The 2021-22 Budget: Medi-Cal Fiscal Outlook

analysis full gutter The 2021-22 Budget: Medi-Cal Fiscal Outlook November 2020 Background. Medi-Cal, the state’s Medicaid 2021-22 Fiscal Outlook main forecast, we assume program, provides health care coverage to about that economic conditions in the state gradually 13 million of the state’s low-income residents. will improve over the next several years. We also Medi-Cal costs generally are shared between the anticipate public health to improve following the federal and state governments. In a typical year, the expected release of an effective COVID-19 vaccine General Fund covers a little more than 20 percent in early 2021 and vaccination of Californians over of total Medi-Cal costs, with federal funds and the proceeding months. Nevertheless, predicting other state and local funds respectively covering economic and public health trends under the the remaining 65 percent and 15 percent of total COVID-19 pandemic is subject to extraordinary costs. In this web post, we describe the major uncertainty. Should the improvement in these factors that we expect to drive changes in General conditions prove slower, faster, or more volatile Fund spending in Medi-Cal over the near term—in than assumed in our outlook, General Fund 2020-21 and 2021-22—and over the longer term spending in Medi-Cal could be substantially higher, through 2024-25. We also describe a number of lower, or more volatile than we project. key assumptions that we made in our spending Fiscal Outlook Assumes Current Law and projections. Policy, Including at the Federal Level. Our Main Fiscal Outlook Forecast Assumes outlook assumes current laws and policies remain Gradually Improving Public Health and in place throughout the outlook window (through Economic Conditions. The coronavirus disease 2024-25). This includes federal law and policy. 2019 (COVID-19) has brought a severe disruption Accordingly, we assume no changes to the Patient to the California economy and the health of its Protection and Affordable Care Act (ACA) that residents. Nevertheless, while there remains affect Medi-Cal costs. Nor do we assume changes considerable risk and uncertainty going forward, in federal Medicaid financing regulations, such there are signs of improvement on both the as those that were proposed under the Medicaid economic and public health fronts (in the form of Fiscal Accountability Regulation, which federal potentially safe and effective vaccines). For our officials announced was no longer being pursued. Near-Term Outlook SUMMARY downward adjustment largely reflects our revised projections showing lower caseload growth due to Significantly Lower Estimated General Fund COVID-19 than was assumed in the budget act. Costs in 2020-21. We estimate that the state Our downward caseload adjustment applies to will spend about $22.7 billion from the General 2019-20 as well, resulting in additional estimated Fund on Medi-Cal in 2020-21, a $920 million savings of $320 million General Fund. (4 percent) reduction relative to what was assumed Sharp Projected Upturn in General in the 2020-21 Budget Act (hereafter referred to Fund Costs in 2021-22. From our revised as the “budget act”). As we describe below, this 2021-22 LAO Budget Series 1 analysis full gutter 2020-21 estimate, we project General Fund are driven by caseload and per-enrollee costs. spending in Medi-Cal will increase by about In 2020-21, we estimate savings of $980 million $3.2 billion (10 percent) in 2021-22 to a total of General Fund relative to the budget act’s $25.9 billion. This reflects the net effect of several assumptions of underlying Medi-Cal program costs. different factors that are displayed in Figure 1. The majority of these savings reflect our updated Through the remainder of this section, we describe projections of Medi-Cal caseload (we project that the major factors that contribute to adjustments in caseload in 2020-21 will be significantly lower than both 2020-21 and 2021-22. that assumed in the budget act), while a relatively small portion of these savings are attributable to UNDERLYING NET GROWTH IN estimated declines in service utilization during the COVID-19 pandemic. In 2021-22, we project a PROGRAM COSTS significant upturn in underlying program costs of Summary. This section describes our projections $2.2 billion in General Fund, driven by significant of underlying program costs in Medi-Cal, which projected growth in the Medi-Cal caseload, general Figure 1 Major Drivers of Projected Net Increase in Medi-Cal Spending Through 2021-22 General Fund (In Billions) 2020-21 Budget Act Estimate $23.6 Billion Lower Than Anticipated -$0.87 Billion Caseload Growth Lower Net Costs -$0.11 Billion Due to COVID-19a Assorted Other Changes +$60 Billion 2020-21 LAO Estimate $22.7 Billion Projected +$1.2 Billion Caseload Growth Assumed Expiration of +$0.81 Billion Enhanced Federal Funding Underlying Per-Enrollee +$0.64 Billion Cost Growth +$0.39 Higher Net Costs Related to COVID-19a Billion +$0.17 Assorted Other Changes Billion 2021-22 LAO Projection $25.9 Billion 22 23 24 25 $26 a Net costs related to COVID-19 include savings from reduced service utilization under the pandemic and anticipated costs for a COVID-19 vaccine. COVID-19 = coronavirus disease 2019. 2021-22 LAO Budget Series 2 analysis full gutter medical inflation, anticipated new costs related under standard Medi-Cal eligibility rules, to a COVID-19 vaccine, and a projected return to would be found to have become ineligible normal levels of service utilization as the pandemic and therefore dis-enrolled from the program declines in severity. (for example, because they no longer meet the program’s low-income requirements), Caseload now may remain enrolled in Medi-Cal through Summary. We project that average monthly the emergency period. The budget act Medi-Cal caseload will be 13.8 million enrollees assumed Medi-Cal caseload would increase in 2020-21, which is 9 percent higher than the significantly—on net—from what it otherwise revised estimate for 2019-20 caseload. Between would be if eligibility terminations were not 2020-21 and 2021-22, we project the caseload to suspended. grow from 13.8 million enrollees to 14.9 million—an Caseload Growth to Date Is Significantly increase of 8 percent, or 1.1 million beneficiaries. Below Initial Expectations… Preliminary data As we describe below, these projections generate show that Medi-Cal caseload growth to date has significant General Fund savings in 2020-21 relative been significantly slower than what was assumed to the budget act, and at the same time result in in the budget act. Rather than growing by around significant year-over-year General Fund cost growth 2 million enrollees between March 2020 and July from 2020-21 to 2021-22. 2020 as assumed in the budget act, caseload Budget Act Assumed Sharply Rising Caseload has grown only by around 500,000 enrollees Due to COVID-19. The budget act assumed that over this same period. Moreover, the budget the deteriorating economic conditions caused act assumed that (1) caseload growth mostly by the COVID-19 crisis would cause a surge in would be concentrated in the families caseload the Medi-Cal caseload. From a low of around category (which includes parents and children), 12.5 million beneficiaries in March 2020, the (2) that growth within the ACA optional expansion budget act projected Medi-Cal caseload would (which primarily includes childless adults) would swell to roughly 14.5 million enrollees by July 2020, be relatively slow, and (3) that growth among increasing General Fund costs above what they seniors and persons with disabilities would be fairly otherwise would be by about $3 billion across robust. In contrast, the preliminary data show that 2019-20 and 2020-21. This breakneck projected caseload growth is fairly evenly split between just growth in the Medi-Cal caseload was assumed to two caseload categories: families and the ACA be due to two primary factors: optional expansion. While there has been some growth among seniors and persons with disabilities • Unprecedented Employment Losses. The to date, this growth has been significantly less than early months of the COVID-19 pandemic was assumed in the budget act. As we describe brought unprecedented declines in below, enrollees in the ACA optional expansion employment in California. The budget and families caseload categories tend to have act assumed that individuals and families significantly lower General Fund costs than seniors experiencing job losses or otherwise having and persons with disabilities. As a result, the their incomes fall under COVID-19 would join greater concentration of caseload growth in the the Medi-Cal program in huge numbers. Most less costly caseload categories than was assumed of the caseload growth assumed in the budget in the budget act contributes to the General act was attributed to this factor. Fund savings we estimate for 2020-21. Overall, • Suspension of Eligibility Terminations. caseload growth to date appears largely due to the Federal COVID-19-related legislation suspension of eligibility terminations. Relatively few effectively requires the state to suspend new enrollees appear to have joined the program eligibility terminations in Medi-Cal for the even as unemployment reached record numbers. duration of the national COVID-19 public …Saving an Estimated $1.2 Billion General health emergency. As a result, enrollees who, Fund Across 2019-20 and 2020-21. We estimate 2021-22 LAO Budget Series 3 analysis full gutter that our revised caseload projections save delay in enrollment could last several months $320 million General Fund in 2019-20 and nearly for some beneficiaries. As a result, we $870 million General Fund in 2020-21 relative assume enrollment will accelerate slightly to budget act assumptions. (These estimated as individuals who have become eligible savings arise despite our projections of significant for Medi-Cal as a result of the deteriorating year-over-year caseload growth in 2020-21 under economic conditions—but have not yet the pandemic. From 2019-20 to 2020-21, we enrolled in Medi-Cal—do so in the near future. project that average monthly caseload will grow by Caseload Projections Are Subject to 9 percent from over 12.6 million enrollees to nearly Significant Uncertainty. Our caseload projections 13.8 million enrollees. This significant projected for the outlook period through 2024-25 are caseload growth raises estimated General Fund displayed later in Figure 3 under the “Longer-Term costs in 2020-21 by $1.4 billion above what they Outlook” section of this post. Importantly, our would be absent the COVID-19 pandemic.) caseload projections are based on several highly Nevertheless, We Project Substantial uncertain assumptions. These include, but are Caseload Growth Until Midway Through not limited to, the severity and duration of the 2021-22. We project average monthly Medi-Cal COVID-19 public health emergency, the severity caseload to increase by another nearly 1.1 million and duration of the economic crisis, which enrollees between 2020-21 and 2021-22, caseload categories experience significant growth, reaching 14.9 million enrollees in 2021-22. This and the degree to which the suspension of eligibility year-over-year growth in the caseload is projected terminations prevents enrollees from leaving the to result in higher General Fund costs of $1.2 billion program who otherwise would do so. A number of in 2021-22 compared to 2020-21. We attribute this factors, including a delay in the deployment of an caseload growth to two factors: effective COVID-19 vaccine or worsening economic • Suspension of Eligibility Terminations conditions, could substantially alter the basis Expected to Have a Large Impact on for these assumptions. Should the future unfold Medi-Cal Caseload Growth on Net. Our significantly differently than we have assumed, projections assume positive caseload caseload could be significantly higher or lower growth for the duration of the national than projected, with potentially major General Fund COVID-19 public health emergency—the consequences. period in which eligibility terminations in Underlying Per-Enrollee Costs Medi-Cal are expected to remain suspended. Given our assumption that the national Limited Underlying Per-Enrollee Cost Growth COVID-19 public health emergency will end Going Into 2021-22. Underlying per-enrollee by December 2021, we expect the Medi-Cal costs—from a General Fund perspective— caseload to grow through the end of calendar are driven by three major factors: (1) medical year 2021 before entering a period of inflation, (2) service utilization, and (3) the federal consistent decline that begins in early 2022. government’s traditional share of cost. (The • Economic Conditions Expected to Have federal government’s share of cost is critical a Delayed Impact on Medi-Cal Caseload. since the federal government typically will pay We assume high unemployment and 50 percent, around 65 percent, or 90 percent of adverse economic conditions will persist total costs depending on the caseload category through 2021-22. Individuals who became that a beneficiary is enrolled in.) We project that unemployed or experienced a persistent underlying per-enrollee costs—only counting the decline in their household incomes in portion that falls on the General Fund—will grow by 2019-20 may, for example, wait until they less than 1 percent between 2020-21 and 2021-22. plan to begin utilizing health care services This limited growth in underlying per-enrollee costs before enrolling in Medi-Cal. The resulting is due to our projections that the influx of additional enrollees in the program under the pandemic will, 2021-22 LAO Budget Series 4 analysis full gutter on average, be less costly than current enrollees. • Additional General Fund Savings in 2020-21 This is for two reasons: From Foregone Routine Care Utilization. The COVID-19 pandemic has caused a major • We project most of the growth in enrollment disruption in routine medical care utilization, to be concentrated in the families and ACA which we expect to result in General Fund optional expansion caseload categories. From savings in Medi-Cal. The budget act assumed a total fund and General Fund perspective, that COVID-19 would reduce Medi-Cal service these groups tend to be less expensive utilization in the final months of 2019-20, but than enrollees in Medi-Cal’s other major not at all in 2020-21. We assume that some caseload category—seniors and persons with reductions in Medi-Cal service utilization disabilities—since they tend to utilize fewer persist through much of 2020-21, with services. utilization gradually returning to normal, • We project the fastest growth in the ACA pre-pandemic levels by the start of 2021-22. optional expansion caseload category, for These projected declines in service utilization which the federal government pays 90 percent result in additional estimated General of cost. This generally results in the General Fund savings of roughly $110 million in Fund only bearing 10 percent of the cost 2020-21 relative to budget act assumptions. of coverage for ACA optional expansion • General Fund Costs in 2021-22 to enrollees. In contrast, the General Fund Vaccinate Medi-Cal Members Against generally covers 50 percent of costs for most COVID-19. We assume that a COVID-19 other Medi-Cal enrollees. We project that vaccine will become available to Medi-Cal growth will be fastest for the ACA optional beneficiaries in early 2021 and that millions of expansion for two main reasons. First, Medi-Cal beneficiaries will receive vaccinations empirically, to date, under the pandemic from through 2021-22 and beyond. General Fund March 2020 to July 2020, the ACA optional is assumed to be needed both to pay for expansion caseload category has grown the vaccine itself and to pay health care at a rate that is 60 percent higher than the professionals for administering the vaccine. caseload as a whole. Second, we believe We project COVID-19 vaccination costs to be enrollment in this caseload category is likely minimal in 2020-21 and, instead, to peak in to be more responsive than other caseload 2021-22 at around $140 million General Fund. categories, such as seniors and persons (Beyond 2021-22, we assume General Fund with disabilities, to changes in economic costs in the tens of millions of dollars annually conditions. Accordingly, we believe individuals to continue to vaccinate Medi-Cal enrollees in the ACA optional expansion caseload from COVID-19.) Significant uncertainty category would be more likely to enroll given surrounds the availability, cost, and take-up recent unemployment losses. rates for one or more COVID-19 vaccines. Costs and Savings Related to COVID-19 Accordingly, General Fund costs to vaccinate Affect Per-Enrollee Costs. As described the Medi-Cal population ultimately could differ below, we expect costs and savings related to significantly from our projections. COVID-19 to influence underlying per-enrollee costs over the near term. These projected costs and savings are subject to considerable uncertainty ASSUME ENHANCED FEDERAL as they closely depend on our assumptions FUNDING EXPIRES IN DECEMBER around when a COVID-19 vaccine becomes widely 2021 available and how quickly public health conditions under COVID-19 continue to improve. These Enhanced Federal Funding for Medi-Cal COVID-19-related impacts are as follows: Results in Substantial General Fund Savings. To relieve state budgetary pressure caused by 2021-22 LAO Budget Series 5 analysis full gutter the impacts of COVID-19 on state tax revenues emergency persist six months longer than we have and Medicaid expenditures, Congress enacted assumed, we estimate the state would benefit from legislation that provides for a temporary more than $1 billion in additional General Fund 6.2 percentage point increase in the federal savings in Medi-Cal in 2021-22 than is assumed government’s share of cost for state Medicaid in our outlook. However, were the emergency to programs. Under this legislation, beginning January expire six months sooner than we assume, the 1, 2020 and ending the first quarter in which state would face over $1 billion in higher General the national COVID-19 public health emergency Fund costs in Medi-Cal in 2021-22. is no longer in effect, the federal share of cost for Medi-Cal services generally increases from ASSUMES SUSPENSIONS DO NOT 50 percent to 56.2 percent. Because Medicaid is TAKE EFFECT an entitlement program, the amount of additional federal funding due to the enhancement is not a Similar to action taken in 2019-20, the budget fixed amount but instead varies based on overall act makes several ongoing Medi-Cal spending Medi-Cal program costs. By offsetting General items subject to potential suspension in 2021-22. Fund costs in Medi-Cal, we estimate that the In these cases, statute directs the Department of enhanced federal share of cost results in General Finance (DOF) to calculate whether General Fund Fund savings of $2.4 billion in 2020-21 and revenues will exceed General Fund expenditures— $1.6 billion in 2021-22. (These amounts do not without suspensions—in 2021-22 and 2022-23. If include General Fund savings from the enhanced DOF determines revenues will exceed expenditures, federal share of cost that are projected to accrue in then the expenditures will continue and not be the In-Home Supportive Services and Department suspended. Otherwise, the expenditures are of Developmental Services programs.) automatically and indefinitely suspended. The Assumed Expiration of Enhanced Federal Medi-Cal items subject to suspension are (1) most Funding in December 2021 Raises General Fund Proposition 56-funded provider payment increases, Costs Beginning in 2021-22. Coinciding with our (2) the extension of coverage for postpartum assumed expiration of the national COVID-19 public mental health, (3) the restoration of previously health emergency, we assume that enhanced eliminated optional benefits, and (4) the expansion federal funding under the pandemic will expire in of screening and intervention to drugs other than December 2021. This has the effect of increasing alcohol. If the Proposition 56-funded provider General Fund costs by $800 million between payments were suspended, most Proposition 56 2020-21 and 2021-22. funding in Medi-Cal would be used to offset Major Fiscal Implications if Enhanced General Fund spending on cost growth in Medi-Cal. Federal Funding Expires Sooner or Later Than The potential suspension of the other three items We Assume. Our assumed expiration date for would result in direct General fund savings. The enhanced federal funding is highly uncertain. When outlook assumes that the suspensions do not the expiration occurs ultimately will depend on take effect. However, if the suspensions were public health conditions around the country, as activated, we project that General Fund spending well as other national considerations. For example, in Medi-Cal would be lower than it would otherwise should the national COVID-19 public health be by around $900 million annually in 2021-22 and beyond. Longer-Term Outlook Annual General Fund Costs Grow by spending in Medi-Cal will grow at an annualized $8.6 Billion Between 2020-21 and 2024-25. As rate of over 8 percent from around $22.7 billion in shown in Figure 2, we project that General Fund 2020-21 to $31.3 billion at the end of our outlook 2021-22 LAO Budget Series 6 analysis full gutter window in 2024-25. Previously, we described the will decline by 5 percent annually from a high of major drivers of General Fund cost growth from 14.8 million in 2021-22 to 12.6 million in 2024-25. 2020-21 to 2021-22. This section describes the These projected caseload declines are estimated to major factors that account for the $5.4 billion in generate more than $600 million in annual General projected growth in annual General Fund costs Fund savings each fiscal year from 2021-22 to between 2021-22 and 2024-25. 2024-25. Our caseload projections for the outlook window, broken down by major caseload SIGNIFICANT UNDERLYING NET population category, are displayed in Figure 3. COST GROWTH Project Significant Per-Enrollee Cost Growth. Consistent with our expectation that new enrollees Projected Caseload Declines Bring Savings. in Medi-Cal during challenging economic times We project that caseload will peak midway through will have, on average, lower per-enrollee costs 2021-22 and decline thereafter, reflecting the than beneficiaries with longstanding ties to the resumption of eligibility terminations and improving program, we expect those who leave the program economic conditions. This results in significant during periods of economic expansion to have year-over-year General Fund savings from lower average per-enrollee costs. This movement 2022-23 to 2024-25. Overall, we project caseload of less costly beneficiaries out of the program Figure 2 General Fund Spending in Medi-Cal Projected to Grow Significantly, in Part Due to COVID-19 LAO Fiscal Outlook (In Billions) $35 Pre-COVID-19 Post-COVID-19 Average annual cost growth: $800 million Average annual projected cost growth: $2 billion 30 25 20 15 10 5 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 COVID-19 = coronavirus disease 2019. 2021-22 LAO Budget Series 7 analysis full gutter has the effect of significantly increasing average from projected declines in caseload (annually per-enrollee cost growth in Medi-Cal starting in around $600 million General Fund). As such, we 2022. While we would expect average per-enrollee project annual underlying net cost growth of around cost growth of 3 percent to 4 percent annually in $800 million over the longer term from 2021-22 to periods where the caseload is stable, we project 2024-25. average per-enrollee cost growth of more than 5 percent annually through the period of projected ASSUME ENHANCED FEDERAL caseload declines, from 2021-22 through 2024-25. FUNDING HAS FULLY EXPIRED In General Fund terms, this adds around $1.4 billion annually to Medi-Cal costs. As previously noted, we assume that the Net Increase in Underlying Costs. Over the enhanced federal funding under the national longer term, robust projected average per-enrollee COVID-19 public health emergency will expire at cost growth (annually around $1.4 billion General the end of December 2021, or halfway through Fund) is expected to more than offset the savings 2021-22. Accordingly, by 2022-23, we expect Figure 3 Medi-Cal Caseload Projected to Grow Significantly Through 2021-22 and Decline Thereafter LAO Projections by Caseload Category (In Millions) Total Families 16 9 14 8 12 7 10 6 8 5 2012-13 14-15 16-17 18-19 20-21 22-23 24-25 2012-13 14-15 16-17 18-19 20-21 22-23 24-25 Actual Projected ACA Optional Expansion SPDs 5 2.4 4 2.2 3 2 2.0 1 1.8 2012-13 14-15 16-17 18-19 20-21 22-23 24-25 2012-13 14-15 16-17 18-19 20-21 22-23 24-25 ACA = Patient Protection and Affordable Care Act and SPDs = seniors and persons with disabilities. 2021-22 LAO Budget Series 8 analysis full gutter the federal share of cost in Medi-Cal to return to business. The state’s previous MCO tax expired normal, raising General Fund costs in Medi-Cal at the end of 2018-19 and, in 2019-20, the by $1.6 billion between 2021-22 and 2022-23. Legislature reauthorized the MCO tax in similar but However, should the emergency persist into not identical form to the prior tax. The reauthorized 2022-23 or even beyond, significant General Fund MCO tax offsets as much as roughly $1.7 billion in savings in Medi-Cal could materialize to the extent General Fund spending annually for the years it is that the enhanced federal funding continues as in effect—January 2020 through December 2022. well. We assume that the MCO tax is not reauthorized following its expiration halfway through 2022-23. ASSUME STATUTORILY This assumption has the effect of raising General Fund costs in Medi-Cal by roughly $1.7 billion SCHEDULED EXPIRATION OF annually in 2023-24 and 2024-25. If the Legislature MANAGED CARE ORGANIZATION instead elects to reauthorize the MCO tax in a (MCO) TAX similar form—and the federal government provides its necessary approval—the state could receive For a number of years, the state has imposed $1.7 billion or more in annual General Fund savings a tax on MCOs’ Medi-Cal and commercial lines of in the final two years of our outlook and beyond. 2021-22 LAO Budget Series 9 analysis full gutter LAO Publications This report was prepared by Ben Johnson, Ned Resnikoff, Corey Hashida, and reviewed by Mark 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. 2021-22 LAO Budget Series 10