The 2016-17 Budget: Analysis of the Medi-Cal Budget

The 2016-17 Budget: Analysis of the Medi-Cal Budget MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • FEBRUARY 2016 2016-17 BUDGET 2 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET EXECUTIVE SUMMARY The Governor’s budget proposes $19.1 billion General Fund for Medi-Cal. This is an increase of $1.4 billion—or 8 percent—above the estimated 2015-16 spending level. This year-over-year increase is due to several factors, such as projected increases in caseload and the loss of General Fund savings due to the impending sunset of the managed care organization (MCO) tax and the hospital quality assurance fee (QAF). Governor’s Caseload Projections Appear Reasonable. The Governor’s budget assumes total annual Medi-Cal caseload of 13.5 million for 2016-17, an increase of 2 percent over revised 2015-16 caseload. We have reviewed the administration’s caseload projections in the context of the substantial changes to Medi-Cal caseload in recent years as a result of the Patient Protection and Affordable Care Act (ACA), and we find the estimates to be reasonable. ACA Implementation Creates Substantial Uncertainty in Projecting Caseload. ACA-related changes have made it more difficult to project caseload using trends in historical caseload data from recent years. This difficulty arises because the initial impacts of ACA implementation on caseload are unlikely to continue in future years. As the initial changes associated with ACA implementation stabilize, caseload trends and their relationship to changes in the economy will become more useful for projecting caseload. However, until that time, both the administration’s and our office’s caseload projections are likely to be more uncertain than in the past. When making budgetary decisions, the Legislature should consider this uncertainty with the understanding that small changes (both increases and decreases) in Medi-Cal caseload can have large impacts on the Medi-Cal budget. Further, we recommend the Legislature require the Department of Health Care Services (DHCS) to report at May Revise hearings on how the most recent data on caseload and redeterminations have informed and changed caseload projections. Several Potential General Fund Cost Pressures on the Horizon. Beginning in 2016-17 and over the next several years, there are several major changes that could occur in the Medi-Cal program and potentially result in total increased General Fund costs as high as the low billions of dollars annually. The potential cost pressures include (1) the sunset of the hospital QAF, (2) impacts associated with the proposed changes to the federal government’s Medicaid managed care regulations, (3) the potential loss of certain federal funds for uncompensated care, (4) the phase in of the state’s share of cost for the ACA optional expansion population, and (5) the potential reduction in federal funds for the Children’s Health Insurance Program (CHIP). We recommend the Legislature extend the hospital QAF this legislative session to provide greater assurance that the fee’s benefit in drawing down federal funds is maximized by preventing a lapse in the fee being operative. We also recommend the Legislature consider these General Fund pressures when making policy and budgetary decisions. These cost pressures may inform legislative decisions related to ongoing spending commitments and building up reserves as the Legislature crafts the 2016-17 budget. www.lao.ca.gov Legislative Analyst’s Office 3 2016-17 BUDGET 4 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET OVERVIEW The Governor’s budget proposes $19.1 billion MCO tax by the Legislature, while the hospital General Fund for Medi-Cal. This is an increase of QAF will sunset on January 1, 2017 absent an $1.4 billion—or 8 percent—above the estimated extension of the fee. 2015-16 spending level. This year-over-year increase In this report, we provide an analysis of the is due to several factors, such as projected increases administration’s caseload projections, as well as a in caseload and the loss of General Fund savings discussion of the impacts of the ACA on the ability due to the impending sunset of the MCO tax and to project caseload. We also provide an assessment the hospital QAF. The proposed budget reserves of several General Fund cost pressures on the most revenues associated with the MCO tax in horizon in Medi-Cal, including the sunset of the a special fund pending passage of a restructured hospital QAF. BACKGROUND In California, the federal-state Medicaid For most families and children, SPDs, and Program is administered by DHCS as the pregnant women, California generally receives California Medical Assistance Program a 50 percent FMAP—meaning the federal (Medi-Cal). Medi-Cal is by far the largest state- government pays one-half of Medi-Cal costs for administered health services program in terms these populations. However, a subset of children of annual caseload and expenditures. As a joint with higher incomes qualify for Medi-Cal as part of federal-state program, federal funds are available to the state’s CHIP. Currently, the federal government the state for the provision of health care services for pays 88 percent of the costs for children enrolled in most low-income persons. Until recently, Medi-Cal CHIP and the state pays 12 percent. Finally, under eligibility was mainly restricted to low-income ACA, the federal government will pay 100 percent families with children, seniors and persons with of the costs of providing health care services to disabilities (SPDs), and pregnant women. As part the newly eligible Medi-Cal population from 2014 of ACA, beginning January 1, 2014, the state through 2016. Beginning in 2017, the federal cost expanded Medi-Cal eligibility to include additional share will decrease to 95 percent, phasing down to low-income populations—primarily childless adults 90 percent by 2020 and thereafter. who did not previously qualify for the program. Delivery Systems. There are two main Financing. The costs of the Medicaid program Medi-Cal systems for the delivery of medical are generally shared between states and the federal services: fee-for-service (FFS) and managed care. government based on a set formula. The federal In a FFS system, a health care provider receives an government’s contribution toward reimbursement individual payment from DHCS for each medical for Medicaid expenditures is known as federal service delivered to a beneficiary. Beneficiaries in financial participation. The percentage of Medicaid Medi-Cal FFS generally may obtain services from costs paid by the federal government is known as any provider who has agreed to accept Medi-Cal the federal medical assistance percentage (FMAP). FFS payments. In managed care, DHCS contracts www.lao.ca.gov Legislative Analyst’s Office 5 2016-17 BUDGET with managed care plans, also known as health • County Organized Health System (COHS). maintenance organizations, to provide health care In the 22 COHS counties, there is one coverage for Medi-Cal beneficiaries. Managed county-run managed care plan available to care enrollees may obtain services from providers beneficiaries. who accept payments from the managed care • Two-Plan. In the 14 Two-Plan counties, plan, also known as a plan’s “provider network.” there are two managed care plans available The plans are reimbursed on a “capitated” basis to beneficiaries. One plan is run by the with a predetermined amount per person, per county and the second plan is run by a month regardless of the number of services an commercial health plan. individual receives. Medi-Cal managed care plans provide enrollees with most Medi-Cal covered • Geographic Managed Care (GMC). health care services—including hospital, physician, In GMC counties, there are several and pharmacy services—and are responsible commercial health plans available for ensuring enrollees are able to access covered to beneficiaries. There are two GMC health services in a timely manner. (In some counties—San Diego and Sacramento. counties, Medi-Cal managed care plans also provide long-term services and supports, including • Regional. Finally, in the Regional model, institutional care in skilled nursing facilities, there are two commercial health plans and home- and community-based services.) available to beneficiaries across 18 counties. The number and type of managed care plans Imperial and San Benito Counties have available vary by county, depending on the model managed care plans that are not run by the county, of managed care implemented in each county. and that do not fit into one of these four models. In Counties can generally be grouped into four main Imperial County, there are two commercial health models of managed care. plans available to beneficiaries and in San Benito, there is one commercial health plan available to beneficiaries. GOVERNOR’S BUDGET CASELOAD PROJECTIONS According to the Medi-Cal Eligibility as a result of eligibility simplification, enhanced Data System, there were over 12 million people outreach, and other provisions and effects of enrolled in Medi-Cal as of September 2015. This the ACA. The Governor’s budget assumes that count includes over 3 million enrollees—mostly following the large influx of enrollees in 2014-15 childless adults—who became newly eligible and 2015-16, ACA-related caseload levels will for Medi-Cal under the optional expansion. A stabilize during 2016-17. The budget also assumes substantial number of families and children who modest underlying growth for baseline enrollment were previously eligible—known as the mandatory within the families and children and SPD expansion—are also assumed to have enrolled populations. 6 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET Historical Trends. Figure 1 displays a decade beneficiaries, 3 million enrollees are projected to of observed and estimated caseload for each major have gained eligibility through the ACA optional category of enrollment in Medi-Cal, beginning expansion. with (1) historical caseload through 2013-14, Administration’s Caseload Projections followed by (2) the administration’s revised Appear Reasonable. We have reviewed the estimate for caseload in 2014-15, and (3) the administration’s caseload projections in the context budget’s projections for 2015-16 and 2016-17. While of the substantial ACA-related changes to the SPD enrollment grew steadily at about 2 percent Medi-Cal caseload in recent years, and we find the annually throughout the historical period, the estimates to be reasonable. We note, however, these families and children caseload grew cumulatively ACA-related changes have made it more difficult by 15 percent (or an average annual growth of to project caseload. We discuss these ACA-related about 4 percent) between 2007-08 and 2010-11 (the impacts in more detail in the next section. Further, onset of the Great Recession through the sluggish if we receive additional information that causes phase of the recovery). The further uptick in us to change our assessment of the caseload families and children in 2013-14 reflects the shift of projections in the Governor’s budget, we will the Healthy Families Program (HFP) to Medi-Cal. provide the Legislature with an updated analysis at Further growth in the families and children the time of the May Revision. population after 2014-15 largely reflects the impact of Figure 1 the ACA. Budget Forecasts Medi-Cal Caseload to Exceed 13 Million Caseload Projections Average Monthly Enrollees (In Millions) in Governor’s Budget. The 16 Governor’s budget assumes total annual Medi-Cal 14 caseload of 13.3 million 12 for 2015-16. This is an ACA Optional Expansion 8 percent increase over the 10 revised caseload estimate of 8 12.3 million for 2014-15. This substantial year-over-year 6 Families and Childrena increase reflects, at least 4 in part, continued growth 2 related to the ACA. The Seniors and Persons With Disabilities budget assumes total annual 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16 16-17 Medi-Cal caseload of Estimated Projected 13.5 million for 2016-17, an a Includes certain refugees, undocumented immigrants, and hospital presumptive eligibility increase of 2 percent over enrollees. revised 2015-16 caseload. Of ACA = Patient Protection and Affordable Care Act. the 13.5 million assumed www.lao.ca.gov Legislative Analyst’s Office 7 2016-17 BUDGET ACA IMPLEMENTATION CREATES SUBSTANTIAL UNCERTAINTY IN PROJECTING CASELOAD There have been number of ACA-related resulted in a significant influx of new enrollees impacts on Medi-Cal caseload that make it difficult into Medi-Cal. In addition to the increase in to use trends in historical caseload data from recent Medi-Cal enrollment associated with the optional years to project future caseload. This is because expansion, several other ACA-related factors— the initial impacts of ACA implementation on such as enrollment simplification, publicity, and caseload are unlikely to continue in future years. outreach—likely increased Medi-Cal enrollment For example, the large influx in Medi-Cal caseload among individuals who were previously eligible, over the past two years associated with the ACA’s but unenrolled—often referred to as the mandatory optional and mandatory expansions is unlikely to expansion. continue in future years as many of those eligible ACA Changes Likely Made It Easier to Enroll have already enrolled. in Medi-Cal. Several ACA-related policy changes have likely made it easier to enroll in Medi-Cal Background coverage and therefore have likely resulted in Medi-Cal Caseload Changes Are a Function of increased Medi-Cal caseload. The state adopted a Inflows and Outflows. Medi-Cal caseload is both a no-wrong-door approach for Medi-Cal applications function of inflows (new enrollees coming onto the that allows applicants to apply: (1) online through program) and outflows (existing enrollees leaving Covered California’s website, (2) by calling either the program due to ineligibility or because they Covered California’s service center or county obtained other health coverage). Taken together, Medi-Cal eligibility offices, (3) in person at county inflows minus outflows equate to the net change in Medi-Cal eligibility offices, or (4) through the mail. caseload. It is therefore important that historical The state has also taken advantage of other options caseload data accurately capture both inflows and under the ACA to streamline the enrollment outflows in order to use such data to project future process, including hospital presumptive eligibility caseload levels. and express lane enrollment. Both are streamlined processes that allow certain individuals to enroll in Impacts of ACA on Medi-Cal Caseload Inflows Medi-Cal without completing a full application. Several ACA-related changes have resulted in Impacts of ACA on Medi-Cal Caseload Outflows an increase in Medi-Cal enrollment (or inflows of Medi-Cal caseload), including eligibility Several ACA-related impacts have affected expansions, outreach efforts, and enrollment the Medi-Cal redetermination process (a check of simplifications. Medi-Cal eligibility necessary to allow continued Increased Enrollment Associated With ACA. enrollment in the program that generally Through the ACA’s optional expansion, California occurs annually during the month in which expanded Medi-Cal eligibility as of January 1, 2014 the beneficiary initially enrolled), which affects to include previously ineligible adults with incomes Medi-Cal caseload outflows. up to 138 percent of the federal poverty level (FPL). While ACA Simplified Some Annual As shown in Figure 1, the optional expansion Redeterminations . . . The ACA and state 8 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET legislation created a new annual redetermination problem, the data that are available indicate that process that reduces the amount of information counties have processed roughly 75 percent of that must be provided by beneficiaries and, instead, redeterminations due between January 2015 and relies on available electronic data. This results in September 2015. the ability for county eligibility workers to complete Ongoing Work Aimed at Addressing a given beneficiary’s annual redetermination CalHEERS Issues and Redeterminations Delay. without contacting the beneficiary for information In the past several years, the Medi-Cal budget has if the available electronic data are sufficient to included additional funding for county workload confirm eligibility. associated with initial implementation of ACA. . . . ACA Implementation Workload Created The Governor’s budget includes an additional Delay in Medi-Cal Redeterminations. Counties $85 million General Fund ($170 million total funds) experienced an increase in workload associated in 2016-17 for this purpose. From conversations with processing Medi-Cal applications as a result with counties, we understand counties are of (1) the large influx of Medi-Cal applications continuing to get caught up on processing resulting from the ACA’s coverage expansion and redeterminations on a more timely basis in recent increased outreach efforts and (2) issues with months. Further, work continues to implement functionality in the California Health Eligiblity, additional functionality and resolve outstanding Enrollment, and Retention System (CalHEERS) issues in CalHEERS. The administration, with that created the need for county eligibility input from counties and other stakeholders, has workers to manually complete some steps of created a rolling 24-month roadmap that provides Medi-Cal eligibility processes. (CalHEERS is a a timeline for reaching full functionality of central automation system, jointly administered CalHEERS. by Covered California and DHCS, that allows ACA Impacts on Projecting Medi-Cal Caseload for real-time eligibility determinations both for Medi-Cal and subsidized coverage through ACA-related policy changes have impacted Covered California.) As a result of this workload, both inflows and outflows of Medi-Cal enrollment DHCS allowed counties to delay the processing of in recent years, creating difficulties in the use of Medi-Cal redeterminations. According to DHCS, historical caseload data to project future caseload counties were advised to delay all redeterminations levels. for the first six months of 2014 and to conduct a Influx of Caseload Associated With ACA modified redeterminations process during the last Distorts Underlying Caseload Trends. Typically, six months of 2014. our office projects families and children caseload Beginning in 2015, DHCS had the by evaluating historical trends in how caseload expectation that counties would be conducting changes as a result of changes in the economy. full redeterminations in a timely manner. We Based on historical trends, we would typically understand from discussions with counties that expect caseload to decrease during the recent not all redeterminations were processed on time period of economic expansion absent other policy in 2015 as a result of continued work associated changes. However, ACA-related policy changes with ACA implementation and ongoing issues during this period have significantly increased with CalHEERS. While comprehensive data are Medi-Cal caseload. The caseload inflows during not available to fully assess the extent of this initial implementation of the ACA coverage www.lao.ca.gov Legislative Analyst’s Office 9 2016-17 BUDGET expansion represent an initial increase associated changed the Medi-Cal coverage landscape. Once with the expanded eligibility and outreach efforts. the initial influx of ACA-related caseload is However, the growth rates experienced during this complete and delays in Medi-Cal redeterminations implementation phase are not trends that we would are resolved, it will take several years before the expect to continue over time. Therefore, the last state has sufficient data to understand underlying several years of historical Medi-Cal caseload data caseload trends. are generally not useful for projecting future trends Legislature Should Consider Caseload in caseload for several reasons: (1) it is difficult to Projection Uncertainty When Budgeting project exactly when the increase in caseload will slow down and (2) the increase in caseload masks Early in the roll-out of the ACA there was how caseload otherwise would have changed as a understandably a focus on getting individuals result of the economic expansion that has occurred enrolled in Medi-Cal. As we move out of the initial in recent years. implementation phases of the ACA, the focus Delay in Medi-Cal Redeterminations shifts more towards continued implementation of Distorts Underlying Caseload Trends. Outflows CalHEERS functionality, the timely processing of of caseload from the past several years are redeterminations, and more accurate tracking of distorted by the delays in processing Medi-Cal caseload. As the initial changes associated with redeterminations. The redetermination delays have ACA implementation stabilize, caseload data will resulted in some enrollees retaining Medi-Cal become more useful for projecting future caseload coverage longer than they otherwise would from recent historical trends. However, until that have if redeterminations had been processed on time, both the administration’s and our office’s time. The delay in redeterminations also prevent caseload projections are likely to be more uncertain us from understanding how the outflows of than in the past. Medi-Cal caseload have changed as a result of the Legislature Should Consider Caseload simplification of redeterminations as a result of Uncertainty When Making Budgetary Decisions. ACA-related policy changes. Further, these factors It is important for the Legislature to be aware of complicate the understanding of outflows of this uncertainty in evaluating Medi-Cal caseload caseload associated with changes in the economy. particularly in the out years. When making Future Medi-Cal Caseload Difficult to budgetary decisions, the Legislature should Project Given Distortions in Recent Historical consider this uncertainty with the understanding Data. Together, the ACA’s coverage expansion that small changes (both increases and decreases) and recent redetermination delays limit the use in Medi-Cal caseload can have large impacts on of the trends in the most recent caseload data in the Medi-Cal budget. For example, even 200,000 projecting future caseload. The best data available more family and children beneficiaries enrolled in to understand trends in Medi-Cal caseload are Medi-Cal than projected could result in additional historical data from the years prior to the ACA, General Fund costs in the low hundreds of millions and both our office and the administration of dollars. To the extent the Legislature is risk have looked to this data in projecting Medi-Cal averse, the Legislature may want to account for the caseload. However, these historical trends may not potential increases in the Medi-Cal budget as a be reflective of caseload trends that will continue result of caseload uncertainty in determining the going forward because the ACA significantly targeted level of General Fund reserves. 10 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET Require DHCS to Report at Budget Hearings useful in projecting future caseload. Given this, we on Caseload and Redeterminations. As time goes recommend the Legislature require DHCS to report on and the initial phases of ACA implementation at May Revise hearings on how the most recent data are complete, trends in historical caseload data and on caseload and redeterminations have informed their relationship to the economy will become more and changed caseload projections. POTENTIAL GENERAL FUND COST PRESSURES ON THE HORIZON Introduction Hospital QAF Sunset Medi-Cal is a complex and dynamic program Background. Federal Medicaid regulations that at any given time is subject to potential allow states to assess “health care-related taxes” changes resulting from economic or policy shifts. on certain health care providers and use the tax These changes can range from economically driven revenues as the nonfederal share of Medicaid caseload changes to policy and programmatic payments. Since 2009, the Legislature has imposed changes such as coverage expansions, the addition a health care-related tax, the hospital QAF, on of new health care benefits, and delivery system certain private hospitals. The hospital QAF benefits reforms. These types of changes typically have fiscal the hospital industry through the use of fee revenue impacts on the state’s budget. to draw down federal funds that are generally Beginning in 2016-17 and over the next several provided to hospitals through various financing years, there are potentially several major changes mechanisms. Most of the revenues collected that could occur in the Medi-Cal program and through the fee provide the nonfederal share of potentially result in increased General Fund costs (1) certain increases to capitation payments that as high as the low billions of dollars annually in Medi-Cal managed care plans are required to total. Some of these changes are relatively certain pass along entirely to private and public hospitals to occur, such as the phase-in of the state’s share of and (2) certain supplemental payments to private cost for the ACA optional expansion population. hospitals. A certain portion of the fee revenue Other potential changes, such as proposed changes offsets General Fund costs for providing children’s to the federal government’s Medicaid managed care health care coverage, thereby achieving General regulations, are still very uncertain but could result Fund savings. In 2015-16, General Fund savings in significant General Fund costs. from the fee are estimated to be $815 million. While some of these potential General Fund Fee Sunsets January 1, 2017 and Governor’s cost pressures would not occur during 2016-17, Budget Does Not Propose Fee Extension. The but rather in future fiscal years, the Legislature current hospital QAF sunsets on January 1, 2017. can use this information when weighing priorities The Governor’s budget does not propose extending for new ongoing spending proposals and reserve the fee. A November 2016 ballot measure, however, levels. Further, awareness of these cost pressures would permanently extend the fee if passed. An may inform other policy decisions the Legislature extension of the fee requires both legislative (or is considering, including whether to pass a voter) approval and subsequent approval from the restructured MCO tax. federal government to draw down federal funds. www.lao.ca.gov Legislative Analyst’s Office 11 2016-17 BUDGET Given Timing of Federal Review, Fee finalized in 2016. This is the first time CMS has Extension Unlikely to Impact Budget in 2016-17 updated the managed care regulations since 2002 . . . In order to have an extension of the fee in and, according to CMS, the regulations were effect retroactive to January 1, 2017, the state proposed to respond to substantial changes in would need to formally submit the proposed the delivery of health care services. One example fee extension for approval from the Centers for of such changes includes the significant increase Medicare and Medicaid Services (CMS) by no later in managed care enrollment. In 2003-04, only than March 31, 2017. (The federal government 50 percent of Medi-Cal enrollees were enrolled in would likely allow the fee to be retroactive to managed care. In 2016-17, 75 percent of Medi-Cal the beginning of the quarter in which the fee is beneficiaries are projected to be enrolled in submitted to it for approval.) However, prior to managed care. submitting for federal approval, the Legislature (or If the proposed regulations were adopted voters) must first authorize an extension of the fee. by CMS in their current form, there would be Once a fee extension is formally submitted to CMS, several potential adverse General Fund impacts. the administration estimates it would take CMS In this report, we focus on potential impacts of the 6 to 12 months to approve the fee extension. The fee regulations that, based our current understanding, would likely be retroactive to January 1, 2017, but could result in significant General Fund impacts. the length of time for CMS approval would create However, the proposed regulations could also a delay in receiving General Fund benefit from the result in many other changes to how Medi-Cal fee until 2017-18. is administered. A discussion of such changes is . . . But Delay in Authorizing Fee Extension beyond the scope of this report. Would Likely Result in Lost General Fund Regulations as Proposed Would Impact Savings. If the state submitted the proposed Medi-Cal Financing Structure. The proposed extension to CMS for approval after March 31, managed care regulations would restrict the state’s 2017, there would likely be a gap between the flexibility in paying managed care plans in two key sunset of the current fee and the effective date of ways: the extended fee during which time the state would • Restriction on Directing Managed Care not receive General Fund benefit from the fee. The Plan Payments. Currently, the state directs magnitude of the General Fund impact would vary managed care plans to pass on certain based on the duration of time between the current payments to specified providers, such as fee’s sunset and the extended fee’s effective date. For payments to hospitals through the hospital example, if the fee was not in effect for one quarter, QAF. The proposed regulations would this could result in General Fund costs in the low generally prohibit the state from directing hundreds of millions of dollars. managed care plan expenditures. This could mean the state would not be able to Proposed Medicaid Managed Care Regulations require managed care plans to use specified Background. The CMS recently proposed portions of capitated rate payments to broad and sweeping changes to the federal support specific health care providers. regulations that govern managed care in Medicaid. These regulations were submitted for public • Elimination of Managed Care Rate comment in June 2015 and are expected to be Range. The state generally contracts with 12 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET actuaries (rate-setting professionals) to experience savings from providing less indigent determine the appropriate capitated rates health care, because many previously uninsured to pay Medi-Cal managed care plans. individuals enrolled in Medi-Cal. In light of The actuaries determine the appropriate this, counties are required under current law to rates in accordance with current federal use a portion of health realignment funding to regulations, which generally require plans help pay for California Work Opportunity and to be reimbursed for the reasonable costs of Responsibility to Kids (CalWORKs) grants, which providing health care services covered by offsets General Fund spending that otherwise Medi-Cal to the population served by the would have occurred in CalWORKs. In counties plan. Currently, the actuaries certify to a that operate public hospitals, realignment savings range of capitated rates for each Medi-Cal are determined through a formula that includes a managed care plan. DHCS then pays plans comparison of the public hospitals’ total revenues a capitated rate that falls within the rate and total costs. range. In general, the state pays at the lower The proposed restriction on directing end of the rate range. Under the proposed managed care plan payments and the proposed managed care regulations, CMS would elimination of the managed care rate range could require actuaries to certify to a specific rate result in less revenue for public hospitals and for a given plan instead of a range. other safety-net providers. For example, certain financing mechanisms pay managed care plans Below, we discuss the potential impact on above the lower end of the rate range and require the General Fund as a result of the potential plans to pass along these payments above the restrictions the proposed regulations would place lower end of the rate range to public hospitals. on how the state pays managed care plans. If as a result of the proposed regulations public General Fund Savings From Hospital QAF hospitals receive less revenue, this in turn could Could Be Compromised. As discussed above, reduce the amount of health realignment funds a key feature of the hospital QAF is the use of redirected to CalWORKs to offset General Fund fee revenue to increase capitation payments to costs for CalWORKs grants. The administration managed care plans. The plans are then required estimates the General Fund offset in CalWORKs to pass along these capitation increases entirely to will be $560 million in 2016-17 (excluding costs private hospitals, county hospitals, and University associated with truing-up the redirection of health of California hospitals. If the proposed regulations realignment from 2013-14). To the extent the prevented the state from directing managed care regulations impact public hospital financing, these plan payments, then the state would likely not be savings could be reduced. able to require the capitation increases to be passed Potential Reductions in Federal Funding on to hospitals. As such, the state would likely be Received by Safety-Net Providers Could Create unable to continue the hospital QAF as currently General Fund Pressure. There is potential for the structured and this could compromise the General proposed managed care regulations to result in a Fund benefit from the fee. reduction of federal funding to public hospitals and General Fund Offset From Health other safety-net providers through the hospital QAF Realignment Savings Could Be Reduced. Counties and other Medi-Cal financing mechanisms that pay for indigent health care using 1991 health could potentially be prohibited under the proposed realignment funding. Under ACA, counties www.lao.ca.gov Legislative Analyst’s Office 13 2016-17 BUDGET regulations. This could destabilize the safety net public hospitals to be self-sustaining absent SNCP and could result in pressure on the General Fund to funding by 2020. replace some of the lost federal funds. Reduced SNCP Funding Would Likely Decrease General Fund Offset From Health Section 1115 Waiver Realignment Savings. If SNCP funding were to Background. The federal government grants decrease in subsequent years of the Medi-Cal 2020 states flexibility in administering their Medicaid waiver, this would decrease funding to public programs through “waivers,” such as those allowed hospitals. All else equal, this would likely decrease under Section 1115 of the federal Social Security the amount of health realignment funding counties Act. When a state’s waiver request is approved by that operate public hospitals would be required to the federal government, the state is permitted to redirect to CalWORKs. This in turn would decrease waive certain federal requirements on the basis the General Fund offset in CalWORKs. that the waiver serves to further the purpose of ACA Optional Expansion the state’s Medicaid program. Certain waivers can allow states to leverage federal funding. The state Background. Currently, the federal government recently received federal approval for a new Section pays 100 percent of the costs for the over 3 million 1115 waiver called the “Medi-Cal 2020” waiver. The Medi-Cal enrollees who became eligible through waiver, which began January 1, 2016, will provide the ACA’s optional expansion (largely low-income, the state with at least $6.2 billion in federal funds childless adults). Beginning in 2017, the state over the next five years. will pay 5 percent of these costs, phasing up to Uncertain Safety Net Care Pool (SNCP) 10 percent in 2020 and thereafter. However, the state Funding Through Waiver. Under the Medi-Cal has paid some costs associated with the optional 2020 waiver, CMS has only agreed to provide expansion since the expansion began in 2014. These certain funds referred to as SNCP funds for the costs occur as a result of a state-only Medi-Cal first year of the waiver. These funds currently program that provides full-scope Medi-Cal to provide roughly $230 million annually to public certain newly qualified immigrants. The state does hospitals for the provision of uncompensated care. not receive a federal match for the costs of these CMS expects the amount of uncompensated care benefits with the exception of emergency and provided by public hospitals to have decreased pregnancy services. State law requires that legal as a result of the ACA’s coverage expansions and immigrants receive the same services as citizens and as such has required the state to conduct a study as such, eligibility for this program was expanded of uncompensated care. The study will inform consistent with the ACA’s coverage expansion. CMS’s decision on the amount of SNCP funding Beginning in 2017, this population is expected to to provide in subsequent years of the Medi-Cal transition from Medi-Cal coverage to coverage 2020 waiver. In general, we understand CMS has through Covered California through which they the expectation that the amount of SNCP funding are eligible for federally funded premium subsidies. will decrease in subsequent years as a result of an Medi-Cal will still pay for premiums (above the expected decrease in the need for uncompensated federally subsidized amount), cost-sharing, and care. In addition to requiring the study of services that are not covered through Covered uncompensated care, CMS has indicated it expects California but are covered through Medi-Cal—also known as wrap-around coverage. 14 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET Administration Estimates Optional are likely to be between $1.4 billion and $1.9 billion Expansion Will Cost $550 Million General Fund by 2020-21, when the state is paying 10 percent in 2016-17, but Only $385 Million Associated of the costs. This range reflects the considerable With 5 Percent Cost Phase-In. The administration uncertainty associated with estimating costs several estimates the optional expansion will cost about years out for this population. The majority of the $550 million General Fund in 2016-17. However, optional expansion population will be enrolled these costs can be grouped into two categories. in Medi-Cal managed care plans that receive a capitated rate per enrollee per month regardless • Optional Expansion Costs Associated of the number of services an enrollee receives. With 5 Percent State Cost Share. Only The rates paid to managed care plans for optional $385 million of the $550 million in optional expansion enrollees have decreased relative to expansion costs are associated with the the rates plans were paid at the beginning of the state paying 5 percent of the optional Medi-Cal expansion because this population was expansion costs for half of the year. less costly than originally estimated. If this trend • Newly Qualified Immigrant Optional continues, costs would likely be at the low end of Expansion-Related Costs. The remaining this range. On the other hand, costs would likely $165 million is associated with the cost of be at the higher end of this range if, for example, providing full-scope Medi-Cal to newly caseload increased as a result of a recession. qualified immigrants who are eligible Children’s Health Insurance Program through the state-only program that was expanded consistent with the optional Background. CHIP is a joint federal-state expansion. program that provides health coverage to children in low-income families, but with incomes too This distinction between these two categories high to qualify for Medicaid. States have the of costs is important in understanding how costs option to use federal CHIP funds to create a associated with the optional expansion will increase stand-alone CHIP program or to expand their as the state’s share of cost increases to 10 percent. Medicaid programs to include children in families The $385 million General Fund represents the with higher incomes (commonly referred to as baseline cost of the optional expansion during Medicaid-expansion CHIP). Recently, California the first six months of 2017 when the state is first transitioned from providing CHIP coverage required to pay 5 percent of the optional expansion through the stand-alone HFP to providing CHIP costs. It is therefore this amount (annualized to coverage through Medi-Cal. With this transition, cover a full fiscal year) that will increase as the completed in the fall of 2013, Medi-Cal generally state’s share of cost for the optional expansion provides coverage to children in families with increases to 10 percent by 2020-21. The state’s incomes up to 266 percent of the FPL. Some infants costs associated with newly qualified immigrants in families with incomes up to 322 percent of the will decrease when this population transitions to FPL may also be eligible for Medi-Cal. (The FPL in coverage through Covered California in 2017. 2016 for a family of four is $24,300.) General Fund Costs Associated With Optional Unlike Medi-Cal, CHIP is not an entitlement Expansion Cost Share Could Reach $1.4 Billion to program. States receive annual allotments $1.9 Billion by 2020-21. We estimate the General of CHIP funding based on historic CHIP Fund costs associated with the optional expansion www.lao.ca.gov Legislative Analyst’s Office 15 2016-17 BUDGET spending. Generally, states receive allotments Recommendations that are sufficient to cover the federal share of Extend Hospital QAF. We recommend the CHIP expenditures for the full year. Allotments Legislature extend the hospital QAF because this correspond to the federal fiscal year (FFY) which fee is both a benefit to the General Fund and the runs from October 1 through September 30. hospital industry. Further, we recommend the Enhanced ACA Federal Funding Reduces Legislature extend the fee this legislative session General Fund Costs by Over $600 Million to provide greater assurance that the fee’s benefit Annually. Beginning October 1, 2015, California’s in drawing down federal funds is maximized by CHIP federal matching rate increased from preventing a lapse in the fee being operative. While 65 percent to 88 percent as authorized by ACA. The there is a ballot initiative that would make the fee administration estimates the increased matching permanent, a delay in authorizing the fee could rate will result in $600 million in General Fund result in General Fund costs of at least the low savings in 2016-17. hundreds of millions of dollars. We also note the Uncertainty as to Whether CHIP Will proposed managed care regulations in their current Be Funded After FFY 2016-17. Congress form could prevent the fee from being implemented has appropriated funding for CHIP through as currently structured. However, the regulations FFY 2016-17, which ends on September 30, 2017. are not yet finalized and it is possible the fee could Therefore, Congress will face a decision as to be implemented under the finalized regulations. whether to fund CHIP beyond FFY 2016-17. If Therefore, we find the Legislature should move Congress does not fund CHIP beyond FFY 2016-17, forward with authorizing a fee extension to the state could continue to provide coverage to this maximize potential General Fund benefit. population through Medi-Cal and would receive Consider Potential General Fund Pressures the 50 percent Medi-Cal matching rate. This would When Making Policy and Budgetary Decisions. result in General Fund costs of roughly one billion We recommend the Legislature consider these dollars on an annual basis. General Fund pressures in Medi-Cal when If CHIP Is Funded, Enhanced Matching Rate making policy and budgetary decisions. These cost Authorized Only Through FFY 2018-19. Assuming pressures may inform legislative decisions related Congress funds CHIP beyond FFY 2016-17, the to ongoing spending commitments and building enhanced matching rate is only authorized by up reserves as the Legislature crafts the 2016-17 the ACA through FFY 2018-19, which ends on budget. Further, some of the Legislature’s decisions September 30, 2019. After such time, the federal on policy issues during this legislative session cost share would revert to the 65 percent CHIP should be made in consideration of these cost matching rate absent additional action by Congress. pressures. Therefore, the roughly $600 million in annual General Fund savings from the enhanced matching rate is likely time-limited. 16 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET www.lao.ca.gov Legislative Analyst’s Office 17 2016-17 BUDGET 18 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET www.lao.ca.gov Legislative Analyst’s Office 19 2016-17 BUDGET LAO Publications This report was prepared by Amber Didier and reviewed by Mark C. Newton. 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. 20 Legislative Analyst’s Office www.lao.ca.gov