The 2019-20 Budget: Analysis of the Medi-Cal Budget

The 2019-20 Budget: Analysis of the Medi-Cal Budget GABRIEL PETEK LEGISLATIVE ANALYST FEBRUARY 13, 2019 analysis full gutter 2019-20 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Executive Summary Overall Medi-Cal Budget Picture. The Governor’s January budget estimates that $20.7 billion General Fund ($98.5 billion total funds) will be required to fund Medi-Cal in 2018-19, reflecting a significant $2.3 billion General Fund downward adjustment relative to the 2018-19 Budget Act. The Governor’s budget proposes $22.9 billion for Medi-Cal from the General Fund ($100.7 billion total funds) in 2019-20, an increase of $2.2 billion (10.6 percent) over the revised 2018-19 General Fund estimate. At these funding levels, the Medi-Cal program represents a significant share of the state’s overall General Fund budget. In light of Medi-Cal’s size and the potential for future cost growth (particularly during a recession), legislative oversight of the Medi-Cal program is critical. Legislature Should Seriously Consider Renewal of the Managed Care Organization (MCO) Tax Package. For several years, the state has imposed a tax on MCOs that leverages significant federal funding. In combination with a package of associated tax changes, the existing MCO tax generates a net General Fund benefit of around $1.5 billion. Under state law, the MCO tax package expires at the end of 2018-19. Extending the MCO tax package past 2018-19 would require statutory reauthorization from the Legislature and approval from the federal government. Based on the recent federal approval of a similar tax in Michigan, federal approval of a reauthorized California MCO tax package appears likely. Despite this development, the administration did not propose an extension of the MCO tax package in 2019-20. Allowing the MCO tax package to expire would forego a significant General Fund benefit. Accordingly, we recommend the Legislature seriously consider renewal of the MCO tax package and explore the trade-offs of renewing the MCO tax package in its current or a modified form. Governor Proposes to Expand Medi-Cal Coverage for Income-Eligible Young Adults, Regardless of Immigration Status. In 2019-20, the Governor’s budget proposes to extend comprehensive Medi-Cal coverage to income-eligible undocumented immigrants ages 19 through 25. Under the Governor’s proposal, the administration projects that 138,000 undocumented young adults will gain comprehensive Medi-Cal coverage in 2019-20, at a net General Fund cost of $134 million. This proposal presents the Legislature with decisions to make on whether it wishes to use its discretionary ongoing resources to fund an expansion of health care coverage and on which of the state’s demographic groups it wishes to prioritize for expanded coverage at this time. Proposed Use of Proposition 56 Revenues in Medi-Cal Raises Several Issues for Legislative Consideration. Proposition 56 (2016) raised state taxes on tobacco products and dedicates most revenues to Medi-Cal on an ongoing basis. To date, Proposition 56 funding in Medi-Cal has been used for two main purposes: (1) augmenting the program, such as by increasing Medi-Cal provider payments, and (2) offsetting General Fund spending on underlying cost growth in Medi-Cal. Proposition 56 currently provides about $1 billion annually to Medi-Cal. In the 2019-20 budget, the Governor proposes to make a number of changes to Proposition 56 funding in Medi-Cal. First, the Governor proposes to use all Proposition 56 funding on provider payment increases, thus eliminating the General Fund offset. Second, the Governor states an intent to make most of the Proposition 56-funded provider payment increases permanent. Third, www.lao.ca.gov 1 analysis full gutter 2019-20 BUDGET the Governor proposes new provider payment increases aimed at improving care in such areas as the identification of children with developmental disabilities and chronic disease management. In our assessment, we advise the Legislature to consider the long-term sustainability of using a declining revenue source to fund ongoing Medi-Cal provider payment increases. We also find that making the Proposition 56 provider payment increases permanent is premature at this time, and advise the Legislature to consider making the provider payment increases limited-term until their impact on access and quality can be evaluated. Finally, we advise the Legislature to use the upcoming budget process to gather more information on the new provider payments proposed by the Governor, as only limited information was available at the time of this publication on the structure justification of the new proposed payments. Recommend Taking Short- and Long-Term Steps to Improve Medi-Cal Fiscal Estimates and Transparency. For a variety of reasons, the Medi-Cal budget has become increasingly difficult to predict. Significant, unanticipated changes to the program’s budget, including the significant $2.3 billion downward adjustment reflected in the Governor’s revised estimates for General Fund Medi-Cal spending in 2018-19, have become routine. These unanticipated changes complicate legislative oversight and decision making. As part of his budget proposal, the Governor makes two proposals intended to help address these issues: (1) increased staffing at the Department of Health Care Services (DHCS) to improve fiscal estimates and cash monitoring and (2) the creation of a new special fund to smooth the impact of drug rebates on the Medi-Cal budget. We recommend that the Legislature approve these proposals. We further recommend that the Legislature require DHCS to share key information gained from improved monitoring with the Legislature. Finally, we recommend that the Legislature require DHCS to submit a report to the Legislature with a plan for longer-term structural and systems changes to promote sound estimates and transparency in the Medi-Cal budget. Additional Analysis on the Governor’s Medi-Cal Budget Forthcoming. In the coming weeks, we intend to release additional analysis on the Governor’s proposed use of Proposition 56 funding in Medi-Cal, the Governor’s initiatives to reduce prescription drug costs, proposals related to improving early intervention for children with developmental delays, and proposed changes to 1991 realignment. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET BACKGROUND Medi-Cal, the state’s Medicaid program, is to include additional low-income populations— administered by the Department of Health Care primarily childless adults who did not previously Services (DHCS) and provides health care coverage qualify for the program. This eligibility expansion to over 13 million of the state’s low-income is sometimes referred to as the “ACA optional residents. Coverage is cost-free for most Medi-Cal expansion.” Medi-Cal has grown significantly both enrollees. Instead, Medi-Cal costs are generally in terms of caseload and spending as a result of shared between the federal and state governments. the ACA optional expansion and the other changes Medi-Cal Has Grown Significantly Under under the ACA to encourage health care coverage. the Patient Protection and Affordable Care Figure 1 shows the growth in Medi-Cal spending Act (ACA). Before 2014, Medi-Cal eligibility was over the last decade. mainly restricted to low-income families with Federal Share of Cost Varies, Primarily by children, seniors, persons with disabilities, and Eligibility Group. The costs of state Medicaid pregnant women. As allowed under the ACA, programs are generally shared between the federal in 2014, the state expanded Medi-Cal eligibility government and states based on a set formula. Figure 1 A Decade of Medi-Cal Spending: 2010-11 Through 2019-20 (In Billions) $100 90 Other Nonfederal Fundsa 80 70 General Fund 60 50 40 30 Federal Funds 20 10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20b a Include funding from state special funds as well as some local funds. b Proposed funding. www.lao.ca.gov 3 analysis full gutter 2019-20 BUDGET The percentage of Medicaid costs paid by the service delivered to a beneficiary. Beneficiaries in federal government is known as the federal medical Medi-Cal FFS may generally obtain services from assistance percentage (FMAP). any provider who has agreed to accept Medi-Cal For most families and children, seniors, FFS payments. In managed care, DHCS contracts persons with disabilities, and pregnant women, with managed care plans to provide health care California generally receives a 50 percent FMAP— coverage for Medi-Cal beneficiaries. Managed meaning the federal government pays half of care enrollees may obtain services from providers Medi-Cal costs for these populations. However, a who accept payments from the managed care subset of children in families with higher incomes plan, also known as a plan’s “provider network.” qualifies for Medi-Cal as part of the Children’s The plans are reimbursed on a “capitated” basis Health Insurance Program (CHIP). Currently, with a predetermined amount per person per the federal government pays 88 percent of the month, regardless of the number of services an costs for children enrolled in CHIP and the state individual receives. Medi-Cal managed care plans pays 12 percent. (The state share is scheduled to provide enrollees with most Medi-Cal covered ramp up to the historical cost share of 35 percent health care services—including hospital, physician, over the coming years.) Finally, under the ACA, and pharmacy services—and are responsible for the federal government paid 100 percent of the ensuring enrollees are able to access covered costs of providing health care services to the ACA health care services in a timely manner. Managed optional expansion population from 2014 through care enrollment is mandatory for most Medi-Cal 2016. Beginning in 2017, the federal cost share beneficiaries, meaning these beneficiaries must decreased to 95 percent and phases down further access most of their Medi-Cal benefits through to 90 percent in 2020 and thereafter. the managed care delivery system. FFS enrollment largely consist of newly enrolled beneficiaries that Delivery Systems. There are two main Medi-Cal will soon enroll in a managed care plan and certain systems for the delivery of medical services: seniors and persons with disabilities. In 2018-19, fee-for-service (FFS) and managed care. In the more than 80 percent of Medi-Cal beneficiaries are FFS system, a health care provider receives an estimated to be enrolled in managed care. individual payment from DHCS for each medical OVERVIEW OF THE GOVERNOR’S BUDGET The Governor’s January budget estimates that nearly $2.3 billion or 10 percent—relative to what $20.7 billion General Fund ($98.5 billion total funds) was assumed in the 2018-19 Budget Act. There will be needed to fund Medi-Cal in 2018-19. In are several factors that contribute to this reduction 2019-20, the Governor’s budget proposes in estimated spending, as displayed in Figure 2 $22.9 billion for Medi-Cal from the General and described below. The magnitude of this Fund ($100.7 billion total funds), an increase of downward revision is the most recent example $2.2 billion (10.6 percent) over the revised 2018-19 of the large unanticipated changes in estimated General Fund estimate. Below, we describe major Medi-Cal spending—both cost increases and cost changes in the current and upcoming fiscal years in decreases—that have been observed in recent the Medi-Cal budget. years. As we describe later in this report, the Medi-Cal budget has become increasingly difficult Current-Year Adjustments to predict, complicating legislative oversight and Estimated General Fund Spending Down decision making. Later in this report, we describe $2.3 Billion in 2018-19. The Governor’s budget some of the underlying factors that have led to reflects a very significant reduction in estimated increased difficulty in estimating Medi-Cal spending General Fund spending in Medi-Cal in 2018-19— and provide an assessment of the Governor’s proposals to try to address some of these factors. 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Higher Than Expected Reimbursements for actual cost data as well as an adjustment to Related to Quality Assurance Fee (QAF) reflect certain reimbursements from prior years that Programs. As part of Medi-Cal, the state operates were delayed until 2018-19. General Fund savings QAF programs wherein certain providers pay from these updated estimates are largely onetime in fees that are used to draw down federal funding nature. and increase the rates paid to those providers. Higher Than Expected Drug Rebate These programs also result in transfers to the Revenues. The state receives rebates from drug General Fund to offset state costs in Medi-Cal. manufacturers for prescription drugs paid for by The 2018-19 Budget Act assumed that the state’s Medi-Cal. The Governor’s budget revises upward QAF programs for hospitals and certain long-term the estimated amount of drug rebates to be care providers (such as skilled nursing facilities) received in 2018-19 by about $480 million. The would reimburse the General Fund $1.4 billion in upward revision reflects changes in the timing of 2018-19. The administration’s revised estimates the rebates as well as increased estimated amounts assume that these reimbursements will now total of rebates to account for more recent data. The almost $2.3 billion in 2018-19, reducing General amount of rebates fluctuates from year to year, but Fund spending by $870 million for the year. The a portion of these increased rebates (and related revised estimates largely reflect updates to account General Fund savings) is likely ongoing. Figure 2 Major Factors Contributing to $2.3 Billion Reduction in Estimated Medi-Cal Spending in 2018-19 (General Fund, In Millions) $0 Greater than expected reimbursements from QAF programs -500 -1,000 Greater than expected drug rebates -1,500 Lower than expected repayments to the federal government Lower than expected caseloads and managed -2,000 care rates Other changes -2,500 QAF = Quality Assurance Fee. www.lao.ca.gov 5 analysis full gutter 2019-20 BUDGET Lower Than Expected Repayments to Federal in the Governor’s budget. These discretionary Government for Potentially Disallowed Claims. changes are (1) the proposed extension and The state claims significant federal funding for the expansion of provider payment increases using support of the Medi-Cal program. When the federal Proposition 56 (2016) funding (which raises government disputes the state’s claims for which General Fund costs by an equivalent amount) and the state has already received federal funding, the (2) the proposed expansion of comprehensive federal government requires the state to repay Medi-Cal coverage to income-eligible young previously claimed funds until the state can provide adults regardless of immigration status. Figure 3 additional funding to justify the claim. The 2018-19 summarizes the major factors responsible for the Budget Act included $675 million in General Fund proposed growth in General Fund spending in costs to repay disputed claims. The Governor’s Medi-Cal from 2018-19 to 2019-20. budget revises downward the estimated amount Expiration of the MCO Tax Raises General of repayments to be made in 2018-19 by nearly Fund Costs by $1.1 Billion. The most significant $440 million because the state has had fewer change in year-over-year Medi-Cal spending disputed claims than expected and the state has relates to the assumed expiration of the MCO also been able to justify some previously disputed tax. In 2018-19, the MCO tax is expected to claims and recover the funds that had already been generate almost $1.9 billion in additional funding repaid. for Medi-Cal, funding which offsets General Fund Lower Than Expected Caseload and Managed costs in the program. Under state law, the MCO Care Rates. The Governor’s budget reflects tax is set to expire at the end of 2018-19. As a a lower caseload in Medi-Cal in 2018-19 than result, the General Fund offset from the MCO tax was assumed in the 2018-19 Budget Act. This is projected to go down by $1.1 billion. Due to a is associated with lower projected utilization of lag in the availability of MCO tax funding, around services in the FFS system and payments to $750 million from the MCO tax is projected to managed care plans on behalf of fewer enrollees. remain available to offset General Fund costs in Additionally, the rates paid to managed care plans, Medi-Cal in 2019-20. estimated at the time of the 2018-19 Budget Act, Increased State Share of Cost for Certain were finalized at a lower level than previously Medi-Cal Populations Associated With as Much estimated. Taken together, these adjustments as $600 Million in Higher State Spending. As account for roughly $400 million of the reduced previously noted, the federal government provides General Fund spending in 2018-19, relative to an enhanced share of cost for the ACA optional previous estimates. expansion and CHIP populations. Under federal law, the federal share of cost for these populations Budget-Year Adjustments and is scheduled to decline over the next several years. Policy Proposals This results in a higher state share of cost for these populations, and higher state costs in Medi-Cal Under the Governor’s proposed budget, overall. For the ACA optional expansion, the state General Fund spending in Medi-Cal would grow share of cost increased from 6 percent to 7 percent from $20.7 billion in 2018-19 to $22.9 billion in on January 1, 2019. The state’s share will further 2019-20—a $2.2 billion, or 10.6 percent, increase increase to 10 percent on January 1, 2020, where it in year-over-year spending. Most of this change is scheduled to remain going forward. For CHIP, the in spending is due to anticipated changes in the state’s share of cost will increase from 12 percent funding requirements of the program, notably to 23.5 percent on October 1, 2019, and further the statutorily scheduled expiration of the MCO increase to 35 percent on October 1, 2020, tax (thereby ending a source of revenue to offset where it will remain going forward. Figure 4 (see General Fund costs) and scheduled reductions in page 8) shows the state’s “effective” share of cost the federal share of cost for certain populations. in Medi-Cal for relevant enrollee populations over Around $400 million, however, is attributable to new the next several fiscal years. California’s effective discretionary policy proposals that are included 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET share of cost is the state’s average share of cost to undocumented immigrants ages 19 through 25. within a state fiscal year. Currently, undocumented adults are only eligible Coverage Expansion to Income-Eligible for restricted-scope Medi-Cal, which covers Adults, Regardless of Immigration Status. The emergency and pregnancy-related services. Governor’s budget provides $194 million General Proposed Expansion of Provider Payment Fund ($257 million total funds) in Medi-Cal to Increases and Associated Increase in General expand comprehensive, or “full-scope,” coverage Fund Spending in Medi-Cal. Proposition 56 raised Figure 3 Major Factors Contributing to $2.2 Billion Growth in Year-Over-Year Medi-Cal Spending in 2019-20 (General Fund, In Millions) $2,200 Other changes Coverage expansion for 2,000 undocumented young adults Expansion of Proposition 56 (2016) provider 1,800 payment increases and associated General Fund increase 1,600 Increased state share of cost for the 1,400 ACA optional expansion and CHIP 1,200 1,000 800 600 Expiration of the MCO Tax 400 200 ACA = Patient Protection and Affordable Care Act; CHIP = Children’s Health Insurance Program; and MCO = managed care organization. www.lao.ca.gov 7 analysis full gutter 2019-20 BUDGET extended tax rate increases Figure 4 on high-income Californians. Effective State Share of Cost for ACA Optional Expansion and Proposition 55 includes a budget CHIP Populations Scheduled to Increasea formula that went into effect in 2021-22 and 2018-19. This formula requires 2018-19 2019-20 2020-21 Ongoing the Director of Finance to annually calculate the amount by which ACA optional expansion 6.5% 8.5% 10% 10% General Fund revenues exceed CHIP 12 21 32 35 Remaining enrollee populations 50 50 50 50 constitutionally required spending a Federal law establishes the federal share of cost for state Medicaid and CHIP programs. Under federal law, the federal on schools and the “workload share of cost is scheduled to decrease over the next couple years, resulting in a higher state share of cost. California’s budget” costs of other government “effective” share of cost reflects its average share of cost over a state fiscal year. ACA = Patient Protection and Affordable Care Act and CHIP = Children’s Health Insurance Program. programs that were in place as of January 2016. Half of General Fund revenues that exceed state taxes on tobacco products and dedicates constitutionally required spending on schools the majority of its revenues to Medi-Cal. In and workload budget costs, up to $2 billion, are 2018-19, most Proposition 56 funding for Medi-Cal directed to increase funding for existing health care ($717 million) supported provider payment services and programs in Medi-Cal. The Director increases, with $218 million used to offset General of Finance is given significant discretion in making Fund spending on cost growth in the program. calculations under this formula. The Governor’s budget proposes to eliminate the General Fund offset and instead dedicate all 2018-19 Budget Package Included No Proposition 56 funding for Medi-Cal to provider Additional Funding for Medi-Cal Pursuant payment increases. This proposal has the effect to Proposition 55 Formula. For 2018-19, the of increasing General Fund spending in Medi-Cal Director of Finance calculated that no additional by $218 million in 2019-20 relative to 2018-19, funding would be available for Medi-Cal under generally on an ongoing basis. the Proposition 55 formula. This result follows from decisions made by the Director of Finance Other Budget-Year Adjustments. The above in interpreting the requirements of Proposition 55. four changes account for the vast majority of the As we noted in our report The 2018-19 overall change in General Fund Medi-Cal spending Budget: The Administration’s Proposition 55 from 2018-19 to 2019-20. However, a large number Estimates, the administration’s approach to of other adjustments—some projecting higher the Proposition 55 calculation had the effect of costs, others projecting lower costs—significantly (1) reducing the amount of revenues considered affect the change in General Fund costs in by the formula and (2) increasing the size of the Medi-Cal going into 2019-20. For example, medical workload budget. Taken together, these factors inflation is projected to increase General Fund costs reduce funding available for Medi-Cal under the in Medi-Cal by hundreds of millions of dollars in formula. At the time, we noted that alternative 2019-20. Such projected cost increases—excluding interpretations of Proposition 55 requirements could the four adjustments and proposals described in have increased available funds for Medi-Cal in the preceding paragraphs—are very roughly offset 2018-19 and potentially in future years. Ultimately, by a variety of projected cost decreases, such as the 2018-19 budget reflected the Department of reductions in the projected amount of Medi-Cal Finance approach to the Proposition 55 formula funding the state will have to repay the federal and accordingly allocated no additional funding to government for disputed claims in 2019-20. Medi-Cal. Proposition 55 2019-20 Governor’s Budget Similarly Allocates No Additional Funding to Medi-Cal Proposition 55 Formula Provides Funding Pursuant to Proposition 55 Formula. Using the for Medi-Cal Under Certain Conditions. In interpretation of Proposition 55 developed as part 2016, voters passed Proposition 55, which 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET of the 2018-19 budget, in 2019-20 the Director an average monthly caseload of 13.2 million of Finance defines the vast majority of proposed in 2018-19, a 1.2 percent decrease relative to spending augmentations in the budget as costs estimated total caseload in 2017-18. The budget related to the workload budget. As a result, the further projects the Medi-Cal caseload will grow Director of Finance again estimates that the costs slightly but remain essentially flat at 13.2 million of constitutionally required spending on schools in 2019-20. Within the total caseload projection and the administration’s estimate of the workload for 2019-20, the Governor’s budget assumes that budget exceed available revenues in 2019-20, such (1) the families and children population will decline that no additional funding would be provided to by 0.1 percent, much more slowly than in the prior Medi-Cal pursuant to the Proposition 55 formula. year; (2) the seniors and persons with disabilities population will increase by 0.6 percent, consistent Caseload Projections with prior years and our expectations; and (3) the Governor’s Budget Projects Essentially Flat optional expansion population will increase slightly Caseload Growth. Figure 5 shows how Medi-Cal by 0.1 percent. caseload grew significantly over the last decade, Caseload Projections Are Cautious. Overall, while being projected to remain essentially flat the administration’s Medi-Cal caseload projections through 2019-20. The Governor’s budget projects appear to be generally reasonable, but cautious. In Figure 5 Budget Assumes Essentially Flat Medi-Cal Caseload Average Monthly Enrollees (In Millions) 16 14 12 ACA Optional Expansion 10 Seniors and Persons With Disabilities 8 6 4 Families and Childrena 2 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 Estimated Projected a Includes certain refugees, undocumented immigrants, and hospital presumptive eligibility enrollees. ACA = Patient Protection and Affordable Care Act. www.lao.ca.gov 9 analysis full gutter 2019-20 BUDGET recent years, the families and children population revenues typically shrink. In past recessions, the has gradually declined, reflecting a strong labor state has received some federal funding assistance market in which fewer families are eligible for to offset state costs in Medi-Cal. However, the coverage. The optional expansion caseload availability and/or extent of such assistance in the appears to have leveled off and shows some future is highly uncertain. Due to the program’s indications of beginning to decline. In projecting size and the potential for countercyclical cost essentially no change in caseload from 2018-19 to growth, legislative oversight of the Medi-Cal 2019-20, the Governor’s budget departs from budget is critical. Accordingly, proposed ongoing these recent trends. There are new policies in augmentations to Medi-Cal should be evaluated in the Governor’s proposed Medi-Cal budget that light of the potential risk posed by the program in will increase the caseload, notably the expansion times of fiscal stress. of coverage to all income-eligible young adults Significant Changes Possible in Coming regardless of immigration status. However, the Months. Several factors, such as changes in the effect of this expansion on the caseload is relatively timing of provider payments and drug rebates or minor and does not fully explain the difference new data on caseload trends, could significantly between projections in the Governor’s budget and affect estimated spending in Medi-Cal, in either recently observed trends. We are unsure what other direction, in both 2018-19 and 2019-20. These factors would cause recently observed declines in changes could have significant impacts on policy caseload to slow. Accordingly, and dependent upon decisions the Legislature may wish to make relative continuing strong economic conditions, we believe to the Medi-Cal program and, because of the large there is some possibility that caseload levels could amount of General Fund support dedicated to turn out to be lower than currently projected in Medi-Cal, other state programs funded from the 2019-20. More information will be available to General Fund. We recommend that the Legislature assess this possibility in May. keep the potential for such changes in mind as budget deliberations proceed in the coming Legislative Oversight of months. Medi-Cal Budget Is Critical Layout of the Medi-Cal Program Makes Up Significant Remainder of the Report Share of State Budget. At $20.7 billion in 2018-19, the Medi-Cal program makes up In the sections that follow, we (1) provide issues 14 percent of the state’s total General Fund for consideration related to the assumed expiration spending and a little less than one-third of General of the MCO tax, (2) assess the proposed eligibility Fund spending not dedicated to funding education expansion, (3) provide a preliminary analysis of the under Proposition 98 (1988). Because Medi-Cal Governor’s proposed use of Proposition 56 funding makes up such a large share of the state’s General to extend and expand provider payment increases, Fund budget, changes in Medi-Cal spending have and (4) make recommendations related to the a significant influence on the state’s overall General Governor’s proposal to improve fiscal oversight Fund budget condition. In the past, caseloads of the Medi-Cal program. We would note that we and spending in the Medi-Cal program have will provide additional analyses of the Governor’s been countercyclical—that is, they have grown in Medi-Cal-related proposals in a series of separate, times of recession when the state’s General Fund forthcoming reports, briefs, and policy posts. 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET GOVERNOR DOES NOT PROPOSE TO EXTEND THE MCO TAX PACKAGE Executive Summary. For several years, the by providing its payers direct or indirect payments state has imposed a tax on MCOs that leverages that do so. significant federal funding. In combination with a Structure of California’s MCO Tax Package. package of associated tax changes, the existing MCOs are health insurance plans that arrange and MCO tax package generates a net General Fund pay for the health care of their members and are benefit of around $1.5 billion. Under state law, overseen either by the Department of Managed the MCO tax package expires at the end of Health Care or DHCS. They do not include health 2018-19. Extending the MCO tax past 2018-19 insurance products regulated by the California would require statutory reauthorization from Department of Insurance. Since 2016-17, the state the Legislature and approval from the federal has imposed a per-member tax on the Medi-Cal government. Based on the recent federal approval and non-Medi-Cal enrollment of MCOs. The of a similar tax in Michigan, federal approval of a structure of the existing MCO tax—in effect from reauthorized California MCO tax package appears 2016-17 through 2018-19—is as follows: likely. Despite this development, the administration • Imposed on Most MCOs, Including Their did not propose an extension of the MCO tax Non-Medi-Cal Lines of Business. The package in 2019-20. Allowing the MCO tax to MCO tax is imposed on most of the state’s expire would forego a significant General Fund MCOs, and applies to their Medi-Cal and benefit. Accordingly, we recommend the Legislature non-Medi-Cal lines of business. Certain health seriously consider renewal of the MCO tax package plans are exempt from the tax—for example, and explore the trade-offs of renewing the MCO tax those that offer only limited services such as package in its current or a modified form. vision or dental coverage. BACKGROUND • Enrollment-Based Tax. The existing MCO tax is an enrollment-based tax where MCOs Federal Government Regulates Health are taxed according to their total number of Care-Related Taxes. Many states levy licensing enrollee member months, counted over the fees, assessments, or other mandatory payments fixed time period of October 2014 through on the provision of health care services or items. September 2015. A member month is defined These are referred to as “health care-related taxes.” as one member being enrolled for one month The federal government has rules that regulate in an MCO. For example, if an individual is states’ health care-related taxes to the extent that enrolled in the Kaiser Foundation Health Plan they are used to draw down federal Medicaid funds. for the 12-month period specified above, The rules apply, for example, to taxes on direct Kaiser would be taxed for 12 member months health care services (such as hospital inpatient for each of the fiscal years 2016-17, 2017-18, stays) as well as to taxes on health insurer revenue and 2018-19. or enrollment. The rules are in place to prevent • Tiered Rate Structure. The existing MCO tax states from imposing taxes that place too great features a tiered rate structure whereby MCOs a burden on federal Medicaid funds. Therefore, are charged different tax rates based on the to receive federal approval, a state must prove following: to the federal government that the burden of » Enrollment Type. MCOs are generally paying a health care-related tax does not fall too taxed at higher rates for Medi-Cal enrollee disproportionately on Medicaid as opposed to member months than non-Medi-Cal non-Medicaid services. In addition, a state may not enrollee member months. hold payers of the health care-related tax harmless www.lao.ca.gov 11 analysis full gutter 2019-20 BUDGET » Enrollment Size. MCOs with higher MCO Tax Package Restored In-Home enrollee member months are taxed at lower Supportive Services (IHSS) Service-Hours effective rates. to Prerecession Levels. IHSS beneficiaries’ » Fiscal Year. The tax rates generally service hours were reduced across the board by increase each fiscal year. 7 percent in an effort to reduce the General Fund shortfall during the most recent recession. The » Structure of MCO. The MCO tax applies MCO tax package restored IHSS service hours to a unique tax rate to non-Medi-Cal prerecession levels for the years the MCO tax is enrollment in any MCO that qualifies as in effect, at an annual General Fund cost of about an “Alternate Health Care Service Plan,” $300 million. (We would note that the Governor’s defined as a nonprofit health plan that has budget independently proposes an extension of high statewide enrollment, that owns or General Fund support for the IHSS service hours operates pharmacies, and that exclusively restoration.) contract with a single medical group in all of its geographic areas of operation. Kaiser Foundation Health Plan is the only MCO STRONG PROSPECTS FOR that qualifies under this definition. FEDERAL APPROVAL OF A Figure 6 details the existing MCO tax’s overall REAUTHORIZED MCO TAX structure. PACKAGE MCO Tax Package Included Changes to Other Taxes Paid by Some MCOs. The MCO tax Prospects of Renewing MCO Tax After package cut other taxes paid by some MCOs and 2018-19 Initially Appeared Uncertain. Following certain affiliated health insurance companies for the federal approval of the existing MCO tax in period the MCO tax is in effect. Specifically, certain 2016-17, there was initial uncertainty among state types of income currently subject to the corporation health policymakers over whether the federal tax is exempted from taxation and the insurance government would approve a similarly structured tax (also known as the gross premiums tax) rate MCO tax after the expiration of the existing tax. is set to zero for certain premium revenue during At that time, state policymakers were expecting the period in which the MCO tax is in effect. The administration Figure 6 estimated that these tax Tax Tiers and Rates of the Existing MCO Tax reductions would lower corporate and insurance tax revenue—which Tax Rate Per Member Month support the General Fund—by Member Monthsa (In Base Yearb) 2016-17 2017-18 2018-19 around $400 million per year. Due Medi-Cal Enrollees in part to these tax reductions 1 - 2,000,000 $40 $42.50 $45 offsetting the impact of the MCO 2,000,001 - 4,000,000 19 20.25 21 tax, the administration estimated 4,000,001 and above 1 1 1 at the time of enactment that the Non-Medi-Cal Enrollees health insurer industry as a whole 1 - 4,000,000 7.50 8 8.50 would receive an approximately 4,000,001 - 8,000,000 2.50 3 3.50 $100 million net benefit annually. 8,000,001 and above 1 1 1 Although the health insurance AHCSP Non-Medi-Cal Enrolleesc industry as a whole was expected 1 - 8,000,000 2 2.25 2.50 to benefit on net, total state taxes a A member month is defined as one member being enrolled for one month in an MCO. b for some MCOs were expected The base year is October 2014 through September 2015. c An AHCSP is defined as a nonprofit health plan that has high statewide enrollment, owns to increase under the MCO tax or operates pharmacies, and exclusively contracts with a single medical group in all of its package. geographic areas of operation. MCO = managed care organization and AHCSP = alternate health care service plan. 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET revisions to federal rules on health care-related the combination of (1) the General Fund portion of taxes that could have, in the years following the cost to pay MCOs back for the tax amounts 2018-19, prohibited an MCO tax similar in structure that they pay on their Medi-Cal lines of business to the state’s current MCO tax. Such revisions (the federal government pays the remaining portion to federal rules, however, were never made. of the Medi-Cal share) and (2) the loss of General Nevertheless, until recently, the state’s prospects Fund revenue associated with the reductions to the for federal approval remained uncertain since the insurance and corporation taxes. current federal administration had neither approved . . . And Is Estimated to Leave California’s nor rejected a health insurer tax proposal structured Health Industry Overall No Worse Off. The MCO like California’s from any state. tax package was designed to at least fully offset, Current Federal Administration Recently on net, the state tax liability of the health insurance Approved Michigan’s Similarly Structured industry as a whole. Although the initial net benefit Tax. In December 2018, the federal government to the industry was estimated at $100 million, approved a new health insurer tax in Michigan. The estimating the net benefit comes with significant new tax on Michigan health insurers is structured uncertainty, particularly on the corporation tax side. very similarly to California’s current MCO tax. Like In 2018-19, the most recent estimates show that California’s MCO tax, Michigan’s new health insurer the MCO tax package reduced the state tax liability tax (1) is enrollment-based, (2) applies to Medicaid of the health insurance industry overall by around and non-Medicaid enrollment, and (3) and is tiered $50 million, relative to what its liability would have so that the tax rate varies based on whether a been absent the MCO tax package. However, under member is enrolled through Medicaid as well as the MCO tax package, certain plans were expected on insurers’ Medicaid enrollment numbers. Unlike to see their net tax liability decline while others California’s MCO tax, Michigan’s health insurer tax were expected to see their net tax liability increase. is based on annually updated insurer enrollment Figure 7 (see next page) summarizes the fiscal numbers. In addition to imposing the above new impact of the MCO tax package—excluding the tax, Michigan repealed other state taxes on health associated restoration in IHSS service-hours—on insurers, including a one percent tax on insurers’ the General Fund and the state’s health insurance health claims. The repeal of these taxes serves to industry. offset the costs of the new health insurer tax. Expiration of MCO Tax Will Eliminate the Federal Approval of a Reauthorized MCO Associated General Fund Benefit. In 2019-20, Tax in California Appears Likely. Following the the net impact of the expiration of the MCO tax approval of Michigan’s new health insurer tax, we package on the General Fund is projected to believe that California’s prospects of receiving be between $700 million and $800 million. This federal approval of a reauthorized MCO tax are reduction in available General Fund resources strong. The administration has shared that it is reflected in the Governor’s January budget agrees with this assessment, stating that it is not proposal. We expect the full fiscal impact of the concerned that the federal government could reject expiration of the MCO tax package—the loss of the a proposal to extend a similarly structured MCO full $1.5 billion General Fund benefit—to materialize tax. in 2020-21 or later. The fiscal impact is less in 2019-20 because of delays in when MCO tax FISCAL IMPLICATIONS OF revenue is available to offset General Fund costs in Medi-Cal. ALLOWING THE MCO TAX PACKAGE TO EXPIRE ISSUES FOR CONSIDERATION MCO Tax Package Generates a $1.5 Billion To Allow the MCO Tax Package to Expire Net General Fund Benefit . . . The net General Would Forego a Significant General Fund Fund benefit from the MCO tax package equals the Benefit. By allowing the MCO tax package to difference between total MCO tax revenues and www.lao.ca.gov 13 analysis full gutter 2019-20 BUDGET Figure 7 Net Impact of MCO Tax on the State and California Health Insurance Industry 2018-19 (In Millions) State Impact Total MCO tax revenue $2,560 Cost of non-federal share for reimbursing Medi-Cal share of tax -660 Reduced General Fund revenue from insurance and corporation tax changes -440 Net General Fund Benefit $1,460 Health Insurance Industry Impact Total MCO tax liability -$2,560 Medi-Cal reimbursement to MCOs: Federal Funds 1,510 General Fund 660 Reduced tax liability from changes to insurance and corporation taxes 440 Net Health Insurance Industry Fiscal Benefit $50 MCO = managed care organization. expire, the state would ultimately forego around Potential Next Steps $1.5 billion in annual revenue. This revenue could Should the Legislature wish to reauthorize support a number of the Legislature’s funding the MCO tax package, a number of steps and priorities. decisions would have to be taken. This section Unclear Why the Administration Would Not describes the major steps and decisions that the Pursue an Extension of the MCO Tax Package. Legislature would have to make should it wish to The administration has not laid out a convincing renew the MCO tax package. rationale for why it has not proposed an extension Establish New Parameters for a Reauthorized of a tax package. The administration’s primary Tax. The parameters of the existing MCO tax stated rationale is that obtaining federal approval package likely would need to be updated under of a reauthorized MCO tax could conflict with the a reauthorized tax. The following are the major state’s negotiations on pending Medi-Cal waiver parameters that the Legislature may wish to renegotiations. Two major Medi-Cal waivers expire consider for an updated MCO tax package. in 2020, requiring renegotiation with the federal government over the scope and provisions of these • Tax Base. The tax base of the existing MCO waivers going forward. However, it is unclear to tax is based on historical MCO member us how MCO tax negotiations would negatively enrollment. Using MCO member enrollment impact negotiations over renewal of the two major as the tax base likely makes sense going Medi-Cal waivers. forward. However, MCO member enrollment Renewal of the MCO Tax Package Warrants may need to be updated to reflect more Serious Consideration. Given the General Fund current MCO enrollment numbers. As benefit and lack of significant negative fiscal impact explained below, an update to the MCO on the state’s overall health insurance industry, member enrollment tax base could have a renewal of the MCO tax package warrants serious significant impact on the federal permissibility consideration by the Legislature. We advise the and revenue-generating potential of other Legislature to use upcoming budget proceedings to parameters of a reauthorized MCO tax. explore the potential trade-offs and risks associated • Tax Rates. As shown earlier in Figure 6, the with pursuing renewal of the MCO tax package. existing MCO tax has tax rates that generally increase annually. This allowed revenues to grow annually and helped prevent the 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET General Fund benefit from diminishing as previously noted, the administration estimates the loss in General Fund revenue from the that changes to these other taxes result in lost insurance and corporation tax changes grew General Fund revenue of around $400 million over time. Accordingly, the state may wish annually while helping to generate a net to update the tax rates to ensure continued benefit for the health insurance industry under MCO tax revenue growth, and by doing the whole MCO tax package. However, there so at least maintain the net General Fund is significant uncertainty as to the full fiscal benefit. In addition, the tax rates that the impact of these changes to state taxes on state may impose—while maximizing revenue both General Fund revenues and on health and remaining in compliance with federal insurers’ state tax liabilities. Reassessment rules—depend on how member enrollment of the impact of these tax changes may be is distributed among MCOs in the state. warranted before potentially reauthorizing this Updates to MCO member enrollment (the tax aspect of the MCO tax package in a similar base) may affect (1) what tax rates the state form. may permissibly impose, (2) what tax rates Approve Reauthorizing Legislation. Should maximize the overall General Fund benefit, the Legislature wish to renew a similarly structured and (3) how the tax rates affect individual MCO tax package, we would advise the Legislature health insurers’ overall state tax liabilities. to use the coming months to evaluate its options Finally, the Legislature could consider around how to structure a reauthorized MCO tax. changing how a reauthorized MCO tax is Doing so would help ensure that the Legislature is tiered—for example, consolidating the number able to approve a reauthorized MCO tax package of tiers for either Medi-Cal or commercial around the same time as passage of the state enrollment or modifying the difference budget by June 30, 2019. This would allow the between the tax rates that apply to the state to avoid the potential loss of General Fund different enrollment tiers. savings and assist health insurer operations related • Other Tax Policy Changes. Lastly, the to incorporating the tax changes into the premium Legislature would have to decide on whether rates they charge their customers. Any such to maintain or modify the changes to other legislation should direct DHCS to submit the state’s state taxes imposed on health insurers—the proposal to reauthorize the MCO tax to the federal state’s insurance and corporation taxes— government before October 1, 2019. that were part of the MCO tax package. As EXPANDS COVERAGE FOR INCOME-ELIGIBLE YOUNG ADULTS, REGARDLESS OF IMMIGRATION STATUS In 2019-20, the Governor’s budget proposes 138,000 undocumented adults and (2) projected to extend full-scope Medi-Cal coverage to General Fund savings under a proposed increase income-eligible undocumented immigrants ages in the redirection of county realignment funding 19 through 25, most of whom are currently for indigent health care services. As discussed considered to be uninsured as they only have below, while there is significant uncertainty around limited Medi-Cal coverage for emergency- and the cost of expanding coverage, we find that pregnancy-related services. The administration the administration’s General Fund cost estimate estimates the net cost of this proposal to be in Medi-Cal is likely too high. Below, we more $134 million in 2019-20. The net cost comprises fully describe and provide our assessment of the (1) the new full-year cost in Medi-Cal of expanding Governor’s proposal. comprehensive Medi-Cal coverage to a projected www.lao.ca.gov 15 analysis full gutter 2019-20 BUDGET Background enough incomes that they currently qualify for—but are not necessarily enrolled in—restricted-scope Undocumented Adults Currently Ineligible for Medi-Cal. Here, we consider enrollees in Comprehensive Medi-Cal Coverage. Medi-Cal restricted-scope Medi-Cal to be uninsured since eligibility depends on a number of individual and they only have access to limited Medi-Cal benefits. household characteristics, including, for example, income, age, and immigration status. Citizens Governor’s Proposal and certain immigrants with documented status Expand Full-Scope Medi-Cal Coverage generally qualify for comprehensive, or full-scope, to Otherwise Eligible Undocumented Adults Medi-Cal coverage, while undocumented Ages 19 Through 25. The Governor proposes immigrants generally do not qualify for full-scope budget-related legislation that would expand Medi-Cal coverage. Rather, those who would be full-scope Medi-Cal coverage to otherwise eligible eligible for Medi-Cal but for their immigration status undocumented immigrants ages 19 through 25. are eligible for what is known as “restricted-scope” The administration projects that this would expand Medi-Cal coverage. Restricted-scope Medi-Cal full-scope Medi-Cal coverage to about 138,000 covers emergency- and pregnancy-related health undocumented young adults in 2019-20. The care services. The federal government pays administration anticipates that the majority of for its portion of undocumented immigrants’ undocumented young adults who would receive restricted-scope Medi-Cal services according to full-scope coverage under the Governor’s proposal standard FMAP rules. are already enrolled in restricted-scope Medi-Cal Full-Scope Medi-Cal Coverage Was Expanded coverage. to Otherwise Eligible Undocumented Children Net General Fund Cost of $134 Million. On in 2015. In 2015, the state expanded full-scope net, the administration estimates the cost of the Medi-Cal coverage to undocumented children ages proposed expansion to be $134 million General zero through 18. Over 200,000 undocumented Fund in 2019-20. As shown in Figure 8, using the children gained full-scope coverage through this administration’s assumptions on caseload and costs, expansion at an annual General Fund cost of we project that the net General Fund cost of this around $300 million. coverage expansion would grow to over $250 million Undocumented Immigrants Represent a after 2019-20. Below, we describe the major Significant Portion of the State’s Remaining components of the administration’s cost projection. Uninsured Population. Around 1.5 million New Incremental Costs in Medi-Cal. The (40 percent) of the state’s estimated 3.5 million $194 million projected by the administration uninsured residents are undocumented adults. for additional Medi-Cal costs reflects the Most of these adults are believed to have low Figure 8 Multiyear Projection of Net General Fund Costa of Expanding Full-Scope Medi-Cal to Young Undocumented Immigrant Adults General Fund (In Millions) 2019-20b 2020-21c 2021-22c 2022-23c Medi-Cal (incremental cost) $194 $286 $299 $308 In-Home Supportive Services 2 26 40 43 Proposed additional redirection of realignment funding for health -63 -64 -65 -66 Net Total $134 $248 $274 $285 a Numbers may not add due to rounding. b Administration’s projection. c LAO projection based on the administration’s Medi-Cal and In-Home Supportive Services cost assumptions, including a 3 percent annual growth factor. 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET incremental General Fund cost of expanding LAO Assessment from restricted-scope to full-scope coverage for Proposed Expansion Would Potentially undocumented young adults. The state currently Reduce the Number of Uninsured uses General Fund to pay for the nonfederal share Undocumented Californians by More Than of restricted-scope Medi-Cal coverage for almost 10 Percent. The Governor’s proposed expansion 90,000 currently enrolled undocumented young would potentially extend full-scope Medi-Cal adults. As such, the incremental General Fund cost coverage to up to around 150,000 undocumented of expanding full-scope coverage excludes existing young adults in the years after 2019-20. We General Fund spending. Following 2019-20, costs estimate that this would reduce the number of for expanding full-scope coverage to this population uninsured undocumented Californians by more are expected to grow as additional eligible but not than 10 percent, and reduce overall the number of currently enrolled individuals sign up for coverage. uninsured Californians by around 4 percent. See Increased IHSS Costs, Mostly in Out Years. the box on page 18 for information on the number In addition to the costs in Medi-Cal, the proposed of uninsured undocumented adults statewide, expansion of full-scope coverage is expected to and the projected enrollment and fiscal impact increase General Fund costs in IHSS under the of expanding full-scope Medi-Cal coverage to all Department of Social Services’ budget. Though otherwise eligible undocumented adults. modest in 2019-20 at $2.2 million General Governor’s Fiscal Estimate Appears Fund, we project, based on the administration’s Somewhat Overstated. There is significant assumptions, significantly increasing General Fund uncertainty in projecting the caseload and cost costs in IHSS in subsequent years—reaching of the Governor’s proposed Medi-Cal expansion. around $40 million annually by 2021-22. These Although the administration’s cost estimate appears costs are on top of those in Medi-Cal. to be in the range of what is reasonable, it is likely Proposed Redirection of $63 Million in overstated, in particular for 2019-20. First, the County Health Realignment Funding to Offset estimate includes the simplifying assumption that General Fund Costs in CalWORKs. Through implementation will occur on July 1, 2019. The 1991 realignment, the state provides funding for state’s recent history in implementing the expansion counties to provide health care services to their of full-scope coverage to undocumented children low-income populations who otherwise lack health shows that it will likely take perhaps an additional care coverage. Following implementation of the half a year before implementation is fully under way. ACA, the number of low-income state residents This short and reasonable delay in implementation without health care coverage has decreased would result in reduced costs in 2019-20. Second, dramatically, lowering the cost to counties of what appears to be an erroneous assumption in the providing health care services to their low-income administration’s caseload model leads it to project populations. As a result, the state redirected the that 98 percent of eligible young adults would enroll portion of realignment funding that was historically in full-scope coverage within several years. It is intended to cover county health care services to our understanding that the administration instead instead offset General Fund costs in the California intended to assume that around 90 percent of Work Opportunity and Responsibility to Kids eligible enrollees would enroll within several years, (CalWORKs). In conjunction with the proposed a reasonable assumption in our view. Correcting coverage expansion, the Governor proposes to this error would likely reduce the ongoing General redirect additional funding from counties. This Fund cost of the Governor’s proposed coverage proposed redirection is projected to free up expansion by around $20 million annually. $63 million General Fund, partially offsetting the cost of the proposed coverage expansion. www.lao.ca.gov 17 analysis full gutter 2019-20 BUDGET Caseload and Cost of Expanding Full-Scope Medi-Cal Coverage to All Otherwise Eligible Undocumented Immigrants Researchers estimate that there are around 1.5 million uninsured undocumented immigrants in California. This makes them one of the largest groups of state residents that continue to lack health care coverage. Administration Estimates Over 1 Million Undocumented Adults Are Income-Eligible for Restricted-Scope Medi-Cal. The administration recently estimated that 1.35 million undocumented adults ages 19 and up are income-eligible for restricted-scope Medi-Cal coverage. Almost one million of these individuals are currently enrolled in restricted-scope Medi-Cal. Over $2 Billion General Fund Required in Medi-Cal to Expand Full-Scope Coverage to All Otherwise Eligible Undocumented Adults. Although the Governor’s proposed Medi-Cal expansion extends only to undocumented adults ages 19 through 25, the administration has released estimates of what the General Fund cost would be to expand full-scope Medi-Cal coverage to all otherwise eligible adults. To do so, the administration estimates that around $2 billion General Fund would be required in Medi-Cal in 2019-20. Under the administration’s assumptions, this would grow to around $2.4 billion annually after 2019-20. Around 1.3 million undocumented adults would gain full-scope coverage under these projections. Importantly, these figures exclude costs in In-Home Supportive Ongoing Caseload and Incremental Cost Estimate of Services (IHSS), which Expanding Full-Scope Medi-Cal to All Otherwise would likely grow to Eligible Undocumented Immigrantsa be in the hundreds of millions of dollars Estimated General Fund Cost Ages Caseloadb (In Millions)b,c annually after 2019-20. The figure summarizes 19 through 25 150,000 $280 the administration’s 26 through 64 1,098,000 1,960 2019-20 caseload 65 and up 28,000 100 and cost estimates for Totals 1,276,000 $2,340 a expanding coverage to the LAO projection based on the administration’s assumptions. b Numbers may not add due to rounding. entire otherwise eligible c Numbers do not include new projected General Fund costs in In-Home-Supportive Services or undocumented adult the General Fund savings under the proposed redirection of realignment health funding. population. Magnitude and Scope of Proposed could be higher than currently estimated by tens of Redirection of Realignment Funding Raises millions of dollars. Questions. In our separate forthcoming brief on Proposal Presents an Opportunity for the 1991 realignment, we analyze the Governor’s Legislature to Decide Among Its Priorities. proposed increase in the redirection of realignment Expanding full-scope Medi-Cal coverage to health funding to help offset the cost of the otherwise eligible undocumented adults would proposed coverage expansion and raise questions represent a sizable investment of the Legislature’s about its scope and magnitude. We note that, ongoing General Fund resources, and result in a should the Legislature wish to scale back the significant reduction in the number of uninsured proposed increase in the redirection, the net state residents. The Governor’s proposal presents General Fund cost of the coverage expansion the Legislature with at least a couple of decisions to make. First, does the Legislature wish to use 18 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET its discretionary ongoing resources on health care 25 years old, as opposed to having full-scope coverage expansion, as opposed to funding other coverage end at age 19. On the other hand, older legislative priorities? Second, does the Legislature undocumented adults may, on average, stand to wish to prioritize health care coverage expansion gain more through the availability of full-scope for the same demographic group as the Governor? Medi-Cal coverage. The prevalence of disease There are reasons to support the Governor’s grows as people age, thus increasing the need for approach and reasons to prefer alternative health care services. Moreover, restricted-scope approaches to expanding coverage within Medi-Cal arguably covers a greater proportion Medi-Cal. For example, supporting the Governor’s of the health care services needed by young prioritization of young adults, the proposed adults compared to older adults—services for expansion would align coverage for low-income emergencies and related to pregnancy. However, undocumented adults with the protection under the we note that the number of uninsured state ACA that compels commercial health insurers to residents who would gain health care coverage extend coverage to their members’ children through under an expansion of full-scope Medi-Cal to age 25. Moreover, this would allow undocumented undocumented elderly adults would be significantly immigrants to maintain consistent full-scope smaller than under the Governor’s proposed Medi-Cal coverage all the way from zero through expansion for young adults. PRIORITIZES PROVIDER PAYMENT INCREASES WITH PROPOSITION 56 FUNDING This section provides an overview of the General Fund spending on underlying cost growth Governor’s proposed use of Proposition 56 in Medi-Cal. Proposition 56 currently provides funding in Medi-Cal, and provides some initial about $1 billion annually to Medi-Cal. Because LAO comments. We will provide a broader tobacco use is projected to continue to decline on assessment of the Governor’s proposals related to an ongoing basis—partially as a result of the new Proposition 56 in Medi-Cal in the coming weeks. In taxes put in place by Proposition 56—revenues addition, we will specifically assess the Governor’s from Proposition 56 for Medi-Cal are expected to proposal to create supplemental payments for gradually decline on a year-over-year basis. developmental screenings in our budget analysis, Use of Proposition 56 Funding in The 2019-20 Budget: Governor’s Proposals for Infants and Toddlers With Special Needs. Medi-Cal In 2017-18, the Legislature and Governor Brown BACKGROUND reached a two-year agreement on how to use Proposition 56 funding in Medi-Cal. As described Proposition 56 Raised State Taxes on below and summarized in Figure 9 (see next Tobacco Products and Dedicates Most page), this agreement—as updated in 2018-19— Revenues to Medi-Cal on an Ongoing Basis. allocated Proposition 56 funding for Medi-Cal to Medi-Cal began receiving Proposition 56 funding in three distinct purposes: (1) increasing provider 2017-18. Funding from Proposition 56 is intended payment, (2) offsetting General Fund spending on to ensure timely access to quality care within the underlying cost growth in Medi-Cal, and (3) creating Medi-Cal program. Proposition 56 funding for a physician and dentist student loan repayment Medi-Cal has been used for two main purposes: program. (We provide additional detail on the (1) augmenting the program, such as by increasing specific allocation of funding for provider payment Medi-Cal provider payments and (2) offsetting increases in Figure 10, see page 21.) www.lao.ca.gov 19 analysis full gutter 2019-20 BUDGET Figure 9 Use of Proposition 56 Funding in Medi-Cala (In Millions) 2017-18 2018-19 Provider payment increases $253 $821 Provider loan repayment — 220 Offset to General Fund spending on natural cost growth 711 218 Totals $964 $1,259 a Funding amounts reflect estimates at the time of the 2018-19 Budget Act. Increase Medi-Cal Provider Payments. In the rules that apply to provider rate reductions, but last two years since funding became available, not reductions in supplemental payments, require about half of Proposition 56 funding for Medi-Cal enhanced state monitoring of the potential effect of has been used to increase Medi-Cal provider a rate reduction on beneficiary access to services. payments. A variety of Medi-Cal provider groups Offset General Fund Spending on Underlying or service categories receive payment increases Cost Growth in Medi-Cal. To date, a significant under Proposition 56, including, for example, portion of Proposition 56 funding for Medi-Cal has physicians, dentists, family planning services, and been used to offset General Fund spending on AIDS Waiver Program services. Where appropriate, underlying cost growth in Medi-Cal. In 2018-19, the provider payment increases apply to both FFS $218 million in Proposition 56 funding was used for and managed care. Under the 2018-19 spending this purpose. This represents a significant reduction plan, $821 million in Proposition 56 funding was from the $711 million in Proposition 56 funding that dedicated to provider payment increases. This was offset General Fund expenditures in Medi-Cal in expected to draw down over $1 billion in federal 2017-18. funds, which help to finance the provider payment Establish a Physician and Dentist Student increases. As shown in Figure 9, funding dedicated Loan Repayment Program. In the 2018-19 to provider payment increases is significantly higher spending plan, $220 million in Proposition 56 in 2018-19 compared to 2017-18. This increased funding from the previous year was dedicated funding is used to (1) further supplement provider to create a physician and dentist student loan payments that already received increases in repayment program. The program—financed with 2017-18 and (2) expand the number and kinds of one-time funding but expected to implement over Medi-Cal services that receive payment boosts. multiple years—will help repay the student loans Primarily, the provider payment increases take of physicians and dentists who serve significant the form of supplemental payments that are tied to numbers of Medi-Cal patients. a designated set of Medi-Cal services, such as, for example, a new patient doctor’s office visit or family Implementation Update planning services. These supplemental payments Implementation of the Proposition 56 provider are paid on top of the base reimbursement rates payment increases has met with some, generally that providers receive for the Medi-Cal services anticipated, delays. Often these delays relate to they provide. In a couple of instances, however, the time line of federal approval of the provider the provider payment increases took the form payment increases. (Federal approval is required of Medi-Cal base rate increases. Supplemental since Proposition 56 funding is matched with federal payments provide flexibility as they are easier Medi-Cal funding to fully finance the payment to reduce or eliminate in the event, for example, increases.) The 2017-18 provider payment increases of an economic downturn. Making subsequent were implemented that same fiscal year and reductions to Medi-Cal rates, to the contrary, can have continued to be paid through 2018-19. The be more challenging for the state because federal 20 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET 2018-19 provider payment increases—which are on increases. Below, we outline the Governor’s top of the 2017-18 increases—have generally either proposal. Figure 10 summarizes the Governor’s recently been implemented or are soon to implement proposed use of Proposition 56 funding in over the next couple of months. In terms of overall Medi-Cal. funding, updated estimates of Proposition 56 Makes Most Provider Payment Increases spending on provider payments in the Governor’s Permanent. The Governor has stated an intent to January budget are relatively consistent with make most of the provider payment increases— projections from the 2018-19 Budget Act. the existing as well as certain new supplemental payment programs—permanent and ongoing. GOVERNOR’S PROPOSAL Eliminates the General Fund Offset. In 2019-20, the Governor proposes to eliminate The Governor’s budget proposes to extend and the General Fund offset, which in 2018-19 is expand upon the previous two-year agreement $218 million. This proposal results in higher General on the use of Proposition 56 funding in Medi-Cal. Fund costs in Medi-Cal in 2019-20 of an equivalent For 2019-20, the proposal would spend just over amount. The Governor’s budget allocates this $1 billion in Proposition 56 funding (more than funding to additional provider payment increases. $3 billion in total funds) on provider payment Figure 10 Governor’s 2019-20 Budget Dedicates All Proposition 56 Funding for Medi-Cal to a Variety of Provider Payment Increases (In Millions) 2018-19 2019-20 Proposition 56 Proposition 56 Funds Total Funds Funds Total Funds Existing Provider Payment Increases: Physician services $409a $1,299 $456 $1,387 Dental services 194 510 217 547 Women’s health 54 203 42 160 Home health services 27 57 31 65 Intermediate Care Facilities for the Developmentally Disabled 14 29 13 28 Pediatric day health care facilities 6 12 7 14 AIDS Medi-Cal Waiver Program 3 7 3 7 Freestanding pediatric subacute care facilities 3 6 1 2 Program for All-Inclusive Care for the Elderly 5 5 — — Community-Based Adult Services programs 2 2 — — Subtotals ($717) ($2,130) ($770) ($2,209) New Proposed Provider Payment Increases: Value-based payments — — $180 360 Developmental and trauma screenings — — 53 105 Medi-Cal family planning — — 50 500 Subtotals (—) (—) ($283) ($965) Subtotals, All Provider Payment Increases ($717) ($2,130) ($1,052) ($3,174) Offset to General Fund spending on Medi-Cal cost growth $218 N/A — N/A Grand Totals, Proposition 56 Spending in Medi-Cal $935 $2,130 $1,052 $3,174 a Estimated Proposition 56 funding for these supplemental payments has been revised significantly downward in the Governor’s January budget relative to the 2018-19 Budget Act. However, total funding for these supplemental payments is actually higher than previously estimated. As such, this change results from an updated estimate of the federal share of cost for these payments—an update that is fiscally beneficial to the state. www.lao.ca.gov 21 analysis full gutter 2019-20 BUDGET Establishes New Supplemental Payment services within the Family Planning, Access, Programs. The Governor’s budget proposes to use Care, Treatment Program (Family PACT) that is $283 million in Proposition 56 funding to establish operated within Medi-Cal. Family PACT serves new supplemental payment programs. At the time state residents with incomes that are low but of this publication, many of the details of the new nonetheless too high for them to qualify for proposed programs remain in development. The Medi-Cal. The Governor’s budget proposes to following bullets provide basic background on these provide similar supplemental payments within new proposed supplemental payment programs. the broader Medi-Cal program. $50 million in Proposition 56 funding is allocated for these • Value-Based Payment Program. The payments, which, with an enhanced federal Governor proposes using $180 million in share of cost, will provide for $500 million in Proposition 56 funding ($360 million total supplemental payments for these Medi-Cal funds) to create a value-based payment family planning services. program to improve the quality and efficiency of care within Medi-Cal managed State Operations Resources Requested for care plans. While details for the program Value-Based Payment Program. To develop and remain under development, the intent is to implement the value-based payment program, the establish incentive payments for managed Governor’s budget proposes 18 new positions care plans and their network physicians that at DHCS at an annual cost of $1.5 million in will reward those that meet predetermined Proposition 56 funds ($3 million in total funds). performance benchmarks. According to the administration, these payments are intended PRELIMINARY ASSESSMENT AND to improve care in three distinct focus areas: SELECTIVE RECOMMENDATIONS (1) chronic disease management, (2) pre- and post-partum care, and (3) behavioral and In the coming weeks, we will release more physical health integration. comprehensive analyses of the Governor’s • Payments to Encourage Timely proposed use of Proposition 56 funding in Developmental and Trauma Screenings. Medi-Cal. In those analyses, we will further analyze The Governor’s budget includes $53 million and provide recommendations related to the in Proposition 56 funding ($105 million total Governor’s overall package of proposals on the use funds) to expand physician screenings for of Proposition 56 funding in Medi-Cal. Below, we (1) appropriate childhood development and provide preliminary issues for consideration. (2) early identification of trauma. Of the total Proposed Funding Levels for Provider amount of proposed Proposition 56 funding, Payment Increases May Not Be Sustainable $30 million is for developmental screenings on an Ongoing Basis. The Governor’s budget and $23 million is for trauma screenings. The proposes to use $1.05 billion in Proposition 56 funding would provide for a $60 supplemental funding on provider payment increases in 2019-20. payment for each developmental screening Proposition 56 revenues dedicated to Medi-Cal and either a $6.50 or a $23 supplemental are projected to be $1.02 billion in 2019-20, and payment for trauma each screening. Whereas to decline on annual basis thereafter. Moreover, developmental screenings are currently scheduled changes in the FMAP for certain required and funded in Medi-Cal, the populations will increase the state’s share of cost introduction of trauma screenings would be for Medi-Cal. This will require the state to pay largely new to the program. for a somewhat higher share of the total cost of • Extends Family Planning Payments to the Proposition 56 provider payment increases Broader Medi-Cal Program. Currently, in the coming years. Accordingly, unless the Proposition 56 funding is used to provide administration’s current spending projections supplemental payments for family planning are too high or its revenue projections overly 22 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET cautious, we would project annual shortfalls of not provided very much detail on the other new Proposition 56 revenue for Medi-Cal compared proposed supplemental payment programs. to Proposition 56 costs in Medi-Cal. Balances While, conceptually, a new value-based payment in the Proposition 56 fund account could cover program may have significant potential to drive these annual shortfalls, but likely only on a quality improvements within Medi-Cal, the details temporary basis, after which General Fund could around how the program would be structured be needed. We thus advise that the Legislature will be crucial to its success. While expanding take into account the long-term sustainability of the use of trauma screening could improve any augmentations to Medi-Cal funded through patient-provider relationships and referral to other Proposition 56. supports and services, it is unclear at this time how Making Provider Payment Increases for a the results of the trauma screening will ultimately Limited Term Would Provide an Opportunity affect Medi-Cal beneficiaries’ treatment plans to Assess Their Impact. To date, no analysis and eligibility for additional services. Improved has been released showing that the existing screening for developmental disabilities is a worthy Proposition 56 provider payment increases have goal. However, it is unclear whether supplemental been effective in improving access to quality care payments reflect the most cost-effective approach in Medi-Cal. Moreover, given implementation to improving the identification of children in need delays and other issues, it is unlikely that any of services. Finally, while equitable payment across information provided by the administration will be the various Medi-Cal delivery systems may be able to definitively show a positive effect from the a worthwhile goal, the administration has not existing payment increases on access and quality. presented evidence of access issues affecting the Accordingly, more time and experience under the Medi-Cal provision of family planning services, provider payment increases would be needed to thereby justifying payment increases. Using the assess their effectiveness. The Legislature might upcoming budget process to gather additional consider making the provider payment increases—if information from the administration on how the new extended—limited term to allow further assessment proposed supplemental payment programs will be of their impact. structured and how they will ultimately improve access and care within the Medi-Cal program could More Details Needed for Legislature to help the Legislature in its decision on whether to Assess New Proposed Supplemental Payment approve these new payment programs. Programs. At this time, the administration has IMPROVING MEDI-CAL FISCAL ESTIMATES AND BUDGET TRANSPARENCY With proposed General Fund support of nearly DHCS to improve estimates of Medi-Cal spending $23 billion in 2019-20, Medi-Cal is a high priority and more effectively manage the program’s budget. for the Legislature’s budgetary oversight. However, several features of the Medi-Cal program make MEDI-CAL EXPENDITURES HAVE its budget extremely complex, difficult for external BECOME INCREASINGLY DIFFICULT stakeholders to track, and challenging to predict. TO PROJECT In this section, we describe recent challenges in accurately projecting Medi-Cal expenditures Significant, Unanticipated Changes to and the major underlying sources of budgeting Medi-Cal Budget Have Become Routine. In uncertainty. We also provide our assessment of recent years, the Legislature has been confronted proposals by the Governor to increase staffing at with multiple significant, unanticipated changes in the Medi-Cal budget. Estimates of future Medi-Cal www.lao.ca.gov 23 analysis full gutter 2019-20 BUDGET costs can change dramatically from the time the million, or in some cases billions, of dollars. Of Governor’s budget is introduced in January to the particular note, the 2017-18 Governor’s Budget time of the May Revision and budget enactment. identified a $1.8 billion upward adjustment in Estimates of Medi-Cal spending also frequently 2016-17 Medi-Cal General Fund costs. (This shift significantly after the budget is enacted. amount of the increase was revised downward Figure 11 shows the change in estimated General to $1.2 billion a few months later.) The recently Fund Medi-Cal spending relative to the respective released 2019-20 Governor’s Budget identifies budget acts for each of the fiscal years from a $2.3 billion downward adjustment in 2018-19 2015-16 through 2018-19, at 5 months and Medi-Cal General Fund costs. 11 months after budget enactment. As shown Medi-Cal Budget Uncertainty Hinders in the figure, revised estimates have varied from Legislative Decision Making. These unanticipated budget act appropriations by several hundred adjustments are large in terms of the Medi-Cal Figure 11 Revised Estimates of Medi-Cal Spending Often Differ Significantly From Budget Act Assumptions Change in Estimated Spending Relative to Budget Act (General Fund, In Billions) $2.5 2.0 1.5 1.0 0.5 -0.5 -1.0 5 months after budget enactmenta -1.5 11 months after budget enactmentb -2.0 -2.5 2015-16 2016-17 2017-18 2018-19c a Estimates of Medi-Cal spending are revised 5 months after budget enactment as part of preparing the Governor's budget proposal for the following fiscal year. b Estimates of Medi-Cal spending are further revised 11 months after budget enactment as part of preparing the May Revision for the following fiscal year. c An additional revised estimate of Medi-Cal spending in 2018-19 will be available in May 2019. 24 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET budget—the $1.8 billion upward adjustment in that take place around the end of a fiscal year, the 2017-18 Governor’s Budget represented a significantly affect the level of Medi-Cal spending in 10 percent increase in estimated Medi-Cal General any given fiscal year. The timing of payments under Fund spending for the year. They are also large cash budgeting can in some cases lead to DHCS in terms of the broader state budget. At the time having insufficient cash available at the end of a of the release of the 2017-18 Governor’s Budget, fiscal year. Cash budgeting also makes oversight the upward adjustment in Medi-Cal spending in of the Medi-Cal budget challenging, since outside 2016-17 was cited as one of the main factors stakeholders, including the Legislature, have limited leading to a projected budget problem in 2017-18. insight into the timing of payments. This required the Governor and Legislature to Medi-Cal Budget Is Interdependent With identify ways to constrain spending to achieve Several External Actors. Another key source of a balanced budget. Such large, unanticipated complexity in the Medi-Cal budget is the program’s changes in estimated Medi-Cal spending can interdependence with other government agencies interfere with the Legislature’s ability to formulate and private parties. Some key interdependencies and pursue longer-term fiscal plans in alignment include: with its priorities, given the potential for these • The Federal Government. The federal priorities to be displaced by changes to base government provides the majority of funding funding requirements in Medi-Cal. for the Medi-Cal program. The Medi-Cal Medi-Cal Budget Complexity Hinders program is dependent on various federal Legislative Oversight. The significant complexity approvals for things like rates paid to of the Medi-Cal budget also creates challenges managed care plans and waivers of federal for the Legislature to independently oversee Medicaid rules to implement state policies. In operations of the program. This is particularly true any given year, DHCS has several applications because often information that would be needed for approval pending with the federal to understand and track the complex operations government. The timing of federal approval of the Medi-Cal budget is not publicly available or can significantly affect the timing and amount easy to obtain (or for the department to provide). of spending in Medi-Cal. Underlying Sources of • Providers. Medi-Cal providers also play a key Budgeting Complexity role in funding the Medi-Cal program. Public entities, such as county hospital systems, There are a few key sources of complexity in the transfer funds to the state which are then Medi-Cal budget, as discussed below. used to draw down additional federal funding In Contrast to Other Programs, Medi-Cal for Medi-Cal services. Other providers, such Is Budgeted on a Cash Basis. Most state as skilled nursing facilities and hospitals, departments and programs are budgeted on an pay a QAF that is similarly used to draw “accrual” basis, which means that spending is down additional federal funding for Medi-Cal. largely accounted for in the fiscal year in which Because of these relationships, the state is the activity that the spending supports takes collecting funds from and distributing funds place. As part of the 2003-04 budget package, to a large number of providers on varying the state shifted the Medi-Cal budget to a “cash schedules, significantly increasing the basis” for budgeting, which means that spending complexity of Medi-Cal finances. is accounted for in the fiscal year in which it leaves • Other State Departments. DHCS also the state’s cash accounts. This action was taken has significant interactions with other state primarily to achieve one-time General Fund savings departments in its administration of Medi-Cal. (estimated at about $930 million at the time), but Several major state programs, including contributes to the complexity of the Medi-Cal personal care services in the IHSS program, budget in important ways. Cash budgeting means administered by the Department of Social that the timing of payments, particularly those www.lao.ca.gov 25 analysis full gutter 2019-20 BUDGET Services, and many services provided by the proposed by the Governor, these resources would Department of Development Services, receive be allocated to four main purposes. federal Medicaid funding. As the designated Improved Monitoring of Cash Flows. Under the single state agency for purposes of federal Governor’s proposal, four of the positions would Medicaid funding, DHCS is involved with be dedicated to improving and centralizing the managing the flow of federal funds for these department’s cash flow monitoring functions. These services to other state departments. positions would be tasked with coordinating among various units at DHCS that separately track different Complexity Has Increased as Medi-Cal components of the department’s cash flow. Program Has Grown. Since the implementation of Increased Reconciliation of Actual Spending the ACA, the size of the Medi-Cal program, both to Previous Estimates. Next, 11 of the positions in terms of caseload and spending, has grown would be dedicated to reconciling actual spending significantly. Relative to 2012-13, the year before and cash flows to estimates of spending developed eligibility for Medi-Cal benefits was significantly as part of the state’s budget process. These expanded under the ACA, the Medi-Cal caseload positions would also make changes to improve the in 2019-20 will have increased 67 percent and departments spending estimates, such as better total spending from all funds will have more aligning the department’s budgeting methodologies than doubled. With this growth, complexity and with how managed care rates are set. uncertainty in budgeting have increased. The ACA added new complexities to the program, such as Improved Processing of Payments and by providing enhanced federal sharing ratios for Collections. Another nine of the positions would certain populations. These higher sharing ratios provide additional support to key payment and allowed the state to provide coverage to these collection processes, including managed care populations at a lower state cost than for other rate development and payment, drug rebate populations, but tracking the appropriate sharing reconciliation, and collections of provider fees. ratio of federal funding for different populations Additional Coordination Among DHCS Units. has led to additional workload and complexity for Finally, the proposal would establish a new Chief DHCS. The growth in the Medi-Cal program also Financial Officer position at DHCS that would made the Medi-Cal budget more difficult to manage provide consolidated leadership for budgeting and as preexisting complexities are magnified over a accounting functions and would help coordinate larger amount of total spending. In the nearby box, among various DHCS units on fiscal issues. we provide examples of how the factors described Create New Special Fund to above can particularly affect certain components of the Medi-Cal program. Smooth Impact of Drug Rebates on Medi-Cal Budget GOVERNOR HAS TWO PROPOSALS The Governor additionally proposes to create TO IMPROVE MANAGEMENT OF a new special fund into which drug rebates would THE MEDI-CAL BUDGET be deposited before being transferred to the General Fund. Under the Governor’s proposal, in years where an unusually large amount of rebates Increase DHCS Staffing to Improve are collected, the state would hold a portion of Fiscal Estimates and Cash Monitoring rebate proceeds in the special fund. In other years, To address concerns about DHCS’s ability to when an unusually low amount of drug rebates is estimate Medi-Cal spending and monitor cash flow, collected, rebates revenue held in the fund would the Governor proposes to provide 25 permanent be transferred to the General Fund. This would positions and $3.8 million total funds ($1.8 million serve to smooth the impact of drug rebates on the General Fund) in 2019-20 and ongoing. As Medi-Cal budget. 26 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET LAO ASSESSMENT OF improving the ability of the Legislature and other external stakeholders to understand and track GOVERNOR’S PROPOSALS Medi-Cal spending is another high priority that Governor’s Staffing Proposal Has Merit. In our should be addressed with this proposal. There view, recent challenges with projecting Medi-Cal are many changes related to the presentation expenditures represent a significant concern that of Medi-Cal estimates and the availability of warrants the Legislature’s attention. Based on our public information about program operations that review of the proposal, the requested resources would increase the transparency of the Medi-Cal would meaningfully improve the department’s ability budget and allow for greater oversight by outside to estimate Medi-Cal spending and monitor cash stakeholders. Many of these changes will take time flow. and planning. Others may be more achievable in Increased Transparency for Legislature the near term. For example, given the significant and Other External Stakeholders Should Also emphasis of the proposal on monitoring cash flow Be a Priority. At the same time, we believe that and reconciling actual expenditures to estimates, Examples of Medi-Cal Program Components Particularly Subject to Budgeting Uncertainty Certain components of the Medi-Cal program are particularly subject to budgeting complexity, and have significantly contributed to the major adjustments to estimated Medi-Cal funding in recent years. Below, we describe three examples. Managed Care Payments. Managed care payments introduce complexities into the Medi-Cal budget in a few key ways. First, the state pays managed care plans each month based on over a thousand individual rates, each of which corresponds to a type of Medi-Cal beneficiary in a particular county or region covered by a particular managed care plan. Each of these individual rates must be submitted for approval to the federal government, and delays in approval of these rates create uncertainty about the timing and amount of managed care payments. Hospital QAF. The hospital Quality Assurance Fee (QAF) program, as described earlier, uses fees paid by private hospitals to draw down additional federal funding to support higher Medi-Cal rates paid to the hospitals. The hospital QAF involves significant amounts of funding—the program is currently projected to provide $8.4 billion in total additional payments to hospitals (including the fees paid by hospitals) and offset $1.1 billion in General Fund costs in Medi-Cal in 2019-20. Because most Medi-Cal beneficiaries are enrolled in managed care, the state pays a significant share of hospital QAF payments through managed care rates. Federal regulations in 2016 related to managed care in Medicaid required the state to significantly change how hospital QAF payments are made through managed care in ways that increased program complexity. Drug Rebates. The state receives rebates from drug manufacturers that lower the net price it pays for prescription drugs. When these rebates are received, the state keeps a share of the rebate and returns a share of the rebate to the federal government, since some federal funds were used to pay for the drugs. In the past, the state has struggled to track the amount of federal rebates due to the federal government, specifically when the federal government pays for a higher share of the cost of drugs for certain populations. Recently, the state has returned insufficient shares of rebates to the federal government, leading to unexpected increases in General Fund costs in later years when the federal government requires that its full share of rebates be paid. The timing of when the state will receive drug rebates may also be difficult to predict, which contributes to the uncertainty related to the General Fund funding requirements of Medi-Cal. www.lao.ca.gov 27 analysis full gutter 2019-20 BUDGET some form of regular public update on spending one, provided that information about amounts relative to budget estimates would seem to be an deposited and withdrawn from the special fund appropriate and reasonable outcome of providing is transparently outlined in budget documents for these additional resources. external stakeholder review. The concept of using a Additional Structural Changes Should Be special fund to smooth funding volatility could also Considered Over Longer Term. The administration have broader application in other Medi-Cal program has indicated that the proposals we have described components, and could be an additional option to represent a first step toward better managing future changes to improve the management of the the Medi-Cal budget, and that additional, more Medi-Cal budget. structural changes will be considered in the future. In our view, more structural changes to reduce RECOMMENDATIONS the complexity of the Medi-Cal budget and limit Approve Requested Positions and Creation unanticipated changes in annual costs should be of Drug Rebate Special Fund. To strengthen explored. Examples of such changes could include: the department’s ability to oversee and manage • Modernize information technology (IT) the Medi-Cal budget, we recommend that the systems that would automate and streamline Legislature approve the positions as requested in processes that are currently manual and labor the Governor’s proposal. We also recommend that intensive. the Legislature approve the Governor’s proposal to • Redesigning the department’s Medi-Cal create a special fund to smooth the impact of drug estimating methodology to better match rebates on the Medi-Cal budget. program operations. In the Short Term, Require DHCS to Share • Potentially reverting to an accrual budget Key Information Gained From Improved for the Medi-Cal program. While we believe Monitoring With Legislature. However, we this is an alternative that should be explored, additionally recommend that the Legislature require, we note that switching Medi-Cal back to in connection with approving these positions, that an accrual basis of budgeting would, on its DHCS share key information gained from improved own, be a complex endeavor, and improved monitoring of the Medi-Cal budget with the budget transparency and oversight would Legislature. In the near term, regular updates on not be guaranteed. The program has cash flows that would compare actual spending to grown significantly since the switch to cash estimated budget amounts, would be a reasonable budgeting in 2003-04. The increased size of first step. the program and other changes may mean Require DHCS to Report to Legislature With that the state could face many of the same Plan For Longer-Term Structural and Systems challenges under an accrual budget as it Changes to Promote Sound Estimates and faces today with a cash budget. Additionally, Budget Transparency. Even with approval of the switching back to an accrual budget would changes proposed by the Governor, the Medi-Cal involve a significant one-time cost as large budget will likely continue to be challenging to payments, deferred in previous years to project and subject to significant uncertainty. The achieve savings, would be accelerated to DHCS has indicated that it intends to continue match with the year in which the services assessing possible long-term solutions to address and activities they fund occur. The amount of these challenges. To continue moving toward this one-time cost was estimated at roughly solutions to these issues and to ensure appropriate $2 billion in 2016-17, and could be larger legislative oversight, we recommend that the today. Legislature require DHCS to develop and present to the Legislature a longer-term plan with structural Drug Rebate Special Fund Concept Has and systems changes that would further promote Promise. The concept of using a special fund to sound estimates and budget transparency in smooth volatility in drug rebates is a promising 28 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Medi-Cal. Such a plan would look at such changes potential use of special funds or other reserves as IT system modernizations (some of which may to smooth unanticipated swings in Medi-Cal already be in process), the implications of moving spending that can be disruptive to the Legislature’s Medi-Cal back to an accrual budget, and the budgetary decision-making and long-term planning. www.lao.ca.gov 29 analysis full gutter 2019-20 BUDGET LAO PUBLICATIONS This report was prepared by Ben Johnson and Ryan Woolsey 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. 30 LEGISLATIVE ANALYST’S OFFICE