The 2021-22 Budget: Analysis of CalAIM Financing Issues

analysis full gutter The 2021-22 Budget: Analysis of CalAIM Financing Issues FEBRUARY 2021 The California Advancing and Innovating Medi-Cal to Medi-Cal financing. The first post in this series (CalAIM) proposal is a far-reaching set of reforms to provides an overview of CalAIM, including the key expand, transform, and streamline Medi-Cal service changes from last year’s withdrawn proposal, and delivery and financing. This post—the second in a analyzes overarching issues related to the proposal. series assessing different aspects of the Governor’s Subsequent posts in this series will assess how proposal—analyzes CalAIM financing issues, CalAIM could affect the care provided to Medi-Cal’s including both the Governor’s funding plan for senior and disabled populations and health equity. CalAIM as well as CalAIM’s policy changes related Background Medi-Cal and the State’s Expiring 1115 Waiver. preventive care in order to avoid the need for Medi-Cal is the state’s Medicaid program. As a joint acute care. state-federal program, Medi-Cal costs generally • The Dental Transformation Initiative, under are shared between the federal, state, and local which dental providers receive payments for governments. Federal Medicaid rules outline what meeting performance benchmarks related to health care services and populations are eligible the provision of preventive dental care and to receive federal Medicaid funding. Through a continuity of coverage. federal waiver opportunity for states known as the • The Whole Person Care program, which allows 1115 waiver, states can receive federal funding for participating counties to receive funding to experimental, innovative programs whose rules coordinate and provide health, behavioral do not strictly conform to federal Medicaid rules. health, and social services for Medi-Cal California has used this authority for many years. high-risk, high-need beneficiaries. Under the state’s current 1115 waiver—that is set • The Drug Medi-Cal Organized Delivery to expire at the end of 2021—the state operates a System program, which expands the array variety of innovative programs. The following bullets of substance use disorder services available summarize several of the state’s current 1115 waiver within participating counties. programs: Governor Proposed CalAIM as Part of the • The Public Hospital Redesign and Incentives January 2020-21 Budget Before Withdrawing in Medi-Cal (PRIME) program, which provides the Proposal in May. CalAIM is a large incentive payments tied to the state’s public package of reforms aimed at (1) reducing health hospitals meeting certain quality and efficiency disparities by focusing attention and resources targets. on Medi-Cal’s high risk, high-need populations; • The Global Payment Program, which (2) rethinking behavioral health service delivery repurposes federal funding for uncompensated and financing; (3) transforming and streamlining care at public hospitals into an incentive-based managed care; and (4) extending federal funding structure that encourages hospitals to provide opportunities currently available under the state’s 2021-22 LAO Budget Series 1 analysis full gutter soon-to-expire 1115 waiver. Originally proposed proposed to fund CalAIM with $348 million General in January 2020 as part of the 2020-21 budget, Fund ($695 million total funds) in 2020-21 and CalAIM was withdrawn at the May Revision due to $395 million General Fund ($790 million total funds) the coronavirus disease 2019 and the estimated annually on an ongoing basis. The non-General effects the pandemic was having on the state’s Fund portion of these proposed expenditures fiscal situation. Prior to its withdrawal, the Governor comprised federal Medicaid funds. Governor’s Proposal The Governor’s 2021-22 budget reintroduces Proposed Policy Changes CalAIM in a highly similar form to last year’s Affecting Funding Needs proposal. Figure 1 summarizes the major policy reforms included under the CalAIM proposal, the Many, if not most, of the reforms under CalAIM vast majority of which are essentially unchanged have significant potential to result in new costs from last year’s proposal except as relates to their and/or savings in Medi-Cal. The rest of this section proposed implementation time line. The Governor is highlights several proposed CalAIM reforms that seeking significant state statutory changes related could have significant fiscal impacts in Medi-Cal. to CalAIM, which are needed to authorize many Improved Coordination and New Services for components of the reform package. High-Risk, High-Need Populations. The CalAIM proposal includes new care coordination provisions Figure 1 Major Policy Reforms Under CalAIM Proposal Increasing the Focus on High-Risk, High-Cost Populations Create new enhanced care management benefit. Ensure enrollment assistance for individuals transitioning from incarceration. Reimburse managed care plans to provide nonmedical “in lieu of services.” Require managed care plans to develop population health management programs. Convene foster care workgroup. Transforming and Streamlining Managed Care Transition certain benefits and enrollee populations from fee-for-service to managed care and vice versa. Modify approach to coordinating care of beneficiaries eligible for both Medi-Cal and Medicare. Set capitated rates on a regional rather than county basis. Require NCQA accreditation of Medi-Cal managed care plans; deem as meeting most federal and state standards. Consider creation of a full-integration pilot. Rethinking Behavioral Health Service Delivery and Financing Streamline behavioral health financing. Seek new federal funding opportunity for residential mental health services. Change medical necessity criteria for beneficiaries to access services. Implement “no wrong door” approach for children obtaining mental health services. Integrate county administration of specialty mental health and substance use disorder services. Extending Components of the Current 1115 Waiver Continue public hospital funding under other programs. Maintain expansion of substance use disorder services begun under DMC-ODS. Extend certain components of the Dental Transformation Initiative and provide a new covered benefit, silver diamine floride. CalAIM = California Advancing and Innovating Medi-Cal; NCQA = National Committee on Quality Assurance; and DMC-ODS = Drug Medi-Cal Organized Delivery System. 2021-22 LAO Budget Series 2 analysis full gutter and services that could result in new gross costs Changes to Behavioral Health Service but also could lead to some offsetting savings in Delivery and Financing. Three significant changes the long run. For example, CalAIM proposes to to behavioral health services and financing could create a new statewide managed care benefit, affect overall state and local costs for these Enhanced Care Management (ECM), to provide services. Whether the net impact of these changes intensive case management and care coordination will increase or decrease costs is unknown. The for Medi-Cal’s most high-risk and high-need three changes are: beneficiaries (provided they are enrolled in managed • Additional Federal Funding for Residential care). The objective is for ECM to play an important Behavioral Health. Historically, federal role in connecting high-risk, high-need members rules have prohibited Medicaid from funding to the appropriate services to improve health residential behavioral health—including outcomes. The CalAIM proposal also allows plans substance use disorder, Severe Mental Illness to be reimbursed for “in lieu of services” (ILOS), (SMI), and Severe Emotional Disturbance nonmedical services such as personal care and (SED)—services in facilities with more than housing navigation that managed care plans could 16 beds. Updated federal guidance in the provide (at their option) in place of more expensive last several years has relaxed this prohibition, standard Medicaid benefits. Today, managed care providing new opportunities for state Medicaid plans may offer such services but would not be programs to access federal Medicaid funding reimbursed for the associated costs. As one final for residential behavioral services in large example, CalAIM would require that all counties facilities. CalAIM commits to pursuing one of implement pre-release Medi-Cal application these opportunities—known as the SMI/SED processes for inmates. This proposal is intended demonstration opportunity—to obtain federal to ensure that soon-to-be released inmates who funding for residential mental health services are eligible for Medi-Cal receive timely access to in large facilities. (The state already accesses physical and behavioral health services that could federal funding for residential substance use prevent the need for costlier interventions in the disorder services in large facilities through the future. Drug Medi-Cal Organized Delivery System Transforming and Streamlining Managed program.) Obtaining this federal funding could Care. CalAIM’s proposed changes to transform result in savings to the county behavioral and streamline Medi-Cal managed care include health delivery system, which could free a number of reforms that could affect the funding up county funds to be invested in providing needs of Medi-Cal, particularly in the long term. additional behavioral health services. These include, for example, (1) the various proposed • Proposed Revisions to Medical Necessity transitions of benefits and populations between Criteria. Currently, beneficiaries are generally Medi-Cal’s two major delivery systems, fee for required to have a covered diagnosis to be service (FFS) and managed care; (2) the setting eligible for county behavioral health services. of capitated payment rates on a regional basis However, individuals often exhibit symptoms rather than by county and by plan, as today; of behavioral health needs before an accurate (3) requirements that managed care plans obtain diagnosis of their condition can be provided. National Committee on Quality Assurance (NCQA) CalAIM proposes to reform medical necessity accreditation; and (4) changes to managed care criteria for county behavioral health services to financing methodologies to allow managed care focus more on level of impairment rather than plans to retain at least a portion of the savings specific diagnoses. This proposed change they generate through improving the delivery of could have a fiscal impact, but the direction cost-effective care (and also to share additional risk of the impact is uncertain. State or county with plans to incentivize more cost-effective care). costs could increase if the change leads to an These various proposed changes could result in increase in services provided, while savings new costs and/or savings, particularly in the long could result if the new rules lead to obtaining term. 2021-22 LAO Budget Series 3 analysis full gutter federal funding for services that are already Proposed Funding being provided, but currently are paid only with Governor Proposes General Fund Spending state and local funds. of $532 Million in 2021-22 and $423 Million • Implementation of “No Wrong Door” Policy. Ongoing on CalAIM. The Governor released a Current law and policy is somewhat ambiguous multiyear funding plan for CalAIM. In 2021-22, regarding the delivery system through which the Governor proposes spending $532 million beneficiaries under the age of 21 are to General Fund ($1.1 billion total funds) on CalAIM. receive certain mental health services—that Costs in 2021-22 represent a half-year of ongoing is, whether this should be through a Medi-Cal CalAIM proposals and certain one-time costs. In managed care plan or in the county behavioral 2022-23, funding would ramp up to $745 million health system. Under CalAIM, beneficiaries General Fund ($1.5 billion total funds) to reflect a under age 21 would be able to access mental full year of implementation. CalAIM funding would health services no matter which delivery remain at a similar level as 2023-24. Beginning in system they initially seek care from. These new 2024-25, funding would be reduced to its ongoing rules could lead to changes in which delivery level of $423 million General Fund ($846 million system beneficiaries under age 21 receive total funds). This reduction reflects the expiration certain services from. (For example, under of certain limited-term spending components, the new rules a beneficiary may access care namely, the managed care plan incentive payments through their managed care plan rather than related to ECM and ILOS. Figure 2 summarizes the their county.) Accordingly, this policy could Governor’s proposed CalAIM funding plan. change which costs are borne by the state and counties, to an uncertain degree. Figure 2 Proposed CalAIM Funding—Governor’s 2021-22 Budget (In Millions) 2021-22 2023-23 2023-24 2024-25 and Ongoing Total General Total General Total General Total General Funds Fund Funds Fund Funds Fund Funds Fund Plan incentivesa $300 $150 $600 $300 $600 $300 — — Enhanced care management 188 94 467 233 490 245 $490 $245 In lieu of services 48 24 115 58 115 58 115 58 Dental services 113 57 227 114 227 114 227 114 Behavioral health QIP 22 22 32 32 32 32 — — Benefit and population delivery 403 175 -10 -5 -10 -5 -10 -5 system transitionsb Local Assistance Subtotal ($1,074) ($521) ($1,431) ($732) ($1,454) ($744) ($822) ($415) DHCS state operations $24 $11 $28 $13 $25 $12 $24c $11c Grand Totals $1,098 $532 $1,459 $745 $1,479 $756 $846 $423 a To assist with the establishment of enhanced care management and in lieu of services. b Not included in last year’s proposal. c While the 2024-25 costs are as listed, ongoing costs are proposed to be $20 million total funds, $10 million General Fund. Note: Totals may not add due to rounding. QIP = Quality Incentive Payments and DHCS = Department of Health Care Services. 2021-22 LAO Budget Series 4 analysis full gutter Assessment Estimated Costs proposed under CalAIM are not entirely new. Rather, many CalAIM components are intended to build While Similar to Last Year’s Proposal, upon or replace innovative programs that debuted Updated CalAIM Funding Plan Includes New within the last several years and offer them within One-Time Components. As with last year’s managed care. For example, ECM is intended to proposal, the Governor’s budget provides upfront replace Health Homes and the case management funding for ECM, ILOS, and incentive payments functions of the Whole Person Care pilots. ILOS is to help managed care plans build the necessary intended to build upon and replace the components infrastructure to be able to deliver these new of Whole Person Care focused on the provision of benefits. Additionally, consistent with last year’s nonmedical benefits such as housing navigation and proposal, the administration proposes funding the transition services. Even the incentive payments to continuation of certain dental components from the help managed care plans build the infrastructure expiring Dental Transformation Initiative and a new necessary to successfully deliver ECM and ILOS dental benefit, silver diamine fluoride. Not part of build upon and/or replace existing infrastructure last year’s budget proposal, the updated 2021-22 funding that currently primarily goes to counties funding plan includes one-time costs related to under Whole Person Care. The dental and public the transition of certain benefits and populations hospital financing components of CalAIM similarly into and out of managed care. (CalAIM proposes build upon or replace existing programs. various benefit and enrollee population transitions, Proposal Shifts Funding to Managed Care in both directions, between managed care and FFS.) Plans. While certain components of CalAIM largely These transitions create additional costs that require are akin to an extension of existing programs, funding because, with Medi-Cal budgeted on a cash some of the largest and costliest components of basis, the timing of when services are reimbursed CalAIM represent a significant change in approach. often differs between the managed care and FFS Counties typically served as the lead entity and delivery systems. recipient of funding under Whole Person Care First-year CalAIM spending under last year’s (though managed care plans generally were involved proposal was $368 million General Fund, whereas in as partners). Under CalAIM, the funding that would 2021-22 it is proposed at $532 million General Fund. support similar activities to Whole Person Care— The new one-time components related to transitions ECM, ILOS, and the related incentive payments— between managed care and FFS explain virtually the would instead flow to managed care plans. While the entire difference in cost between the two proposals. administration has expressed a goal for managed As for ongoing funding beginning in year four of care plans to continue to work with existing CalAIM implementation, the 2020-21 Governor’s community-based providers, including those Budget proposed annual General Fund spending currently providing Whole Person Care and Health of $415 million while the 2021-22 budget proposes Homes services, the extent to which managed care annual General Fund spending of $423 million. plans will bring certain services in-house or forge The difference in proposed ongoing General Fund new community partnerships is unclear. Overall, spending is largely related to a relatively minor CalAIM would represent a shift in responsibility and increase in the projected ongoing cost of ECM. funding for the delivery of ECM and new nonmedical benefits. Changes in Service Delivery As a Result, State Would Take on New Funding and Financing Responsibilities. CalAIM would spend similar Many CalAIM Components Would Build Upon amounts on the programs—like Whole Person Care or Replace Existing Innovative Programs. Many and Health Homes—ECM and other nonmedical of the benefit expansions and other components benefits would replace. The proposed funding 2021-22 LAO Budget Series 5 analysis full gutter sources under CalAIM, however, are different than state’s ability to draw down federal Medicaid funding those of existing programs. Namely, General Fund in several ways. First, CalAIM would replace certain would replace the local funding that currently serves existing programs—whose federal funding under as the nonfederal share of cost for Whole Person the state’s 1115 waiver is capped—with programs Care. CalAIM’s dental components also would be with no such federal funding limitations. Second, funded using General Fund for the state’s share CalAIM would allow the state to start drawing down of cost. Currently, similar dental initiatives under federal funding for services not previously covered the Dental Transformation Initiative effectively are by Medicaid. Third, CalAIM would expand statewide entirely federally funded—an option that is no longer a variety of services that are only available in certain available due to federal rule changes. (Other CalAIM counties. The following bullets provide additional components that reflect extensions of existing detail on two changes under CalAIM that would programs, even if in modified form, do not feature a allow the state to draw down additional federal change in the nonfederal fund source.) Combining Medicaid funding for services not historically eligible the new costs to build upon and replace Whole for such funding: Person Care and the Dental Transformation Initiative, • ILOS. Services such as housing navigation the funding plan would replace what are currently and transition (including funding to cover hundreds of millions of dollars of non-General Fund rental deposits), recuperative care, and home expenditures with around $400 million of General modifications such as ramp installations have Fund expenditures on an ongoing basis. not been broadly eligible for Medicaid funding. Using State General Fund Resources Is Instead, public funding for such services often Reasonable. Using General Fund is a reasonable has come from capped funding sources, approach to replacing other state and local sources rather than varying automatically with the level of nonfederal funding that currently support the of need. By proposing to add the 14 optional expiring, but potentially promising, services CalAIM nonmedical benefits through ILOS, CalAIM seeks to build upon or replace. First, Whole Person could expand the amount of federal (and state) Care currently is an optional pilot program operating funding that supports such services, which in 24 counties and one city and funded with a mix could both offset existing funding sources and of federal and local funds. CalAIM would end these expand the services’ availability. pilots, expand certain service components of Whole • Residential Mental Health Services Person Care statewide, and transfer management Provided in Large Facilities. As discussed over many of the activities included under Whole earlier, the state currently receives federal Person Care generally from counties to managed funding for residential substance use disorder care plans. In moving these services statewide, services provided in large facilities (which were making certain services mandatory, and shifting previously ineligible for Medicaid funding). control away from counties, the justification for using Under CalAIM, the state would pursue federal local funds diminishes. (Traditionally, mandatory, funding for residential mental health services statewide programs have usually used state funds in large facilities, with the goals of (1) offsetting to cover the nonfederal share.) Second, regarding local funds used to fund these services today the dental service components of CalAIM, recent and (2) expanding the availability of residential federal rule changes prohibit the state from using mental health services as part of a more the same fund source as the nonfederal share of comprehensive continuum of mental health cost as was used under the Dental Transformation services. Initiative. Accordingly, using another available state fund source such as General Fund to continue to CalAIM Would Expand the Resources fund similar services seems appropriate. Managed Care Plans Have to Address Their CalAIM Would Unlock Federal Medicaid Members’ Needs. CalAIM vests managed care Funding for Services Beyond Traditional Health plans with significant new responsibilities and Benefits and Settings. CalAIM would expand the opportunities, namely those related to ECM and 2021-22 LAO Budget Series 6 analysis full gutter ILOS. To support managed care plan efforts to Changes to Managed Care Plan develop new capacities and provide new services Finances and Fiscal Incentives under CalAIM, the funding plan would provide plans Managed care is Medi-Cal’s largest delivery with significant new resources. Over four years, system, covering over 80 percent of enrollees. managed care plans would receive an additional Over $50 billion in total Medi-Cal funding flows $2.3 billion in total funds, half of which would be through managed care annually, reflecting about General Fund. During the first two full years of 50 percent of total Medi-Cal funding. Given the size implementation, total annual funding for managed of the managed care delivery system, how managed care plans would increase by around $1 billion, a care plans are financed has major implications roughly 2 percent increase over what plans currently for Medi-Cal funding as a whole. Several CalAIM receive for all services. The ongoing funding reforms would affect managed care financing. As commitment to managed care plans under CalAIM described below, these reforms have the potential would be substantially less at around $600 million to significantly affect the long-term funding needs of annually in total funds. As we discuss later in this Medi-Cal. post, however, we have outstanding questions about the reasonableness of assuming such a significant CalAIM Could Improve Managed Care Plan scaling back of CalAIM expenditures within managed Fiscal Incentives to Deliver More Cost-Effective care by the fourth year of implementation. Care. Medi-Cal managed care plans receive a monthly payment, or “capitated rate,” per member to CalAIM Would Reform Behavioral Health cover the cost of the care they arrange and pay for Payment Model in an Effort to Move Toward on behalf of their members. Plans’ capitated rates Value-Based Care in the Future. The CalAIM generally are set based on the costs they report on proposal would change how county behavioral the eligible services utilized by their members (with health departments receive reimbursement for a lag time of around three years). Capitated rates are providing Medi-Cal-eligible services. Currently, set at different levels for different Medi-Cal enrollee counties pay for behavioral health services when populations—for example, a managed care plan they are administered. They then submit expenditure might receive around $100 per child member per claims to the Department of Health Care Services month and closer to $1,000 per senior member per (DHCS) in order to be reimbursed with federal funds month. As the following bullets describe, certain that cover the federal government’s share of cost. aspects of how capitated rates currently are set lead The state provides this reimbursement to counties to distorted incentives at the managed care plan on an interim basis until the completion of a multiyear level around whether to make investments to provide cost reconciliation process. The current financing more cost-effective care, which CalAIM seeks to system is cost-based, which does not account for improve upon. quality or outcomes in reimbursement amounts. DHCS is proposing to transition behavioral • Reimbursable ILOS. Today, managed care health financing to a different system in which plans can provide benefits not covered by reimbursement would not be tied directly to cost, Medi-Cal for their members, such as the and would rather be based on predetermined services proposed under ILOS. However, per-service payment rates. Unlike today, as long plans currently cannot receive reimbursement as the payment rates are above counties’ costs, through their capitated rates for the costs of counties would be able to retain payment amounts any such services they provide, which reduces above their costs. This methodology also is expected plans’ incentives to offer such services, even if to result in more timely payment and reduce the services could improve health outcomes. counties’ administrative burden and multiyear fiscal Under CalAIM, the costs of ILOS would be uncertainty. In addition, this framework would reimbursable via plans’ capitated rates, make transitioning to payment models that would improving plans’ incentives to provide these incentivize the quality of care provided over the benefits. volume of services provided easier. 2021-22 LAO Budget Series 7 analysis full gutter • Shared Savings and Shared Risk. Because could receive and retain earnings if they are managed care plan funding is to a significant able to improve their capacities to reduce extent cost-based, investments made by plans unnecessary LTC facility stays. that result in savings ultimately can result in • Enrolling Dual Eligibles in a Single Plan. reduced funding in the future. Accordingly, Medi-Cal pays for the majority of long-term plans do not have a consistent incentive services and supports (LTSS) costs for dual to reduce costs. Under the current model, eligibles, but a relatively small portion of the there is even less motivation for plans to costs of hospitalizations, which are paid provide services such as ILOS since plans primarily by Medicare. Therefore, Medi-Cal are not reimbursed for those services and plans have limited financial incentive to provide any generated savings largely would accrue additional LTSS that would potentially reduce to the state and federal governments. This hospital utilization for dual eligibles, since the would change under CalAIM, as plans would savings resulting from avoided hospitalizations be reimbursed for the ILOS they provide. would largely accrue to Medicare. Under Shared savings mechanisms are designed CalAIM, aligning Medicare and Medi-Cal to mitigate these perverse incentives and enrollees within a single health plan could instead allow plans to at least temporarily keep eliminate the incentive to shift costs between at least some of the savings they generate programs, because both potential costs to from new investments, such as better care Medi-Cal and potential savings to Medicare coordination and the provision of ILOS or would accrue to the same plan. ILOS-like services. As we discuss below, while the shared savings concept has merit, almost Effects of Regional Rate Setting no detail on this aspect of the CalAIM proposal currently is available, making determining Regional Rate Setting Would Reduce DHCS whether the changes under CalAIM represent Administrative Burdens. Currently, capitated the best approach to improving plan rates generally are set on a plan-by-plan and incentives to provide more cost-effective care county-by-county basis. Because capitated rates impossible. Beyond the blended capitated differ by enrollee population, plan, and county, rates mechanism discussed below, how the DHCS and its contracted actuary annually have to administration intends to leverage the concept develop thousands of distinct capitated rates. Under of shared risk is even less clear. regional rate setting, rather than developing distinct capitated rates for each plan in each county, DHCS • Blended Capitated Rates. In areas of the instead would develop capitated rates on a regional state where institutional long-term care basis. For example, DHCS could develop a single (LTC) is a managed care plan benefit, plans capitated rate for each unique enrollee population generally receive increased funding when their for all the plans operating in the Bay Area. This members enter an LTC facility and decreased single set of regional rates for the Bay Area could funding when their members leave an LTC replace the 11 different sets of rates that currently facility. This funding arrangement means plans have to be set for the Bay Area counties individually. do not have a consistent incentive to divert Regional rate setting would reduce administrative members from unnecessary institutional LTC burdens at DHCS by reducing the number of stays. Under CalAIM, the state would pay capitated rates the department has to develop and managed care plans a blended capitated receive approval for from the federal government. rate for LTC facility residents and seniors and persons with disabilities (SPDs) who live in the Regional Rates Could Encourage More community. Since this blended capitated rate Managed Care Plans to Improve Efficiency... In would essentially compensate plans for the counties with more than one plan, the state employs combined, average costs of institutionalized an adjustment to the capitated rates that averages and non-institutionalized SPDs, plans a portion of each plan’s individually established 2021-22 LAO Budget Series 8 analysis full gutter capitated rates. As a result of this adjustment, the efficiency of Medi-Cal managed care through known as “county averaging,” the higher-cost plan(s) regional rate setting generally would represent in a county are paid capitated rates that do not fully sound public policy provided that it did not generate reflect their reported costs, while the lower-cost unacceptable trade-offs, such as impairing access plan(s) in that same county are paid at capitated to quality services. However, today we understand rates above their reported costs. This encourages that the state’s higher-cost plans often perform plans operating within a single county to compete better in terms of access and quality. This raises with each other to meet their responsibilities more questions about whether the transition to regional efficiently. rate setting would improve efficiency at the cost of Regional rate setting would encourage plans reduced access and/or quality. To mitigate against that currently do not face competition within their this important potential drawback, the Legislature county to be more efficient. For example, if the Bay could consider ways to more closely tie managed Area were set as a region, the capitated rates paid care plan funding to their performance on access to San Mateo Health Plan—which is the only plan and quality standards. in the county—would no longer fully reflect San Multiyear Costs Mateo’s reported costs, but instead would reflect May Be Underestimated the average reported costs of all the Medi-Cal managed care plans operating in Bay Area counties Despite being more encompassing than last (potentially with certain adjustments to account year’s funding plan, we have outstanding questions for differences in health care needs in different around whether certain potential CalAIM costs counties). Therefore, by setting capitated rates are adequately reflected in the Governor’s funding regionally, the state could encourage managed plan, both in 2021-22 and beyond. This section care plans in all regions of the state to provide summarizes the components where we have such more efficient care since they would not be fully outstanding questions. Beyond the components compensated if their costs exceed the average highlighted below, additional, unanticipated costs costs of plans operating in their region. also could emerge given the complexity and scope …But Also Would Produce Different Winners of the CalAIM reform package. and Losers… Moving to regional rates very likely Managed Care Plan Incentive Payments Could would result in different winners and losers than Lead to Higher Ongoing CalAIM Costs. As shown under today’s system. Under the current system, in Figure 2, the Governor proposes three-year, plans can be penalized if their costs are higher limited-term funding in the form of incentive than other plans operating within their county. payments for managed care plans to establish ECM Under CalAIM, each region’s relatively high-cost and ILOS infrastructure, which over three years plans likely would be losers since they would be would total $750 million General Fund ($1.5 billion reimbursed at below their reported costs, while in total funds). We have questions about whether each region’s low-cost plans would be winners. For the assumed phasing out of this funding after three example, we have heard that a large higher-cost years is reasonable. For example, plans may be plan recently forwent over $100 million that it able to use this funding on covered, reimbursable otherwise would have received through capitation, services. To the extent that managed care plans are which instead went the lower-cost competitor able to use this funding on such services, they could plan due to county averaging. Extending a similar reflect the associated cost in their cost reports. rate-setting process to plans in single-plan counties, After several years, these costs could then get which have not been subject to any competition reflected in the ongoing payments paid to managed for decades, could result in similar financial losses care plans, thereby raising state costs. To the extent (though for an individual plan, they likely would be managed care plans are not able to use this funding lower in magnitude). on covered, reimbursable services and are unable ...And Possibly Impact Access and Quality. to achieve significant offsetting savings (such as Despite generating winners and losers, improving on institutional care) through better targeting and 2021-22 LAO Budget Series 9 analysis full gutter delivery of preventive services, there could be County Inmate Eligibility Processes Could pressure on the Legislature to provide additional Increase Medi-Cal Caseload and Represent a funding to sustain the new managed care plan Reimbursable County Mandate. By requiring that services created under CalAIM. each county implement a pre-release Medi-Cal New Managed Care Plan Administrative enrollment process for inmates, CalAIM could Requirements Could Increase Costs. CalAIM significantly increase the number of inmates who includes a number of new administrative enroll in Medi-Cal following their release. This requirements on managed care plans that do not could raise Medi-Cal caseload and thus increase appear to be directly funded under the Governor’s Medi-Cal costs that are not budgeted under the plan. These include, but are not limited to, CalAIM proposal. Additionally, requiring counties to CalAIM’s requirements that each plan establish a establish new eligibility processes for counties may population health management program, obtain constitute a new state mandate, for which the state NCQA accreditation, and set up a Medicare may need to reimburse county governments. Advantage special needs plan for their dual eligible Many Key Programmatic beneficiaries. Each of these new requirements on Details Are Lacking plans is likely to result in new costs for managed care plans, though these costs would vary How Would the Cost-Effectiveness of ILOS significantly among plans since many plans already Be Overseen by the State and Managed Care at least partially comply with some of CalAIM’s new Plans? ILOS are intended to be cost-effective standards. Although no direct funding for these new alternatives to standard Medi-Cal benefits. managed care plan requirements is provided under For example, home modifications such as ramp the funding plan, in the long run at least, some of installations are intended to deter placement in these costs could get built into the payments the nursing facilities, recuperative care is intended to state makes to managed care plans, which are set in reduce hospitals stays, and temporary housing part based on plans’ reported costs. assistance is intended to prevent emergency room Behavioral Health Reforms Could Increase visits for conditions that might develop during Counties’—and the State’s—Costs. As part of an periods of homelessness. By replacing such agreement in which the state realigned responsibility costly services as nursing home stays, hospital for certain programs and services to counties admissions, and emergency room visits with less (including behavioral health services), the state costly ILOS, the goal is for ILOS to ultimately offset is responsible for funding additional costs as a other costs in Medi-Cal (and potentially other public result of new state mandates placed on counties. programs). The extent to which ILOS ultimately will As discussed previously, the proposed medical offset other Medi-Cal costs is uncertain. Recent necessity revisions for receiving behavioral health research on such benefit expansions shows that, in services could result in additional costs that are not many cases, new preventive and care coordination budgeted in the administration’s multiyear funding services often supplement rather than substitute for plan, to the extent that they result in increased more costly services like hospital admissions and utilization of behavioral health services and do not nursing home stays. How the state and managed result in offsetting savings from counties receiving care plans would oversee and evaluate whether increased federal funding. In addition, the transfer ILOS are proving to be cost-effective alternatives of responsibility for covering specialty mental health to standard Medi-Cal benefits is unknown at this services to the county from a Medi-Cal managed time. Moreover, an evaluation of ILOS benefits could care plan (Kaiser) in two counties could lead to help to inform future state decisions on what ILOS a significant increase in costs in those counties. to extend and/or expand into statewide, mandatory Whether the state would be required to fund the covered benefits. additional costs counties may bear for these reforms is unclear. 2021-22 LAO Budget Series 10 analysis full gutter Would the State Meet the Requirements non-institutionalized SPDs). We have outstanding for Additional Federal Funding for Residential questions about how savings would be determined Mental Health Services? Historically, the state has under the shared savings calculation, how any favored placement in community settings for mental determined savings would be shared between plans health treatment over placement in institutional and the state and federal governments, and what settings, in keeping with the principle of providing the shared risk components of this proposal are. mental health care in the least restrictive setting Which Regions and What Adjustments Would possible. One of the requirements for the state to Be Used Under Regional Rate Setting? Which obtain approval for the CalAIM SMI/SED waiver counties would be grouped together regionally opportunity would be to demonstrate to the federal under the new rate-setting process is unclear and government that it is committed to maintaining likely remains under development. In addition, support for and potentially enhancing community whether DHCS would employ county-by-county or behavioral health treatment options. This is meant plan-by-plan adjustments to the regional capitated to ensure that additional federal funding provided rates to account for local differences in population for mental health services rendered in institutional health and the health care market conditions is settings does not incentivize institutional placement unclear. Such adjustments could be important for beyond what is absolutely necessary. While there protecting against disruptions in Medi-Cal managed is an accompanying budget proposal that may be care if the new regional capitated rates do not seen as complementary to this effort, the CalAIM adequately reimburse plans based on the underlying proposal does not provide details on the state health of their members and the prices charged by strategy to meet this federal requirement. local service providers. What Performance Benchmarks Related to Ensuring Transparency Around ECM and ILOS Would Trigger a Managed Care Plan Incentive Payment? The Governor’s proposal CalAIM Costs and Savings to spend $750 million General Fund over three years Tracking CalAIM’s Costs and Savings Could on incentive payments for managed care plans Prove Challenging Without New Reporting and lacks detail. What performance benchmarks would Evaluation Requirements. Standard Medi-Cal be used and how much plans would receive for budget documents are not organized in such a way achieving each benchmark are unclear. Additionally, or sufficiently detailed to allow analysts to closely the administration intends for this funding to be track the myriad fiscal impacts an initiative like shared with on-the-ground providers but the CalAIM is having in the program. Depending on administration provides no detailed plan for how decisions made by DHCS, supplementary budget this would be encouraged. Health Homes and documents such as managed care plans’ cost Whole Person Care providers likely would need to reports similarly may not contain sufficient detail for receive some of this funding in order to sustain their identifying the costs and savings of the components relatively new services and infrastructure. Whether of CalAIM that affect managed care. Accordingly, and how the performance benchmarks would reflect without new reporting and evaluation requirements, (1) the intent for the funding to flow to providers and the costs and savings of the various reforms of (2) the goal of sustaining Health Homes and Whole CalAIM would be challenging to track. This raises Person Care services and infrastructure is unclear. issues since many CalAIM reforms are intended to How Would Managed Care Shared Savings be cost-effective and ultimately to reduce program and Risk Be Structured? Although the concept of spending in the long run. Without being able to introducing shared savings and shared risk within identify the reform’s fiscal impact, the Legislature the capitated rate-setting process is promising, would not be able to know whether the reforms are information on how the administration intends to achieving their fiscal goals. The administration has structure this component of CalAIM generally is not yet to release a plan for how the fiscal impacts of available (with the exception of the proposal to blend CalAIM would be reported and evaluated. capitated rates for institutional LTC residents and 2021-22 LAO Budget Series 11 analysis full gutter Issues for Legislative Consideration Despite Multiyear Budget Problem, CalAIM significant fiscal risks due to its scope, complexity, Merits Consideration Since Relatively New but and the experimental nature of many of the reforms. Existing Programs Otherwise Would Expire. Unforeseen administrative costs could emerge as Under the Governor’s budget proposal, the state program administrators gradually realize all the would spend hundreds of millions of dollars of various systems changes that would be needed General Fund on an ongoing basis to implement to allow CalAIM’s reforms to be effective. Savings CalAIM. Unlike when CalAIM was proposed in might not materialize as expected from the creation January 2020, the 2021-22 proposal comes in the of improved care coordination and a variety of new context of a projected multiyear budget deficit. nonmedical benefits should the expanded access to In this context, major program expansions or preventive medical and nonmedical benefits prove embarking on untested new ways of delivering to supplement rather than substitute for more costly services, with significant accompanying fiscal risks, services. Considering the fiscal risks of CalAIM, may not be advisable. However, while much of particularly over the longer term, is important as the CalAIM represents novel changes to how Medi-Cal Legislature deliberates over which CalAIM reforms services are delivered and financed, much of the to adopt. proposed new General Fund spending reflects a Recommend the Enactment of Strong change in how the state would fund fairly new but Oversight and Evaluation of the Fiscal, as Well existing services. Should the Legislature choose as Programmatic, Components of CalAIM. The not to fund at least certain components of CalAIM, administration has yet to release a detailed plan certain programs that the state has been testing for how CalAIM would be overseen and evaluated. over the last several years would expire. That said, Standard budget documents and other reports the Legislature could ask the administration whether routinely released publicly by the administration are an additional, temporary extension of the state’s not suited to identifying CalAIM’s fiscal impacts. existing 1115 waiver is possible. This would allow We recommend that the Legislature establish existing programs to continue to operate at less cost a framework for overseeing and evaluating the to the state General Fund, though at higher cost to fiscal impacts of CalAIM. Such a framework could local governments. include regular reports from the administration that CalAIM Brings Significant Fiscal Risks in track the direct costs of each of CalAIM’s major Addition to Many Potential Programmatic reforms, as well as any direct or indirect savings Benefits. CalAIM has potential to transform that are generated from service and delivery Medi-Cal for the better by focusing attention on system improvements. We recommend this be high-risk, high-need beneficiaries, streamlining care part of a larger oversight and evaluation framework delivery and financing, and modernizing behavioral established by the Legislature, as discussed in our health services. However, CalAIM also brings post on CalAIM’s overarching issues. 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 12