOR PROPOSES ELIMINATION OF MRMIB The Governor proposes to eliminate MRMIB Overview MRMIB effective July 1, 2014, and shift the three The MRMIB consists of five members programs currently administered by MRMIB to (hereafter referred to as the board), all of whom DHCS. In this analysis, we provide an overview serve four-year terms: the Governor appoints of MRMIB and a summary of the Governor’s the chair and two other members and the Senate proposal for MRMIB’s elimination. We outline Committee on Rules and the Speaker of the general principles of when a government Assembly each appoint one member. The board reorganization, such as the elimination of a selects an executive director who manages board, agency, office, or department makes MRMIB’s staff and directs the day-to-day sense, and provide our assessment of the administration of the programs overseen by the Governor’s proposal. board. 52 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET The board holds monthly public meetings of the FPL are generally eligible for the Medi-Cal where its five members are presented with Program.) The AIM Program provides coverage information about the programs MRMIB through participating health plans and covers administers, such as program enrollment reports, eligible women through their pregnancy and state budget updates, and vendor performance 60 days postpartum. Caseload for AIM was 5,474 reports. Much of the information presented by as of December 2013. MRMIB’s executive director and staff at these CHIM. Chapter 648, Statutes of 2001 (AB 495, monthly meetings is made available to the public Diaz), created the CHIM in the State Treasury. on MRMIB’s website. The MRMIB currently The fund allows for the intergovernmental administers three programs—Major Risk Medical transfer of local funds used for local County Insurance Program (MRMIP), Access for Infants Children’s Health Initiative (CHI) purposes to and Mothers (AIM), and the County Health draw down federal matching funds for children Initiative Matching Fund Program (CHIM)—that eligible for federal Children’s Health Insurance provide health coverage. We describe these three Program (CHIP) funding. The CHI provides programs below in more detail as well as HFP low-cost health coverage to uninsured children formerly administered by MRMIB. through age 19 who are not eligible for TLICP— MRMIP. The MRMIP is a health insurance formerly HFP—or no-cost Medi-Cal, and whose high-risk pool, established in January 1991, household income falls within 251 percent to that provides health insurance for Californians 300 percent of the FPL. The fund allows counties unable to obtain coverage in the individual and county agencies to use local county funds health insurance market because of their as a match to draw down federal CHIP funds for preexisting conditions. Californians qualifying CHIs. The counties use the federal matching funds for the program participate in the cost of their to provide health insurance coverage to uninsured health insurance coverage by paying premiums. children through County Organized Health The state supplements the premiums paid by Systems of Local Initiatives. enrollees to cover the cost of care in MRMIP. HFP Was Shifted to DHCS. California’s Because of funding limitations, MRMIP CHIP was formerly administered by MRMIB sometimes has a waiting list. Caseload for and known as HFP. Chapter 28, Statutes of 2012 MRMIP was 6,321 as of November 2013. (AB 1494, Committee on Budget), was enacted AIM. The AIM Program provides low-cost, by the Legislature to implement a modified health insurance coverage to uninsured middle- version of the Governor’s proposal to shift all income pregnant women and to women who HFP enrollees into Medi-Cal. Between January 1, have private insurance with a maternity-only 2013 and November 1, 2013, about 850,000 HFP deductible or copayment greater than $500. enrollees were shifted to Medi-Cal. The name Pregnant women whose family income is between of California’s CHIP was changed from HFP to 200 percent and 300 percent of the FPL are eligible TLICP. The 2013-14 Budget Act provides authority for the program provided they meet certain for the administration to shift MRMIB’s personnel eligibility requirements such as being not more from MRMIB to DHCS. While the shift of HFP than 30 weeks pregnant as of the application enrollees to TLICP has been completed, the shift date and being ineligible for no-cost Medi-Cal. of the personnel who administered HFP, from (Pregnant women with incomes below 200 percent MRMIB to DHCS, is still in progress. www.lao.ca.gov Legislative Analyst’s Office 53 2014-15 BUDGET Infants born to women enrolled in AIM The 2013-14 Budget Act provides authority for (commonly referred to as AIM-linked infants) the DOF to transfer positions and funds in order are automatically eligible for HFP, unless they to complete the transfer of HFP from MRMIB to are enrolled in employer-sponsored insurance or DHCS within 2013-14. However, MRMIB wants to no-cost Medi-Cal. Effective November 1, 2013, maintain the 12 positions throughout 2013-14 for AIM-linked infants began transitioning from HFP closeout activities related to the transfer of HFP, into the Medi-Cal delivery system. The AIM-linked and the budget is therefore proposing to transfer infants program is being renamed the Medi-Cal the 12 positions and corresponding funding on July Access Program. 1, 2014. Overall Budget Proposal. The budget plan As shown in Figure 12, the proposal would proposes no funding for MRMIB in 2014-15, which shift $1.9 million ($800,000 General Fund) in state is consistent with the administration’s proposal to operations funding and 12 positions to complete eliminate MRMIB. Here we provide a summary the transfer of HFP to DHCS. This is a funding of the amount of funding—broken out by state decrease of $1.2 million ($232,000 General Fund) operations and local assistance—that would shift or about 40 percent below the revised estimate of from MRMIB to DHCS under the proposal. current-year spending. State Operations Funding Shifted to DHCS. Local Assistance Funding Shifted to DHCS. Excluding the year-over-year effect of the HFP Excluding the year-over-year effect of the HFP shift which we describe separately below, the shift which we describe separately below, the budget proposes $2.9 million (all funds) in DHCS budget proposes DHCS local assistance funding state operations funding in 2014-15 for the of $173 million (all funds) in 2014-15 for programs programs administered by MRMIB in 2013-14. As administered by MRMIB in 2013-14. This is an shown in Figure 12, the budget plan proposes no increase of almost $11 million ($212,000 General year-over-year change in state operations funding Fund) over revised 2013-14 spending levels. Almost for these programs between 2013-14 and 2014-15. all of the proposed year-over-year increase is due to growth in spending in AIM. Figure 12 Shift of State Operations Funding From MRMIB to DHCS (Dollars in Millions) From MRMIB To DHCS Change From (2013-14 Authorized) (2014-15 Proposed) 2013-14 to 2014-15 General Total General Total Total Program Fund Funds Positions Fund Funds Positions Funds Positions Access for Infants and Mothers — $1.1 6.0 — $1.1 6.0 — — Major Risk Medical Insurance — 1.3 6.0 — 1.3 6.0 — — Program County Health Initiative — 0.5 3.0 — 0.5 3.0 — — Matching Fund Subtotals, MRMIB Programs — ($2.9) (15.0) — ($2.9) (15.0) — — Healthy Families Program $1.0 3.2 14.0 $0.8 1.9 12.0 -$1.3 -2.0 Totals $1.0 $6.1 29.0 $0.8 $4.8 27.0 -$1.3 -2.0 MRMIB = Managed Risk Medical Insurance Board and DHCS = Department of Health Care Services. 54 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET The MRMIB’s 2013-14 budget includes Reorganization Should Maintain or Improve $63 million all funds ($22 million General Fund) Efficiency. A reorganization should maintain or to fund the provision of services to HFP enrollees improve efficiency by eliminating overlapping between July 1, 2013 and November 1, 2013 when or duplicative government functions and/or the last HFP enrollees were shifted to the TLICP. maximizing existing resources through better departmental coordination and allocation Governor’s Reorganization Proposal of administrative functions. From a fiscal The Governor’s budget plan proposes to perspective, improved efficiency may result in eliminate MRMIB and shift MRMIB’s remaining savings from eliminating duplicative government programs and administrative functions to DHCS. functions and achieving economies of scale. Under the administration’s proposal, 27 positions Reorganization Should Maintain or (including 12 positions for administration of Improve Effectiveness. A reorganization should HFP) and $4.8 million in state operations funding contribute toward the fulfillment of the mission (including $1.9 million for administration of of the department or entity that will assume HFP) would be shifted from MRMIB to DHCS in responsibility for administration of a program. 2014-15. One key measure of the effectiveness of a The administration’s rationale for the proposal reorganization is whether it will result in the is that it is inefficient to maintain infrastructure public receiving better government services. for MRMIB to administer three small programs Reorganization Should Maintain or Improve serving approximately 14,000 subscribers. In the Accountability. A reorganization should result past, administration of HFP was the majority of in a government structure where the Legislature the work undertaken by MRMIB and with the and the public can identify the person or entity completion of the transition of the HFP population, responsible for management of a program MRMIB has been relieved of the bulk of its and hold that person or entity accountable for workload. Furthermore, the administration states achieving defined goals and objectives. The that transitioning the remaining MRMIB programs reorganization plan should delineate the roles and to DHCS makes operational sense and further responsibilities of each of the divisions within the streamlines California’s publicly financed health new or expanded department or entity that will programs. assume responsibility for transferred programs and administrative functions. General Principles of When Government Reorganization Should Be Based Upon a Reorganizations Make Sense Policy Rationale. A reorganization should be Here we describe general principles of when a consistent with an underlying policy rationale to government reorganization, such as the proposed address a problem or inefficiency that has been elimination of MRMIB, makes sense. Broadly, a clearly identified. For example, facilitating better reorganization should maintain or improve the integration of programs that provide similar efficiency, effectiveness, and accountability of an benefits, such as health insurance benefits, is a organization; be based on a policy rationale; and policy rationale for shifting a program from one reflect legislative priorities. Later in this analysis department to another. we evaluate the Governor’s proposal based on Reorganization Should Reflect Legislative these criteria. Priorities. A reorganization should be consistent www.lao.ca.gov Legislative Analyst’s Office 55 2014-15 BUDGET with priorities that the Legislature has set for a the department indicated that after its managers program or government function. had more experience with the programs, it would potentially be able to identify ways to improve Does Elimination Make Sense Based Upon program effectiveness. General Principles of Reorganization? Reorganization Unlikely to Maintain or Here we provide our assessment of whether Improve Accountability. Programs administered by the proposed elimination of MRMIB makes sense MRMIB receive significant oversight due to monthly based upon the general principles already outlined public meetings where MRMIB’s staff report to the in this analysis. board about the programs it manages. These regular Proposal Would Not Immediately Improve public meetings of the board and the monthly Efficiency. No positions are eliminated as a result reporting of key program data provide a greater of the elimination of MRMIB and the transfer level of transparency than is typical of most state- of MRMIP, AIM, and CHIM. Furthermore, administered health programs. After the transition, no overlapping or duplicative functions would these monthly meetings would no longer occur. immediately be eliminated as a result of the The MRMIB’s staff prepare an estimate of transfer. The MRMIB staff would move from expenditures, or estimate package, for AIM and their current offices to new offices provided by CHIM that provide a significant amount of fiscal DHCS. According to DHCS, the costs of moving detail on these programs. The estimate packages the employees to their new offices is minor and are provided to the Legislature twice every year, absorbable within DHCS’s budget. Based upon on January 10 and again on May 14 as part of the discussions with DHCS, the administrative Governor’s May Revision of the budget plan. It is positions for MRMIP, AIM, and CHIM would unclear whether a comparable amount of fiscal continue to perform the same workload after they information would be provided in estimate packages are transferred to DHCS. The DHCS indicates prepared by DHCS after the transition. that after its managers had more experience Some Components of Reorganization Are administering these programs, it could potentially Based Upon a Policy Rationale. In discussions identify opportunities and implement changes with DHCS, the department indicates that to improve efficiency and eliminate duplicative transferring AIM and CHIM from MRMIB to functions. DHCS, would move two programs that interact Unclear Whether Transition Would Improve with Medi-Cal into the same department where Effectiveness. The reorganization could contribute Medi-Cal is administered. This could facilitate better toward the fulfillment of DHCS’s mission. coordination between Medi-Cal administrators and (DHCS’s mission is to provide low-income AIM and CHIM administrators. This is a sound Californians with access to affordable, high-quality policy rationale because AIM and CHIM wrap health care, including medical, dental, mental around the Medi-Cal Program with the objective of health, and substance use disorder services and providing health services to certain targeted low- to long-term services and supports.) However, the middle-income populations who are ineligible for administration has not provided any information Medi-Cal. Closer integration could potentially to support the conclusion that the transitions would lead to a better coordinated continuum of care immediately result in the public receiving better for persons eligible for these programs. However, government services. In discussions with DHCS, it is unclear how the transition of MRMIP could 56 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET result in better coordination of services for state • How Will the Proposed Reorganization health programs. Improve Accountability? The department should report on whether it will continue Analyst’s Recommendations to provide the same amount of fiscal As discussed above, as budgeted, the proposal information about the transition programs to eliminate MRMIB meets some but not all of that is currently annually provided by the criteria against which proposed governmental MRMIB on January 10 and at the time of reorganizations are typically judged. Therefore, to the May Revision. assist the Legislature’s evaluation of this proposal, • What Is the Policy Rationale for the we recommend the Legislature require DHCS to Reorganization? The department should report at budget hearings on how the elimination of report on the administration’s policy MRMIB and the transfer of the three programs it rationale for proposing the reorganization. currently administers to DHCS would address the following criteria for a government reorganization. Based on the information provided to us • How Will the Proposed Reorganization from the administration, there is some basis to go forward with the transition but the administration Improve Efficiency? How would the has not made a compelling case that there would proposed reorganization improve efficiency be an immediate improvement in the efficiency or both in the next fiscal year and in following effectiveness of the programs that would transition years? The DHCS should also report from MRMIB to DHCS. Furthermore, we find that on how and when they will keep the there would likely be a loss of fiscal transparency Legislature informed of any efficiencies if the transition were to be approved. Therefore, that are ultimately achieved. the Legislature should mainly weigh whether the • How Will the Proposed Reorganization administration’s policy rationale is compelling and Improve Effectiveness? How would the whether it aligns with legislative priorities when proposed reorganization improve the deciding whether or not to approve the Governor’s effectiveness of the programs transferred proposal. to DHCS? Specifically, will it result in the public receiving better services? DEPARTMENT OF STATE HOSPITALS Overview to approximately 5,400 patients with a variety of mental health needs. Patients at the state hospitals The DSH provides inpatient mental health fall into one of two categories: civil commitments services at five state hospitals (Atascadero, or forensic commitments. Civil commitments Coalinga, Metropolitan, Napa, and Patton) and at are generally referred to the state hospitals for three psychiatric programs located on the grounds treatment by counties. Forensic commitments are of California Department of Corrections and typically committed by the courts and include Rehabilitation (CDCR) prisons (Vacaville, Salinas, individuals classified as incompetent to stand trial and Stockton). The hospitals provide treatment (IST), not guilty by reason of insanity, mentally www.lao.ca.gov Legislative Analyst’s Office 57 2014-15 BUDGET disordered offenders (MDOs), or sexually violent frames and can be required to appear in court or predators. In addition, the three colocated DSH be held in contempt when it fails to do so. In light psychiatric programs treat inmates referred of these concerns, the 2013-14 budget provided by CDCR. (These inmates are called Coleman $22.1 million to increase treatment capacity for IST commitments because their psychiatric care is the and MDOs by 155 beds. subject of a lawsuit known as Coleman v. Brown, The 2013-14 budget also included reductions which involves allegations that the state prison in funded beds at DSH-Vacaville and DSH-Salinas system provided constitutionally inadequate Valley, based on the assumption that Coleman psychiatric care for inmates.) patients in these facilities would be relocated to Currently, over 90 percent of the patient the newly activated California Health Care Facility population is forensic in nature and there has (CHCF) in Stockton, which is operated by CDCR. been a steady increase in waitlists for forensic The transfer was scheduled for completion by commitments. In contrast, the population of December 2013, but has since been delayed because civil commitments has remained relatively stable. of difficulties hiring staff at CHCF. As of January 2014, the department had nearly Governor’s Proposals 500 patients awaiting placement. The Governor’s budget proposes total As we discuss below, the Governor’s budget expenditures of $1.6 billion ($1.5 billion from the proposes additional funding to DSH to support General Fund) for DSH operations in 2014-15, additional beds for CDCR and IST patients. These which reflects a less than 1 percent increase from proposals are accompanied by staffing increases the revised 2013-14 funding level. The department’s based on the department’s patient to staff ratios. budget includes increased funding for several Coleman Population Adjustments. In view proposals, including plans to operate 242 more beds of the waitlist for beds for forensic patients, as than were budgeted in 2013-14, initiate a program to well as the delay in the complete activation of manage bed space on a statewide level, and develop the mental health beds at CHCF, the Governor’s a cost estimate for enhanced security units. budget proposes to permanently maintain 137 beds for Coleman patients at DSH-Vacaville and Population and Personal DSH-Salinas Valley. (For 2013-14, the Governor’s Services Adjustments budget proposes to redirect $13.3 million in savings related to the delayed activation of CHCF to support Background the 137 beds.) For 2014-15, the budget proposes As mentioned above, DSH has seen an increase a $26.3 million General Fund augmentation and in waitlists for forensic patients. The largest 204 positions to support the beds at DSH-Vacaville waitlists are for IST and Coleman commitments. and DSH-Salinas Valley. The 2014-15 budget would As of January 2014, there were 393 IST and maintain the previously approved funding and 63 CDCR patients awaiting placement in DSH positions to support the beds at CHCF. facilities. Such long waitlists are problematic IST Adjustments. In addition, the Governor’s because they could result in increased court costs budget includes a $27.8 million General Fund and higher risk of DSH being found in contempt of augmentation and 251 positions to activate 105 new court orders to admit patients. This is because DSH beds for IST patients. Specifically, the budget is required to admit patients within certain time proposes activating 105 beds at DSH-Coalinga, 58 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET which would be filled with current MDO patients available bed space, and therefore cannot utilize transferred from DSH-Napa, DSH-Patton, available beds. Also, patients are committed to DSH-Metropolitan, and DSH-Atascadero. The beds specific locations by referring agencies (such made available from this transfer would then be as courts), so some available beds may not be filled with IST patients. filled because patients are not being referred to those locations. Proposals Raise Several Issues Second, according to DSH, it must receive Gap Exists Between Budgeted Population and funding to staff beds that will remain vacant for a Census. In recent years, there has been a significant portion of the year. For example, the department mismatch between the size of the population DSH indicates that some beds are budgeted for certain is funded to serve and the number of patients commitment types—such as for IST patients—and actually in the hospitals. This is because while DSH those beds must be open for only those commitment Graphic Sign Off has received funding increases in recent years to types. Also, a certain percentage of beds must support additional beds, the department has not remain vacant for patients who are attending Secretary been able to activate the planned beds at the rate court hearings or transferring locations. While we Analyst expected—resulting in much lower-than-expected acknowledge that it is necessary to maintain some MPA growth in the patient population. As shown in number of vacant beds for this purpose, it is unclear Deputy Figure 13, DSH has consistently maintained from the information provided by DSH that the a smaller population than beds for which it is current number of vacant beds is appropriate. We budgeted to support. In total, DSH is currently note, for example, that the number of vacant beds— budgeted for 616 more beds than it has patients. both at various DSH facilities and by commitment Specifically, the department is overbudgeted by 365 Figure 13 beds in state hospitals and DSH Budgeted and Actual Population, All Facilities 251 beds in the psychiatric Budgeted programs. Despite this, the 7,000 Actuala department has not reverted unused funds to the General 6,000 Fund at the end of the year. 5,000 There are several reasons that may explain 4,000 why there is a gap between the population DSH is 3,000 budgeted to serve and 2,000 the population it actually serves. First, DSH is not 1,000 always able to utilize beds for which it has received 2010 2011 2012 2013 2014 funding. For example, DSH a Population as of the end of June of each year except 2014, which is as of January 7, 2014. often has difficulty hiring DSH = Department of State Hospitals. clinical staff to support ARTWORK #140038 www.lao.ca.gov Legislative Analyst’s Office 59 Template_LAOReport_mid.ait 2014-15 BUDGET type—changes frequently with little evidence of populations. Therefore, it seems unlikely that corresponding changes in care. This suggests that increased funding for staff—whether it results in DSH has been able to operate with fewer vacant filled vacancies or increased registry funding— beds than they currently have. would result in an increase in the population or The gap between the budgeted and actual reduction in patient waitlists. population is problematic for two reasons. First, Implementation of Alternatives to Capacity it suggests that the department is overbudgeted Could Reduce Waitlists. Because of the dramatic to serve its current population. Second, it increase in the waitlists for IST and Coleman suggests that approving additional funds for patients, the department has initiated some steps the department will not necessarily result in an in recent years to help manage the waitlists. increase in population or a reduction in waitlists. For example, traditionally DSH has treated the Instead, additional funding may only result in IST population in state hospitals. In 2007-08, funding for positions that DSH is unable to fill, however, the Legislature approved a pilot project not an increase in hospital capacity. For example, allowing counties to provide Restoration of despite the Legislature approving funding to Competence (ROC) services to IST patients in support 155 additional beds in the 2013-14 budget county jail. The pilot showed that those services for IST and MDO populations, these populations could be provided at a significantly lower cost to have actually declined by 30 patients statewide. the state. In 2012-13, the Legislature authorized Vacancy Rates Remain a Concern. The DSH to continue this on an ongoing basis and the Governor’s budget assumes that additional department is currently considering expanding staff can be quickly hired to support additional this program. In addition, DSH is also involved patients. However, it is uncertain whether the in a workgroup established by the administration department will be able to hire staff within the to identify reasons for the increase in IST patient expected time frame. Moreover, DSH currently commitments and possible solutions for managing has high vacancy rates at DSH-Vacaville and the resulting increase in this population. The DSH-Salinas Valley, where it proposes to results of these efforts, and their impacts on maintain beds for Coleman patients. The DSH patient waitlists, have not yet been realized. The has historically had difficulty filling positions. As shown in Figure 14, the vacancy rates at Figure 14 DSH-Vacaville and DSH-Salinas Valley are DSH 2013-14 Vacancy Ratesa particularly high—34 percent and 33 percent, Budgeted Vacant Percent respectively. Given these vacancy rates, it is Location Positions Positions Vacant unlikely that the positions proposed in the budget Atascadero 1,827.8 254.4 14% for these facilities will be filled. We note that Coalinga 1,750.0 303.5 17 Metropolitan 1,218.0 178.4 15 DSH does use some registry staff to provide care Napa 1,965.0 160.5 8 and offsets those registry costs with savings from Patton 2,032.9 181.6 9 having vacant positions. (Registry staff provide Salinas Valley 315.7 103.5 33 Vacaville 472.7 159.6 34 services on an hourly basis when civil servants are Totals 9,582.1 1,332.5 14% unavailable.) However, the department’s current a Excludes California Health Care Facility in Stockton, due to only use of registry staff does not seem to significantly partial-year data being available. reduce the gap between the budgeted and actual DSH = Department of State Hospitals. 60 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET pilot program and workgroup may result in LAO Recommendations patient waitlist reductions, which could reduce In view of the above concerns, we recommend the department’s need for additional capacity that the Legislature reject the Governor’s proposal and thus the need for the Governor’s proposed to provide additional funding for increased augmentations. bed capacity at DSH-Vacaville, DSH-Salinas Current Staffing Ratios Not Based on Valley, and at the various facilities due to receive Rigorous Analysis. Until 2013, DSH was under additional IST bed capacity. We also recommend a consent decree pursuant to the federal Civil that the Legislature direct DSH to report at budget Rights for Institutionalized Persons Act, which subcommittee hearings this spring on (1) why the is designed to protect individuals in public patient population remains stable despite growing institutions such as mental hospitals. The consent waitlists, (2) why there is a mismatch between their decree was reached between the U.S. Department budgeted capacity and their patient population, of Justice and DSH in 2006 to address identified (3) what steps the department is taking to address deficiencies. The terms of the consent decree, its high vacancy rate, and (4) the department’s however, had limited the state’s options with progress on expanding ROC services in county respect to adjusting DSH’s staffing. Given that the jails and the findings of the IST working group. department is no longer under court oversight, it Such information could assist the Legislature in now has the ability to reassess whether its existing making a determination about the appropriate staffing levels are appropriate. level of budget and staffing increases necessary However, the department has not undertaken to treat the DSH patient population. We further an independent analysis of its staffing needs since recommend that the Legislature direct DSH to the termination of the consent decree. As such, it develop a proposal to contract for an independent is not clear if the department employs reasonable staffing analysis to determine appropriate staffing staff to patient ratios given the types of patients levels for each facility. These staffing ratios should it treats and the physical layout of its facilities. be based on licensing requirements, clinical need, We note, for example, that an audit conducted necessary bed vacancies, and other factors as by DOF in 2008-09 found that DSH’s staffing deemed appropriate by the independent assessor. model did not accurately reflect its workload and Patient Management and that the department was not efficiently using Bed Utilization Unit some of its staff. Moreover, as mentioned earlier, the department does not have standards for the number of beds that should remain vacant to Background account for patients who are away at court or Under certain circumstances, counties, being transferred to other locations, as well as the courts, or CDCR can make commitments to number of staff positions necessary for such beds. either a specific hospital or psychiatric program Without such an analysis it is unclear whether or to the DSH system at large, without reference DSH’s current staffing patterns are appropriate. to a specific institution. Currently, the process It is possible that DSH has too much or too little for assigning an individual is largely focused staff, which would impact whether the Governor’s on legal requirements rather than clinical need. proposed augmentation is appropriate. Specifically, assignment to a specific location is at the discretion of the referring entity based on www.lao.ca.gov Legislative Analyst’s Office 61 2014-15 BUDGET a patient’s legal commitment and security risk, • Centralized Patient Placement and statutory requirements of the locations, agreements Waitlist Management. The new unit with communities and CDCR, and DSH policy. would centralize and coordinate patient Once in a DSH facility, a patient may be transferred placement at a statewide level. The to a different location. However, for that transfer Governor’s budget proposes having to occur a patient must first be admitted and (1) courts, counties, and CDCR commit stabilized. patients to DSH at large, rather than to We find that the current system for specific institutions and (2) the patient commitments can result in unintended management unit determine the specific consequences. For example, some locations may location for placement. The unit would be overutilized while others may be underutilized, also centralize patient waitlists, which are which can lead to delays in placement. While DSH currently maintained through several state may transfer patients to address those capacity and local systems. concerns, currently such transfers occur on an • Centralized Population Information. The ad hoc basis. In addition, commitments that new unit would also create reports tracking assign patients to specific locations may reduce bed vacancies, facility populations, patient DSH’s clinical effectiveness, because it prevents diagnoses, commitment type, county of the department from assigning patients to the origin, length of stay, and recidivism rates. facility to which they are best suited. The ability to do so is important because specialty care for LAO Assessment specific medical or mental health diagnoses varies by location. For example, DSH-Patton has a unit Proposal Has Merit. . . As described above, the for individuals with certain chronic diseases and current disconnected system of patient placement DSH-Metropolitan has a skilled nursing facility. has numerous drawbacks. The Governor’s proposal Moreover, because each facility may be required to has the potential to address many of the issues. intake numerous patient types, each facility must For example, the proposal might allow DSH to maintain the ability to house each of these patient find placements for patients more quickly, which types. This increases costs because it prevents could reduce court orders requiring DSH to facilities from achieving the efficiencies possible accept specific patients from waitlists. It could also from specialization and the economies of scale improve the department’s ability to budget for each available from concentrating specific patient types institution, because it would allow DSH to place in certain facilities. patients in available bed space rather than having some facilities have empty space while others have Governor’s Proposal patients waiting for entry. It could also reduce The Governor’s budget for 2014-15 proposes lengths of stay by placing patients in the most $1.1 million in General Fund support and the clinically appropriate setting. establishment of ten limited-term positions for We note, however, that there could be some DSH to create a patient management and bed additional costs associated with the patient utilization unit. According to the administration, management unit. For example, patients assigned the proposed unit would serve several key to locations far from their county of commitment purposes, including: might incur additional travel costs for court visits. 62 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET In addition, evaluating patients before placement population has been growing. Currently more could also slow the placement and transfer than 90 percent of patients are committed through processes, resulting in longer lengths of stay. the criminal justice system. There are concerns Despite this, the potential operational benefits of the that this shift has resulted in increased acts of proposal would likely outweigh such drawbacks. aggression by patients toward other patients and . . . But Department Lacks Authority to Fully staff. For example, since 2008, three murders have Realize Benefits of Management Unit. The DSH occurred in DSH facilities and the department has currently does not have the statutory authority seen an increase in incidents that require first aid or to implement patient placement programs, and hospitalization. Because DSH hospitals were built the Governor’s proposal does not include trailer for civil commitments, the facilities do not have bill language to provide the department with that secure units to house aggressive patients on a short- authority. Though some courts and counties permit or long-term basis. In addition, DSH facilities are DSH to manage patient placement, the discretion currently licensed as acute psychiatric hospitals or to allow this remains with those entities, not intermediate care facilities, and licensing standards the department. Even if DSH were to establish a for those facilities preclude the use of secure units. patient management and bed utilization unit, it Governor’s Proposal would be unable to fully realize the benefits of such a program because, without statutory changes, The Governor’s budget provides $1.5 million in referring entities would remain the arbiters of General Fund support to DSH for the Department patient placement. of General Services (DGS) to prepare an analysis, estimate, and infrastructure design for the LAO Recommendation development of approximately 44 enhanced Though the administration’s proposal could treatment units (ETUs) in DSH hospitals. result in increased efficiency and potential cost The rooms in these units would serve several savings, until statutory language exists permitting purposes, including: providing temporary secure DSH to fully control the placement of the patients environments for violent patients and patients committed to its care, the benefits of the patient transferring to CDCR facilities, as short-term management unit cannot be fully realized. housing for patients with behavioral problems, and Therefore, we recommend the Legislature support as longer-term housing for violence-prone patients. the administration’s proposal to create a patient The units would be designed to have individual management and bed utilization unit and adopt patient rooms and externally locking doors. trailer bill language clarifying that DSH has the The Governor also proposes the development authority to fully control patient placements. of a Forensic Needs Assessment Panel (FNAP) and Forensic Needs Assessment Team (FNAT). The Statewide Enhanced FNAP could be comprised of clinical executives Treatment Units and review placement and treatment issues. The FNAT would include psychologists with Background experience in forensic assessment, and perform Historically, DSH has provided treatment risk assessments of patients referred for enhanced to those civil commitments without a history of treatment, evaluate ETU patients’ treatment plans, violence. However, as noted above, the forensic and follow the patient through placement in the www.lao.ca.gov Legislative Analyst’s Office 63 2014-15 BUDGET ETU. The proposal also includes proposed criteria be able to create an accurate budget package or for ETU admission and evaluation, which include determine the most appropriate infrastructure time frames for clinical evaluation, placement, and design for these units. We are also concerned reconsideration of ETU placement. The proposed that the lack of specificity about the ETUs creates criteria also include standards for treatment uncertainty about DSH’s ability to build the and case management time frames, as well as units. Under the administration’s proposal, it is unspecified increases in clinical oversight and unclear whether each hospital will be permitted to treatment. maintain ETUs or whether units will be required As noted above, current licensing standards do at each location. Additionally, it is unclear what not permit the use of locked units in DSH hospitals. design specifications may be required, such as The administration indicates that it is pursuing room size, bathroom facilities, or type of door various amendments and additions to acute lock. Without such information, it is unclear how psychiatric hospital regulations that would permit DGS will be able to conduct the proposed analysis. DSH hospitals to create units with individual Because each hospital has a different physical rooms and external door locks. However, such plant design, some hospitals may not meet those language has not yet been provided to the specifications, or it may be prohibitively expensive Legislature. to build the units. Lack of Clarity on Details of Proposal LAO Recommendation As mentioned above, the administration In light of these concerns, we recommend that has not provided language that would give DSH the Legislature reject the Governor’s proposed the authority it seeks. As such, the details of the $1.5 million to obtain a DGS study of ETUs. While project remain uncertain. For example, there is no we do not have major concerns with the proposal information about the approved lengths of stay or to consider the development of ETUs in DSH types of locked facilities that would be permitted hospitals, we are concerned that planning the units under statute. Without that clarity, DGS may not without having specific guidelines could result in unnecessary costs. 64 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET www.lao.ca.gov Legislative Analyst’s Office 65 2014-15 BUDGET 66 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET www.lao.ca.gov Legislative Analyst’s Office 67 2014-15 BUDGET Contact Information Mark C. Newton Deputy Legislative Analyst 319-8323 Mark.Newton@lao.ca.gov Shawn Martin Managing Principal Analyst 319-8362 Shawn.Martin@lao.ca.gov Ross Brown Medi-Cal–Families/Children 319-8345 Ross.Brown@lao.ca.gov Amber Didier Public Health 319-8327 Amber.Didier@lao.ca.gov Health Benefit Exchange Sarah Larson State Hospitals 319-8306 Sarah.Larson@lao.ca.gov Lourdes Morales Information Technology 319-8320 Lourdes.Morales@lao.ca.gov Felix Su Medi-Cal–Seniors and Persons with Disabilities 319-8344 Felix.Su@lao.ca.gov LAO Publications The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 68 Legislative Analyst’s Office www.lao.ca.gov