The 2021-22 Budget: Analysis of the Medi-Cal Budget

analysis full gutter The 2021-22 Budget: Analysis of the Medi-Cal Budget FEBRUARY 2021 Overview. This post describes the major Medi-Cal Is the State’s Largest Health Care adjustments to the Medi-Cal budget in 2020-21 Program, Covering Over 13 Million Low-Income and 2021-22, with a focus on the technical Californians. Medi-Cal is the state’s Medicaid adjustments such as the administration’s caseload program and provides health care coverage to over estimates. While this post summarizes the major 13 million Californians with low incomes. As a joint discretionary proposals that contribute to increased state-federal program, costs are shared between spending in 2021-22, we will further analyze the federal and state as well as local governments. the major discretionary Medi-Cal proposals in Figure 1 summarizes Medi-Cal spending trends separate publications and communications to the over the last decade. Legislature. Figure 1 A Decade of Medi-Cal Spending: 2012-13 to 2021-22 (In Billions) $140 120 100 Other Nonfederal Funds 80 General Fund 60 40 Federal Funds 20 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 Estimated Projected Note: Other Nonfederal Funds include state special funds and some, but not all, local funding. 2021-22 LAO Budget Series 1 analysis full gutter Overview of the Governor’s Budget CURRENT YEAR year-over-year basis. Total spending growth is less than General Fund spending growth in part due to Estimated General Fund Revised Downward lower federal funding, which we explain later. by Roughly $1.2 Billion to $22.5 Billion in Major Technical Adjustments. Technical 2020-21. The Governor’s budget estimates adjustments, or year-over-year changes in the Medi-Cal spending to be $22.5 billion General Fund funding needs of the program under existing ($118 billion total funds) in 2020-21. This reflects program rules, account for around three-quarters an approximately $1.2 billion (5 percent) downward of the growth in proposed General Fund spending adjustment relative to what was assumed in the between 2020-21 and 2021-22. While the following 2020‑21 Budget Act. Compared to previous bullets summarize the major General Fund years, a 5 percent adjustment is large but not cost drivers, ultimately, many additional factors unprecedented. As we expand upon below, lower contribute to this increase in proposed spending. than anticipated caseload growth accounts for roughly $950 million of the downward adjustment • Caseload. Medi-Cal costs vary closely with in estimated General Fund spending in 2020-21. the program’s caseload. The Governor’s Furthermore, the Governor’s budget recognizes budget projects significant (12 percent) additional savings in 2020-21 of around $230 million year-over-year growth in the Medi-Cal General Fund related to the decline in routine health caseload going into 2021-22. This caseload care utilization due to the coronavirus disease 2019 growth is responsible for $2.6 billion of the (COVID-19) pandemic. These two adjustments increase in General Fund costs in 2021-22. explain virtually all of the net change in estimated • Underlying Cost Growth. Underlying cost General Fund spending in 2020-21. (While there are growth reflects changes in Medi-Cal costs due many other, sometimes significant, adjustments, to health care cost inflation and underlying these other adjustments roughly cancel each other service utilization trends (the disruption out.) COVID-19 has had on service utilization would not factor into underlying trends). We estimate BUDGET YEAR that underlying cost growth accounts for about $1.2 billion of the overall increase in Proposed General Fund Spending to Grow General Fund costs between 2020-21 and by $5.9 Billion, Reaching $28.4 Billion in 2021-22. This reflects somewhat higher, but 2021-22. Under the Governor’s proposed budget, not extraordinary, underlying cost growth General Fund spending in Medi-Cal would grow compared to recent years. from $22.5 billion in 2020-21 to $28.4 billion in • Assumed Expiration of Enhanced 2021-22—a $5.9 billion, or 26 percent, increase Federal Funding. As a part of federal in year-over-year spending. Year-over-year COVID-19 response legislation, Congress growth in General Fund spending in Medi-Cal of approved a 6.2 percentage point increase this magnitude is unprecedented. As shown in in the federal government’s share of Figure 2 at the top of the next page, $4.4 billion cost for Medicaid for the duration of the of the $5.9 billion in General Fund growth in COVID-19 national public health emergency. 2021-22 reflects technical adjustments to the The federal government determines when Medi-Cal budget. The remaining $1.5 billion the emergency is over. For each year the reflect new policy proposals from the Governor. increase in federal funding is in effect, the Total spending in Medi-Cal is proposed to state saves between $2 billion and $3 billion grow by $4.3 billion to nearly $122.2 billion on a General Fund in Medi-Cal. The Governor’s 2021-22 LAO Budget Series 2 analysis full gutter Figure 2 Major Drivers of Proposed Increase in Medi-Cal Spending Between 2020-21 and 2021-22 General Fund (In Millions) Projected caseload growth +$2,594 Underlying cost growth +$1,246 Assumed expiration of +$522 increased federal share of cost Other net COVID-19 spending +$503 Temporary reduction in +$390 available hospital fee funding Technical Adjustments Assorted other changes +$340 Use of General Fund for Proposition 56 provider +$258 payment increases Projected Medi-Cal Rx savings -$325 Reduction in funding for -$1,103 major repayments Behavioral health continuum +$750 CalAIM +$521 Discretionary Spending Proposals Student behavioral health +$194 Benefit expansions +$38 $22,471 $28,400 COVID-19 = coronavirus disease 2019 and CalAIM = California Advancing and Innovating Medi-Cal. budget assumes the public health emergency occur in 2022-23, reflecting a full fiscal year will remain in place through December 2021. without the enhanced federal funding.) Because the increased federal funding • Reduction in Funding for Major would expire halfway through 2021-22 under Repayments. The 2020-21 budget includes the administration’s assumption, about $1.1 billion General Fund to make various $500 million General Fund is needed in repayments to the federal government Medi-Cal in 2021-22. (Significantly higher and managed care plans to correct prior General Fund cost increases as a result of the federal fund claims and other payments expiration of increased federal funding would that were made in error. These repayments 2021-22 LAO Budget Series 3 analysis full gutter are concentrated in 2020-21. As a result, The 2021‑22 Budget: CalAIM Financing the net amount of General Fund needed for Issues. such repayments is projected to go down by • School-Based Behavioral Health. To $1.1 billion. increase capacity to provide student behavioral health services, the Governor Discretionary Spending Proposals. proposes $200 million General Fund Discretionary spending proposals account for ($400 million total funds) one-time available about one-quarter of the $5.9 billion General for three years to provide incentive payments Fund proposed increase in Medi-Cal spending in to Medi-Cal managed care plans to establish 2021-22. This $1.5 billion in discretionary spending partnerships with schools and county includes the following proposals: behavioral health departments. We will • Behavioral Health Continuum analyze this proposal in a separate upcoming Infrastructure. To expand county behavioral post, The 2021‑22 Budget: Behavioral Health: health treatment capacity, the Governor Medi‑Cal Student Services Funding Proposal. proposes $750 million one-time available for • Benefit Expansions. The Governor’s budget three years to provide grant funds to counties proposes net spending of $30 million General to acquire and renovate behavioral health Fund ($85 million total funds) on three facilities. We will analyze this proposal in a Medi-Cal benefit expansions. (Because of separate upcoming post, The 2021‑22 Budget: technical reasons and the fact that one of Behavioral Health: Continuum Infrastructure the benefit expansions already is in effect Funding Proposal. temporarily, these benefit expansion increase • California Advancing and Innovating General Fund spending by $38 million Medi-Cal (CalAIM). CalAIM is a far-reaching on a year-over-year basis.) These three set of reforms to expand, transform, and expansions are (1) introducing a new remote streamline Medi-Cal service delivery patient monitoring benefit as part of a larger and financing. To implement CalAIM, the package of telehealth reforms; (2) adding Governor proposes $532 million General continuous glucose monitors as a benefit for Fund ($1.1 billion total funds) in 2021-22. This Medi-Cal beneficiaries with Type I diabetes; funding reflects the first half-year of CalAIM and (3) permanently reinstating coverage of funding, a portion of which would be ongoing over-the-counter cough and cold products, under the CalAIM funding plan. We analyze which currently are covered as a part of CalAIM financing issues in a separate post, the state’s temporary package of Medi-Cal pandemic response policies. Analysis of Caseload BACKGROUND childless adults who are part of the eligibility expansion under the Patient Protection and Prior to the pandemic, Medi-Cal provided Affordable Care Act. Seniors and persons with coverage to around 13 million Californians. disabilities (SPDs) tend to have greater needs than Medi-Cal serves a number of discrete populations some other Medi-Cal populations, and therefore with somewhat distinct characteristics and costs tend to have higher per-enrollee costs. Childless to the state and federal government. These adults and families tend to have lower per-enrollee populations include families with children, seniors costs. Additionally, the federal government currently aged 65 or older, persons with disabilities, and 2021-22 LAO Budget Series 4 analysis full gutter pays 90 percent of Medi-Cal costs for individuals enrollees between March 2020 and July 2020 (and enrolled as part of the optional expansion. then declining thereafter) as assumed in the budget Budget Act Assumed Sharply Rising act, caseload grew only by around 1.2 million Caseload Due to COVID-19. The budget enrollees from March to December 2020, the most act assumed that the deteriorating economic recent month for which we have data. Overall, conditions caused by the COVID-19 crisis would caseload growth to date appears largely due to the cause a surge in the Medi-Cal caseload. From a low suspension of eligibility terminations. Relatively few of around 12.5 million beneficiaries in March 2020, new enrollees appear to have joined the program the budget act projected Medi-Cal caseload even as unemployment reached record numbers. would increase to roughly 14.5 million enrollees by Although why employment losses have not yet July 2020, increasing General Fund costs above had a significant impact on Medi-Cal caseload is what they otherwise would be by about $3 billion unclear, there likely are several factors at play. For across 2019-20 and 2020-21. This rapid projected example, employment losses disproportionately growth in the Medi-Cal caseload was assumed to have affected low-wage workers who were more be due to two primary factors: likely to already be enrolled in Medi-Cal. • Employment Losses. The early months of the GOVERNOR’S BUDGET COVID-19 pandemic brought unprecedented declines in employment in California. The Administration Projects Strong, Extended budget act assumed that individuals and Caseload Growth Through December 2021, families experiencing job losses or otherwise Followed by Declines. Governor’s budget having their incomes fall under COVID-19 estimates that caseload grew by 155,000 enrollees would join the Medi-Cal program in huge per month over the second half of 2020. The numbers. Most of the caseload growth administration assumes this growth rate increases assumed in the budget act was attributed to to 200,000 additional enrollees per month in this factor. January 2021, and that new enrollees will be • Eligibility Redetermination Suspensions. added to the Medi-Cal caseload at that higher rate Federal COVID-19-related legislation for the duration of 2021, with caseload peaking effectively requires the state to suspend most at more than 16 million in December 2021. This eligibility redeterminations in Medi-Cal for increase is driven by the projected impact of the the duration of the national COVID-19 public ongoing COVID-19 pandemic. As a result, the health emergency. As a result, enrollees who, Governor’s budget estimates the average number under standard Medi-Cal eligibility rules, of enrollees in 2020-21 to be slightly below would be found to have become ineligible 14 million. While this represents a gain of more than and therefore disenrolled from the program 1 million enrollees over 2019-20, it is still nearly (for example, because they no longer meet 300,000 enrollees fewer than what the budget act the program’s low-income requirements), projected. We estimate that the downward revision now may remain enrolled in Medi-Cal through for 2020-21 results in $950 million in General Fund the emergency period. The budget act savings ($1.4 billion in total funds). assumed Medi-Cal caseload would increase Projected Caseload Increase Results in significantly—on net—from what it otherwise Significant Growth in Costs in 2021-22. As noted would be if eligibility redeterminations were above, the administration anticipates caseload not suspended. to continue to grow through December 2021. In response to the assumed end of the public Caseload Growth to Date Is Significantly health emergency and the ensuing resumption Below Expectations. Preliminary data show of eligibility redeterminations, however, the that Medi-Cal caseload growth to date has been Governor’s budget then projects that caseload significantly slower than what was assumed in the will decline by roughly 275,000 enrollees per budget act. Rather than growing by around 2 million 2021-22 LAO Budget Series 5 analysis full gutter month for the first half of 2022. Over the course of 6,000 enrollees (4 percent) lower than assumed by 2021-22, the administration projects the average the administration. A difference of this magnitude number of enrollees to be 15.5 million. The shows the administration’s 2020 caseload growth administration projects that Medi-Cal spending estimates are quite reasonable. (Average monthly will rise by $2.6 billion General Fund ($13.5 billion caseload growth over the entire course of the total funds) from 2020-21 to 2021-22 due to pandemic in 2020—from March 2020 through continued COVID-19-related caseload increases. December 2020—has been somewhat lower than The administration projects that General Fund the administration’s assumptions, coming in at costs associated with caseload increases will be less than 140,000 enrollees per month.) To reach $4.3 billion above what they would have been a caseload of 16 million in January 2022, the absent the COVID-19 pandemic in 2021-22. administration assumes that caseload will grow by nearly 200,000 enrollees per month for all of ASSESSMENT 2021—46 percent above the average since the beginning of the emergency in March 2020 and At a high level, Medi-Cal costs are driven by two 10 percent higher than the maximum growth rate of factors, caseload, or the number of people enrolled any individual month to date. Figure 3 displays the in the program, and cost per enrollee. Because difference between the administration’s projections different enrollee populations have different and caseload actuals. average per-enrollee costs, assumptions around Administration’s Caseload Projections Are which enrollee populations will join or remain on Likely Overstated, Particularly in 2021-22. the program in greater proportions significantly Caseload likely will rise significantly over the course affects costs per enrollee. (These assumptions are of 2021-22 as a result of the COVID-19 pandemic. made more important by the fact that the state is Given the trends we have observed so far, however, responsible for different shares of cost for different enrollee Figure 3 populations.) Below, we describe how our assumptions around Average Monthly Medi-Cal Enrollment Growth, caseload and cost per enrollee Actuals Versus Administration Projections differ from the administration’s, which lead to different 200,000 expectations of cost growth. 180,000 Projected Caseload 160,000 Growth 140,000 120,000 Administration’s 2021 Caseload Projections 100,000 Exceed Recent Trends. The 80,000 administration’s caseload 60,000 estimates use actual caseload 40,000 numbers through July 2020. For August 2020 through 20,000 December 2020, the Actuals Administration Administration administration assumes March - December March - December Calendar Year monthly caseload growth of 2020 2020a 2021 155,000 enrollees. Based on updated actuals through a Administration used actuals up until July 2020, during which average monthly growth under the pandemic was around 120,000 enrollees. For August 2020 through December 2020, the December 2020, the average administration assumed average monthly growth of 155,000 enrollees. monthly growth has been roughly 2021-22 LAO Budget Series 6 analysis full gutter we believe caseload rising to 16 million enrollees fund terms, the federal government pays 90 percent by January 2022 is unlikely. For this to happen, of their costs and the General Fund only covers average monthly caseload growth for all of 2021 10 percent. In contrast, for other populations, the would need to be 46 percent higher than it has state generally pays 50 percent of enrollee costs. been for the duration of the pandemic to date. Administration’s Assumed Costs Per Case Although the administration’s projections fall within Likely Are Overstated. We expect the additional the realm of possibility, they likely represent a Medi-Cal enrollee populations will be similar over worst-case scenario in fiscal terms. If caseload the next year to what we have observed so far were to grow at an average monthly rate similar during the pandemic. For example, we assume to one of the fastest months of growth since the growth among SPDs would remain relatively pandemic started—but not the fastest month insensitive to future labor market impacts, which of growth—we would expect caseload to grow suggests SPD-enrollee, pandemic-driven growth 13 percent faster in 2021 than it has so far during likely would be close to what the actuals to date the pandemic. This would reflect slightly more indicate. As a result, we would expect SPDs to than 150,000 additional enrollees per month. comprise about 5 percent of COVID-19-related With this assumption, Medi-Cal caseload would caseload growth going forward, rather than the peak at 15.7 million enrollees in January 2022— 9 percent assumed by the administration. We approximately 300,000 (3 percent) lower than what also would assume optional expansion enrollees the administration projects. (The somewhat modest continue to comprise around 45 percent of difference in our peak caseload estimates is due to additional enrollment, rather than nearly 40 percent (1) the preliminary November and December 2020 as assumed by the administration. Due to our actuals coming in higher than estimated by the different assumptions on the case mix of Medi-Cal administration and (2) our assumption that caseload caseload growth, we assume per-enrollee General declines after the end of the national public Fund costs will be around 5 percent lower than the health emergency begin in February rather than administration. January 2022.) Overall Assessment Projected Per-Enrollee Costs Our office modeled Medi-Cal caseload Administration Assumes Relatively High to compare the administration’s caseload Growth Among Costlier Caseload Groups. projections with what we would expect. Like the The administration’s assumptions around which administration, we assumed a set number of enrollee populations will join or remain in the enrollees will be added to the Medi-Cal caseload program in greater proportions differ from the each month in calendar year 2021 as a result actuals that we have observed to date during the of the COVID-19 public health emergency, and pandemic. The administration projects 9 percent that caseload will begin to decline in substantial of new enrollees will be SPDs. The preliminary numbers after the assumed end of the public actuals we have reviewed indicate that 5 percent health emergency in December 2021. We also used of the enrollees added since the beginning of the administration projections of the average monthly pandemic are SPDs. If SPDs make up a smaller per-enrollee cost for each eligibility category. share of pandemic-related caseload growth However, we made two key assumptions that than the administration assumes, the result likely differed from those of the administration. First, would be significantly lower per-enrollee costs we assumed caseload would grow at an average since SPDs can be two-to-three times as costly monthly rate similar to a month during the pandemic per enrollee. Additionally, we find that optional that showed a large, but not the largest, caseload expansion enrollees have comprised a larger share increase. Second, we assumed the case mix of of caseload growth so far under the pandemic additional enrollment in Medi-Cal would equal the than assumed by the administration. While optional shares observed so far under the pandemic. expansion enrollees are relatively high cost in total 2021-22 LAO Budget Series 7 analysis full gutter General Fund Costs in Medi-Cal Could significantly from those of the administration, we are Be Significantly Lower Than Assumed in the not at this time recommending an adjustment to the Governor’s Budget. In our assessment, General Governor’s budget. The COVID-19-related public Fund costs in Medi-Cal are likely to be around health emergency is unprecedented in the history of $1 billion lower across the current year and budget Medi-Cal, and so its impact on Medi-Cal caseload year than under administration assumptions. is difficult to predict. As a result, any projections of Should caseload growth be closer to the average near-term caseload growth and associated costs of what the state has seen under the pandemic are highly uncertain. Accordingly, we will wait for so far—rather than somewhat higher than average additional information to make our final assessment monthly growth to date, as we assume in our and recommendations related to Medi-Cal caseload model—General Fund costs could be even lower costs at the time of the May Revision. than we estimate. While our projections differ Analysis of Other Technical Issues Governor’s Budget Assumption on the End Governor’s budget assumption on the expiration of of the National Public Health Emergency Is the national public health emergency reasonable, Reasonable. As discussed previously, federal particularly in light of recent pronouncements by COVID-19 legislation increased the federal the new federal administration that the national government’s share of cost for Medicaid by public health emergency is likely to remain in effect 6.2 percentage points for the duration of the through December 2021. national COVID-19 public health emergency. The General Fund Cost Related to Proposition 56 federal administration has discretion to determine Provider Payments Likely Is Overstated Due to when the emergency ends. The assumption of Flavored Tobacco Referendum. Proposition 56 when the public health emergency will end has (2016) raised state taxes on tobacco products substantial impacts on the Medi-Cal budget since and dedicates most revenues to Medi-Cal on an every year that it remains in effect saves the state ongoing basis. Funding from Proposition 56 for between $2.5 billion and $3.5 billion General Fund Medi-Cal is used to make increased payments (or between $240 million and $300 million General to health care providers, which are intended Fund per month). to ensure timely access, limit geographic The budget act assumed the national public shortages of services, and ensure quality care. health emergency would end in June 2021 at Proposition 56 revenues provided about $1.3 billion the end of the state’s 2020-21 fiscal year. The in 2019-20 to Medi-Cal. Because tobacco Governor’s budget assumes that the national use is projected to continue to decline on an public health emergency would remain in place ongoing basis—partially as a result of the new taxes for six months longer, through December 2021. put in place under Proposition 56—revenues from Ultimately, when the public health emergency Proposition 56 for Medi-Cal are expected to expires is uncertain and will depend on the course gradually decline on a year-over-year basis. the pandemic takes as well as decisions by federal The administration projects a substantial decline policymakers. Should the public health emergency of about $200 million in Proposition 56 revenues remain in place for longer than is assumed by the between 2020-21 and 2021-22. Although administration, General Fund costs in Medi-Cal Proposition 56 revenues are expected to could be hundreds of millions of dollars lower gradually decline on a year-over-year basis, the than currently budgeted in 2021-22. Should the administration’s projected revenue decrease emergency be ended sooner than assumed, primarily is attributed to the anticipated General Fund costs could be hundreds of millions implementation of Chapter 34 of 2020 (SB 793, of dollars higher than budgeted. We find the Hill et. al) which bars retailers from selling flavored 2021-22 LAO Budget Series 8 analysis full gutter tobacco products. This prohibition—slated to General Fund Costs Will Need to Be Adjusted implement January 1, 2021—was expected to Upward Due to Recent Federal Extension of substantially reduce Proposition 56 revenues Disproportionate Share Hospital Funding. in both 2020-21 and 2021-22, since it would The 2021-22 Medi-Cal budget proposal reflects result in fewer transactions involving tobacco a $100 million year-over-year reduction in products for the state to tax. The Governor’s General Fund spending on payments to private Medi-Cal budget includes $275 million General disproportionate share hospitals, which serve large Fund to backfill this expected revenue decline in numbers of low-income or uninsured populations. 2021-22 in order to sustain the provider payment This reduction generally is triggered by a scheduled increases Proposition 56 has supported. However, reduction in federal funding that the state largely opponents of this legislation have collected enough directs to public disproportionate share hospitals. signatures to place a referendum for voter approval (The General Fund payment levels that go to private of SB 793. Accordingly, implementation of this hospitals are tied to federal funding levels that go ban on sales of flavored tobacco products will be to public hospitals, so reductions in federal funding delayed pending the results of the referendum. lower General Fund payments to participating As a result, we expect the administration’s private hospitals.) After the Governor’s budget Proposition 56 revenue estimates to be revised largely was finalized, Congress has delayed upward by around $50 million in 2020-21 and the scheduled federal reduction (as it has done around $200 million in 2021-22 at May Revision. previously). Due to the Congressional delay in the This would reduce the need for General Fund to scheduled federal reduction, we would expect support Proposition 56 provider payment increases General Fund costs to be around $100 million by $200 million in 2021-22. higher in 2021-22 than currently budgeted. Conclusion Medi-Cal spending projections are subject to current understanding and assumptions around enormous uncertainty given the program’s size, caseload, we anticipate would be reflected in the complexity, and the manner in which it is budgeted. May 2021 revised Medi-Cal budget. However, Given these characteristics, the Medi-Cal budget our estimated downward adjustment assumes no regularly is subject to significant adjustments other net changes to the Medi-Cal budget, which each time it is estimated. We would expect the is unlikely. We will carefully analyze the revised upcoming May Revision to be no different. In this Medi-Cal budget in May to assess its overall post, we identify significant net General Fund reasonableness, including in light of our anticipated savings in Medi-Cal of over $1 billion that, given our adjustments. LAO Publications This report was prepared by Ben Johnson, Corey Hashida, and Ned Resnikoff, 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. 2021-22 LAO Budget Series 9