The 2022-23 Budget: Analysis of the Medi-Cal Budget

The 2022-23 Budget: Analysis of the Medi-Cal Budget Summary Overall Medi-Cal Budget Picture. The Governor’s budget proposes $34.9 billion for Medi-Cal from the General Fund ($133 billion total funds) in 2022-23, an increase of roughly $8 billion (30 percent) over the revised 2021-22 General Fund estimate. Of this $8 billion, $6.4 billion is for technical and workload adjustments, with the balance for policy proposals. Assumed Expiration of the Public Health Emergency (PHE) Is Reasonable, While Leaving Room for Fiscal Upside. In 2020, Congress approved an increase in the federal share of cost for Medicaid for the duration of the PHE related to COVID-19. The Governor’s budget assumes the PHE remains in place through June 2022, which we find reasonable. However, an additional extension of the PHE is plausible, in which case we estimate that every additional quarter the PHE is in effect would result in roughly $300 million in General Fund savings in Medi-Cal. Governor’s Caseload Projections May Be Overstated; End Date of PHE Relevant. The administration projects continued caseload growth until the budget’s assumed end of the PHE in June 2022, after which the administration projects steep caseload declines. To assess the reasonableness of the Governor’s projections, we model two scenarios—one where the PHE expires in April 2022 and another where the PHE is extended until July 2022. In both scenarios, we project lower caseload than the administration and hundreds of millions of dollars in General Fund savings across 2021-22 and 2022-23 compared to the Governor’s January budget. Recommend Legislative Consideration of Options to Renew the Managed Care Organization (MCO) Tax. The current MCO tax is scheduled to expire in December 2022. By not proposing to renew the MCO tax, the Governor’s budget would allow it to expire, raising General Fund costs in Medi-Cal by around $1.6 billion annually beginning in 2023-24. While we agree with the administration that the reprocurement of MCO’s Medi-Cal contracts presents challenges for the MCO tax’s renewal, we think this barrier could be overcome. We recommend the Legislature explore the feasibility and trade-offs of options for renewing the MCO tax as part of its budget deliberations. Two Discretionary Policy Proposals Raise Questions for Legislative Consideration. We analyze the Governor’s proposals to: (1) make payments to providers to promote health equity and outcomes and (2) eliminate certain provider payment rate reductions. We provide several questions for the Legislature to ask the administration to assist in its assessment of these proposals and suggest that it consider alternative and/or complementary approaches to fulfilling the goals behind them. GABRIEL PETEK | LEGISLATIVE ANALYST FEBRUARY 2022 2022-23 BUDGET BACKGROUND Medi-Cal Is the State’s Medicaid Figure 1 Program. Medi-Cal provides health care coverage to over 14 million Californians A Decade of Medi-Cal Spending: with low incomes. As a joint state-federal 2013-14 to 2022-23 program, costs are shared between the (In Billions) federal and state as well as local governments. The Department of Health Care Services $140 (DHCS) administers the Medi-Cal program. Figure 1 summarizes Medi-Cal spending 120 Other Nonfederal Funds trends over the last decade. Federal funds 100 currently support 69 percent of total 80 Medi-Cal expenditures, followed by General General Fund 60 Fund (20 percent) and other state and local funds (11 percent). 40 Federal Funds 20 2013-14 14-15 15-16 16-17 17-18 18-19 19-20 20-21 21-22 22-23 EstimatedProposed OVERVIEW OF THE GOVERNOR’S BUDGET CURRENT YEAR requirements on top of standard Medicaid rules, the most important being a prohibition on states Estimated General Fund Spending Revised from terminating eligibility for existing beneficiaries Downward by $1.3 Billion to Slightly Above except in limited circumstances. This is known as $26.8 Billion. The Governor’s budget estimates the “continuous coverage requirement.” The federal Medi-Cal spending to be $26.8 billion General government determines when the PHE is over. Fund ($124 billion total funds) in 2021-22. This While the increase in federal funding lowers General reflects an approximately $1.3 billion (nearly Fund costs in Medi-Cal, the continuous coverage 5 percent) downward adjustment relative to what requirement raises General Fund (and total fund) was assumed in the 2021-22 Budget Act. This costs by increasing Medi-Cal caseload levels above downward adjustment is very similar in magnitude what they otherwise would be. On net, the state to that made last January to the prior year’s budget receives significant savings for each period the PHE act at the Governor’s 2021-22 budget. Below, we remains in effect. The 2021-22 Budget Act assumed describe the major drivers of this net General Fund the increase in federal funding would expire at the downward adjustment. end of December 2021, whereas the Governor’s Extension of COVID-19 Public Health budget assumes a six-month extension of the Emergency (PHE), Generating General Fund PHE through the end of the 2021-22. We estimate Savings. As a part of federal COVID-19 response that about $900 million of the downward General legislation, Congress approved a 6.2 percentage Fund adjustment in 2021-22 is due to the assumed point increase in the federal government’s share of extension of the PHE. We assess the reasonableness cost for Medicaid for the duration of the COVID-19 of the Governor’s budget assumptions on the national PHE. To be eligible for this increased expiration of the PHE in the “Analysis of Technical federal funding, states must comply with several Adjustments” section of this report. 2 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Shift in the Timing of Payments, Leading to Lower One-Time Costs for CalAIM. CalAIM is Lower Costs. Medi-Cal is budgeted on a “cash a large set of reforms in Medi-Cal to expand basis,” meaning that costs are based on when access to new and existing services and streamline payments are made rather than when services are how services are arranged and paid. As part delivered. Changes in the timing of payments occur of the streamlining effort, the state is changing regularly and are difficult to predict. Additionally, requirements related to which beneficiary implementing new Medi-Cal programs and policy populations are mandatorily enrolled in managed changes often occurs more slowly than the budget care or fee-for-service (Medi-Cal’s two main anticipates, which can result in shifts of funding to delivery systems). These transitions are expected subsequent years. Shifts of funding between years to occur in 2022 and 2023. While the transitions are due to these factors result in around $740 million assumed to be cost neutral on an ongoing basis, in General Fund savings in 2021-22. About one-time costs are anticipated due to differences $550 million of these General Fund savings reflect in the timing of payments between managed care a shift of funding into 2022-23, primarily due to and fee-for-service. The 2021-22 Budget Act new implementation time lines for various 2021-22 included $175 million General Fund to support behavioral health augmentations and the California these one-time costs. The Governor’s budget Advancing and Innovating Medi-Cal (CalAIM) revises these costs downward by $170 million reform package. General Fund. According to the administration, Higher Federal Repayments and Deferrals. correcting a budgeting error is the primary reason Federal Medicaid rules require the state to repay the for the adjustment. federal government when federal funding is claimed in error. Additionally, the federal government defers BUDGET YEAR the availability of federal funds when it identifies Proposed General Fund Spending Growth of claims that potentially were made in error. In $8 Billion—to $34.9 Billion—Between 2021-22 cases where the federal government subsequently and 2022-23. The Governor proposes $34.9 billion determines the claiming was not done in error, the in General Fund spending ($133 billion total funds) deferred federal funds will be released and made in 2022-23, a roughly $8 billion (30 percent) available to the state. In both situations, General increase in General Fund spending over the Fund generally must be used to repay the federal revised 2021-22 estimate. This reflects the government or backfill deferred federal funds until largest year-over-year dollar increase in General they are released. The revised 2021-22 Medi-Cal Fund spending in the last decade and is roughly budget estimates General Fund costs related to equivalent to the largest percent increase in federal repayments and deferrals to be about General Fund spending over the same time period, $500 million higher than was assumed in the budget which occurred between 2020-21 and 2021-22. act, reflecting one of the largest individual upward Figure 2 on the next page shows the major drivers adjustments since 2016-17. This significant upward of the proposed net increase in Medi-Cal spending adjustment reflects (1) the federal government’s between 2021-22 and 2022-23. clarification of how much the state must repay for prior years of erroneous claims within the managed Technical Adjustments Account care system ($249 million), (2) a shift in the timing for $6.4 Billion of the Net Growth in of a repayment related to dental services from Spending 2020-21 to 2021-22 ($190 million), (3) a downward Technical adjustments, or changes in the funding revision to the estimated amount of increased needs of the program under existing program rules, federal funding available to support the costs of account for around 80 percent of the growth in certain immigrant populations for which the state proposed General Fund spending between 2021-22 had previously been under-claiming federal funds and 2022-23. While the following paragraphs ($102 million), and (4) updated assumptions related summarize the major General Fund cost drivers, to the timing by which deferred federal funds would many additional factors contribute to this increase be released ($77 million). in proposed spending. www.lao.ca.gov 3 2022-23 BUDGET Ramp Up of 2021-22 Augmentations. Higher Federal Repayments and Deferrals. The 2021-22 Budget Act included multiple, About $397 million (5 percent) of the overall multiyear Medi-Cal augmentations for which the year-over-year net increase in General Fund associated spending was expected to ramp up spending is associated with repayments to the in subsequent years. These include, for example, federal government for erroneously claimed federal CalAIM and certain components of the Children and funds and the deferral of federal funding. This Youth Behavioral Health Initiative. Additionally, as increase largely is the result of a large, one-time previously noted, implementation of certain 2021-22 repayment to the federal government for erroneous augmentations have been slower than anticipated, claims within managed care. resulting in spending originally expected to occur Additional General Fund Needed to Backfill in 2021-22 shifting into 2022-23. These two Projected Declines in Proposition 56 (2016) factors lead to sharply rising General Fund costs Revenues. Proposition 56 raised state taxes on to implement 2021-22 budget act augmentations tobacco products and dedicates most revenues in 2022-23 compared to 2021-22. The ramp up to Medi-Cal on an ongoing basis to increase of these augmentations accounts for $3.5 billion payments to Medi-Cal providers. The administration (44 percent) of the overall year-over-year net projects a substantial decline in Proposition 56 increase in General Fund spending in Medi-Cal. revenues between 2021-22 and 2022-23, primarily Assumed Expiration of the PHE, Raising as a result of the anticipated implementation of General Fund Costs. As previously discussed, a statewide ban on the sale of flavored tobacco the Governor’s budget assumes the PHE expires products. Under the administration’s projections at the end of June 2022, ending the increase in for 2022-23, Proposition 56 would not provide the federal share of cost, the continuous coverage enough revenue to Medi-Cal to cover the costs of requirement, and other temporary COVID-19-related policies. Figure 2 Because the state receives significant net savings under the Major Drivers of Proposed Net Increase in PHE, its assumed expiration at Medi-Cal Spending Between 2021-22 and 2022-23 the beginning of 2022-23 has General Fund (In Millions) the effect of significantly raising General Fund costs in Medi-Cal on a year-over-year basis. We Ramp Up of Major estimate that, under the Governor’s Prior-Year Augmentations +$3,526 budget assumptions, the expiration Assumed Expiration of the +$2,257 Public Health Emergency of the PHE is responsible for nearly $2.4 billion (28 percent) Discretionary Proposals +1,617 of the overall net growth in General Fund spending between Underlying Cost Growth +$826 2021-22 and 2022-23. Federal Repayments +$397 Underlying Cost Growth. and Deferrals Underlying cost growth General Fund Backfill For +$176 Proposition 56 Funding reflects changes in Medi-Cal costs due to health care cost Other Net Costs +$97 inflation and underlying service Lower Net Spending on -$858 utilization trends. We estimate that Drugs and Medical Supplies underlying cost growth accounts for about $830 million (10 percent) 2021-22 Revised 2022-23 Proposed of the overall net increase in $26,847 $34,886 General Fund spending between 2021-22 and 2022-23. 4 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Proposition 56-funded provider payment increases. Expansion of Medi-Cal to All Income-Eligible To sustain these increases, the Governor proposes Californians. Historically, undocumented to use General Fund in place of Proposition 56 immigrants who were income-eligible for Medi-Cal funds, which has the effect of raising projected only qualified for coverage for their emergency- and General Fund spending in Medi-Cal by $176 million. pregnancy-related services. Over the last several Higher Prescription Drug and Medical years, and in a number of steps, the Legislature Supply Savings. The state collects rebates on the has expanded comprehensive Medi-Cal coverage prescription drugs and medical supplies used by to all income-eligible undocumented immigrants Medi-Cal beneficiaries. The associated revenue, who are under the age of 26 or over the age of 49. the amount of which is hard to predict in advance, The Governor proposes to expand comprehensive is used to offset state and federal spending in Medi-Cal coverage to all income-eligible Medi-Cal. In January 2021, the state began to undocumented immigrants aged 26 through 49 (the implement Medi-Cal Rx, which transfers Medi-Cal’s last remaining population not eligible for pharmacy services benefit from managed care to comprehensive Medi-Cal coverage) beginning no fee-for-service. The Governor’s budget projects earlier than January 1, 2024. While no funding is that Medi-Cal Rx will result in gradually increasing provided within the budget window (2021-22 and savings over time. Between 2021-22 and 2022-23, 2022-23) due to the proposed schedule of the Governor’s budget projects that net General implementation, the administration estimates the Fund spending on prescription drugs and medical expansion would cost $614 million General Fund supplies will fall by $868 million. These projected ($819 million total funds) beginning in 2023-24. net savings are driven both by the assumed On an ongoing basis, the administration projects higher savings from implementing Medi-Cal Rx the expansion would cost $2.2 billion General Fund and projected increases in rebate revenue not ($2.7 billion total funds) annually. Of this ongoing connected to Medi-Cal Rx. annual spending, about $400 million General Fund is expected to fall outside of the Medi-Cal Discretionary Policy Proposals budget and instead be captured in the In-Home Account for Remaining $1.6 Billion in Supportive Services (Department of Social Services) Cost Growth budget. We will analyze this proposal in a separate publication on the Governor’s health care access The Governor proposes a number of discretionary and affordability proposals. augmentations to the Medi-Cal budget, totaling Equity and Practice Transformation Grants. about $1.6 billion. These augmentations collectively The Governor proposes $200 million General Fund account for 20 percent of the net increase in ($400 million total funds) in one-time Medi-Cal General Fund spending between 2021-22 and spending in 2022-23 to promote health equity 2022-23. The ongoing costs of these augmentations and improve outcomes in the areas of children’s are expected to be over $2 billion General Fund preventive services, maternal health, and mental annually. The remaining paragraphs in this section health and substance use disorder treatment. describe those proposals. The goals of the initiative include, for example, Behavioral Health Bridge Housing Funding. the closing of racial and ethnic disparities in child The Governor proposes $1.5 billion General Fund immunizations, prenatal care, and child delivery via in one-time funding (available over two years) to cesarean section. We further describe and analyze augment last year’s Behavioral Health Continuum this proposal in the final section of this brief. Infrastructure Program to provide immediate Reduce Medi-Cal Premiums to $0. While housing support (and time-limited treatment Medi-Cal coverage is free for the vast majority of services) for people with behavioral health needs. program recipients, several hundred thousand While many details of this proposal remain under beneficiaries must pay premiums to remain development, the funding is intended to go to enrolled in the program due to their incomes being counties. We plan to analyze this proposal in a over standard Medicaid income-eligibility levels. separate behavioral health-focused budget post. www.lao.ca.gov 5 2022-23 BUDGET For the largest affected population, premiums Adds New Benefits. The Governor’s equal $13 per beneficiary per month, with a family budget proposes to add three new benefits to maximum monthly premium of $39. The Governor the Medi-Cal program in 2022-23: (1) mobile proposes to reduce all Medi-Cal premiums to crisis behavioral health intervention services, $0 beginning at the start of 2022-23. The Governor’s (2) coverage of the human papillomavirus vaccine budget projects the cost of effectively eliminating within the Family Planning Access Care Treatment Medi-Cal premiums to be $19 million General program that is operated through Medi-Cal, and Fund ($53 million total funds). We will analyze this (3) laboratory-processed crowns within the Medi-Cal proposal in a separate budget publication on health dental program for adult beneficiaries (children care access and affordability. on Medi-Cal already are eligible for this benefit). Financing Reform for Certain Major Medi-Cal The Governor’s budget projects $34 million General Provider Types. The Governor’s budget expresses Fund ($154 million total funds) will be needed to an intent to reform Medi-Cal financing for three support these new benefits. We will analyze the key Medi-Cal provider types: (1) health centers mobile crisis behavioral health intervention services (nonprofit health care clinics that deliver health care proposal in our budget post on behavioral health. in medically underserved areas and to medically Discontinue the Existing Delay in End-of-Year underserved populations), (2) nursing facilities, and Fee-for-Service Provider Payment Processing. (3) public hospitals. We understand that the intent As a budget solution in 2006-07, the state of these reforms generally is to expand the use of implemented a delay in processing fee-for-service value-based payment models. The administration provider payments for the last two weeks of intends to propose statutory changes to authorize the fiscal year—a delay which remains in effect the reforms. The statutory language related to today. Because Medi-Cal is budgeted based on health centers is expected to be released in when payments are made, the delayed payment February 2022. The language affecting nursing processing generated one-time savings in 2006-07. facilities is expected within several weeks while that The Governor’s budget proposes to discontinue this for public hospitals is expected to remain under delay in provider payment processing in 2022-23 development through the entire 2022-23 budget in order to ease associated provider cash flow process, and therefore likely will not be available for challenges. One-time funding is needed to support consideration until at least next year. The only fiscal the action since it would cause an additional two impact assumed in the Governor’s budget proposal weeks of provider payments to occur in 2022-23 related to these financing reform proposals is for the as opposed to 2023-24. The Governor’s budget nursing facilities, which roughly is estimated to cost estimates $309 million General Fund ($796 million $46 million General Fund ($96 million total funds). total funds) would be needed for this purpose. Eliminate Certain Provider Payment Rate Reductions. To help address the state budget crisis that accompanied the Great Recession over a decade ago, the state put in place Medi-Cal payment rate reductions of up to 10 percent for a variety of provider types. The Governor’s budget proposes to eliminate these rate reductions for several provider types at a cost of $9 million General Fund ($20 million total funds). We provide further detail and analyze this proposal in the last section of this brief. 6 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET ANALYSIS OF TECHNICAL ADJUSTMENTS BUDGET ASSUMPTION ON THE recent federal action to extend the PHE, the assumption, as it relates to the expiration of the EXPIRATION OF THE COVID-19 PHE increase in federal funding, is consistent with the PHE Currently Set to Remain in Place latest federal action. In generally being consistent Until April 16, 2022. The federal government with the latest federal action and current COVID-19 declared a national PHE related to COVID-19 on conditions, we find the Governor’s budget’s January 31, 2020. Federal PHEs typically last for assumed expiration of the PHE to be reasonable. 90 days unless renewed by the Secretary of the Nevertheless, given existing COVID-19 conditions federal Department of Health and Human Services. and uncertainties, an additional extension of the On January 14, 2022, the federal government PHE is entirely plausible. An additional renewal renewed the then-latest PHE declaration, which likely would extend the PHE at least into July 2022— otherwise would have expired on January 16, 2022. resulting in the increase in federal funding remaining Unless prematurely terminated (which we do not in place through September 2022. We roughly think is likely), the PHE currently is set to remain estimate that for every additional quarter the PHE in place until April 16, 2022. Additionally, the remains in effect past the second quarter of 2022, Biden administration has committed to providing the state would save around $300 million General 60-day notice of a possible termination of the Fund in Medi-Cal (this does not include an estimated PHE. Accordingly, by mid-February 2022, the state nearly $300 million in additional General Fund should know whether the PHE will be allowed to savings per quarter in the In-Home Supportive expire in April 2022. Services and Department of Developmental Major Medi-Cal Fiscal and Policy Changes Services budgets). These estimated quarterly Under the PHE. The federal government authorized savings reflect the net impact of (1) lower General a number of changes to Medicaid policy for the Fund costs due to the increase in the federal period the PHE is in effect, the two most important share of cost, (2) higher caseload costs due to the being a 6.2 percentage-point increase in the extension of the continuous coverage requirement, federal government’s share of Medicaid costs and and (3) higher other costs related to other temporary the continuous coverage requirement previously policies in place during the PHE (such as increased described. While the continuous coverage provider payment rates). Accordingly, we project requirement expires the month after the PHE ends, General Fund spending in Medi-Cal would be the increased federal share of cost does not expire $300 million lower—on net—than the Governor’s until the end of the quarter which includes days in budget projects if the PHE is extended by the which the PHE is in effect. Accordingly, if the PHE federal government for another 90-day period. expires in April 2022, the increased federal funding would expire at the end of June 2022 while the ANALYSIS OF THE BUDGET’S continuous coverage requirement would no longer CASELOAD ASSUMPTIONS remain in place as of May 2022. The timing of the expiration of the PHE is the most significant fiscal Background uncertainty in the Medi-Cal budget. Prior to the pandemic, Medi-Cal provided Budget’s Assumed Expiration of PHE in coverage to around 12.5 million Californians. June 2022 Is Reasonable, While Leaving Medi-Cal serves a number of discrete populations Room for Fiscal Upside. The Governor’s budget with somewhat distinct characteristics and costs assumes the PHE remains in place through to the state and federal government. These June 2022, six months later than was assumed populations include families with children, seniors in the 2021-22 Budget Act. Although the budget aged 65 or older, persons with disabilities, and assumption was developed prior to the most www.lao.ca.gov 7 2022-23 BUDGET childless adults who are part of the eligibility Governor’s Budget expansion under the Patient Protection and Administration Projects Caseload Will Affordable Care Act. Seniors and persons with Climb Through June 2022 Before Declining. disabilities tend to have greater needs than some The administration projects that average Medi-Cal other Medi-Cal populations, and therefore tend to caseload will continue to rise through June 2022 have higher per-enrollee costs. Childless adults to a peak of about 15.1 million enrollees before and families tend to have lower per-enrollee costs. beginning to decline through June 2023 due to Additionally, the federal government currently pays the resumption of eligibility redeterminations. As 90 percent of Medi-Cal costs for individuals enrolled such, the administration assumes that the average as part of the optional expansion, as opposed to monthly caseload in 2021-22 will be 14.7 million and 50 percent for most other beneficiary populations. 14.3 million in 2022-23. Substantial Caseload Growth During Assessment Pandemic. Between March 2020 and October 2021 (most recent data we have available), the The COVID-19-related emergency is Medi-Cal caseload has grown by 1.7 million unprecedented in the history of Medi-Cal, and (14 percent) to a total caseload of about 14.2 million. so its impact on Medi-Cal caseload is difficult to This increase is largely due to two primary factors: predict. As a result, any projections of near-term caseload growth and associated costs are highly • Employment Losses. The early months of the uncertain. In particular, if the PHE remains in place COVID-19 pandemic brought unprecedented beyond what is assumed, Medi-Cal caseload and declines in employment in California. This associated costs likely will be higher in 2021-22 and resulted in an increase in individuals and 2022-23 relative to what either the administration or families becoming eligible for Medi-Cal due to we project. (However, as we discuss elsewhere, an reduced household income. extension of the PHE results in offsetting General • Continuous Coverage Requirement. Fund savings due to the enhanced federal funding As previously discussed, the federal that would continue.) continuous coverage requirement effectively Administration’s 2021-22 Caseload Estimates prohibits states from terminating Medi-Cal Likely Are Overstated. In order to reach the eligibility for existing beneficiaries except administration’s estimate for 2021-22 (which was in limited circumstances. This effectively based on actual caseload data through July 2021), requires the state to suspend most eligibility the Medi-Cal caseload growth would need to redeterminations in Medi-Cal for the duration increase dramatically over the next several months. of the PHE. As a result, enrollees who, under As of October 2021 (the month for which the most standard Medi-Cal eligibility rules, would be recent actual caseload data are now available), the found to have become ineligible and therefore Medi-Cal caseload was slightly under 14.3 million. disenrolled from the program (for example, In order to reach an average of 14.7 million enrollees because they no longer meet the program’s for 2021-22, the Medi-Cal caseload would need low-income requirements), now may remain to grow by about 126,000 enrollees per month. enrolled in Medi-Cal through the duration of However, over the last 12 months of available the PHE. This requirement expires the month data, average caseload growth has only been following the end of the PHE. Once that about 78,000 enrollees per month. Therefore, occurs, states are expected to complete all monthly caseload growth would have to increase eligibility redeterminations within 12 months. by 62 percent relative to recent trends in order to reach the levels estimated by the administration. Given that monthly caseload growth appears to have slowed considerably following the first year of the continuous coverage requirement being in place, we find such an increase unlikely assuming current caseload trends. 8 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Caseload Projections, Particularly in Caseload Would Continue to Grow for 2022-23, Depend Heavily on End Date of PHE. Additional Months if the PHE Is Extended. Based on the most recent communication from As discussed in more detail later in this publication, the federal government, the current PHE will there is considerable uncertainty regarding how expire in April 2022 unless extended by the federal long the PHE will remain in place. As shown government. As noted earlier, the continuous in Figure 3, if the PHE is extended beyond its coverage requirement will end the month after currently scheduled end date in April 2022, the PHE expires. After which point, the federal this will significantly affect Medi-Cal caseload government expects eligibility redeterminations to levels by delaying the resumption of eligibility be completed within 12 months. The administration redeterminations. For example, if the PHE is assumes that both the PHE and the continuous extended for another 90 days until July 2022, coverage requirement will remain in place through eligibility redeterminations would be delayed until June 2022, and as such, projects that the Medi-Cal August 2022. We estimate this would result in an caseload will continue to grow until July 2022 average monthly caseload of about 14.5 million in before declining through June 2023 due to the 2021-22 and 14.2 million in 2022-23. resumption of eligibility redeterminations. However, Despite Overall Caseload Decline, if the PHE is not extended beyond April 2022, we Administration Projects Growth in High-Cost expect that caseload likely would peak in May 2022 Seniors and Persons With Disabilities. and that eligibility redeterminations would be largely The administration projects that overall caseload completed by the end of April 2023. As shown in will decline by about 431,000 enrollees between Figure 3, this would result in a lower caseload in 2021-22 and 2022-23 largely due to the assumed both 2021-22 and 2022-23 than estimated in the expiration of the continuous coverage requirement. Governor’s budget. The administration projects that this decline will be concentrated among childless adults and families while other caseload groups, including higher-cost Figure 3 Administration's 2021-22 Caseload Likely Overstated, 2022-23 Caseload Depends Heavily on End Date of PHE Caseload (In Millions) 16 DHCS (PHE Ends June 2022, Estimate) 15 LAO (PHE Ends July 2022, Estimate) 14 13 Actuals LAO (PHE Ends April 2022, Estimate) 12 Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct 2019 2019 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 2023 2023 2023 2023 PHE = COVID-19 public health emergency and DHCS = California Department of Health Care Services. www.lao.ca.gov 9 2022-23 BUDGET seniors and persons with disabilities, will continue BUDGET ASSUMES EXPIRATION OF to grow. Specifically, the administration projects MANAGED CARE ORGANIZATION that between 2021-22 and 2022-23, the number of TAX childless adults and families enrolled in Medi-Cal will drop by about 480,000 (a 4 percent decline) Managed Care Organization (MCO) Tax while the number of seniors and persons with Expires Halfway Through 2022-23. For over disabilities enrolled will increase by about a decade and following multiple renewals, the 48,000 (a 2 percent increase). state has imposed a tax on MCOs and used the revenues to offset General Fund costs in Medi-Cal. Based on enrollment data through October 2021 The current MCO tax has been in place since along with disenrollment data from before and during January 2020 and generates an annual net General the PHE, we anticipate that the number of seniors Fund benefit of over $1.5 billion. While early and persons with disabilities who are disenrolled versions of the MCO tax taxed MCOs based on from Medi-Cal as a result of the resumption of their revenues, the recent versions of the MCO tax eligibility redeterminations will largely offset any have taxed MCOs based on their enrollment. For caseload growth that otherwise would occur. operational and other purposes, the MCO tax is Accordingly, we project the seniors and persons based on a single, fixed period of recent historical with disabilities caseload will remain largely flat MCO enrollment rather than periodically being between 2021-22 and 2022-23, rather than growing updated to rebase the tax on the most recent by 48,000. Because seniors and persons with annual MCO enrollment numbers. Because disabilities are a relative costly population, our lower the MCO tax draws down federal Medicaid projections result in significant savings relative to the funds, federal approval of the current MCO tax administration’s caseload assumptions. is necessary. State authorization and federal Fiscal Impact of Our Alternative Caseload approval of the MCO tax expire at the end of Assumptions. Assuming the PHE ends in December 2022. April 2022, we estimate that General Fund costs in Governor Does Not Propose an Extension Medi-Cal could be over $800 million lower across of the MCO Tax, Citing Factors Complicating the current year and budget year relative to the Its Renewal. The Governor’s budget does not administration’s assumptions. We note that an propose to extend the MCO tax, instead allowing it extension of the PHE beyond April 2022—which to lapse after December 2022. The administration is a real possibility—would delay the end of the has shared that the scheduled reprocurement of continuous coverage requirement and result in Medi-Cal MCO contracts—which likely will lead higher overall caseloads and associated costs in to changes in which MCOs serve the Medi-Cal both 2021-22 and 2022-23. However, even if the PHE program—as well as anticipated volatility in the is extended by 90 days to July 2022, we still project Medi-Cal caseload present challenges for renewing that General Fund costs related Medi-Cal caseload the MCO tax. We agree with the administration would be about $300 million lower relative to the that the reprocurement of Medi-Cal managed Governor’s budget across 2021-22 and 2022-23. care plans temporarily complicates the renewal Overall Assessment. While our initial projections of the MCO tax, if the tax were renewed with its differ significantly from those of the administration, existing structure. However, once new Medi-Cal we recognize that any projections of near-term MCO contracts are established and Medi-Cal caseload growth and associated costs are highly enrollment by MCOs can be reasonably estimated, uncertain due to unprecedented nature of the this complication should no longer hold. On COVID-19-related PHE. As a result, we are not at this the other hand, we are less convinced that the time recommending an adjustment to the Governor’s volatility of the Medi-Cal caseload—anticipated budget. We will wait for additional information to to significantly decline following the end of the make our final assessment and recommendations COVID-9 PHE—presents a major complication to related to Medi-Cal caseload costs at the time of the renewal of the MCO tax. the May Revision. 10 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Fiscal Impact of the Budget’s Assumed posed by reprocurement. For example, rather Expiration of the MCO Tax. The Governor’s than basing the tax on a fixed, prior period of budget does not assume a significant General Fund MCO enrollment, the state periodically could impact from the expiration of the tax in 2022-23 update the tax base based on more recent due to assumptions around the timing by which the MCO enrollment. By updating the tax base associated revenues will be available to support the in this manner—as Michigan does with its Medi-Cal program. Rather, under the Governor’s similar tax—the state could ensure that MCOs’ budget assumptions, the fiscal impact of the tax liabilities properly reflect the changes in expiration of the MCO tax primarily would materialize their enrollment and participation in Medi-Cal in 2023-24, raising annual, ongoing General managed care resulting from reprocurement. Fund spending by between around $1.4 billion Importantly, some such modifications to the and $1.6 billion. MCO tax model—including rebasing the tax Recommend Legislative Consideration of on more up-to-date MCO enrollment—likely Three Options Related to the MCO Tax. Given come with operational and other challenges. the importance of the MCO tax as a reliable funding We recommend the Legislature consider any source for Medi-Cal, we recommend the Legislature such challenges when deciding if and how to explore the feasibility and trade-offs of renewing the modify the MCO tax to allow for a multiyear MCO tax as part of its budget deliberations. Renewal reauthorization. For example, additional state of the MCO tax generally based on the existing operations resources may be needed by model could generate a General Fund benefit of at DHCS to effectively administer a significantly least $1.5 billion annually for each year it is in place. modified MCO tax. Three specific options that the Legislature could • Allow MCO Tax to Lapse and Renew at a consider include: Later Date. Given the challenges in renewing the MCO tax on a multiyear basis and the • Renew the MCO Tax Based on the existing, robust fiscal condition of the state, Existing Model for One Year. As previously the Legislature could consider allowing the discussed, we agree with the administration MCO tax to expire. In this case, we would that Medi-Cal managed care reprocurement recommend that the Legislature consider presents a challenge for a multiyear renewal renewing the MCO tax at a later date after of the MCO tax. However, we are not yet managed care reprocurement is completed. convinced that anticipated changes in the Medi-Cal caseload complicate renewal. With the expiration of the existing MCO tax at the ANALYSIS OF OTHER end of 2022 and the anticipated start of new TECHNICAL ISSUES Medi-Cal managed care contracts in 2024, the MCO tax could be renewed for calendar Proposition 56 Revenues Could year 2023 without being subject to the Be Higher Than Expected complications resulting from reprocurement. Proposition 56 raised state taxes on tobacco Accordingly, the Legislature could consider products and dedicates most revenues to directing the administration to develop a plan Medi-Cal on an ongoing basis. Funding from for a one-year renewal of the MCO tax. For Proposition 56 for Medi-Cal is used to increase 2024 and beyond, the Legislature could then payments to health care providers, which are reassess when it would be feasible to reimpose intended to ensure timely access, limit geographic the MCO tax following Medi-Cal managed shortages of services, and ensure quality care. care reprocurement. Because tobacco use is projected to continue • Provide Multiyear Reauthorization of a to decline on an ongoing basis—partially as Modified MCO Tax Model That Overcomes a result of the new taxes put in place under Reprocurement Challenges. There potentially Proposition 56—revenues from Proposition 56 for are a number of ways that the MCO tax could Medi-Cal are expected to gradually decline on a be modified to overcome the challenges year-over-year basis. www.lao.ca.gov 11 2022-23 BUDGET The administration projects a substantial the flavored tobacco ban), Proposition 56 revenues decline of roughly $170 million in Proposition 56 will be higher than expected, reducing the need for revenues between 2021-22 and 2022-23. General Fund to maintain the Proposition 56-funded Although Proposition 56 revenues are expected provider payment increases by roughly $120 million. to gradually decline on a year-over-year basis, Uncertain Whether Certain the administration’s projected revenue decrease primarily is attributed to the anticipated Components of CalAIM Will implementation of Chapter 34 of 2020 Be Federally Approved (SB 793, Hil et. al) which bars retailers from selling The CalAIM reform package, approved in the flavored tobacco products. This prohibition 2021-22 Budget Act, requires federal approval is expected to substantially reduce Proposition 56 in order to draw down federal funding. As of revenues, since it would result in fewer transactions December 29, 2021, the federal government has involving tobacco products for the state to tax. approved most of CalAIM. However, discussions are However, opponents of this legislation have collected continuing between the administration and federal enough signatures to place a referendum for voter government on whether the federal government will approval of SB 793, delaying implementation of this approve two components of the package, which legislation pending the results of the referendum. allows for the availability of federal funding for these Accordingly, the administration assumes that the services. These components are: (1) providing referendum will pass (resulting in voter approval services to justice-involved people 90 days prior of the flavored tobacco ban) in arriving at its to release from jail or prison and (2) reimbursing Proposition 56 revenue estimates. The Governor’s costs for traditional healers and natural helpers Medi-Cal budget includes $176 million General Fund for American Indians and Alaska Natives. The to backfill this expected revenue decline in 2022-23 Governor’s budget assumes federal approval of in order to sustain the provider payment increases these components. However, should the state Proposition 56 has supported. (Of this amount, the not ultimately receive approval, alternative annual Governor also proposes to transition $147 million funding of about $123 million would be needed to of provider payment increases on an ongoing basis support these services or they may not be able from Proposition 56 revenues to the General Fund.) to be implemented. If the referendum fails (resulting in voter rejection of ANALYSIS OF SELECT DISCRETIONARY PROPOSALS EQUITY AND PRACTICE antidepressant medication management for individuals with mental illness, and control of TRANSFORMATION PAYMENTS hemoglobin levels for individuals with diabetes. Background A State Auditor’s report from several years ago found that Medi-Cal performs 40th among state Medi-Cal’s Performance on Certain Health Medicaid programs in providing preventive services Care Quality and Equity Measures Has Been to children. A 2020 Health Disparities Report Poor. DHCS tracks Medi-Cal’s performance on commissioned by DHCS identified widespread many different health quality and equity measures health disparities across a range of preventive health across the various Medi-Cal delivery systems, measures. Finally, a recent California Health Care including within managed care. Examples of key Foundation study found that statewide managed quality and equity measures include whether care performance on quality measures has declined children receive their recommended immunizations or remained stagnant as much or more than it has and developmental screenings, the timeliness improved over the last decade. of prenatal care for expecting mothers, effective 12 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Proposal recent mothers. This proposal, by significantly focusing on children’s preventive services and Governor Proposes Equity and Practice maternal health, appropriately targets addressing Transformation Payments to Address an existing gap in the state’s quality and equity Deficiencies in Quality and Equity. As previously efforts within Medi-Cal. Moreover, following our noted, the Governor proposes $200 million initial review, the specific goals, such as improving General Fund ($400 million total funds) in one-time childhood immunization rates and closing racial Medi-Cal spending in 2022-23 to promote health and ethnic disparities in cesarean child deliveries, equity and improve health outcomes. This funding target key areas of concern as indicated by existing would be available for expenditure for two years quality and equity data measures. However, a through 2023-24. The goals of the initiative include more comprehensive review of Medi-Cal’s current (1) improving children’s preventive services performance on quality and equity measures would utilization; (2) raising maternal and adolescent be necessary to determine whether this proposal screening and referral rates for depression; leaves unaddressed any specific, major, and (3) improving follow-up after emergency department comparable quality and equity deficiencies. visits for mental health and substance use disorder; and (4) closing racial and ethnic disparities in Condition of Existing Clinical Infrastructure well-child visits, child immunizations, prenatal care, Among Medi-Cal Providers Is Difficult to and child delivery via cesarean section. Medi-Cal Discern. This proposal rests on the assumption managed care plans initially would receive the that deficiencies in clinical infrastructure are a funding and be expected to distribute the funding major barrier to improving quality and equity within as grants to providers. The funding is intended to Medi-Cal. While plausible, we currently do not have support clinical infrastructure improvements rather sufficient information on the state of existing clinical than direct health care service delivery. Examples infrastructure to be able to determine that funding of such clinical infrastructure improvements include such infrastructure improvements is a key first step developing case management and other systems in improving Medi-Cal quality and equity. designed to close care gaps, updating medical Sustained Progress on Quality and Equity record systems, expanding telehealth and remote Will Depend on the Strength of Future Efforts. patient monitoring capabilities, and generally In late December 2021, DHCS released a draft supporting population health improvements. report outlining the department’s quality and Key aspects of the proposal, such as the equity strategy. This report establishes a roadmap selection criteria for grant applications, remain incorporating current and prospective reforms in development. for improving quality and equity within Medi-Cal. In addition to various efforts to improve data Assessment quality, DHCS lays out an intent to reform Medi-Cal Proposal Appropriately Targets Key Areas of payment methodologies to better tie payment Concern Related to Quality and Equity. Recently, levels to the performance of managed care plans the state has expanded its vision for how Medi-Cal and providers on quality and equity measures. can serve to improve the health of Californians For example, starting in 2023, DHCS intends to with low incomes and address longstanding adjust Medi-Cal managed care payment rates and health disparities. CalAIM is the most prominent member-assignment methodologies based on example of these efforts. To a significant degree, their performance on quality and equity measures CalAIM focuses on improving care and equity for (the exact changes to these methodologies remain Medi-Cal’s most high-risk, high-need populations under development). By establishing ongoing such as individuals who are homeless and/or have incentives for plan and provider improvement, we behavioral health disorders. CalAIM does not go believe these prospective efforts to tie payment as far in addressing known health care quality levels to quality and equity will be essential for and equity issues for other important Medi-Cal creating sustained improvement in Medi-Cal. populations, such as children and expecting and www.lao.ca.gov 13 2022-23 BUDGET Recommend Gathering More Information on rate reductions, which resulted in many of the Proposal Before Approving. We have a number of reductions being implemented a few years later key outstanding questions related to this proposal, when the state prevailed in court proceedings.) the answers to which would clarify whether the Since then, several types of providers and services Governor’s approach is likely to be a successful have been exempted from the payment rate next step toward improving health care quality and reductions through either DHCS administrative equity. These questions include: decisions or enacted legislation. (For example, legislation enacted in 2015 exempted dental • Are there key quality and equity goals providers from the 10 percent payment rate potentially within the scope of this proposal reduction.) However, most of the Medi-Cal payment that are left unaddressed and should be rate reductions approved in 2011 remain in place. incorporated into the proposal? • What is the condition of Medi-Cal providers’ Proposal existing clinical infrastructure and why does Governor Proposes to Eliminate Rate Cuts funding related improvements represent a for Certain Providers. The Governor’s budget key first step to improving quality and equity proposes $9 million General Fund ($20 million total within Medi-Cal? funds) to eliminate these payment rate reductions • How will grant applications be selected and for certain provider types among those still subject how will the allocation and expenditure of to the 2011 rate reductions. These proposed these funds be overseen by DHCS? eliminations would apply to payment rate reductions • How will DHCS’s other efforts to improve for (1) nurses, (2) alternative birthing centers, data quality and tie managed care plan (3) audiologists and hearing aid dispensers, and provider payments to performance on (4) respiratory care providers, (5) durable medical quality and equity measures sustain ongoing equipment oxygen and respiratory services, improvement in these areas? (6) chronic dialysis clinics, and (7) emergency air medical transportation. (In addition, the We recommend the Legislature gather Governor separately proposes to eliminate the information related to these questions before payment rate reduction for nonemergency medical deciding whether to approve this proposal. transportation providers by converting the current Furthermore, we recommend the Legislature focus Proposition 56-funded supplemental payment future oversight and provide input on how the state rate increase for these providers to an ongoing proceeds to more closely tie Medi-Cal managed rate increase.) care plan and provider payment levels to quality and equity. Assessment Why Proposal Prioritizes Certain Providers PROPOSED ELIMINATION OF for Restored Rates Over Others Is Unclear. CERTAIN PROVIDER PAYMENT The Governor’s proposal to eliminate Medi-Cal RATE REDUCTIONS payment rate reductions does not apply to all of the provider types currently subject to these Background reductions. Accordingly, the Governor’s proposal In Response to Great Recession State prioritizes certain Medi-Cal providers for restored Budget Crisis, State Approved a 10 Percent payment rates over others (who would still be Reduction in Payment Rates to Many Medi-Cal subject to the previously approved reductions). Providers. To help address the state budget The administration has not provided a clear crisis that accompanied the Great Recession rationale for why these select Medi-Cal provider over a decade ago, in 2011, the state put in types should be prioritized for restored payment place Medi-Cal payment rate reductions of up to rates. The administration broadly has stated 10 percent for a variety of provider types. (Many that the proposed elimination of payment rate providers challenged the legality of these payment reductions is intended to address the impacts of 14 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET COVID-19, but has not provided information that Governor’s proposal appears to assume that plans indicates that the select group of providers targeted would (temporarily) absorb the costs of any provider in the Governor’s proposal are disproportionately payment increases associated with the elimination impacted by COVID-19 (relative to other provider of the payment reductions. types currently subject to payment rate reductions). Recommend Considering Alternative Lack of Funding to Eliminate Rate Reductions Approaches and Comprehensive Cost Within Managed Care Raises Questions. Estimates. Why this select group of Medi-Cal Medi-Cal managed care plans often—but not providers is targeted under this proposal is unclear. always—tie the payment rates they pay their Accordingly, the Legislature could consider contracted providers to the rates paid in the requesting the administration to provide a clear Medi-Cal fee-for-service delivery system. At rationale for why these provider types were chosen. the same time as the fee-for-service provider Information to request from the administration payment rates were reduced, the state adjusted in this regard could include evidence that these downward managed care payment rates to reflect provider types have experienced relatively worse an assumed equivalent reduction in provider impacts from COVID-19 than other providers. In payments for their contracted providers. While the addition, the Legislature could request information administration’s proposal to restore rates likely justifying the assumption that managed care plans’ would affect payment levels in both fee-for-service potential costs related to the action would be and managed care, the proposal’s cost estimate minimal. Finally, before approving the Governor’s only reflects rate increases for fee-for-service proposal, the Legislature could consider assessing providers. Fee-for-service providers serve only the merits (and related costs) of restoring Medi-Cal about 20 percent of Medi-Cal enrollees, with the payment rates for other or all remaining provider remaining being enrolled in managed care. The types that still would be subject to the 2011 rate administration states the managed care costs reductions under the Governor’s proposal. Across would be small and difficult to estimate. However, managed care and fee-for-service, we estimate if the relative impact of the proposed restorations the annual cost of restoring all the provider were similar to that of all the cuts in effect, then we payment reductions currently in place to be roughly would expect funding the elimination of these rate $200 million General Fund ($550 million total funds). reductions in managed care could cost as much (These amounts include the estimated cost of the as roughly twice that of fee-for-service. By not Governor’s proposed restorations.) budgeting any funding within managed care, the www.lao.ca.gov 15 2022-23 BUDGET LAO PUBLICATIONS This report was prepared by Ben Johnson, Corey Hashida, 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, California 95814. 16 LEGISLATIVE ANALYST’S OFFICE