The 2020-21 Budget: Analysis of the Medi-Cal Budget

The 2020-21 Budget: Analysis of the Medi-Cal Budget GABRIEL PETEK LEGISLATIVE ANALYST FEBRUARY 14, 2020 analysis full gutter 2020-21 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Table of Contents Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Overview of the Governor’s Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Medicaid Fiscal Accountability Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Medi-Cal Is Partly Financed From a Variety of Non-General Fund Sources . . . . . . . . . . . . . . . . . . 10 As Proposed, Federal Regulations Would Change Medicaid Financing and Oversigh .t . . . . . . . . . 13 Potential Impacts in Medi-Cal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Update on Medi-Cal Pharmacy Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Governor’s Proposa .l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 LAO Assessment and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Full-Scope Expansion for Seniors Regardless of Immigration Status . . . . . . . . . . . . . . . . . . . . . . . 23 SNF Rate Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 County Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Proposal to End Dental Managed Care in the Two Pilot Counties . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Summary of Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 www.lao.ca.gov analysis full gutter 2020-21 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Executive Summary Overall Medi-Cal Budget Picture. The Governor’s budget proposes $25 .9 billion General Fund ($103 .5 billion total funds) in 2020-21, an increase of $2 .9 billion (12 .4 percent) over estimated 2019-20 levels . This increase reflects both a number of workload budget adjustments that increase General Fund costs along with new funding to support several policy proposals . Notably, the Governor proposes $348 million General Fund ($695 million total funds) to implement the provisions of a broad set of Medi-Cal reform proposals collectively referred to as “Medi-Cal Healthier California for All .” We do not assess these reform proposals in this report, but will do so in a separate forthcoming report . Administration Recently Submitted a Modified Managed Care Organization (MCO) Tax Proposal for Federal Consideration. For a number of years, the state has imposed a tax on MCOs . Revenues from the MCO tax result in a significant annual General Fund benefit—most recently, nearly $1 .3 billion . The MCO tax expired at the end of 2018-19 and the Legislature reauthorized a new MCO tax in 2019 . Because the MCO tax would increase federal Medicaid funding, it requires federal approval . In late January 2020, the federal government rejected the state’s original MCO tax proposal . In early February 2020, the administration—using authority in the MCO tax’s reauthorizing legislation—modified the MCO tax and submitted a new proposal to the federal government . The modified MCO tax proposal would generate a smaller annual General Fund benefit ($1 .3 billion to $1 .7 billion) than the original proposal (around $2 billion) and have different impacts on MCOs’ tax liability . Federal approval of the modified MCO tax remains uncertain . (We note that as the Governor’s budget does not assume the receipt of revenues from the reauthorized tax until 2021-22, the fiscal impact of the ultimate federal decision on the state’s proposal will not affect the Governor’s budget structure until 2021-22 .) Draft Federal Regulation Could Have Significant Fiscal Effects for Medi-Cal. In October 2019, the federal government released draft regulations related to financing and oversight in the Medicaid program . The draft rule, if implemented in its current or similar form, would require significant changes to major Medi-Cal financing mechanisms, possibly resulting in several billion dollars of higher General Fund costs . (The modified MCO tax discussed earlier, however, could be approved under existing federal rules .) The ultimate impact of the proposed regulations is highly uncertain and depends on what provisions are in the final rule and how the federal government elects to implement them . However, given the potential for a significant fiscal impact on Medi-Cal financing, we recommend that the Legislature approach proposals to significantly increase ongoing General Fund expenditures in the 2020-21 budget with caution . Governor’s Budget Includes Various Proposals Intended to Result in Pharmacy Savings. This report analyzes the Governor’s pharmacy-related proposals that implicate Medi-Cal and the Department of Health Care Services (DHCS), including (1) changes to facilitate the transition of Medi-Cal pharmacy services from a managed care to a fee-for-service (FFS) benefit, which include proposed supplemental payments for clinics to mitigate associated financial losses, and (2) budget-related legislation authorizing DHCS to collect rebates on drugs not paid for through Medi-Cal . First, we find that the Governor’s savings estimate for the transition of Medi-Cal pharmacy services to an FFS benefit likely is overstated . We recommend that the Legislature enact report requirements to ensure that this major policy change is achieving its objective of generating state savings . Additionally, we question whether the Governor’s proposed www.lao.ca.gov 1 analysis full gutter supplemental payments for clinics serve a public purpose in the long run, and recommend either making the payments temporary or, if made ongoing as proposed, tying them to quality and/or access improvements . Governor Proposes Expanding Comprehensive Coverage for Income-Eligible Seniors, Regardless of Immigration Status. Historically, income-eligible undocumented immigrants only qualified for “restricted-scope” Medi-Cal coverage, which covers emergency- and pregnancy-related health care services . Over the last several years, the Legislature has expanded comprehensive “full-scope” Medi-Cal coverage to undocumented children ages 0 through 18 and adults ages 19 through 25 . The Governor proposes to expand full-scope Medi-Cal coverage to income-eligible undocumented seniors ages 65 and older beginning in January 2021 . The Governor projects $64 million will be needed to fund this half-year expansion in 2020-21 . We project that this expansion will cost around $250 million on an ongoing basis, with this funding split between Medi-Cal and the In-Home Supportive Services program . Proposed Skilled Nursing Facilities (SNF) Rate Reform Has Promise, But Many Questions Remain. The state’s current system for setting reimbursement rates for SNF sunsets in August 2020 . The Governor proposes to reauthorize the rate-setting system with several changes . Overall, these changes intend to increase the role of SNF quality in setting rates . The Governor also proposes to extend a quality assurance fee paid by SNF that offsets the General Fund costs of SNF reimbursement . We find that, in concept, better integrating quality incentives with rates could strengthen incentives for SNF to improve quality . However, many questions remain about the proposal, such as how the proposed rate system would function in the managed care environment . (The Governor has separately proposed transitioning SNF care to the managed care delivery system statewide .) We recommend that the Legislature withhold action on this proposal until more information is provided . Should the Legislature adopt the Governor’s proposal, we recommend requiring an evaluation of the new rate structure’s impact on SNF quality . Increased Oversight of County Medi-Cal Administration Is Warranted. Implementation of the Patient Protection and Affordable Care Act (ACA) was disruptive to county Medi-Cal administration . Federal and state audits have identified deficiencies in county administration and the state’s oversight of these activities during and following ACA implementation . Further, the analytical basis for the state’s approach to budgeting for county administrative activities has significantly eroded . The Governor proposes to provide a cost-of-living adjustment for county administration funding (consistent with recent practice) with no other changes to the state’s budgeting methodology . The Governor further proposes to reinstate and build on county oversight processes that previously were suspended . We recommend that the Legislature require the administration to provide an update on county performance and efforts to improve performance prior to approving the Governor’s proposals . We further recommend that the Legislature adopt a plan for revising the budgeting methodology for county Medi-Cal administration . Proposal to End Dental Managed Care. For over 25 years, the state has operated a dental managed care pilot program in Sacramento and Los Angeles Counties whereby Medi-Cal dental services are accessed through specialty dental managed care plans rather the typical Medi-Cal dental FFS delivery system . The Governor proposes to end the dental managed care pilot program and transition Medi-Cal dental services to FFS in the two pilot counties . In our assessment, dental managed care has not achieved its objectives of achieving savings while ensuring access and quality . Accordingly, we recommend approval of the Governor’s proposal assuming no information is obtained during the budget process that shows clear improvement in the dental managed care plan performance . 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET INTRODUCTION Report Provides Assessment of Overall (MCO) tax proposal . Following this section, we Medi-Cal Budget Proposal… With proposed provide analysis and recommendations on a series General Fund expenditures of nearly $26 billion, of key issues: Medi-Cal is one of the largest items in the state’s • Recently proposed draft federal regulations budget . This report provides a broad overview referred to as the “Medicaid Fiscal of the major spending changes reflected in the Accountability Regulation .” Governor’s proposed Medi-Cal budget, as well • Proposals related to the Medi-Cal pharmacy as analysis and recommendations on several services benefit . proposals for legislative consideration . • The Governor’s proposal to expand …But Does Not Assess Medi-Cal Healthier comprehensive Medi-Cal coverage to California for All. This report does not provide otherwise eligible seniors regardless of analysis and recommendations on the Governor’s immigration status . proposed broad Medi-Cal reform effort, referred to as “Medi-Cal Healthier California for All” (MHCA) . • Proposed changes to rate-setting for skilled We will provide our comments on that reform nursing facilities (SNFs) . proposal in a separate forthcoming report . • Issues related to county administration of Layout of This Report. This report begins eligibility and enrollment functions in Medi-Cal . with some high-level background on the Medi-Cal • The Governor’s proposal to end dental program, followed by an overview of the major managed care in the current two pilot drivers of year-over-year spending changes in counties and instead provide dental care as a the Governor’s budget . We also discuss the fee-for-service (FFS) benefit statewide . administration’s recent submittal (late January We conclude this report with a summary table of 2020) of a modified managed care organization our recommendations . BACKGROUND Medi-Cal, the state’s Medicaid program, is the program . This eligibility expansion sometimes administered by the Department of Health Care is referred to as the “ACA optional expansion .” Services (DHCS) and provides health care coverage Medi-Cal has grown significantly both in terms to almost 13 million of the state’s low-income of caseload and spending as a result of the ACA residents . Coverage is cost-free for most Medi-Cal optional expansion and the other changes under enrollees . Instead, Medi-Cal costs generally are the ACA to encourage health care coverage . shared between the federal, state, and local Figure 1 (see next page) shows the growth in (county) governments . Medi-Cal spending over the last decade . Figure 3, Medi-Cal Has Grown Significantly Under the found later in this report, shows the significant Patient Protection and Affordable Care Act increase in Medi-Cal caseload from nearly 8 million (ACA). Before 2014, Medi-Cal eligibility mainly was enrollees to over 13 million enrollees in the years restricted to low-income families with children, following implementation of the ACA, with the seniors, persons with disabilities, and pregnant caseload leveling off recently . women . As allowed under the ACA, in 2014, the Federal Share of Cost Varies, Primarily by state expanded Medi-Cal eligibility to include Eligibility Group. The costs of state Medicaid additional low-income populations—primarily programs generally are shared between the federal childless adults who did not previously qualify for government and states based on a set formula . www.lao.ca.gov 3 analysis full gutter Figure 1 Medi-Cal Spending: 2011-12 to 2020-21 (In Millions) $110 100 90 Other Nonfederal Funds 80 70 General Fund 60 50 40 30 Federal Funds 20 10 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 Estimated Proposed a Includes Medi-Cal funding from state special funds and some, but not all, local funding. b Proposed funding. The percentage of Medicaid costs paid by the 2016 . Beginning in 2017, the federal cost share federal government is known as the federal medical decreased to 95 percent and phases down further assistance percentage (FMAP) . to 90 percent in 2020 and thereafter . For most low-income families and children, Delivery Systems. There are two main Medi-Cal seniors, persons with disabilities, and pregnant systems for the delivery of medical services: FFS women, California generally receives a 50 percent and managed care . In the FFS system, a health FMAP—meaning the federal government pays half care provider receives an individual payment from of Medi-Cal costs for these populations . For the DHCS for each medical service delivered to a subset of children in families with higher incomes beneficiary . Beneficiaries in Medi-Cal FFS generally that qualify for Medi-Cal as part of the Children’s may obtain services from any provider who has Health Insurance Program (CHIP), the federal agreed to accept Medi-Cal FFS payments . In government pays 76 .5 percent of the costs and managed care, DHCS contracts with managed care the state pays 23 .5 percent . (The state share is plans to provide health care coverage for Medi-Cal scheduled to ramp up to the historical cost share of beneficiaries . Managed care enrollees may obtain 35 percent over the coming years .) Under the ACA, services from providers who accept payments from the federal government paid 100 percent of the the managed care plan, also known as a plan’s costs of providing health care services to the ACA “provider network .” The plans are reimbursed on optional expansion population from 2014 through a “capitated” basis with a predetermined amount 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET per person per month, regardless of the number beneficiaries must access most of their Medi-Cal of services an individual receives . Medi-Cal benefits through the managed care delivery system . managed care plans provide enrollees with most FFS enrollment largely consists of newly enrolled Medi-Cal covered health care services—including beneficiaries who will soon enroll in a managed hospital, physician, and pharmacy services—and care plan and certain seniors and persons with are responsible for ensuring enrollees are able to disabilities . In 2019-20, more than 80 percent of access covered health care services in a timely Medi-Cal beneficiaries are estimated to be enrolled manner . Managed care enrollment is mandatory in managed care . for most Medi-Cal beneficiaries, meaning these OVERVIEW OF THE GOVERNOR’S BUDGET Current-Year Adjustments flat in 2020-21, growing only by 0 .4 percent to an average of 12,880,440 enrollees per Estimated General Fund Spending Down month . This assumption results in higher $92 Million in 2019-20. The Governor’s budget General Fund costs in the low tens of projects that Medi-Cal spending will be $92 million millions of dollars relative to 2019-20 . In lower (0 .4 percent) in 2019-20 relative to what our view, the Governor’s Medi-Cal caseload was assumed in the 2019-20 Budget Act . This is a estimates are cautious as we project that small current-year adjustment relative to previous the caseload will continue to decline slowly, years . The downward adjustment primarily reflects provided that the economy continues to (1) savings from reduced expected enrollment in expand . (In recent years, caseload declined the program and (2) a number of other, primarily by around 1 percent to 2 percent per year technical adjustments that largely offset one on average .) The Governor will provide another . updated caseload estimates in May, at which time we will reassess the reasonableness Budget-Year Adjustments and of the administration’s Medi-Cal caseload Proposals assumptions . Under the Governor’s proposed budget, • Per Capita Cost Growth. We estimate General Fund spending in Medi-Cal would grow that per capita cost growth accounts for from $23 billion in 2019-20 to $25 .9 billion in $830 million of the increase in spending 2020-21—a $2 .9 billion, or 12 .4 percent, increase relative to 2019-20 . in year-over-year spending . Figure 2 (see next • MCO Tax. The Medi-Cal budget reflects a page) summarizes the major factors responsible $582 million increase relative to 2019-20, for the proposed growth in General Fund spending due to the expiration of the previous MCO in Medi-Cal, which includes both workload budget tax and the Governor’s budget assumption adjustments and new policy proposals . that revenues from the MCO tax recently Workload Budget Adjustments. Most of this reauthorized by the Legislature would not change in General Fund spending from 2019-20 to materialize until 2021-22 . 2020-21 is due to workload budget adjustments . • Scheduled Reductions in Federal Share of We describe several major adjustments below . Costs. We estimate that the Medi-Cal budget reflects a $518 million increase in spending • Governor’s Budget Cautiously Assumes relative to 2019-20 due to scheduled changes Caseload Essentially Will Be Flat Going in the federal share of costs for the ACA Into 2020-21. As shown in Figure 3 (see optional expansion and CHIP populations . page 7), the Governor’s budget projects that the Medi-Cal caseload will remain essentially www.lao.ca.gov 5 analysis full gutter • Ramp-Up of 2019-20 Augmentations. services, and (5) the restoration of certain The Medi-Cal budget reflects a $277 million optional Medi-Cal benefits . increase in spending relative to 2019-20 due • “Disproportionate Share Hospital” to continued implementation of 2019-20 Reduction. The Medi-Cal budget reflects an augmentations . These augmentations include $83 million reduction in spending on payments (1) the expansion of full-scope Medi-Cal to to private disproportionate share hospitals, otherwise eligible young adults regardless of which serve large numbers of low-income or immigration status, (2) an increased income uninsured populations . This state reduction eligibility threshold for certain seniors and is triggered by a scheduled reduction in persons with disabilities, (3) expanded federal funding for payments the state largely eligibility for postpartum mental health directs to public disproportionate share services, (4) expansion of screening and hospitals . (Congress has repeatedly delayed intervention for substance use disorder the scheduled federal reduction and may do Figure 2 Major Drivers of Increased Costs in Medi-Cala From 2019-20 to 2020-21 Per Capita Cost Growth $830 Million Expiration of Previous MCO Tax $582 Million Increased Share of Cost for ACA OE and CHIP Populations $518 Million Spending changes due to workload budget adjustments b Ramp-Up of 2019-20 Augmentations $277 Million c Assorted Other Changes $231 Million Medi-Cal Pharmacy Services Carve Out $43 Million (Savings) Medi-Cal Healthier California for All $348 Million Spending changes resulting Full-Scope Coverage for Undocumented Seniors $58 Million from proposed policy changes Long-Term Care Rates and Fee Reauthorization $50 Million 2019-20 Estimated 2020-21 Proposed $23 Billion $25.9 Billion a Spending changes reflect costs, unless otherwise noted as savings . b Includes the full-scope expansion for young undocumented adults, increased eligibility threshold for seniors and persons with disabilities, expanded eligibility for postpartum mental health services, expansion of screening and brief intervention services, and restoration of certain optional benefits . c Summarizes the net impact of a large number of budget adjustments, among the major ones being the reductions in Disproportionate Share Hospital funding, changes related to the Heatlh Insurer fee, and a modest projected increase in caseload . MCO = managed care organization; ACA OE = Patient Protection and Affordable Care Act optional expansion; and CHIP = Children’s Health Insurance Program . 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET so again . If this happens, the General Fund in 2020-21 to implement MHCA . Under the savings identified in the Governor’s budget Governor’s proposal, spending would double on payments to private disproportionate to $695 million General Fund ($1 .4 billion total share hospitals may be reduced or may not funds) in 2021-22 and 2022-23 . Beginning materialize at all .) in 2023-24, ongoing annual costs would be $395 million General Fund ($790 million total New Policy Proposals. Nearly $490 million funds) . of the increase in General Fund spending is • Expansion of Comprehensive (“Full-Scope”) attributable to new discretionary policy proposals Medi-Cal Coverage to Seniors Regardless that are included in the Governor’s budget . of Immigration Status. The administration • MHCA. The administration’s recently introduced proposes extending comprehensive Medi-Cal MHCA proposal intends to significantly coverage to income-eligible seniors aged 65 overhaul the state’s Medi-Cal system, and and older regardless of immigration status . introduces new benefits intended to provide The Medi-Cal budget provides $58 million in more comprehensive care to patients with 2020-21 to implement this proposal for a half more complex health needs . The Medi-Cal year . On an annual basis, we project Medi-Cal budget proposes spending $348 million from General Fund costs for the expansion to be the General Fund ($695 million total funds) around $110 million . Figure 3 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 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 Estimated Projected a Includes certain refugees, undocumented immigrants, and hospital presumptive eligibility enrollees. ACA = Patient Protection and Affordable Care Act. www.lao.ca.gov 7 analysis full gutter • SNF Rate Reform. The administration Governor’s Budget Assumes a Delayed proposes reforming the way in which SNF Implementation of the Reauthorized MCO rates are set . In recent years, SNF rates Tax. Due to uncertainty regarding the timing of have received an annual increase and the federal approval of the reauthorized MCO tax, the Governor’s proposal would continue this Governor’s budget assumed a delay in when the practice . However the Governor additionally General Fund benefit from the reauthorized MCO proposes providing an additional midyear rate tax would materialize . Accordingly, the Governor’s increase in 2020-21, related to transitioning budget assumes the General Fund benefit from the SNF rate setting from a state fiscal-year basis MCO tax would materialize in 2021-22 rather than to a calendar-year basis . Budget documents in either 2019-20 or 2020-21 . released on January 10, 2020 indicate that Federal Government Rejected the State’s the General Fund cost of this midyear increase Initial Proposal for a Reauthorized MCO Tax. will be around $50 million in 2020-21 . The In late January 2020, after the release of the ongoing costs of this midyear adjustment Governor’s budget, the federal government notified would be roughly double this amount . the state of its decision to reject the state’s proposal • Supplemental Payment Pool for Clinics to for a reauthorized MCO tax . The federal government Mitigate Loss in Earnings Due to Changes rejected the reauthorized MCO tax proposal under to Medi-Cal Pharmacy Services. To mitigate existing federal rules . Based on our understanding, the loss in earnings for clinics due to changes the federal government rejected the state’s to Medi-Cal pharmacy services, the Governor proposal, at least in part, due to the reauthorized proposes half-year funding of $26 million tax not imposing any liability on MCOs that do not General Fund ($53 million total funds) to have Medi-Cal membership, thereby—in the federal create a new supplemental payment program . government’s view—violating the no-hold harmless requirement in existing federal law . Administration Recently Resubmitted Administration Has Submitted a Modified a Modified MCO Tax Proposal MCO Tax Proposal for the Federal Government to Consider. In the reauthorizing legislation for the Background. For a number of years, the MCO tax, the Legislature gave the administration state has imposed a tax on MCOs’ Medi-Cal authority to modify the structure of the MCO tax and commercial lines of business . This tax in order to gain federal approval, provided that historically raised significant special fund revenues the modifications do not significantly increase the ($2 .6 billion in 2018-19), which generate a General total tax amounts projected to be collected under Fund benefit (most recently, nearly $1 .3 billion in the tax . The administration has used this authority 2018-19) by offsetting a portion of General Fund and, in early February, resubmitted a modified expenditures in Medi-Cal . Following the expiration MCO tax proposal to the federal government for of the most recent MCO tax, which was in place consideration . from 2016-17 through 2018-19, the Legislature To gain federal approval, the administration reauthorized the MCO tax last year under a has modified the MCO tax proposal in a way that somewhat modified structure from the previous increases the net tax liability on a number of MCOs, tax . The reauthorized MCO tax would generate specifically by lowering the enrollee threshold for a General Fund benefit of $1 billion to $2 billion taxation on non-Medi-Cal membership . In effect, annually from 2019-20 to 2023-24 . Because the this would increase the net liability on four MCOs reauthorized MCO tax would increase federal that have no Medi-Cal membership . By imposing a Medicaid funding, it requires federal approval . For net liability on MCOs without Medi-Cal membership, more information on the reauthorized MCO tax, see the state’s modified MCO tax proposal is intended our Budget and Policy Post: The 2019-20 Budget: to address the federal government’s principal California Spending Plan—Health and Human objection to the structure of the recently rejected, Services . original proposal . 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Figure 4 compares the structure Figure 4 of the original and modified MCO Comparing the Tax Rates of the Original and tax structures . Figure 5 compares Modified MCO Tax Proposals the fiscal impact in the first year of implementation . The net General Tax Rate Per Member Month Fund benefit of the modified MCO Member Monthsa Original Proposalb Modified Proposalc tax would be lower than that of Medi-Cal Enrollees the rejected tax . Rather than 1–675,000 $40 — generating a General Fund benefit 675,001–4,000,000 40 $40 of up to around $2 billion on an 4,000,001 and above — — annual basis, the modified MCO Commercial Enrollees tax would generate a $1 .3 billion 1–675,000 — — to $1 .7 billion General Fund 675,001–4,000,000 — $1 benefit on annual basis . The lower 4,000,001 to 8,000,000 $1 — benefit is largely due to effectively 8,000,001 and above — — eliminating the tax on MCOs’ a A member month is defined as one member being enrolled for one month in an MCO. first 675,000 Medi-Cal enrollees . b Original proposal refers to the MCO tax as reauthorized and proposed to the federal government Moreover, some MCOs will face for consideration in 2019. c Modified proposal refers to the MCO tax as modified by the administration and proposed to the higher net tax liability under the federal government for consideration in 2020. modified proposal, while others will MCO = managed care organization. face lower net tax liability . As with the original proposal, the modified in 2021-22 . This amount is relative to the multiyear proposal would be in place for 3 .5 years . assumptions included in the Governor’s budget . Federal Decision, if Maintained, Significantly Extends Potential Suspensions to Raises the Amount of General Fund Needed for Medi-Cal Beyond 2020-21. If the state 2023-24 ultimately does not obtain federal approval on the To prevent a potential General Fund operating modified MCO tax proposal, an additional $1 billion deficit from arising in the years after 2019-20, to $2 billion of General Fund would be needed the 2019-20 Budget Act adopted provisional annually to fully fund the Medi-Cal program starting suspension language that applies to a number Figure 5 Comparing the Fiscal Impacts of the Original and Modified MCO Tax Proposals LAO Estimates for First Full Year of Implementation (In Millions) Original Modified State Impact Proposala Proposalb Difference Total MCO tax revenue $2,631 $2,063 -$568 General Fund cost of Medi-Cal reimbursement to MCOs -915 -714 201 Net General Fund Benefit $1,716 $1,349 -$367 Health Insurance Industry Impact MCO tax liability $2,631 $2,063 -$568 Medi-Cal reimbursement to MCOs -2,614 -2,040 574 Net Health Insurance Industry Liability $17 $23 $6 a Original proposal refers to the MCO tax as reauthorized and proposed to the federal government for consideration in 2019. b Modified proposal refers to the MCO tax as modified by the administration and proposed to the federal government for consideration in 2020. MCO = managed care organization. www.lao.ca.gov 9 analysis full gutter of recent, mostly health and Figure 6 human services augmentations . Medi-Cal Augmentations Subject to Figure 6 lists the four Medi-Cal Potential Suspension augmentations subject to the suspension language . The General Funds (In Millions) 2019-20 Budget Act’s provisional Proposition 56 Medi-Cal provider payment increasesa $819 language suspends all of the Extension of Medi-Cal coverage for postpartum mental health 46 augmentations subject to the Medi-Cal optional benefits restoration 34 language as of January 1, 2022 Expansion of screening and intervention in Medi-Cal to drugs 3 unless the Department of Finance other than alcohol determines in May 2021 that Total $902 a annual General Fund operating The Proposition 56 funding for Medi-Cal no longer supporting provider payment increases would be used to offset General Fund spending on cost growth in Medi-Cal. surpluses could accommodate all the augmentations over be suspended starting in 2023-24 unless the the next two fiscal years . The Governor’s Department of Finance determines that there 2020-21 budget proposes to extend the effective is sufficient General Fund to support all the date of the suspensions for one-and-a-half augmentations subject to the suspension language years to July 1, 2023 . Accordingly, the four in 2023-24 . Medi-Cal augmentations listed in Figure 6 would MEDICAID FISCAL ACCOUNTABILITY REGULATION In October 2019, the federal government variety of non-General Fund sources to finance the released draft regulations related to financing and nonfederal share of Medi-Cal, including local funds, oversight in the Medicaid program . These rules, health care-related taxes, and state special funds . if implemented in their current or a similar form, We describe these nonfederal funding sources would require significant changes to major Medi-Cal below . financing mechanisms, possibly resulting in several Local Funds billion dollars of higher General Fund costs . These rules also would dramatically increase the Some Local Governments Operate Health amount and types of information the state would Facilities That Serve Medi-Cal Enrollees. Some be required to report to the federal government . In local government entities in the state—including this section, we provide background on how the some counties, cities, and special districts— nonfederal share of Medi-Cal costs is financed and operate health care facilities, such as hospitals the major provisions of the proposed regulations . and clinics . These government-operated facilities The provisions of the draft federal regulations are part of the state’s health care “safety net,” a are likely to change before being finalized, so the term which is sometimes used to refer to health ultimate impact on the state is highly uncertain . care providers that provide care regardless of an individual’s health insurance coverage status or MEDI-CAL IS PARTLY ability to pay for care . Medi-Cal enrollees and the FINANCED FROM A VARIETY OF uninsured typically make up a large share of these providers’ patients . Local governments that operate NON-GENERAL FUND SOURCES health facilities receive payment through the Figure 7 displays total funding for Medi-Cal Medi-Cal program for the services that they provide in 2019-20 and 2020-21 under the Governor’s to Medi-Cal enrollees . proposal . As shown in the figure, the state uses a 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Local Governments Also Figure 7 Contribute Toward the Total Funding in Medi-Cal From All Sources Nonfederal Share of Medi-Cal Costs. In addition to providing LAO Estimate, 2019-20 (In Billions) health care services to Medi-Cal enrollees, local governments also contribute toward financing Local the nonfederal share of cost Funds $9 in Medi-Cal . There are two Other State Funds $8 mechanisms established in federal law through which local governments contribute to financing Medi-Cal: • Certified Public General Fund $30 Federal Funds $66 Expenditures (CPEs). Under the first mechanism, a local government incurs costs providing covered health care services to Medi-Cal enrollees . The local government certifies to the state that expenditures were made and the state then Note: In contrast to estimates of Medi-Cal spending under DHCS, the funding amounts in this display include makes a claim to the federal (1) local funds not included in the state budget and (2) state funding for services covered through Medi-Cal that is budgeted in state agencies other than DHCS. As a result, these funding amounts differ significantly government to receive from other estimates of Medi-Cal funding. funding to cover the federal DHCS = Department of Health Care Services. share of the expenditures . This federal funding is then used to reimburse the local entity for the federal Figure 8 share of the expenditure . Flow of Funds for CPEs As described earlier, the portion of Medi-Cal Federal Government expenditures covered by 3 the federal government The state reports $100 in The federal government varies depending on the local government Medi-Cal provides $50 to the state expenditures to the federal as federal share of cost . population being served . government . Figure 8 provides an 2 example of how funds State would flow through this 4 State provides $50 in A local government reports CPE process assuming an federal funding to reimburse $100 in Medi-Cal FMAP of 50 percent . We expenditures to the state . the local government entity for the federal share of cost . estimate that CPEs account 1 for around $3 .1 billion Local Government Entity in Medi-Cal funding in 2019-20 . CPEs = certified public expenditures. www.lao.ca.gov 11 analysis full gutter • Intergovernmental Transfers (IGTs). Under payments on the provision of health care services the second mechanism, local governments or products . These are referred to as “health transfer funding to the control of the state, care-related taxes .” Given its significant role which then commits to the federal government in funding health care, the federal government that the funding will be used in the future has existing rules that regulate states’ health for Medi-Cal expenditures . The federal care-related taxes to the extent that these are government provides the state funding to levied to draw down federal funds . The rules apply, cover the federal share of cost of the future for example, to taxes on direct health care services expenditures and the state then provides (such as hospital inpatient stays) as well as payers both the local funding and the federal of health care services (such as health insurer funding to the local government for Medi-Cal revenue or enrollment) . expenditures . Under current practice and The rules are in place to prevent states from consistent with federal approvals to date, imposing too disproportionate a burden on federal funding that local governments provide as an Medicaid funds to pay the tax . Therefore, to receive IGT can come from various sources, such as federal approval, a state must prove to the federal revenue the local government entity receives government that the burden of paying a health from providing health care services and local care-related tax does not fall too disproportionately tax revenues . Figure 9 provides an example on Medicaid as opposed to non-Medicaid services . of how funds would flow through the IGT Specifically, health care-related taxes must pass process assuming an FMAP of 50 percent . a complex statistical test that determines whether We estimate that IGTs account for about the tax falls too disproportionality on federal $4 .6 billion in Medi-Cal funding in 2019-20 . Medicaid funds . To further ensure that the tax liability is distributed broadly among Medicaid Funds From and non-Medicaid services, a state cannot hold Health Care-Related Taxes payers of the health care-related tax harmless by providing its payers direct or indirect payments Federal Government Currently Regulates to offset the tax . While a state may implement a Health Care-Related Taxes. Many states levy health care-related tax that violates federal rules, licensing fees, assessments, or other mandatory the federal government reduces funding for the state’s Medicaid program in proportion to the revenues raised Figure 9 by an impermissible tax, making Flow of Funds for IGTs imposition of such taxes highly unappealing . Federal Government Medi-Cal Relies on 3 The state commits that The federal government Revenues From Several Health $50 in local funds, plus provides $50 to the state Care-Related Taxes. California $50 in federal funding, to cover the federal share will be used for Medi-Cal of cost . has—or until recently has had in expenditures . place—several health care-related 2 taxes that, together, generate State significant revenues that help 4 A local government The state returns $50 in finance the Medi-Cal program and local funding, along with transfers $50 to the $50 in federal funding, for often serve to offset what would control of the state . local Medi-Cal expenditures . otherwise be General Fund costs . 1 We describe these taxes below . Local Government Entity • MCO Tax. As previously IGT = intergovernmental transfer. discussed, in 2019, the state 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET proposed for federal approval a reauthorized Medi-Cal . The SNF QAF is projected to MCO tax that would generate a General Fund raise $505 million in 2019-20 . benefit of up to roughly $2 billion annually . » Ground Emergency Medical While no revenues from the MCO tax are Transportation (GEMT) QAF. The state assumed in the Governor’s budget to offset assesses a fee on GEMT that is used General Fund spending in Medi-Cal in either to raise reimbursement levels for GEMT 2019-20 or 2020-21, the administration, in providers and offset what otherwise would the January budget, assumes such revenues be General Fund costs in Medi-Cal . The would offset General Fund Medi-Cal spending GEMT QAF is projected to raise around starting in 2021-22 . As also noted, in early $200 million in 2019-20 . February of this year, the state submitted » Intermediate Care Facility (ICF) QAF. The a modified MCO tax proposal following the state assesses a fee on the gross receipts federal government’s late-January decision of certain ICFs that is used to offset state to reject the California’s original MCO tax costs for ICF services . The ICF QAF is proposal on the basis of current federal rules projected to raise $35 million in 2019-20 . related to health care-related taxes . • Hospital Quality Assurance Fee (QAF). Other Special Funds Under the hospital QAF, the state assesses a In addition to local funds and revenues from tax on private hospitals based on the amount health care-related taxes, the state relies on a of care they provide to Medi-Cal enrollees number of other state special funds to finance the and other populations (measured in terms of nonfederal share of cost in Medi-Cal . For example, bed days), totaling a projected $3 .5 billion in Medi-Cal’s most significant source of other state 2019-20 . Most of the QAF revenues are used special fund revenue is from state taxes on tobacco to provide supplemental payments to private products, including the approximately $1 billion hospitals and a small amount of grant funding in Proposition 56 (2016) revenue that supports to public hospitals, increasing their total provider payment increases in Medi-Cal . overall reimbursement for services provided to Medi-Cal enrollees . Another portion of the AS PROPOSED, hospital QAF funding is kept by the state to offset what otherwise would be General Fund FEDERAL REGULATIONS WOULD costs, a projected $914 million in 2020-21 . CHANGE MEDICAID FINANCING The Legislature first established the hospital AND OVERSIGHT QAF in 2009 . The hospital QAF was later reauthorized by the Legislature several times . Below, we describe provisions of the draft In 2018, voters approved Proposition 52, federal regulations that would have the greatest which made permanent the statutory authority impact on Medi-Cal . for the state to assess the hospital QAF Changes Related to Allowable and provide the associated supplemental payments and grant funding . However, the Sources of Funding state is required to seek federal approval The draft regulations significantly change what for adjustments to the QAF and related the federal government would allow as a source of supplemental payments every few years . nonfederal funding for Medi-Cal . • Other Provider Fees and Taxes. The state has a few other, relatively minor, provider • Would Limit Use of State Special Funds. taxes, listed below: The draft regulation specifies that state funding for Medi-Cal would need to come » SNF QAF. The state assesses a fee on SNF from the General Fund, which would appear bed days that is used to offset the state’s to preclude the possibility of the state using General Fund costs for SNF services in www.lao.ca.gov 13 analysis full gutter state special funds, such as those that receive supplemental payments to the federal government . tobacco tax revenues, to finance Medi-Cal . Under the proposed regulation, the state would be • Would Limit Permissible Sources of IGTs. required to provide information on the amount of The draft regulation also specifies that the supplemental payments provided to each individual source of IGTs would be limited to state and provider . local government tax revenues . This limitation Would Require More Frequent would exclude local governments’ patient care Reauthorization of Supplemental Payments. For revenue—a very significant source of funding many of the state’s supplemental payments, the for IGTs under current financing structures . state periodically seeks reauthorization from the federal government to continue the program . For Changes Specific to some supplemental payment programs, however, the state is not currently required to seek periodic Health Care-Related Taxes reauthorization . Under the proposed regulation, New Proposed Rules Would Prohibit Health the state would be required to seek federal Care-Related Taxes From Placing an Undue reauthorization every three years for all payments . Burden on Medicaid. As previously noted, the Would Require Evaluation of Supplemental federal government already has rules that effectively Payments. In connection with the periodic prohibit health care-related taxes if the tax burden reauthorization described above, the state would falls too disproportionately on Medicaid as opposed be required to commit to evaluating the impacts of to non-Medicaid services . Under the proposed supplemental payments on quality and access to federal regulations, the federal government would services . The state generally has not been required add additional, nonstatistical tests beyond the to conduct such evaluations in the past . existing statistical test to determine whether a health care-related tax falls too disproportionately Allows Temporary “Grandfathering” on Medicaid services . These additional tests would Period effectively prohibit health care-related taxes that The draft regulations include a provision allowing place different tax rates on taxpayers based on states to continue financing structures and their levels of Medicaid (versus non-Medicaid) supplemental payments that do not comply with the activity . In addition, the new federal rule would give regulation for a period of no more than three years the federal government significant discretion— after the regulations are finalized, provided that beyond the tests—to determine whether a federal approval was in place before the regulations proposed health care-related tax places an undue are finalized . We understand that the regulations burden on Medicaid as opposed to non-Medicaid could be finalized this summer, but this is uncertain . services . Notably, the state recently applied for approval of Significantly Increases the most recent iterations of the hospital QAF and Reporting Requirements the MCO tax . The draft regulations would significantly POTENTIAL IMPACTS IN MEDI-CAL expand the amount and types of information the state would be required to provide to the federal State May Be Unable to Continue Various government . These new reporting requirements Financing Mechanisms Without Significant could result in significant new state costs . Changes. If the draft regulations were finalized Requires Provider-Level Reporting on in their current or similar form, many of the Supplemental Payments. The state provides state’s mechanisms for financing Medi-Cal with supplemental payments (that is, payments on top non-General Fund sources would be at risk of of base rates that increase overall compensation) being disallowed . For financing mechanisms that to various Medi-Cal providers, and currently reports are disallowed, the Legislature would need to make information about the aggregate amount of these a choice as to whether to replace the non-General 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Fund sources with General Fund, restructure the billions of dollars if the draft regulations were financing mechanism (where feasible) to make it finalized in their current or similar form and the compliant with the regulations (which would likely state were to maintain Medi-Cal funding at current require either the state or other entities to increase levels . their contribution toward Medi-Cal costs), or reduce Ultimate Impact of Proposed Regulations spending in the Medi-Cal program to account for Highly Uncertain. The provisions of the draft the lost funding . regulations would have significant adverse impacts Ultimately, the draft federal regulations likely for Medicaid programs in many other states . In would have different impacts on different Medi-Cal light of this, there is a strong possibility that some financing mechanisms . Consequently, the entire provisions of the draft regulation could be changed amount of funding from local funds and other before the regulation is finalized . The ultimate state funds displayed in Figure 7 is not necessarily fiscal impact of the regulations on the state will at risk . For some financing mechanisms, such depend on what provisions are in the final rule and as the MCO tax, the provisions of the state’s how the federal government elects to implement tax are clearly incompatible with the provisions them . Additionally, as noted previously, some of the draft rule and being able to continue this financing mechanisms that are ultimately found to financing mechanism in the future is unlikely . In be noncompliant with the final regulations may be other cases, depending on the contents of the grandfathered if federal approval is achieved before final rule, the state might be able to make relatively the rule is finalized . These factors make the ultimate modest adjustments to come into compliance impact of the proposed regulations on the state with the regulations, mitigating the fiscal impact highly uncertain . However, given the potential for on the state . Other items, such as the SNF QAF, a significant fiscal impact on Medi-Cal financing, appear to largely comply with provisions of the we recommend that the Legislature approach draft regulations, so any impact may be limited . proposals to significantly increase ongoing General At this time, we estimate that the state could face Fund expenditures with caution . increased annual General Fund costs in the several UPDATE ON MEDI-CAL PHARMACY SERVICES This section analyzes the Governor’s executive a statewide implication (that is, not Medi-Cal/ order issued in 2019 to transition Medi-Cal’s DHCS-focused)—(1) to create a California generic pharmacy services benefit from managed care to drug label and (2) to establish the Golden State entirely an FFS benefit . (Transitioning benefits from Drug Pricing Schedule . managed care to FFS is referred to as “carving out” a service .) Please see our previous report, BACKGROUND The 2019-20 Budget: Analysis of the Carve Out of Medi-Cal Pharmacy Services From Managed Brand-Name Versus Generic Drugs Care, for more background on and analysis of the pharmacy services carve out . This section also A “brand-name” drug is a drug that is sold under analyzes the two new prescription drug affordability a trademarked name . Brand-name drugs are often proposals by the Governor that primarily impact “innovator” drugs that enjoy patent protection, Medi-Cal or DHCS—(1) to consider international which prohibits nonowners of the patent from prices in the negotiation of drug rebates and (2) to manufacturing and selling the drug without the authorize DHCS to collect rebates on drugs that owner’s consent . As such, brand-name drugs are are not paid for through Medi-Cal . Our forthcoming often single-source drugs, meaning that the patent report will analyze the Governor’s two other major owner has no competitors offering an identical prescription drug affordability proposals that have drug for sale within the drug market . A generic www.lao.ca.gov 15 analysis full gutter drug is a non-brand-name drug that is made with but primarily only for prescription drugs paid for the same chemical combination as a currently or through FFS . Both types of rebates lower the formerly available brand-name drug that has had final cost of prescription drugs . Hereafter, we its patent and exclusivity period expire (usually after refer to prescription drug costs before accounting roughly 15 years of coming to market) . Typically, for rebates as “gross” costs, and costs after generic drugs are multiple-source drugs where accounting for rebates as “net” costs . multiple manufacturers compete to produce and Rebates, Primarily Federally Required sell drugs made of identical chemical combinations . Rebates, Significantly Reduce Net Prescription Because brand-name drugs often do not face Drug Costs in Medi-Cal. On average, the federally any marketplace competition, they tend to be required rebates lower the net cost of prescription significantly more expensive than generic drugs . drugs by between 30 percent and 50 percent . State supplemental rebates reduce the net cost Medi-Cal Pharmacy Services of prescription drugs by a considerably smaller Medi-Cal Covers Pharmacy Services, amount—around 3 percent if only counting the Predominantly Through Managed Care. Under drugs for which the state receives supplemental its pharmacy services benefit, Medi-Cal covers rebates (those generally paid for through FFS) . prescription drugs and other medical products In addition, Medi-Cal managed care plans also obtained from pharmacies for the nearly 13 million generally negotiate supplemental rebates from state residents enrolled in the program . For the vast drug manufacturers . The savings to plans (around majority of Medi-Cal recipients, Medi-Cal pays the 4 percent) are of a similar magnitude as state entire cost of covered drugs and medical products . supplemental rebates and are at least partially As shown in Figure 10, most Medi-Cal pharmacy passed along to the state in the form of lower services utilization and a majority of spending occurs through managed care . Although Medi-Cal managed Figure 10 care plans currently cover and Most Medi-Cal Pharmacy Services pay for most prescription drugs Are Delivered Through Managed Care in Medi-Cal, certain therapeutic Fiscal Year 2017-18 classes of drugs—primarily, expensive classes of drugs, such 100% as those for hemophilia and HIV— are carved out of managed care and instead paid for directly by 80 the state through FFS . DHCS Generally Only Directly Collects Supplemental Rebates 60 in FFS. For most prescription drugs dispensed to Medi-Cal enrollees, the state collects 40 “federally required” rebates from Fee-for-Service drug manufacturers according to formulas prescribed under Managed Care 20 federal law . In addition, DHCS uses the Medi-Cal program’s purchasing power to negotiate state supplemental rebates from Utilization Spending drug manufacturers on top of the federally required rebates, 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET capitated payments to Medi-Cal managed care hopes that the carve out will enable DHCS to use plans . the full negotiating power of the Medi-Cal program In FFS, the State Receives Direct Savings and its nearly 13 million enrollees to negotiate Through the 340B Program… The federal 340B deeper discounts on prescription drugs than program entitles eligible health care providers currently achieved . At the time the executive order (mainly hospitals and clinics that serve large was released, the administration did not release an numbers of low-income patients) to discounts on estimate of the savings that would result from the outpatient prescription drugs (drugs that are not carve out . administered by a physician or within a hospital Key 2019 Developments Related to the setting) . These discounts result in savings that Carve Out. The following bullets describe the two benefit participating health care providers, payers major developments that occurred related to the for health care such as Medi-Cal, and other entities, Medi-Cal pharmacy services carve out following the such as the retail pharmacies that dispense drugs Governor’s executive order . purchased through the 340B program (hereafter • Administration Released a Savings referred to as 340B drugs) . In Medi-Cal FFS, Estimate. In May 2019, DHCS estimated that the state pays for 340B drugs at the purchasing the carve out would, on net, result in ongoing hospital or clinic’s discounted cost, plus a fee to General Fund savings of $393 million on an cover the cost of dispensing the drug . This means annual basis . 340B discounts are passed along to the state in • Contract Awarded to a Company to Help Medi-Cal FFS . Administer the Carved-Out Benefit. In …While In Managed Care, Providers Retain November 2019, DHCS announced the Earnings Through the 340B Program. In Medi-Cal awarding of a contract to an administrative managed care, however, managed care plans pay services organization—Magellan Medicaid negotiated prices for 340B drugs . This allows the Administration, Inc .—to assist the state in health care providers participating in the 340B administering the entire Medi-Cal pharmacy program to keep the difference between (1) their benefit through FFS . Rather than acting as discounted cost and (2) the negotiated prices a full-service pharmacy benefit manager, paid by Medi-Cal managed care plans . Therefore, Magellan primarily will assist the state by 340B savings in managed care generally accrue to paying pharmacy claims and performing hospitals, clinics, and their retail pharmacy partners first-line authorizations for drugs that require rather than being passed along to the state . For administrative review before being dispensed . more information on the interaction between the DHCS, rather than Magellan, will (1) set the 340B program and Medi-Cal, see our report, The state’s preferred drug list (the drugs that will 2018-19 Budget: Analysis of the Governor’s 340B not require administrative review, also known Medi-Cal Proposal . as prior authorization), (2) negotiate discounts Governor’s January 2019 with drug manufacturers, (3) make final determinations related to prior authorizations, Executive Order and (4) continue to perform certain other Carve Out Medi-Cal Pharmacy Services From administrative responsibilities . Managed Care. In early January 2019, Governor Newsom released an executive order that, among GOVERNOR’S PROPOSAL other changes, directed DHCS to carve out the Medi-Cal pharmacy services benefit from managed The Governor’s budget proposes several care and transition it entirely to FFS . Under this changes to facilitate the pharmacy services carve carve out, DHCS would more directly pay for and out . In addition, the Governor proposes two novel manage the pharmacy services utilized by Medi-Cal changes to state law, more loosely related to the beneficiaries, in contrast to paying Medi-Cal carve out, aimed at increasing DHCS’ power to managed care plans to do so . The administration www.lao.ca.gov 17 analysis full gutter obtain deeper discounts on prescription drugs . We these savings, estimating that $43 million in net describe these proposed changes in this section . General Fund savings ($126 million total funds) will materialize in 2020-21 . Given the January 1, Proposals and Update 2021 implementation date, the 2020-21 savings Related to the Carve Out estimate reflects a half-year of the carve out being in effect . Figure 11 summarizes the administration’s Proposes Budget-Related Language to estimate of savings under the carve out . Facilitate Carve Out. The Governor proposes budget-related language aimed at improving the New Proposals experience for Medi-Cal beneficiaries under the pharmacy services carve out . This language would Authorizes Consideration of International make two statutory changes: (1) remove the current Best Prices in Rebate Negotiations With Drug limit in FFS of six prescriptions per Medi-Cal Makers. The Governor proposes budget-related beneficiary and (2) eliminate the state’s authority to legislation to change state law so that DHCS, collect copays for prescription drugs obtained at when negotiating state supplemental rebates from pharmacies . drug manufacturers, may consider the best prices manufacturers make available to international Proposes Supplemental Payment Pool for purchasers and payers . In contrast, today, state Clinics to Mitigate Loss in 340B Earnings. As a statute authorizes DHCS to consider the best consequence of transitioning Medi-Cal pharmacy prices available to domestic purchasers and services from managed care to FFS, participating payers . providers (primarily hospitals and clinics) generally will no longer be able to generate earnings through Authorizes DHCS to Collect Rebates for the 340B program . To mitigate the loss in earnings Drugs Not Paid for by Medi-Cal. The Governor for clinics but not hospitals or hospital-affiliated proposes budget-related legislation that would clinics, the Governor proposes to spend $53 million authorize DHCS to collect rebates for drugs General Fund ($105 million total funds) on an that are paid for by entities other than Medi-Cal . ongoing basis through the creation of a new The intent is to utilize the purchasing power— supplemental payment program . For 2020-21, as well as DHCS’ established infrastructure for the Governor proposes half-year funding of collecting rebates—to obtain deeper discounts on $26 million General Fund ($53 million total funds) . prescriptions drugs . Any rebate revenues collected The administration indicated that the supplemental on behalf of non-Medi-Cal beneficiaries would payments would be made to qualifying clinics be used to offset General Fund expenditures in based on the prescription drug utilization of their patient Figure 11 populations . DHCS Estimate of Savings Under the Budget Assumes $43 Million Medi-Cal Pharmacy Services Carve Out in Associated Net General General Fund (In Millions) Fund Savings in 2020-21, and 2020-21 Ongoing $405 Million Ongoing. The Governor’s budget revises the Direct Pharmacy Costs Change in gross pharmacy spending -$14 -$33 administration’s previous estimate Additional state supplemental rebate revenue -12 -292 of savings under the pharmacy Savings on 340B drugs -31 -74 services carve out . On an ongoing Subtotals (-$57) (-$399) basis, the administration now Lower administrative costs -$14 -$58 estimates $405 million in net 340B clinic supplemental payment program 26 53 General Fund savings under the Grand Totals -$43 -$405 carve out (nearly $1 .2 billion Note: Negative numbers denote savings; positive numbers denote costs. Totals may not add due to total funds) . The administration rounding. DHCS = Department of Health Care Services. assumes a gradual ramp up of 18 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Medi-Cal, and thereby increase the amount of • Significantly Higher Generic Drug General Fund available to the Legislature for any Utilization. Today, around 90 percent of drugs other purpose by the amount of additional rebates paid for by Medi-Cal are generic drugs . In the collected . The proposed budget-related language mid-2000s, around 50 percent of drugs paid would give the administration the authority to for by Medi-Cal were generics . We understand determine which non-Medi-Cal populations would that the state collects no state supplemental be included in the rebate program . rebates on generic drugs . In our view, the administration’s savings estimate does not LAO ASSESSMENT AND account appropriately for the significant shift away from brand-name drugs to generic drugs RECOMMENDATIONS that has occurred over the last 15 years or so . Accordingly, we find that the DHCS estimate Carve Out’s Estimated Savings likely significantly overstates savings under the Are Uncertain carve out . • Higher Federally Required Rebates. For DHCS’ Savings Estimate Is More many expensive prescription drugs, the ACA Comprehensive Than Last Year’s Estimate. in 2010 amended federal law to significantly Last year, DHCS’ estimate of savings under the increase the minimum level of federally carve out did not capture a major component of required rebates that drug manufacturers savings—those related to changes in how the state must pay to Medicaid programs . Given the would reimburse 340B drugs . DHCS’ updated higher level of federally required rebates, estimate captures at least a significant portion, drug manufacturers are unlikely to offer state but not all, of likely savings related to 340B drugs . supplemental rebates as high as they did prior The estimate includes likely savings on 340B to the ACA’s changes to federal law . drugs provided through clinics, but, due to data limitations, excludes likely savings on 340B drugs • Medi-Cal Managed Care Plans Achieve provided through hospitals . 4 Percent Savings. Some, though not all, Medi-Cal managed care plans have significant General Fund Savings Estimate Likely prescription drug purchasing power based Is Overstated Due to Overly Optimistic on their total nationwide membership . For Assumptions Related to Supplemental Rebates. example, Anthem has more than 40 million While DHCS’ updated savings estimate is more members nationwide while Kaiser Health Plan comprehensive than last year’s estimate, it has around 12 million . We understand that likely significantly overstates the savings that the large Medi-Cal plans regularly use the will be generated by the carve out . Under the full negotiating power associated with their carve out, DHCS assumes the state will be total nationwide membership to negotiate able to more than quintuple state supplemental rebates from drug manufacturers . While DHCS rebate revenues—so that they eventually reach may be able to surpass 4 percent in state $292 million in General Fund annually, as shown supplemental rebate savings, we seriously in Figure 11—without facing significantly higher question whether the department could do gross costs for prescription drugs . DHCS believes three times as well as Medi-Cal managed care such savings through state supplemental rebates plans currently do . are achievable since the state was able to collect state supplemental rebates at these levels in the • State Supplemental Rebate Estimate Is mid-2000s, before Medi-Cal had transitioned to a Substantially Higher Than the Percentage program predominantly run through managed care . Amount Collected by Any Other State We believe that collection of rebates at these levels Medicaid Program. We understand that the is overly optimistic absent a significant increase in most any state collects in state supplemental gross pharmacy services costs for the following rebates is 7 percent of gross pharmacy reasons: services spending . DHCS’ estimate assumes www.lao.ca.gov 19 analysis full gutter the state will collect 12 percent of gross opposite of the intended effect and result in net Medi-Cal pharmacy services spending under General Fund costs . This risk primarily stems from the carve out—a rate that is 70 percent higher two possibilities: (1) that DHCS could pursue high than what is achieved by any other state state supplemental rebates without necessarily Medicaid program . While we agree that, given achieving lower net drug costs and (2) that Medi-Cal’s size, the state could collect state the costs of administering the benefit could be supplemental rebates at a higher rate than any significantly higher than currently assumed . other state, a rate that is 70 percent higher …And Without New Reporting Requirements, than any other state appears overly optimistic . Any Savings Will Be Difficult to Track. The actual fiscal impact of the carve out will be difficult to Ultimate Savings Are Highly Uncertain But track through the existing fiscal reports produced Likely Lower Than Governor Estimates… Savings by DHCS . While DHCS’ fiscal reports will provide under the carve out are highly uncertain due to aggregate gross and net spending totals, they data limitations and the challenge of predicting will not display how pharmacy services utilization the outcomes of future negotiations between the has changed—for example, if it has gone up or state, drug manufacturers, and potentially other if utilization of brand-name drugs has increased providers . In our assessment, and as shown in relative to utilization of generic drugs . Moreover, Figure 12, net General Fund savings are more likely due to changes in the complex makeup of the to be around $150 million annually on an ongoing prescription drug market, no one fiscal measure basis, or between 30 percent and 40 percent of will clearly indicate whether the state has achieved what DHCS estimates . Assuming a similar ramp-up savings under the carve out . schedule as DHCS has assumed, we would project Recommend Enacting Reporting related savings of around $15 million in 2020-21, Requirements in Order to Oversee Fiscal Impact as opposed to the $43 million estimated by DHCS . of Pharmacy Services Carve Out. Because the Our projected savings are not precise, and the fiscal impact of the carve out will be difficult to fiscal impact could differ by hundreds of millions assess using existing fiscal reports by DHCS, we of dollars . While we view the carve out as likely recommend that the Legislature establish detailed to generate net General Fund savings, there is reporting requirements for DHCS . Such reports are a tangible risk that the carve out could have the necessary to ensure that the Legislature will know the extent to which the carve out Figure 12 is achieving one of its primary goals—to generate savings in Comparison of DHCS and LAO Estimates of Medi-Cal . Reports should compare Net Savings Under the Medi-Cal Pharmacy Services spending on pharmacy services Carve Out prior to and after the carve out, General Fund (In Millions) and include at least the following DHCS LAO elements: Direct Pharmacy Costs • Estimates of Gross and Net Change in gross pharmacy spending -$33 $60 Pharmacy Services Spending Additional state supplemental rebate revenue -292 -160 Per Drug Prior to and After the Savings on 340B drugs -74 -80 Subtotals (-$399) (-$180) Carve Out. Because changes Lower administrative costs -$58 -$40 in utilization could significantly 340B clinic supplemental payment program 53 53 impact overall Medi-Cal spending Other — 20 on pharmacy services, obtaining Grand Totals -$405 -$150 information on spending per drug Note: Negative numbers denote savings; positive numbers denote costs. Totals may not add due to utilized will be important . rounding. DHCS = Department of Health Care Services and LAO = Legislative Analyst’s Office. 20 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET • Average Net Cost and Utilization Estimates is somewhat uncertain . In addition, existing of Top 25 Most Expensive and Top 25 Most fiscal reports produced by DHCS will not Utilized Drugs. Because developments in the show how much funding has been removed pharmaceutical market will render pharmacy from managed care plans’ capitated rates services spending per drug an imperfect specifically for administering pharmacy estimate of the fiscal impact of the carve out, services . Accordingly, we recommend for a second approach to understanding changes DHCS to annually report (1) the additional in pharmacy services spending would be funding needed to administer the pharmacy useful for understanding the fiscal impact of services carve out and (2) the annualized the carve out . As such, the Legislature could amount of funding removed from Medi-Cal consider requiring DHCS to report net cost managed care plans’ capitated rates and utilization estimates of the top 25 most specifically for administration . expensive and top 25 most utilized drugs in Medi-Cal . Carve Out Implementation Time Line • Generic Versus Brand-Name Drug Is Optimistic Utilization and Spending. Generics are Many systems changes need to be completed to significantly less expensive than brand-name ensure the smooth transition of pharmacy services drugs and generally equivalent in terms of from managed care to FFS . Most critically, DHCS efficacy . In our view, to ensure savings under and its new administrative services contractor the carve out, maintaining high levels of must be ready to receive and pay claims to almost generic drug utilization in Medi-Cal will likely every pharmacy in the state, as well as perform be critical . Accordingly, a key measure of necessary prior authorizations . Delays in DHCS’ or the carve-out’s fiscal performance will be the the administrative services contractor’s readiness— degree to which generic drug utilization levels without a similar delay in the effective date of the remain high . The Legislature could go further carve out—would significantly disrupt Medi-Cal than reporting requirements and also require beneficiaries’ ability to obtain their prescription DHCS to release a communication each time drugs and other medical supplies from pharmacies . it includes a brand-name drug for which there However, delaying the effective date for the carve is a generic equivalent on Medi-Cal’s preferred out comes with significant challenges . For one, drug list, attesting that it has performed funding for pharmacy services is scheduled to an analysis that shows that, on net, the be removed from managed care plans’ capitated brand-name drug will be less expensive than rates starting in January 2021 . In preparation for the generic competitor . the date of transition, managed care plans need to • Changes in 340B Drug Utilization. A have plans for the winding down of their capacity major component of gross savings under to administer the pharmacy services benefit . The the carve out will result from changes extent to which Medi-Cal managed care plans to 340B reimbursement . To obtain a will have the functional capacity to administer more comprehensive picture than the pharmacy services past January 2021 should the administration’s estimate of what 340B state not be ready to implement the carve out is savings under the carve out may be, the unclear . report should assess changes in Medi-Cal Recommend Requiring DHCS to Report on spending on 340B drugs for all providers that Progress to Date. Given the optimistic time line of utilize the 340B program . implementation of the carve out, we recommend • Estimate of Spending on Administration of that the Legislature use the budget process to ask the Pharmacy Services Benefit Prior to and DHCS and stakeholders for information to assess After the Carve Out. In our view, whether the extent to which implementation is on track for proposed funding to administer the carve out the January 1, 2021 effective date of the carve out . will be sufficient for ongoing implementation www.lao.ca.gov 21 analysis full gutter Supplemental Payments for Clinics significantly hurting access in Medi-Cal—appears unlikely . Given somewhat generous reimbursement How Supplemental Payments for Clinics Will for affected clinics and the lack of an explicit Be Structured Still Somewhat Uncertain. We link between the supplemental payments and await more information from the administration on improvements in quality or access, the value of certain specifics of how the supplemental payments providing these payments in the long run is unclear . will be structured . For example, at this point, how Recommend Making Supplemental Payments much each supplemental payment will be and how Temporary or, if Made Ongoing, Tie Them patients’ pharmacy services utilization data will flow to Quality and/or Access Improvements. We from pharmacies to clinics and then to DHCS is recommend that the Legislature only approve the unknown . Governor’s proposed supplemental payments, as Supplemental Payments Will Significantly currently structured, on a limited-term basis to Reduce Net General Fund Savings Under the help clinics adjust to lower revenues . Alternatively, Carve Out. The Governor’s proposal to mitigate if the Legislature wishes to provide supplemental clinics’ financial losses under the changes related payments to clinics on an ongoing basis, we to 340B reimbursement through the creation of a recommend that the Legislature specifically tie supplemental payment program will partially offset the payments to improvements in either access a major component of savings under the carve out . or quality rather than on the prescription drug According to our estimate, this proposal reduces utilization of clinic patients . net General Fund savings under the carve out by around 25 percent . International Best Prices In the Short Run, Backfilling Lost Funding Policy Change Unlikely to Result in Any for Clinics Might Have Merit… We understand Significant Savings. In our view, DHCS currently that clinics have come to rely upon 340B earnings has the authority to open negotiations with drug through Medi-Cal managed care as a major revenue manufacturers by asking for any price they wish . source . Accordingly, eliminating these earnings, Authorizing DHCS to consider international prices without giving clinics some time to adjust to this for drugs will not change this aforementioned loss in earnings, could disrupt clinic operations and authority . As such, we are skeptical that the policy their ability to serve their patients in the short run . change will result in significant new savings in For this reason, temporary supplemental payments Medi-Cal . that backfill clinics’ lost earnings might have merit . No Major Concerns With Adopting Proposed …In the Long Run, What Public Purpose the Statutory Change. While, in our assessment, Supplemental Payments Would Serve Is Unclear. this proposed change to state law will not Neither federal nor state law prescribes how clinics result in much savings for the state, there is no participating in the 340B program can spend their significant cost to making the change . Accordingly, 340B earnings . Accordingly, while clinics likely use the Legislature could consider approving the a portion of these earnings to improve access or Governor’s proposed budget-related language . quality, there is no requirement that they do so . Therefore, backfilling clinics’ lost 340B earnings Collection of Rebates for Drugs Not does not necessarily fulfill a public purpose, Paid for Through Medi-Cal such as improving access or quality . Moreover, most of the clinics that would be eligible for the Policy Change Has Merit Since It Could 340B supplemental payments receive cost-based Significantly Increase the Negotiating Power of reimbursement from Medi-Cal, which generally State Drug Purchasers. We find that expanding ensures that their costs are covered . Since the DHCS’ authority to collect rebates on drugs not reimbursement methodology for clinics already paid for through Medi-Cal has significant merit . covers their costs, and generally is more generous We believe such a change could result in state than what other Medi-Cal providers receive, the savings on prescription drugs, while also potentially possibility that many clinics would close—thereby streamlining state negotiations on drug prices . 22 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Outstanding Questions. At this time, on Recommend Approving in Concept. Given which populations’ behalf DHCS would negotiate the potential of this proposal to generate savings non-Medi-Cal prescription drug rebates is unclear . and streamline negotiations on drug prices, However, we expect that these non-Medi-Cal we recommend approval of the Governor’s populations could include, for example, incarcerated proposal to authorize DHCS to collect rebates individuals, Department of Developmental Services on drugs not paid for through Medi-Cal— consumers, and students in the California State contingent upon the administration answering University system . In addition, the proposed certain outstanding questions during the budget legislation does not require the administration process . We recommend that the Legislature to notify the Legislature of decisions on which ask the administration how it intends to decide populations will be included in the rebate program . on the appropriateness of adding populations to Finally, there is uncertainty as to how adding the rebate program and how the Legislature will populations might affect which drugs are made ultimately be informed of such decisions . available to the various participating populations . FULL-SCOPE EXPANSION FOR SENIORS REGARDLESS OF IMMIGRATION STATUS Background the state expanded full-scope Medi-Cal coverage to otherwise eligible undocumented young adults Prior to 2015, Undocumented Immigrants ages 19 through 25 . Today, undocumented Were Eligible Only for “Restricted-Scope” immigrants ages zero through 25 are eligible for Medi-Cal Coverage. Medi-Cal eligibility depends full-scope Medi-Cal coverage . Undocumented on a number of individual and household adults ages 26 and over currently are only eligible characteristics, including, for example, income, for restricted-scope Medi-Cal coverage . age, and immigration status . Historically, Undocumented Immigrants Continue to income-eligible citizens and immigrants Represent a Significant Portion of the State’s with documented status have qualified for Remaining Uninsured Population. Undocumented comprehensive, or “full-scope,” Medi-Cal coverage, immigrants above age 25 do not qualify for public while otherwise income-eligible undocumented financial assistance to obtain comprehensive immigrants generally have not qualified for health care coverage, either through Medi-Cal full-scope Medi-Cal coverage . Rather, those or through the state’s Health Benefit Exchange who would be eligible for Medi-Cal but for their known as Covered California . As a result, they immigration status were historically eligible only for represent a significant portion of the state’s restricted-scope Medi-Cal coverage, which covers remaining uninsured . Recent estimates indicate emergency- and pregnancy-related health care that there are likely more than 1 .5 million uninsured services . The federal government pays for a portion undocumented immigrants in the state, which of undocumented immigrants’ restricted-scope represents as much as 50 percent of the state’s Medi-Cal services according to standard FMAP remaining uninsured . Figure 13 (see next page) rules . provides a brief overview of where the state Today, Otherwise Eligible Young stands today in terms of Medi-Cal coverage of Undocumented Immigrants Are Eligible for undocumented immigrants, including an estimate Full-Scope Medi-Cal Coverage. In 2016, the of the General Fund cost to expand full-scope state expanded full-scope Medi-Cal coverage to Medi-Cal coverage to otherwise eligible populations otherwise eligible undocumented children from not currently covered or proposed to be covered by birth through age 18 . Then, in the 2019-20 budget, the Governor . www.lao.ca.gov 23 analysis full gutter Figure 13 Ongoing Caseload and Cost of Expanding Full-Scope Medi-Cal Coverage to Otherwise Eligible Undocumented Immigrants General Fund Cost Coverage and Age Groups Caseload (In Millions)a Populations That Currently Have Full-Scope Coverage Otherwise eligible children ages 0-18 130,000 $150 Otherwise eligible adults ages 19-25 105,000 260 Population Proposed to Gain Full-Scope Coverage in 2020-21 Otherwise eligible seniors ages 65+ 27,000 250 Remaining Population Only Eligible for Restricted-Scope Coverage Otherwise eligible adults ages 26-64b 890,000 2,350 All 1,150,000 $3,000 a Cost estimates include those in both Medi-Cal and the In-Home Supportive Services programs. b Should the Legislature approve the Governor’s proposed expansion for undocumented seniors ages 65 and older, the 26-64 year old age-group reflects the caseload and cost of expanding to the remaining uninsured, otherwise eligible undocumented immigrants. Governor’s Proposal Assessment Expand Full-Scope Medi-Cal Coverage to Governor’s Fiscal Estimate Appears Otherwise Eligible Undocumented Seniors Ages Reasonable. Overall, the Governor’s caseload 65 and Older. The Governor’s budget proposes to and cost estimates for the undocumented seniors expand full-scope Medi-Cal coverage to otherwise expansion generally appear reasonable in 2020-21 . income-eligible undocumented seniors 65 and However, the multiyear caseload and cost impact— older . Nearly 27,000 seniors are expected to in IHSS in particular—might turn out to be lower gain full-scope coverage under the expansion . than what is assumed by the administration, The Governor’s budget projects that around particularly given the speed by which the $64 million General Fund ($80 million total funds) administration assumes them to grow over time . will be needed to fund the expansion in 2020-21, That said, we do not recommend any changes to which is proposed to begin halfway through the the Governor’s budget assumptions at this time . fiscal year in January 2021 . Of this General Fund Figure 13 summarizes the Governor’s projected amount, $58 million reflects funding in Medi-Cal ongoing General expenditures for the proposed through DHCS and $6 million reflects funding in undocumented seniors expansion, and compares the In-Home Supportive Services (IHSS) program this year’s proposal to (1) previous expansions for through the Department of Social Services . On an the undocumented population and (2) the caseload ongoing annual basis, the Governor projects this cost of expansion to the remaining undocumented expansion will cost around $320 million General population that could be eligible for full-scope Fund, split close to evenly between Medi-Cal and Medi-Cal coverage . IHSS . Whereas the administration expects the full Medi-Cal costs to materialize within a year of implementation, it expects IHSS costs to gradually grow over several years until reaching around $150 million General Fund in 2022-23 . 24 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET SNF RATE REFORM Background of the rates paid under the cost-based framework described above . SNF Spending Makes Up Significant Share SNFs Also Receive Quality Incentive of Medi-Cal Budget. SNFs provide medical, Payments. In 2010, the Legislature adopted the rehabilitative, and skilled nursing care for those who Quality and Accountability Supplemental Payment cannot receive such care in a home setting . SNF (QASP) program, which provides incentive care is a covered benefit in Medi-Cal and makes payments to SNFs based on their performance on up a large amount—we estimate roughly $5 billion specified performance measures . For 2019-20, (total funds)—of Medi-Cal expenditures . Currently, the total amount of incentive payments is limited there are over 1,000 licensed SNFs in the state . to $88 million . The cost for the supplemental Medi-Cal payments are a significant revenue source payments is shared roughly equally by the federal for SNFs . Statewide, the majority of SNF residents government and state funds, with state funds are covered by Medi-Cal . coming almost entirely from the General Fund . Medi-Cal Rates for SNFs Set Under State Authorization for Rate Framework, Cost-Based Framework. The state’s current QAF, and QASP Expires in August 2020. framework for setting SNF reimbursement When Chapter 875 was enacted, it included a rates initially was put in place through statutory “sunset” date after which the cost-based Chapter 875 of 2004 (AB 1629, Frommer) . The reimbursement methodology and QAF would be framework established by Chapter 875 assigns repealed . The Legislature has since extended each SNF an individual rate each year based on the sunset date multiple times, while making its reported costs from two years prior, with some some changes in the structure of the rate-setting adjustments . First, DHCS adjusts downward methodology and the QAF . Under the most recent reported costs if they exceed statutorily defined extension, the rate framework and the QAF will ceiling amounts . As shown in Figure 14, these sunset in August 2020 . The QASP also sunsets in ceilings are determined relative to reported costs August 2020 . of other SNFs in a “peer group” that the state 2018 State Audit Raised Concerns About SNF established to group similarly situated SNFs . The Quality and QASP’s Effectiveness. In 2018, the cost ceilings are intended to provide an incentive California State Auditor released a report on quality for SNFs to control the growth of their costs relative of care, financial practices, and statewide oversight to other SNFs in the peer group . Next, DHCS caps the growth in the Figure 14 cost-based rates so that overall SNF rates do not increase by more Cost Ceilings for SNF Rates than 3 .62 percent on average . SNF Costs for These Items... Are Limited to... Without this cap, SNF rates Direct care labor 90th percentile of peer group costs typically would grow by more than Indirect care labor 90th percentile of peer group costs 3 .62 percent, so, in practice, SNFs Direct and indirect nonlabor 75th percentile of peer group costs have received an average annual Administration 50th percentile of peer group costs increase of 3 .62 percent in recent Professional liability insurance 75th percentile of peer group costs years . Property taxes No limit Licensing fees No limit General Fund Costs for SNF Caregiver training No limit Care Partially Offset by QAF. QAF No limit Chapter 875 also established a Fair rental valuea No limit QAF that SNFs pay to the state a The state has a separate process for determining fair rental value for SNFs. to offset the General Fund costs SNF = skilled nursing facility and QAF = quality assurance fee. www.lao.ca.gov 25 analysis full gutter 2020 -21 BUDGET of SNFs . Among other things, the report identified a Increases Overall Cap on Annual Rate growing number of findings of quality deficiencies at Growth. In budget documents released January 10, SNFs from 2006 through 2015 and concluded that 2020, the Governor proposed to provide an the QASP program was not as effective as it could aggregate rate increase consistent with the current be due to its relatively limited size and the number 3 .62 percent cap in August 2020, with an additional of facilities that could receive an award . midyear increase of 1 .5 percent effective January SNF Care Currently Is Covered Under 2021 . The administration estimated this midyear Managed Care in Certain Counties. Prior to rate increase would result in General Fund costs 2013, the Medi-Cal SNF benefit was provided as of around $50 million (General Fund) . After the a Medi-Cal FFS benefit in most counties, meaning release of the budget, the administration indicated the state paid SNFs directly based on the rates it has revised its proposal to instead provide a determined under the rate-setting framework midyear increase of 3 .5 percent, but has not described above . Beginning in 2013, the Medi-Cal provided an updated cost estimate . The Governor managed care plans began paying for the SNF further proposes to provide 4 percent increases in benefit in seven of the state’s most populous 2022, 2023, and 2024 (after which the revised rate counties—Los Angeles, Orange, Riverside, San framework would sunset, unless reauthorized) . Bernardino, San Diego, San Mateo, and Santa Extends QASP One Year, Then Eliminates Clara . (These counties are home to more than 50 QASP and Conditions Portion of Rate Increases percent of Medi-Cal beneficiaries .) This shift was on Quality. The Governor proposes to make QASP done as part of the Coordinated Care Initiative, a payments for one additional year in 2021 based at demonstration project aimed at increasing the the same level of total funding ($88 million) . After integration of care for seniors and persons with 2021, the QASP would be eliminated . Instead, disabilities, particularly those dually eligible for beginning in 2022, a portion of each SNF’s Medi-Cal and Medicare . In counties where SNF calculated rate increase under the 4 percent cap care is provided through managed care, managed would be placed in a “quality pool,” from which care plans have the ability to pay a rate other than SNFs could only earn their full rate increase the state FFS rate, but plans generally have paid contingent on meeting quality expectations . The SNFs the FFS rate determined through the rate- portion of rate increases that would be placed in setting methodology described above . However, in the quality pool and the allocation of quality pool some limited cases, plans have agreed with SNFs funds are described in Figure 15 . to pay a higher rate . Governor Proposes Fully Moving SNF Benefit Figure 15 Into Managed Care. As part of MHCA, the New SNF Quality Framework Under Governor has proposed to move SNF care from Governor’s Proposal FFS to managed care statewide . Under the Governor’s proposal, this transition would be Portion of Aggregate Rate Increase Allocated to Quality Pool effective beginning January 2021 . We assess this 2022 40% proposal in a forthcoming report analyzing the 2023 45 administration’s MHCA proposal . 2024 45 Distribution of Quality Pool Overview of the Governor’s Proposal • 75 percent available for SNFs to earn based on performance Governor Proposes Reauthorizing relative to quality benchmarks. Rate-Setting Framework and QAF, With Several • 15 percent allocated to SNFs with significant improvement on Changes. The Governor proposes to extend performance relative to quality benchmarks. • 10 percent to high-performing SNFs. the sunset date for the SNF reimbursement SNF = skilled nursing facility. methodology and QAF to the end of December 2024, with several changes that are described below . 26 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Increases Emphasis on Direct Labor Costs who are dependent on medical technology in Rates. The proposal would allow for higher (typically ventilators) for survival . There currently direct labor costs in the cost-based portion of are only four FS-PSAs in the state . FS-PSAs are the rate-setting methodology by increasing the currently subject to the same QAF as SNFs, but cost ceiling from the 90th percentile to the 95th do not receive rates under the cost-based rate percentile . methodology used for SNFs . The estimated QAF Increases the Number of Peer Groups revenue from these facilities is just over $1 million . for Determining Cost Ceilings. The Governor The Governor proposes to no longer assess the proposes to increase the number of peer groups to QAF on FS-PSAs . determine cost ceilings from the current number of LAO Assessment 7 to 12 . The administration indicates this change is proposed to take into account changes in the In Concept, Integrating Quality Incentives in distribution and operations of SNFs since the peer Rates Could Strengthen Positive Incentives… groups were initially established, to increase the We estimate that the value of the quality pool (the degree to which SNFs within a peer group are portion of rate increases that would be conditional similarly situated . on quality) will not be significantly larger than the Would Set State-Determined Rates as Floor funding currently available for QASP . However, for Managed Care Payments. The Governor the implications of meeting or not meeting quality proposes to specifically require Medi-Cal managed expectations under the Governor’s proposal could care plays to pay SNFs the rate determined under be more enduring than under the QASP . Under the the proposed revised rate-setting framework, QASP, SNFs receive one-time incentive payments unless the managed care plan and the SNF based on their performance, but these payments mutually agree to a different, higher rate . have no impact on future rates . In contrast, under the Governor’s proposal, increased payments Increases Authority to Collect Delinquent QAF. Finally, the Governor proposes changes to based on meeting quality expectations would be increase QAF collections from providers that have built into the rate and form the basis on which not remitted the payment as required . Specifically, future rate increases would be applied . In the same the Governor proposes to: way, SNFs that do not meet quality expectations would have a lower rate on which future rate • Allow DHCS to assess penalties and interest increases would build, perpetuating the impact of for QAF payments that are past due . not meeting quality expectations into the future . • Allow DHCS to require SNFs to provide This feature of the Governor’s proposal increases information about other entities or facilities the incentive for SNFs to meet quality expectations that have certain financial relationships (such relative to the QASP . as being owned or operated by the same …But Might Also Perpetuate Low Quality parent organization) in order for DHCS to by Permanently Reducing Rates. However, at offset Medi-Cal payments to those entities the same time, SNFs that experience lower rate to recover past due QAF payments . (The increases than expected after not meeting quality department already withholds Medi-Cal expectations might struggle to improve in light of payments to SNFs that are past due on QAF the lower funding they receive . Building the loss of obligations .) quality-based payments into the rate could make it • Prohibit organizations that operate SNFs from more difficult for lower-quality facilities to improve purchasing additional facilities until they have over time . paid any past due QAF amounts or set up a Proposal to Use FFS Rates to Incentivize plan with DHCS to repay past due QAF . Quality Improvements Is Somewhat Unconventional. In general, the state delegates Excludes Freestanding Pediatric Subacute to managed care plans the responsibility of Facilities (FS-PSAs) From QAF Requirement. determining provider rates and overseeing the FS-PSAs provide specialized care for children www.lao.ca.gov 27 analysis full gutter quality of providers and determining reimbursement accountable for their performance . However, in rates . In some cases, managed care plans pay recent years, concerns have been raised about the providers based on the rate the provider would effectiveness of the state’s oversight of managed receive in the FFS delivery system, but in other care plans performance . The Governor’s proposal cases managed care plans pay higher rates could provide a more direct way for the state to put in order to guarantee access to services or to in place quality incentives for SNF care, provided provide quality incentives . This leads to providers that most managed care plans pay FFS rates to receiving different reimbursements in different SNFs . parts of the state, based on local circumstances . Rationale for Some Features of Governor’s The Governor’s proposal to establish a complex Proposal Is Unclear. The Governor’s proposal new FFS rate-setting structure for a benefit that reflects several choices on the part of the is proposed to be moved fully into managed care administration that affect how much the reformed diverges from this conceptual framework . rate-setting system would cost the state and what Transition to Managed Care Could Blunt incentives the new system would create for SNFs . Policy’s Impact… The potential effects of the The rationale for some of these choices is not Governor’s proposed changes described earlier clear and more information is needed for legislative depend on SNFs being paid the FFS rate that consideration . We identify three key areas where the new framework would determine for each the rationale for a key policy choice is unclear: facility . Over time, managed care plans may make • First, the administration has not clearly laid arrangements with SNFs to pay different, higher out how the amount of the midyear rate rates than would be paid under FFS . To the extent increase in 2020-21 and the annual increases that managed care plans pay higher rates than are thereafter were chosen or provided a clear determined through the Governor’s proposed rate justification for why this level of increase framework, the impact of the Governor’s proposed should be provided, such as a need to changes could be lessened . For example, if a plan increase rates to improve access to SNF agrees to pay a rate to an SNF that is above the services . SNF’s FFS rate, then the rate paid by the managed • Second, the administration has not clearly laid care plan might not necessarily change in response out why it is proposing to increase the ceiling to changes in the facility’s floor FFS rate due to that on SNFs’ reported costs on direct labor from facility meeting or not meeting quality expectations . the 90th percentile to the 95th percentile . This would break the link between an SNF’s performance on quality measures and the rate • Finally, the administration has not clearly that it receives, eliminating much or all of the rate laid out how it determined amounts related structure’s incentive effect . to the new quality pool . This includes how the portion of the aggregate rate increase …But Could Give State Greater Control Over that would be allocated to the quality pool Quality Incentives, Provided Most Managed was determined . It also includes how the Care Plans Pay FFS Rates. Although the percentage allocations within the quality Governor’s proposal would allow managed care pool—between additional increases to SNFs plans to pay above the FFS rate, in many cases based on their individual performance, they likely would not do so, at least initially . If increases to SNFs with the most improvement managed care plans continue to mostly pay the in their performance, and increases to FFS rate, the new system would retain its incentive SNFs with the highest performance—were effects . This would give the state greater control determined . over quality incentives than it typically would have for a managed care benefit . For other types of Obtaining additional information on the rationale services in managed care, the state’s conceptual for these policy choices will be important as the approach to promoting quality is to measure the Legislature considers the effects that the proposed performance of managed care plans and hold plans 28 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET revised rate-setting system will have on SNFs and • On what basis did the administration choose on the state budget . the amounts of the annual rate increases that Increased Enforcement of QAF Collections would be allocated to the quality pool and Could Offset General Fund Costs, but Impact how the amounts in the quality pool would be Uncertain. As described previously, QAF revenues allocated to SNFs? serve to offset the General Fund costs of SNF Ask Administration to Justify the Use of FFS payments . Increasing the collection of delinquent Rate-Setting Structure to Implement Quality QAF payments that otherwise would not be Incentives for a Managed Care Benefit. Given collected would result in General Fund savings, the potential for the transition to managed care to provided the cost of increased enforcement actions blunt the quality incentive impacts of the proposed would be less than the increased QAF collected . methodology, we recommend that the Legislature However, little information on QAF collections is ask the administration to justify further at budget publicly available, so we are unable to estimate the hearings the use of FFS rates as a tool to promote possible budgetary impact of changes to increase quality for a managed care benefit . Some key QAF collections . questions for the Legislature’s consideration Recommendations include: Withhold Action on Proposal Until More • Under what conditions would managed care Details Are Provided. As of the writing of this plans be expected or allowed to pay rates analysis, many details on the Governor’s proposal above the state FFS rate determined under were yet to be determined, such as which quality the proposed new rate-setting system? measures would be used and the specific ways • How often would managed care plans be SNF performance relative to these measures would expected to pay higher rates? inform quality-based increases in their rates . These • Are there alternative structures for providing details could significantly affect the incentives incentives through managed care that would created for SNFs that are paid the FFS rate . guarantee that SNF compensation would Additionally, the rationale for some policy choices change based on performance relative to the administration made in crafting its proposal quality measures? are not clear . We recommend that the Legislature If Adopted, Require Evaluation of New Rate withhold action on this proposal until more details Structure’s Impact on Quality. If the Governor’s on how the proposal would be structured and why proposal is adopted, we recommend that the the administration made the policy choices it did Legislature require DHCS to evaluate how the new in structuring its proposal . Some key questions for structure affects SNF quality and report back to the legislative consideration include: Legislature . Such an evaluation could examine such • How were the amounts for the proposed questions as: midyear rate increase in 2020-21 and later • How often and in what circumstances do annual rate increases determined? Were these managed care plans pay rates above the state amounts chosen in response to an evaluation FFS rate? of levels of access or quality at SNFs for Medi-Cal beneficiaries? • To what extent did changes in SNF performance on quality measures actually • Why is the administration proposing to translate into the rates that SNFs received increase the cost ceiling for direct care labor from managed care plans? from the 90th percentile to the 95th percentile? What problem is this change intended to • Following implementation, what evidence address? exists on the impact of the new rate-setting framework on SNF quality? www.lao.ca.gov 29 analysis full gutter Ask Administration to Comment on Current (1) the current extent of delinquent SNF payments, Status of QAF Collections and Potential (2) the department’s current approach to collecting Budgetary Impact of Enhanced Collection Tools. delinquent QAF revenues and the effectiveness of We recommend that the Legislature ask DHCS to this approach, and (3) the potential budgetary impact provide additional information at budget hearings on of the proposed new collection tools . COUNTY ADMINISTRATION Background DHCS has budgeted for county administrative expenses by determining a base amount of Counties Administer Medi-Cal Eligibility and funding by reviewing county costs in three main Enrollment Functions. Counties are responsible areas: (1) staff costs, (2) support costs, and for eligibility and enrollment functions in Medi-Cal . (3) staff development costs . The historical DHCS This includes things like determining individuals’ methodology also made adjustments for caseload, initial eligibility to enroll in the program, maintaining an annual cost-of-living adjustment (COLA), accurate records on individuals’ ongoing and program changes . However, the state has eligibility, and administering regular eligibility deviated from this practice in many instances . redeterminations . Counties also are responsible for For example, the annual COLA for the county similar functions in major human services programs, administration budget was suspended most years including California Work Opportunity and from 2008-09 through 2017-18 due in part to state Responsibility to Kids (CalWORKs), CalFresh, and General Fund budget shortfalls . IHSS . Counties primarily rely on a set of information …And County Performance Overseen technology (IT) systems collectively referred to as Through “County Performance Standards.” the county Statewide Automated Welfare System State and federal law require DHCS to oversee the (SAWS) to determine eligibility and maintain counties’ eligibility and enrollment performance and enrollee records . However, eligibility and enrollment state law lays out certain performance standards . processes also require counties to interact with These standards are listed in Figure 16 . Historically, state-operated IT systems including the Medi-Cal DHCS monitored the performance of the Eligibility Data System (MEDS), which is a statewide database that Figure 16 stores information on individuals receiving public benefits, and the County Administration Performance Standards California Healthcare Eligibility, • 90 percent of general applications without applicant errors completed within 45 days. Enrollment, and Retention System • 90 percent of applications based on disability within 90 days, excluding delays by the state. (CalHEERS), which supports • 90 percent of annual redetermination forms mailed to recipient by anniversary date. eligibility and enrollment for health • 90 percent of annual redetermination forms completed within 60 days of the annual benefits through Covered California redetermination date when returned by the recipient complete and in a timely manner. and Medi-Cal . • 90 percent of annual redeterminations not returned timely completed by sending a notice Historically, County of action within 45 days of when the redetermination form was due to the county. Administration Funding • Process 95 percent of discrepancies where county records are not reflected in MEDS to Determined Through Cost- and be effective at the beginning of the next month if received by the 10th working day or by the Caseload-Driven Methodology… end of the month after the next month if received after the 10th working day. State law requires DHCS to • Process 90 percent of MEDS discrepancies that affect an individual’s eligibility or share of cost in Medi-Cal to be effective by the beginning of the next month if received by the maintain a methodology for 10th working day or by the end of the month after the next month if received after the budgeting for county Medi-Cal 10th working day. administrative costs . Historically, MEDS = Medi-Cal Eligibility Data System. 30 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET 25 counties with the largest Medi-Cal enrollment California State Auditor found that unresolved through a process known as County Performance discrepancies between SAWS and MEDS after the Standards . Under this process, counties were ACA expansion led to significant payments being required to submit an annual report to DHCS on made for individuals who were potentially not their performance relative to the standards . DHCS eligible for Medi-Cal, including some instances of also has conducted periodic oversight visits as part payments made to Medi-Cal managed care plans of County Performance Standards . for Medi-Cal beneficiaries who were deceased . Implementation of ACA Significantly DHCS is required to take actions to address the Impacted County Workload. Beginning in January identified deficiencies as a result of these audits . As 2014, the state expanded eligibility for Medi-Cal part of these efforts, the department has engaged to include childless adults that previously had in “fiscal performance reviews” with counties to not been eligible to enroll . The state also began address high-priority deficiencies, such as those implementing new rules for determining Medi-Cal related to SAWS and MEDS discrepancies . eligibility for most enrollees known as “modified Current Law Directs DHCS to Develop adjusted gross income,” or MAGI . These MAGI and Implement New Budgeting Methodology rules are simpler and more streamlined compared for County Administration No Sooner than to preexisting eligibility rules . 2015-16. Current law requires DHCS to develop a As noted earlier in this report, the ACA new methodology for budgeting county Medi-Cal expansion led to a dramatic surge in enrollment in administration that would reflect the impact of Medi-Cal . At the same time, counties experienced changes under the ACA . This requirement initially significant IT-related challenges, particularly called for the new methodology to be developed with the interface between SAWS and the by 2012, but was delayed to accommodate other newly developed CalHEERS . These combined priorities during the ACA implementation period . factors resulted in significantly increased county Currently, the law does not place a deadline on workload . In light of the increased workload, the DHCS to develop the new methodology, but rather state (1) suspended the County Performance specifies that the new methodology be developed Standards oversight process, (2) directed counties no sooner than 2015-16 . to prioritize enrollment of newly eligible enrollees New Budgeting Methodology Has Not Been over other functions such as redetermination and Developed. As part of the 2014-15 budget processing discrepancies between MEDS and package, DHCS received two limited-term positions SAWS, and (3) provided increased funding for and contract funding to prepare for developing a county administration . From 2012-13 to 2017-18, new budgeting methodology . These resources were total funding for county administration in Medi-Cal used to begin the process of developing a new grew from $1 .4 billion ($639 million General methodology, but these plans were put on hold Fund) to $2 .2 billion ($778 million General Fund) . after the state and the counties determined that These augmentations largely were determined there were too many changes being made to county through budget negotiations between the state eligibility and enrollment processes to effectively and counties on a year-by-year basis rather than develop a new methodology at that time . As part of through a clearly defined methodology looking the 2017-18 budget package, these resources were at factors such as caseload or cost per case for extended through June 2020 . After this most recent administration . extension, the department prepared a request 2018 Audit Findings Highlight Administrative for proposal to bring on a contractor to assist Challenges. In 2018, both the California State with gathering information to develop a revised Auditor and the Office of the Inspector General of methodology for Medi-Cal administration, but a the federal Health and Human Services Agency suitable contractor was not identified and plans to released audit reports that identified problems revise the budgeting methodology were again put with county eligibility determinations and other on hold . To date, DHCS has not developed a new administrative processes . In particular, the budgeting methodology . www.lao.ca.gov 31 analysis full gutter In the meantime, the 2018-19 budget reset order to continue this county oversight work and counties’ administrative base funding to be roughly to support the additional steps described below . equivalent to the total amounts provided during the The Governor’s proposal outlines no new plans ACA expansion . The 2018-19 budget also returned for revising the Medi-Cal county administration to the practice of providing an annual COLA . This budgeting methodology . practice was continued in the 2019-20 budget . Plans to Reinstate County Performance These actions, while not establishing a new Standards… As part of the MHCA proposal, methodology per se, did increase counties’ base DHCS announced its intention to reinstate County funding amount . Performance Standards . Under DHCS’ proposed Methodologies to Budget Administrative time line, the department will outline an updated Costs for Other Major Health and Human process for monitoring County Performance Services Programs Recently Revised or Standards during 2020 and would begin evaluating Soon to Be Revised. The 2018-19 budget county performance relative to the standards package included the adoption of revised beginning in January 2021 . budgeting methodology for county administrative …And Implement Additional Accountability costs in CalWORKs and IHSS . As part of his Tools. DHCS further proposes to implement a 2020-21 budget proposal, the Governor stated county performance monitoring dashboard that his intent to put forward a revised budgeting makes information on county performance relative methodology for CalFresh administration as part to County Performance Standards and other of the May Revision . The details of these revisions potential measures yet to be identified public . have varied by program, but each program’s DHCS also proposes to begin using a tiered budgeting methodology relies at least to some corrective action approach with counties that do degree on projections or assumptions about the not meet performance expectations, including cost of performing administrative activities and the corrective action plans, providing technical volume of activities to be performed . assistance, and assessing fiscal penalties on counties that are not responsive to requirements Overview of the Governor’s Proposal for improved performance . (DHCS already has the Similar to Recent Years, Provides COLA ability to require counties to enter into corrective for County Administration Funding. The action plans and assess fiscal penalties .) Governor’s budget proposes $2 .4 billion in total LAO Assessment funds ($640 million General Fund) for county administration of Medi-Cal in 2020-21 . This Counties Continue to Struggle With includes a 3 .25 percent COLA, at a cost of Performance Goals. While efforts have been made $68 million totals funds ($34 million General Fund) . to address audit findings, counties continue to fail Proposes Repurposing Temporary to meet some performance standards identified in Positions Provided to Develop New Budgeting state law . For example, in April 2019, only three Methodology for Ongoing County Oversight counties completed more than 90 percent of annual Workload. As described earlier, DHCS received redeterminations by the month they were due (the temporary positions and funding to develop state requirement) and 11 counties completed less a new budgeting methodology for county than 70 percent by the due month . Medi-Cal administration as required by law . As Increased Oversight and Transparency of plans to develop this new methodology have County Performance Is Warranted. Factors largely been put on hold, these resources have been beyond the state’s and counties’ control during the repurposed to perform county performance period of implementing the ACA made meeting state oversight in connection with addressing recent performance standards very challenging . However, audit findings . The Governor proposes to make the Medi-Cal caseload has since stabilized and these resources—$279,000 total funds ($139,000 many IT challenges that increased county workload General Fund) for two positions—permanent in have been addressed . In light of recent audit 32 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET findings, now is an appropriate time to increase county performance . However, given the focus on county performance . Currently, public breadth of the administration’s proposal information on county performance, particularly on related to county oversight, the Legislature some standards such as resolving discrepancies may wish to comprehensively review between SAWS and MEDS, is limited . Increasing what resources DHCS dedicates to these the transparency of county performance information functions and assess whether overall funding would help the Legislature in its oversight of and staffing for county oversight is at an Medi-Cal operations and could provide additional appropriate level . encouragement to low-performing counties to Current County Administration Budgeting improve . Practice Lacks Strong Analytical Basis. Questions Remain About Administration’s Historically, Medi-Cal county administration Proposed Next Steps. While increased focus budgeting was based on a variety of objective on oversight of county Medi-Cal administration factors, including base county staff costs, is laudable, many questions remain about the support costs, and staff development costs, administration’s proposed approach . with adjustments for changes in program • Which Are the Right Performance caseload, inflation, and program changes . But Measures? The current County Performance over time, the role of these objective factors Standards were developed prior to has diminished . Today’s base amount of funding implementation of the ACA . The Legislature reflects a patchwork of historical amounts and could consider whether these measures one-time augmentations to accommodate the continue to be the most appropriate ACA expansion . As a result, whether the amount measures, or whether other measures would of funding that counties currently receive is be more appropriate in addition to or in place appropriate to cover the costs of performing their of current measures . responsibilities is unclear . Further, changes in county eligibility processes brought about through • What Are the State’s Priorities for the ACA such as the introduction of MAGI rules— Improving County Performance? Given many of which streamlined eligibility requirements— the complexity of Medi-Cal administration mean that previous methods and assumptions used and the number of issues identified in state to budget county administrative funding likely are audits, counties might not be able to improve no longer adequate . their performance on the full array of state standards all at once . The Legislature could Recommendations consider establishing priorities for which areas of performance to focus on first . Withhold Action on Making Temporary Resources Permanent. We recommend that the • Do Counties Have an Appropriate Level Legislature withhold action on the administration’s of Resources Relative to the State’s request to make temporary resources permanent, Expectations? As described below, in light pending additional information from the of changes brought about by the ACA—both administration described below . those that increased workload and those that streamlined processes—whether the amount Require DHCS and Counties to Update of funding provided to counties is at an Legislature at Budget Hearings on Current appropriate level to allow counties to meet the Performance and Plans for Future Changes. state’s performance expectations is unclear . We recommend that the Legislature direct DHCS and counties to update the Legislature at budget • Does DHCS Have an Appropriate Level of hearings on current county performance and Resources to Perform Effective County plans for changes to state oversight in the coming Oversight? The Governor’s proposal requests months . Specifically, we suggest that DHCS and the extension of limited-term funding for two counties be asked to comment on: positions to help support state oversight of www.lao.ca.gov 33 analysis full gutter • The status of state and county efforts to to the budgeting methodology for county address recent audit findings . Medi-Cal administration . • The administration’s thinking in regards Adopt a Plan for Revising Medi-Cal County to timing of required revisions to the Administration Budgeting Methodology. county Medi-Cal administration budgeting Given the lack of a strong analytical basis for the methodology . state’s current practices for budgeting county • How county spending patterns have changed administrative funding, we recommend the in recent years as the caseload has stabilized Legislature take steps to move toward a more and some IT-related challenges have been objective budgeting approach . In our view, the resolved . current statutory requirement that DHCS develop • Which additional performance measures a new budgeting methodology no sooner than should be considered . in 2015-16 provides too much discretion to the • How planned and in-process changes to administration and limits legislative oversight of this major IT systems used in eligibility and process . We recommend that the Legislature adopt enrollment functions affect plans for increased language to establish, in consultation with DHCS county oversight and potential future changes and counties, a specific time frame for developing a new budgetary methodology in the coming years . PROPOSAL TO END DENTAL MANAGED CARE IN THE TWO PILOT COUNTIES Background care plans more broadly, the state makes per member per month payments to dental managed Medi-Cal Covers Dental Services, care plans that are intended to cover the average Predominantly on an FFS Basis. Dental services cost of plan members’ dental services utilization . are a covered benefit under Medi-Cal . The vast Such payments—also known as capitated majority of Medi-Cal dental services are paid for payments—also are intended to cover dental on an FFS basis . As a predominantly FFS benefit, managed care plans’ costs of administering DHCS, with the help of an administrative services the benefit . Currently, six dental managed care organization, arranges and directly pays for the plans are in operation across Los Angeles and dental services utilized by Medi-Cal members . Sacramento Counties, collectively covering about Accordingly, DHCS sets Medi-Cal dental services 800,000 Medi-Cal beneficiaries . In Sacramento reimbursement rates and maintains a “network” of County, enrollment in a dental managed care plan enrolled providers . is mandatory for Medi-Cal beneficiaries, while in Dental Managed Care Currently Operates in Los Angeles County, Medi-Cal beneficiaries have Only Los Angeles and Sacramento Counties. the option of obtaining their Medi-Cal benefits In 1992, the Legislature authorized the creation either through dental managed care or FFS . In Los of a pilot program in two counties—Los Angeles Angeles County, about 10 percent of Medi-Cal and Sacramento—implementing dental managed enrollees have opted to obtain their dental benefits care . Under dental managed care, private specialty through dental managed care . managed care plans arrange and pay for dental services in place of DHCS . As specialty plans, Governor’s Proposal dental managed care plans are separate from End Dental Managed Care and Return the Medi-Cal managed care plans through which to FFS in Pilot Counties. The Governor has physical health care coverage is predominantly proposed budget-related legislation that would end provided in Medi-Cal . Similar to Medi-Cal managed dental managed care in the pilot counties, and, 34 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET instead, have all Medi-Cal beneficiaries statewide enroll, with the vast majority electing to obtain access dental services exclusively through FFS . their dental benefits through FFS . Given the lower The administration cites ongoing performance utilization, higher costs, and low participation challenges among dental managed care plans where it is voluntary, dental managed care does not as the rationale for the proposal . In addition, the appear to be fulfilling the pilot’s legislative intent of proposal is consistent with the broader MHCA achieving savings while ensuring access and quality . reforms insofar as it standardizes service delivery Recommendation on a statewide basis . Transition From Dental Managed Care to Use Budget Process to Learn More About FFS Is Intended to Be Cost Neutral. While the the Potential Trade-Offs of Transitioning to budget assumes nearly $9 million in General Fund FFS. We have some outstanding questions savings associated with the transition from dental related to the Governor’s proposal to end dental managed care to FFS in 2020-21, these savings managed care . First, we have yet to see a detailed arise from the timing of payments rather than a transition plan . Therefore, to ensure appropriate projection of ongoing savings under statewide legislative oversight over the transition from dental dental FFS . On an ongoing basis, the administration managed care to FFS, we recommend using the assumes that the transition to FFS will be cost budget process to ask DHCS to share a detailed neutral due to expected higher utilization of dental transition plan, including what efforts are being services following the transition offsetting higher made to prevent disruptions in services for current administrative costs under dental managed care . dental managed care enrollees . In addition, we Proposal Does Not Affect San Mateo Health recommend that the Legislature ask DHCS and the Plan Dental Integration Pilot. In 2018-19, the dental managed care plans to share if there has Legislature approved budget-related legislation been further improvement in dental managed care establishing the San Mateo Health Plan Dental plan performance over the last year . Integration Pilot, whereby San Mateo’s Medi-Cal Approve Governor’s Proposal Assuming No managed care plan would cover its beneficiaries’ Clear Information on Improved Dental Managed dental services in addition to physical health Care Plan Performance. If information from DHCS services . The Governor’s proposal to end dental and the dental managed care plans gathered managed care does not affect the San Mateo during the budget process clearly shows that dental integration pilot . dental managed care is on track to achieve at least comparable outcomes with dental FFS in terms Assessment of access and cost-effectiveness, the Legislature Dental Managed Care Pilot Has Not Achieved could consider deferring action for a limited period Its Objectives. Dental managed care has faced of time on a decision about the future of dental a number of challenges over the course of its managed care in the pilot counties . This would give implementation, most notably related to low the Legislature additional time to assess dental utilization of dental services by plan members . In managed care plan performance to determine 2018-19, the last year for which data are available whether the legislative intent of achieving savings on DHCS’ website, utilization rates of dental while ensuring access and quality is being achieved . services are around 15 percent lower in dental If no new information comes to light during the managed care compared to dental FFS . Preventive budget process that clearly shows comparability in dental service utilization rates in dental managed outcomes between dental managed care and FFS, care are even lower relative to dental FFS . Despite we recommend approval of the Governor’s proposal lower utilization, per capita Medi-Cal spending is to end the dental managed care pilot, along with around 50 percent higher in dental managed care continued legislative oversight of the transition to compared to dental FFS . Finally, in Los Angeles, FFS to ensure successful implementation . where dental managed care is optional, a small percentage of Medi-Cal enrollees have opted to www.lao.ca.gov 35 analysis full gutter 36 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET SUMMARY OF RECOMMENDATIONS Issue Governor’s Proposal LAO Recommendations Medi-Cal pharmacy services Carve pharmacy services out of • Enact reporting requirements to ensure managed care and transition to carve out is generating state savings. Use fee-for-service. budget process to oversee implementation. 340B clinic supplemental $26 million in 2020-21, • Make supplemental payments temporary or, payments $53 million ongoing to fund if made ongoing, tie them to quality and/or supplemental payments for access improvements. clinics participating in the 340B program. Non-Medi-Cal prescription Authorize DHCS to collect • Approve in concept. Use budget process to drug rebates rebates on prescription drugs learn more about administration’s intent. not paid for by Medi-Cal. SNF rate reform Reauthorize SNF rate-setting • Withhold action until more details are framework, with various provided on how administration developed changes to increase the role parameters of the proposal. of quality in the rates. Also • Ask the administration to justify the use of increase authority to collect a fee-for-service rate-setting structure for a delinquent QAF. managed care benefit. • If adopted, require an evaluation of the new rate structure’s impact on quality. • Ask the administration to comment on the current status of QAF collections and the potential budgetary impact of enhanced collection tools. County administration Provide a COLA for county • Withhold action on making temporary administration. Permanently resources permanent pending additional extend temporary resources information from the administration on the for two positions related current status of county performance and the to oversight of county administration’s near-term plans for county administration. Reinstate and oversight. build on county performance • Adopt a plan for revising Medi-Cal county measurement programs. administration budgeting methodology. Medi-Cal dental services End dental managed care pilots • Approve proposal assuming no new and transition all Medi-Cal information obtained during budget dental services to fee-for- process shows clear plan performance service. improvements. DHCS = Department of Health Care Services; SNF = skilled nursing facility; QAF = quality assurance fee; and COLA = cost-of-living adjustment. www.lao.ca.gov 37 analysis full gutter 38 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET www.lao.ca.gov 39 analysis full gutter LAO PUBLICATIONS This report was prepared by Ben Johnson and Ryan Woolsey, with contributions from Corey Hashida, and reviewed by Mark C. Newton and Carolyn Chu. 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. 40 LEGISLATIVE ANALYST’S OFFICE