The 2022-23 Budget: Medi-Cal Fiscal Outlook

analysis full gutter The 2022-23 Budget: Medi-Cal Fiscal Outlook NOVEMBER 2021 This post describes our fiscal outlook for This net increase primarily is due to our expectation Medi-Cal, the major factors that we expect to drive that enhanced (pandemic-related) federal funding changes in General Fund spending in Medi-Cal, no longer will be available and a scheduled ramp and a number of our key underlying assumptions. up in costs for augmentations approved in the (Specifically, this post concerns projections of 2021-22 Budget Act. Projected declines in caseload Medi-Cal local assistance spending within the and its associated costs reduce the projected Department of Health Care Services [DHCS].) growth in year-over-year spending below what it We estimate that Medi-Cal General Fund otherwise would be. spending will be $27.5 billion in 2021-22, a Between 2022-23 and 2025-26, we project downward adjustment of $470 million compared annual General Fund costs in Medi-Cal will grow to the 2021-22 Budget Act estimate. This by $3.5 billion to $34.6 billion. This cost growth adjustment largely is driven by our expectation largely is attributable to the assumed full phase out of higher levels of federal funding being available of certain non-General Fund sources of funding for (offsetting General Fund costs) than was previously Medi-Cal (most notably, from the managed care anticipated. Between our revised 2021-22 estimate organization [MCO] tax) and underlying per-enrollee and 2022-23, we project General Fund costs in cost growth related to projected changes in Medi-Cal to grow by $3.6 billion to $31.1 billion. utilization and service costs. BACKGROUND Medi-Cal, the state’s Medicaid program, could be substantially higher, lower, or more provides health care coverage to around 14 million volatile than we project. of the state’s low-income residents. Medi-Cal Fiscal Outlook Assumes Expiration of the costs generally are shared between the federal and National Public Health Emergency (PHE) state governments. In a typical year, the General Declaration Related to Coronavirus Disease Fund covers a little more than 20 percent of total 2019 (COVID-19) in Early 2022. In early 2020, Medi-Cal costs, with federal funds and other the federal government declared a national PHE state and local funds respectively covering the in response to the COVID-19 pandemic. There are remaining 65 percent and 15 percent of total costs. a number of temporary policy and financing rule Main Fiscal Outlook Assumes Declining changes within the Medi-Cal program that generally Unemployment Rates. While there remains remain in place for the duration of the PHE. For considerable uncertainty going forward, our example, Congress approved a 6.2 percentage 2022-23 Fiscal Outlook main forecast assumes that point increase in the federal government’s the unemployment rate gradually will decline over share of cost for most Medicaid services for the the next several years. Should this decline prove duration of the PHE. In addition, the same federal slower, faster, or more volatile than assumed in legislation effectively prohibits the state (as a our outlook, General Fund spending in Medi-Cal condition of receiving the enhanced federal share of Medicaid costs) from terminating the eligibility 2022-23 Budget Series 1 analysis full gutter of current Medi-Cal enrollees, except in limited declaration will expire at this time. We describe the circumstances, until after the PHE ends. This fiscal implications of this assumption, as well as of prohibition is known as the “continuous coverage the alternative scenario where the PHE is extended requirement.” When the national PHE declaration beyond early 2022, in further detail later in this post. will end is an assumption that significantly impacts Fiscal Outlook Assumes Current State and our spending projections. The 2021-22 Budget Federal Law and Policy. Our outlook generally Act assumed the PHE declaration would expire assumes current laws and policies remain in place by the end of December 2021. While the end date throughout the outlook window (through 2025-26). of the PHE declaration is subject to considerable This includes federal law and policy. For example, uncertainty, the federal government recently we assume the state’s managed care organization announced the renewal of the PHE through at (MCO) tax will expire halfway through 2022-23 least the first half of January 2022 (with enhanced as scheduled in statute. (We describe the fiscal federal funding expiring at the end of March 2022). implications of our assumptions regarding the MCO Consequently, our outlook assumes that the PHE tax in further detail later in this post.) OVERVIEW OF PROJECTIONS Below, we summarize our projected adjustments -General Fund costs in HCBS programs operated to the Medi-Cal budget and describe the major by DHCS. Per state and federal law, all associated drivers of these changes, both in the near and HCBS program savings ultimately will be used to longer terms. The “near term” includes the current support various HCBS program augmentations, as year (2021-22) and budget year (2022-23) and the outlined here.) Second, we estimate $140 million “longer term” includes the final three years of the outlook window Figure 1 (2023-24 through 2025-26). Major Drivers of Estimated Net Near Term Reduction in 2021-22 Medi-Cal Spending General Fund (In Millions) Hundreds of Millions of Dollars in Estimated General Fund Savings in 2021-22… We estimate that Medi-Cal General Enhanced Federal Fund spending will be $27.5 billion -$280 HCBS Funding in 2021-22, a downward adjustment of $470 million compared to the Assumed One-Quarter 2021-22 Budget Act (budget act) -$140 Extension of PHE estimate. As shown in Figure 1, there are three major drivers of this downward adjustment. Lower-Than-Anticipated -$70 Caseload Growth First, we reflect $280 million in General Fund savings due to the 6 percentage point increase in the Assorted Other Changes $20 federal share of cost for home- and community-based services (HCBS) authorized by the American Rescue Revised LAO Estimate Budget Act Estimate Plan Act for the period of April $27,506 $27,977 2021 through March 2022. (These savings only reflect reduced HCBS = home- and community-based services and PHE = public health emergency. 2022-23 Budget Series 2 analysis full gutter in net General Fund savings due to our assumption • Ramp Up of Costs for Budget Act that certain program rules related to the PHE Discretionary Augmentations. Over remain in place through March 2022 (the end of the $1.8 billion of the projected increase in net quarter during which the PHE expires)—rather than General Fund costs between 2021-22 and through December 2021 as was assumed in the 2022-23 is attributed to the ramp up of budget act. This amount is the net effect of (1) an costs for discretionary augmentations in extra three months with the enhanced federal share Medi-Cal approved in the budget act. (This of cost for Medi-Cal and (2) higher costs for certain amount reflects the net of higher costs and temporary COVID-19-related policies which expire savings from the scheduled expiration of the at or after the end of the PHE (such as certain augmentations that were one time.) These temporary provider reimbursement rate increases). include several major augmentations, such as: Third, we estimate slower caseload growth than » $1.2 billion General Fund in 2022-23 for the was projected in the budget act, resulting in Behavioral Health Continuum Infrastructure $70 million in General Fund savings. Program (an increase of $720 million from …Followed by a Large Projected Upturn in the 2021-22 level). Net General Fund Costs in 2022-23. We project » $560 million General Fund in 2022-23 to a $3.6 billion net increase in General Fund costs expand comprehensive Medi-Cal coverage in Medi-Cal between 2021-22 and 2022-23. This for undocumented adults age 50 and up (an year-over-year increase is the result of a large increase of $520 million from the 2021-22 number of individual adjustments. Figure 2 and the level). following bullets summarize the major drivers of the » $450 million General Fund in 2022-23 for projected year-over-year net increase in General school behavioral health partnerships and Fund costs. capacity (an increase of $350 million from the 2021-22 level). • Assumed Expiration of Major Sources of Non-General Fund Funding. Figure 2 We assume that three major sources of non-General Major Drivers of Projected Net Increase in Fund funding for Medi-Cal Medi-Cal Spending Between 2021-22 and 2022-23 expire in 2022-23, together General Fund (In Millions) raising year-over-year General Fund costs by around $2.5 billion. First, we estimate Ramp Up of 2021-22 Budget Act +$1,800 higher General Fund costs Augmentations of $1.7 billion in 2022-23 due Assumed Expiration to the assumed expiration of +$1,700 of PHE in Early 2022 the PHE’s enhanced federal share of cost at the end of Underlying Per-Enrollee +$1,300 Cost Growth March 2022. Second, we assume the MCO tax expires Assumed Expiration +$500 of MCO tax halfway through 2022-23 and is not reauthorized, Projected Caseload Declines -$1,300 raising General Fund costs by $500 million. Third, we back Assorted Other Changes -$430 out the 2021-22 increase in federal funding for Medi-Cal HCBS programs, which 2021-22 Estimate 2022-23 Projection $27,506 $31,146 raises General Fund costs in PHE = public health emergency and MCO = managed care organization. 2022-23 by $280 million. 2022-23 Budget Series 3 analysis full gutter » $430 million one-time General Fund 1 million enrollees (7.4 percent), reducing in 2022-23 to provide grants for General Fund costs by $1.3 billion. evidence-based behavioral health practices • Assorted Other Adjustments Reduce for children and youth. Costs. We project $430 million in additional » The elimination of the asset test for General Fund savings in 2022-23 compared determining Medi-Cal eligibility (which will to 2021-22, which reflect the net impact of a result in General Fund costs of $200 million large number of individual adjustments. The in 2022-23). largest such adjustments include additional » $780 million General Fund in 2022-23 to funding from a fee on hospitals (which offset implement the California Advancing and General Fund costs), savings related to the Innovating Medi-Cal (CalAIM) initiative transition of Medi-Cal pharmacy services (an increase of $150 million above the from managed care to fee-for-service (a 2021-22 level). change known as Medi-Cal Rx), and the expiration of certain temporary policies related » $180 million General Fund in 2022-23 to to COVID-19. extend postpartum Medi-Cal coverage for new mothers for 12 months post-childbirth (an increase of $140 million above the Longer Term 2021-22 level). General Fund Spending in Medi-Cal • Underlying Per-Enrollee Cost Growth. Projected to Grow by $3.5 Billion From 2022-23 Underlying per-enrollee cost growth in to 2025-26. We project annual General Fund Medi-Cal is driven by changes in utilization costs in Medi-Cal will grow from $31.1 billion to and service costs. We project General Fund $34.6 billion between 2022-23 and 2025-26. This costs to grow between 2021-22 and 2022-23 reflects an average net annual General Fund cost by $1.3 billion (5 percent) due to per-enrollee growth of nearly $1.2 billion (3 percent). The major cost growth. As we describe further below, long-term net cost drivers include: this higher than usual per-enrollee cost growth results from (1) higher caseload • Full Phase Out of Funding From Certain and (2) our projections that as caseload Non-General Fund Sources. As previously declines, relatively more expensive caseload discussed, we assume that the enhanced groups (such as seniors and persons with federal funding under the PHE declaration disabilities) will remain on the program in expires three-quarters of the way through higher proportions, which raises average cost 2021-22 and that the MCO tax expires halfway per enrollee. through 2022-23 The full projected phase out of these non-General Fund sources of • Savings From Significant Projected funding for Medi-Cal result in $1.9 billion of the Reductions in Caseload. Caseloads (and projected $3.5 billion net increase in General their associated costs) have increased Fund spending in Medi-Cal between 2022-23 dramatically during the PHE—largely due and 2025-26. to the continuous coverage requirement and economic conditions such as higher • Underlying Per-Enrollee Cost Growth. unemployment. We project that caseloads, Between 2022-23 and 2025-26, we and their corresponding costs, will project General Fund costs to grow by decline substantially beginning in 2022-23 around $1 billion (3 percent) annually due following the expiration of the continuous to per-enrollee cost growth. This rate of coverage requirement and declines in the growth is roughly in line with historical rates unemployment rate. Specifically, between of underlying per-enrollee cost growth in 2021-22 and 2022-23, we project that total Medi-Cal. We discuss our projections for Medi-Cal caseload will decline by over underlying per-enrollee cost growth, as 2022-23 Budget Series 4 analysis full gutter well as for caseload, in greater detail in the lower in 2023-24 and beyond due to the next section of this post. expiration of various limited-term budget act • Expiration of Funding for a Variety discretionary augmentations in Medi-Cal. of Discretionary Augmentations. This reduction in costs is nearly entirely Compared to 2022-23, we project annual driven by the expiration of billions of dollars General Fund costs to be about $2 billion in limited-term funding for various behavioral health-related augmentations. SIGNIFICANT UNDERLYING NET COST GROWTH Underlying Net Cost Growth Averaging Project Large Decline in Caseload Following Around $900 Million Annually Throughout the End of the PHE Declaration. As shown in Figure 3 Forecast Window. Underlying net cost growth on the next page, we project a large decline in the reflects the fiscal impact of changes in the Medi-Cal overall Medi-Cal caseload following the end of the caseload and per-enrollee costs. Over the full PHE declaration. In particular, during the 12-month forecast window, we project annual underlying period after the continuous coverage requirement net cost growth averaging nearly $900 million expires, we expect caseloads to drop substantially General Fund. This net cost growth stems from our as a result of the resumption of eligibility projection that average per-enrollee cost growth terminations for enrollees found ineligible for the will more than offset the savings from projected program under normal eligibility rules along with declines in caseload. We describe these projections improving economic conditions. Between 2021-22 in detail below. and 2022-23 under our projections, Medi-Cal caseload will shrink by about 1 million enrollees Projected Caseload Declines (7.4 percent), which will result in reduced General Beginning in Late 2021-22 Fund costs in 2022-23 of about $1.3 billion relative to 2021-22. We expect caseloads will continue to Significant Medi-Cal Caseload Growth Under decline through the outlook period, largely due the PHE. As we noted previously, the Medi-Cal to reductions in the unemployment rate, but that caseload (and its associated costs) have increased the rate of decline will begin to level off in the final dramatically during the PHE. Between March years of the outlook window. Accordingly, while we 2020 and July 2021, total Medi-Cal caseload has project a total caseload decline of around 3 percent grown from around 12.5 million enrollees to roughly between 2022-23 and 2023-24, we project 14 million enrollees, a 12 percent increase. This essentially flat caseload trends in the final years of increase largely was driven by the continuous the outlook. Despite these anticipated declines, coverage requirement and economic factors we assume caseload will remain higher than during such as higher unemployment. While the budget the pre-pandemic period due to our long-run act assumed a 7.6 percent increase in caseload demographic and labor market projections. between 2020-21 and 2021-22, we estimate For example, while our outlook assumes that growth will be 6.8 percent due to actual caseload the state’s unemployment rate will continue to through June 2021 being lower than assumed in improve relative to its peak during the pandemic the budget act. (This reduction in caseload growth (15.2 percent), we assume that it will remain higher occurs despite our assumption that the PHE lasts than the pre-pandemic unemployment rate of one additional quarter compared to budget act about 4.3 percent. assumptions.) Consequently, we expect Medi-Cal Caseload Projections Subject to caseload costs to be $70 million lower in 2021-22 Considerable Uncertainty. Our caseload than was assumed in the budget act. estimates are subject to significant uncertainty compared to prior years. As described earlier, 2022-23 Budget Series 5 analysis full gutter the end of the PHE declaration has a significant rates to have lower average per-enrollee costs. impact on caseload. Consequently, if the PHE This movement of less costly enrollees out declaration is extended beyond the third quarter of the program has the effect of significantly of 2021-22, Medi-Cal caseload would not decline increasing average per-enrollee cost growth in as we forecast. Moreover, while there have been Medi-Cal starting in 2022-23. (In part, this is due significant gains in the labor market over the course to differences in the federal share of cost between of 2021, there is uncertainty as to when jobs will such populations.) While we would expect average recover, further impacting our caseload estimates. per-enrollee cost growth of around 3 percent annually in periods where the caseload is stable, Underlying Per Capita Cost Growth we project average annual per-enrollee cost growth Consistent with our expectation that new of almost 4 percent due to projected caseload enrollees in Medi-Cal during challenging economic declines between 2021-22 through 2025-26. In times will have, on average, lower per-enrollee General Fund terms, our projections of per-enrollee costs than beneficiaries with longstanding ties cost growth add around $1.1 billion annually to to the program, we expect those who leave the Medi-Cal costs. program during periods of declining unemployment Figure 3 Medi-Cal Caseload Projected to Decline Following End of PHE Before Leveling Off LAO Projections by Caseload Category (In Millions) 16 Total 6.9 Families 15 Projected 6.7 14 6.5 13 Actual 6.3 12 6.1 11 5.9 10 5.7 9 5.5 2013-14 15-16 17-18 19-20 21-22 23-24 25-26 2013-14 15-16 17-18 19-20 21-22 23-24 25-26 5 ACA Optional Expansion 2.4 SPDs 2.3 4 2.2 3 2.1 2 2.0 1.9 1 1.8 2013-14 15-16 17-18 19-20 21-22 23-24 25-26 2013-14 15-16 17-18 19-20 21-22 23-24 25-26 PHE = public health emergency; ACA = Patient Protection and Affordable Care Act; and SPDs = seniors and persons with disabilities. 2022-23 Budget Series 6 analysis full gutter FISCAL IMPLICATIONS OF MAJOR ASSUMPTIONS This section provides further detail on the fiscal certain providers), should reduce General Fund implications of two major assumptions—that the costs in Medi-Cal. We project that such reduced PHE declaration will expire in January 2022 and that costs would offset over one-third of the higher the MCO tax will expire halfway through 2022-23 General Fund costs due to the expiration of the without reauthorization. Additionally, we estimate enhanced federal funding. the fiscal impacts of alternative assumptions: (1) if An Extension of the PHE Beyond Early 2022 the PHE declaration were to remain in place beyond Would Bring Significant Net General Fund early 2022 and (2) if the MCO tax is reauthorized Savings. Our assumed expiration date for the PHE at a similar level as the current tax. Finally, we note is highly uncertain. When the expiration occurs that if Medi-Cal price inflation exceeds the historical ultimately will depend on public health conditions average, General Fund cost pressure in Medi-Cal around the country, as well as other national could be higher than we project. considerations. For each additional quarter that the PHE declaration remains in effect beyond Assumed Expiration of PHE in Early January 2022, we would expect additional General 2022 Fund savings in Medi-Cal of around $500 million. This amount reflects the net fiscal impact of Below, we discuss the fiscal implications of (1) savings from the longer duration of enhanced our PHE declaration assumption in further detail federal funding and (2) additional costs related to and explore the fiscal implications of alternative the continuous coverage requirement’s effect on scenarios where the PHE declaration remains in caseload, as well as other policies in place during place past the first quarter of 2022. the PHE. Expiration of Enhanced Federal Funding Will Result in Higher General Fund Costs in the Assumed Expiration of the MCO Tax Low Billions of Dollars… We estimate that having three-quarters of the enhanced federal funding in Reauthorization of the MCO Tax Would 2021-22 will result in $2.5 billion in General Fund Generate Billions of Dollars in General Fund savings (compared to typical cost-sharing ratios). Savings Beginning in 2023-24. The MCO Once the enhanced federal funding expires, the tax generates annual General Fund savings in associated General Fund savings will phase out. Medi-Cal of $1.5 billion or more for each year it Given cash budgeting in Medi-Cal, we expect the is in effect. Under current state law, the MCO tax phase out of General Fund savings to take two is scheduled to expire in December 2022. Our years. Between 2021-22 and 2022-23, we project projections assume the MCO tax expires at the the phase out will raise General Fund costs in scheduled date and is not reauthorized, resulting Medi-Cal by $1.7 billion. Then, in 2023-24, the full in higher annual General Fund costs in Medi-Cal phase out will raise General Fund costs by another that reach nearly $1.7 billion by 2024-25. However, $800 million. legislative reauthorization of a similar MCO tax for a three-year period beginning in January 2023 …Which Likely Will Be Offset Partially by could result in around $2 billion in annual General Other Savings Resulting From the End of the Fund savings relative to our projections in 2023-24 PHE Declaration. With the assumed expiration of and 2024-25 and $1 billion in General Fund the enhanced federal funding at the end of March savings in 2025-26. Despite a reauthorized tax 2022, the continuous coverage requirement also will potentially taking effect halfway through 2022-23, end. As we described above, we expect caseload we assume the associated General Fund savings will decline significantly once the continuous would not materialize until the following year due to coverage requirement expires. This, as well as the payment delays. expiration of other policies in place during the PHE declaration (such as reimbursement increases for 2022-23 Budget Series 7 analysis full gutter Inflation Expectations uncertainty. As Medi-Cal price inflation and broader measures of inflation in the economy are Inflation in the overall state economy has been different, the Medi-Cal Outlook does not project considerably higher over the last several months any substantially increased cost from inflationary than average historical levels. Although the pressures. Should they arise, however, General consensus of economic forecasters anticipates Fund cost pressure in Medi-Cal could be higher that inflation will subside to historical levels within a than we project. year or so, these forecasts are subject to significant LAO PUBLICATIONS This report was prepared by Corey Hashida, Ben Johnson, and Luke Koushmaro, and reviewed by Mark C. Newton and Carolyn Chu. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 2022-23 Budget Series 8