The 2022-23 Budget: Health Care Access and Affordability

2022-23 BUDGET The 2022-23 Budget: Health Care Access and Affordability Summary This brief focuses on access to health insurance coverage and the affordability of health care costs. We assess various Governor’s proposals intended to improve health care access and/or affordability, discuss options to improve affordability of health plans purchased through Covered California, and highlight some key access and affordability challenges that remain to address. Expand Full-Scope Medi-Cal Coverage to All Remaining Income-Eligible Undocumented Populations. Building on previously approved expansions, the Governor proposes to expand full-scope Medi-Cal coverage to income-eligible, undocumented residents aged 26 through 49 beginning no sooner than January 1, 2024. We discuss options to provide coverage earlier and ensure certain young adults do not lose coverage prior to January 1, 2024. Reduce Medi-Cal Premiums to Zero Cost. Certain individuals who are otherwise not income-eligible for Medi-Cal can enroll if they pay premiums. The Governor proposes reducing these premiums to zero. While we agree with the policy basis for this proposal, additional information is needed to determine if it should be approved as is or with modifications. Establish Office of Health Care Affordability. The Governor re-proposes to create the Office of Health Care Affordability—intended to control rising overall health care costs. We find that, in concept, the proposal to create this new office is reasonable, but ambitious. Continued monitoring would be necessary to ensure the office achieves its goals. As such, we recommend the Legislature consider (1) whether any adjustments are needed to the proposed trailer bill language creating the office and (2) establishing a process for legislative oversight. Reduce the Cost of Insulin Through State Partnership. Chapter 207 of 2020 (SB 852, Pan) directed the state to enter into partnerships to produce and distribute generic prescription drugs to improve affordability. The Governor announced a future proposal to manufacture insulin. We recommend withholding approval until more information is provided to ensure the proposal meets SB 852’s criteria for viability and other factors. Options to Improve Covered California Affordability. At the direction of the Legislature, Covered California developed options for cost-sharing reductions to improve the affordability of plans offered on its exchange. We discuss various issues for the Legislature to consider when deciding on any actions related to these options. Various Access and Affordability Issues Remain. In the final section, we discuss various access and affordability issues that will remain even if the Legislature approves the Governor’s proposals and addresses affordability of Covered California health plans. GABRIEL PETEK | LEGISLATIVE ANALYST FEBRUARY 2022 www.lao.ca.gov 1 2022-23 BUDGET INTRODUCTION Health Care Access and Affordability. health insurance coverage and the affordability Health care access and affordability are a challenge of health care costs Californians face. In this for many Californians. Notably, roughly 3.2 million context, we first provide an assessment of various Californians lack access to comprehensive Governor’s budget proposals intended to improve health insurance. Even those who do have health health care access and/or affordability. (We provide insurance can struggle with health care costs that an assessment of proposals potentially affecting can consume a large portion of their annual income. access through other means, such as by increasing These challenges have prompted recent actions Medi-Cal provider payment levels, in other budget by the Legislature and a number of additional publications.) We then discuss issues for the proposals in the Governor’s budget as well as other Legislature to consider as it evaluates options issues for the Legislature to consider during the to improve the affordability of health insurance current budget cycle. coverage offered on the state’s health benefit Report Focuses on Issues Related to Health exchange—Covered California. Finally, we conclude Insurance Coverage and Health Care Costs. with a brief discussion of some key access and While there are a broad range of issues impacting affordability challenges that likely would remain both the affordability and access to quality health even if the Legislature approves the Governor’s care services, this report focuses on access to proposals and takes action to improve affordability within Covered California. BACKGROUND Most Californians Have Health Insurance… coverage to undocumented residents who are As shown in Figure 1, we estimate that most 50 or older which will go into effect in May 2022. Californians—92 percent—have health insurance In addition, the estimate does not reflect impacts coverage. (Compared with other states, California’s of a federal policy change regarding Medi-Cal rate of insurance is roughly in the middle—some enrollment during the COVID-19 national public states have higher rates of insurance, while others health emergency (which likely increased insurance have lower rates of insurance.) Employer-sponsored coverage). As shown in Figure 2, the majority insurance is the most common source of coverage. of uninsured Californians are undocumented Major public health insurance programs, including residents, followed by individuals who are eligible Medi-Cal, the state’s Medicaid program which for but not enrolled in insurance from a variety covers low-income people, and Medicare, the of sources. federal program that primarily provides health Affordability of Health Care Remains a coverage to the elderly, also cover large portions of Challenge. Over the last several decades, health the state’s residents. care costs have grown significantly. To a significant …But an Estimated 3.2 Million Californians degree, this cost growth has been driven by growth Lack Comprehensive Insurance. While most in health care prices. As Figure 3 shows, medical Californians have comprehensive health insurance, inflation in major California metro areas has far an estimated roughly 3.2 million people (about outpaced inflation for other goods and services 8 percent) in the state lack such coverage in in recent decades, reducing what Californians 2022—including people who are uninsured or can afford to spend on these other goods and have “restricted-scope” Medi-Cal that only covers services. While other expenditures such as emergency- and pregnancy-related health services. housing have a greater impact on California’s However, these figures do not reflect a previously cost of living, Californians need to balance approved expansion of comprehensive Medi-Cal health care costs with these other expenditures. 2 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Figure 1 Figure 2 Most Californians Have Health Insurance, Roughly 3.2 Million Californians Obtained From a Variety of Sources Lack Health Insurance in 2022 2020 Estimated Individual Market Eligible for Employer-Sponsored Coverage Subsidized 480,000 1.3 Million (All on Covered California) Eligible for Medi-Cal Unsubsidized 0.6 Million Uninsured 610,000 (About 186,000 on Covered California)a Eligible for Covered California With Without Medi-Cal Subsidies Subsidiesa 630,000 170,000 Public Insurance Private Insurance Undocumentedb Medicare 1,270,000 and Medi-Cal Employer- Sponsored Insurance Medicare a Documented residents who can purchase plans through Covered California but do not meet certain federal requirements to qualify for federal subsidies. b This number does not reflect a previously-authorized expansion of full-scope Medi-Cal benefits to undocumented residents who are 50 or older, which will be implemented in May 2022. Other Public Insurance Source: UC Berkeley, UC Los Angeles; California Simulation of Insurance Markets, Version 3.0. a Remaining roughly 400,000 purchased coverage “off exchange.” Note: Estimates reflect LAO adjustments to California Health Interview Survey 2020 data. Figure 3 Medical Prices Have Grown Significantly Faster Than Nonmedical Prices in Major California Metro Areas Consumer Price Index Greater Los Angeles Bay Area (Los Angeles, Long Beach, and Anaheim) (San Francisco, Oakland, and Hayward) 600 500 Medical Medical Inflation Inflation 400 300 200 Nonmedical Nonmedical Inflation Inflation 100 1980 1985 1990 1995 2000 2005 2010 2015 2020 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: LAO estimate based on Bureau of Labor Statistics Consumer Price Index for all urban consumers. www.lao.ca.gov 3 2022-23 BUDGET According to a survey conducted between decided to delay, skip, or reduce their utilization of November 2020 and January 2021, roughly health care in the prior 12 months due to costs. Of 82 percent of Californians stated that it was either those who made such decisions, 41 percent stated very or extremely important for the Legislature and that the steps they took to reduce costs had a Governor to make health care more affordable. negative impact on their health. In the same survey, roughly half of Californians GOVERNOR’S PROPOSALS TO IMPROVE HEALTH CARE ACCESS AND AFFORDABILITY EXPAND FULL-SCOPE MEDI-CAL full-scope Medi-Cal coverage to otherwise eligible undocumented young adults ages 19 through 25. COVERAGE TO REMAINING Most recently, as part of the 2021-22 budget UNDOCUMENTED POPULATIONS package, the state passed legislation to expand eligibility to undocumented residents who are 50 or Background older beginning May 1, 2022. The costs of these Historically, Undocumented Residents Were expansions are paid almost entirely by the state Eligible Only for Restricted-Scope Medi-Cal because the federal government only shares in the Coverage. Medi-Cal eligibility depends on a cost of restricted-scope services. Accounting for number of individual and household characteristics, these recently enacted expansions, undocumented including, for example, income, age, and adults who are between the ages of 26 and 49, immigration status. Historically, income-eligible inclusive, are the remaining undocumented citizens and immigrants with documented status population eligible for only restricted-scope generally have qualified for comprehensive, or Medi-Cal. Once the 50-and-older expansion is fully full-scope, Medi-Cal coverage, while otherwise implemented, we estimate that a little over 1 million income-eligible undocumented immigrants have undocumented immigrants will have full-scope not qualified for full-scope Medi-Cal coverage. Medi-Cal coverage. Up until recently, all undocumented residents who met the income criteria for Medi-Cal have Proposal been eligible only for restricted-scope Medi-Cal The Governor proposes to expand full-scope coverage, which only covers emergency- and Medi-Cal coverage to income-eligible pregnancy-related health care services. The federal undocumented residents aged 26 through 49 government pays for a portion of undocumented beginning no sooner than January 1, 2024. Due to immigrants’ restricted-scope Medi-Cal past expansions, this proposal would effectively services according to standard federal-state provide universal access to Medi-Cal regardless of cost-sharing rules. immigration status. The administration estimates State Has Expanded Full-Scope Medi-Cal that in 2023-24, the first year of the expansion, Coverage to Many, but Not All, Otherwise 714,000 undocumented residents between the Income-Eligible Undocumented Residents. ages of 26 through 49 would enroll in Medi-Cal The state has taken steps to expand eligibility and that this would increase to 764,000 residents for full-scope Medi-Cal coverage to otherwise at full implementation. Due to the proposed eligible undocumented residents in various implementation date, there is no budgetary impact age groups. First, in 2016, the state expanded in 2022-23. The administration estimates that the full-scope Medi-Cal coverage to otherwise eligible expansion would result in costs of $613.5 million undocumented children from birth through General Fund ($819.3 million total funds) in 2023-24 age 18. Then, in 2020, the state expanded and $2.2 billion General Fund ($2.7 billion total 4 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET funds) annually at full implementation. The growth eligible is unclear. In addition, average costs for this in projected spending primarily is due to annualizing caseload could be significantly different than the half-year costs in 2023-24 and projected gradual average costs for current full-scope enrollees due increases in the uptake of In-Home Supportive to differences in their health needs. For example, Services among beneficiaries, along with gradual research on the health of the U.S. and California increases in caseload. populations shows that immigrants, including undocumented immigrants, have lower disability Assessment rates than other residents. To the extent this is Proposal Consistent With Statutory Goals true for the proposed expansion population, their and Recent Legislation. The Governor’s average per-enrollee costs could be significantly proposal is consistent with past legislative efforts lower than existing full-scope enrollees. This is to expand Medi-Cal coverage to younger and because Medi-Cal enrollees with disabilities tend older undocumented residents. It also further the to have health care costs that are two to ten times goals established in Chapter 34 of 2018 (AB 1810, higher on a per-enrollee basis than other enrollees. Committee on Budget) which, among other goals, Extended Time Frame Relative to Past declared an intent that all Californians (1) receive Expansions Impacts Access to Coverage. high-quality health care regardless of various As currently structured, this expansion would factors including age and immigration status and occur no sooner than a year and a half following its (2) have access to affordable health coverage. approval (provided it is approved). In comparison, Proposal Would Significantly Reduce Number past expansions were implemented within a year of of Californians Who Lack Comprehensive being approved. Adopting a similar implementation Insurance. If the administration’s caseload time frame as past expansions for all or part assumptions are correct, this proposal would of this remaining age group would accelerate substantially reduce the number of Californian’s implementation and could improve access to who do not have access to comprehensive health care sooner. Moreover, the extended health insurance. Using the administration’s implementation time frame could result in some assumptions for this proposal, and assuming that young adults losing coverage while waiting for 235,000 undocumented residents who are 50 or the proposal to be implemented. Currently, the older will enroll in Medi-Cal once they are eligible potential number of young adults who could lose this May under previously enacted legislation, we full-scope coverage prior to January 1, 2024 is estimate that the number of Californians who lack particularly large because many young adults comprehensive health insurance would go down who otherwise would have aged out of full-scope to about 2.2 million people following the proposal’s Medi-Cal (upon turning 26 years of age) have full implementation, which is roughly 1 million lower been able to keep their benefits as a result of a than the current level of about 3.2 million people. federal policy that effectively prevented eligibility Continuing to Evaluate Administration’s terminations except in limited circumstances during Caseload and Cost Estimates. Due to the the COVID-19 national public health emergency. availability of data at the time of this analysis, we (For more information on this federal policy and have not yet evaluated the reasonableness of the its impacts on the Medi-Cal caseload, please administration’s estimates of the caseload and see our recent publication, The 2022-23 Budget: cost impacts of this proposal. Any estimate of Analysis of the Medi-Cal Budget.) While there is expansion cost and caseload, however, is subject some uncertainty regarding the number of young to considerable uncertainty. For example, while adults who would lose full-scope coverage once restricted-scope enrollees generally automatically the public health emergency ends, we estimate that would shift over to full-scope coverage once upwards of 40,000 undocumented young adults eligible, how many of the individuals who are not could lose full-scope coverage between the end currently enrolled in restricted-scope coverage of the public health emergency until they would would choose to enroll in full-scope coverage once regain eligibility after January 1, 2024. These lapses www.lao.ca.gov 5 2022-23 BUDGET could have a negative impact on health outcomes older will become eligible for full-scope for the affected population and also would create Medi-Cal beginning May 1, 2022. Doing an additional administrative workload—first to convert additional expansion within a short time frame them to restricted-scope coverage when they potentially could complicate work associated lose eligibility upon aging out and then to re-enroll with the 50-and-older expansion, as it affects them in full-scope coverage once the expansion the training of eligibility workers and outreach is implemented. provided to potential beneficiaries. Administration States That Earlier We acknowledge that similar to past expansions, Implementation Could Create Workload implementing this proposal likely would result in Challenges. The administration has stated a temporary increase in administrative workload, that, due to competing workload, implementing largely for counties due to their key role in the proposed expansion any sooner than Medi-Cal eligibility administration. While counties January 1, 2024 would be difficult. The competing would be facing additional workload demands workload largely is attributed to the following: simultaneously, we suggest the Legislature • Conversion to the California Statewide consider alternative strategies for implementation. Automated Welfare System (CalSAWS). Incremental Approach Could Expand Eighteen counties plan to convert to Coverage Faster and Partially Reduce CalSAWS (a statewide system to manage Workload Impacts. While we recognize that the eligibility and enrollment data across various workload challenges of an earlier expansion than public benefit programs) between October that proposed by the administration could be 2022 and October 2023. In addition to this impactful, they are not necessarily insurmountable. process increasing administrative workload Notably, the Legislature could take a more temporarily, updating CalSAWS to reflect incremental approach to the expansion that changes in Medi-Cal eligibility policies is could reduce, although not fully eliminate, some challenging, such that carrying out eligibility of the workload challenges noted previously. policy changes while the information For example, the Legislature could take steps to technology systems changes are taking place prevent lapses in full-scope coverage for young could result in information being inaccurate in adults who would age out of coverage prior to one or both systems due to a need to rely on January 1, 2024. Two potential approaches would manual processes. include (1) directing counties to maintain full-scope • Resumption of Eligibility Redeterminations. coverage for enrollees who would otherwise be In addition, during the national COVID-19 moved to restricted-scope coverage due to their public health emergency, the federal age or (2) expanding coverage to people up to government effectively prohibits terminating age 30 ahead of the broader January 1, 2024 Medi-Cal coverage for existing beneficiaries expansion date. (The latter option would extend except in limited circumstances. After the eligibility to people who would otherwise lose public health emergency ends, counties will eligibility due to turning 26 after the start of the need to complete eligibility redeterminations national COVID-19 public health emergency in for the entire Medi-Cal caseload (which 2020, when eligibility terminations were suspended we estimate could be at about 14.9 million and prior to January 1, 2024, when the proposed enrollees depending on the end date of the expansion would be implemented.) public health emergency) and end coverage Recommendation for any enrollees who are no longer eligible for Medi-Cal. To the extent the Legislature is interested in adopting an accelerated time line for all or part • Implementation of Full-Scope Medical of the population impacted by this proposal, we Expansion to Undocumented Residents recommend that the Legislature request that Aged 50 or Older. As was noted previously, the administration provide information about undocumented residents who are aged 50 or 6 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET the feasibility, administrative cost, and caseload The administration estimates that this would cost impact of adopting an alternative approach to $18.9 million General Fund ($53.2 million total implementation. (The Legislature also might seek funds) in 2022-23, increasing to $31 million General similar input from counties due to their key role Fund ($89 million total funds) ongoing. in Medi-Cal eligibility administration.) Potential Assessment alternatives could, but do not necessarily need to, include the options raised above to prevent Proposal Would Help Improve Affordability coverage lapses for undocumented residents who and Access. Reducing premiums to zero would are currently enrolled in full-scope Medi-Cal but, help reduce health care costs for the impacted due to their age, would lose their coverage while populations who are relatively low income. It also waiting for the proposal to be implemented. could help to improve coverage among people who are otherwise qualified for these programs REDUCE MEDI-CAL but are not enrolled. First, research shows that premium costs deter enrollment—including in PREMIUMS TO ZERO COST similar programs. As such, reducing premiums Background to $0 should remove any deterrent effect of the current premiums. Second, because failure to pay Certain Medi-Cal Enrollees Must Pay premiums can result in people being disenrolled Premiums to Be Enrolled in Medi-Cal. The vast from Medi-Cal, this proposal likely would result in majority of California’s Medi-Cal enrollees do fewer people losing Medi-Cal coverage. not pay premiums. However, state residents with Fiscal Impact of Potential Increase in certain characteristics and who have incomes Caseload Is Lacking in Administration’s Cost above standard Medicaid thresholds may Estimate. The administration has stated that it enroll in Medi-Cal provided they pay premiums. expects any caseload impacts of the premium Figure 4 provides more details on the specific reductions would be minor and difficult to predict. groups of state residents who may enroll in As such, they do not estimate a caseload impact Medi-Cal with premiums, as well as the amount of from the proposed policy change, nor any premiums they pay. Populations that potentially can associated costs. However, because the proposal enroll in Medi-Cal with premiums despite otherwise would remove the deterrent effect of premiums and not being income-eligible include children, reduce the number of people who are disenrolled pregnant women, and persons with disabilities who from Medi-Cal for not paying premiums, we think are employed. that there is a high likelihood there would be at Reduce All Medi-Cal Premiums to $0. least some impact on caseload. While there is The Governor proposes to reduce all Medi-Cal considerable uncertainty about the caseload premiums to $0 beginning July 2022. impact and corresponding costs, we think these costs could be in the tens of millions of dollars General Fund. Figure 4 Medi-Cal Populations Currently Required to Pay Premiums Demographic Group FPL Income Rangea Estimated Caseload Monthly Premium Children ages 1 through 18 161% - 266% 504,000 $13 per child, $39 family max Children ages 0 through 1 267 - 322 2,000 $13 per child, $39 family max Children 0 through 18 in select countiesb 267 - 322 9,000 $21 per child, $63 family max Pregnant or postpartum persons 214 - 322 6,000 1.5 percent of income Working persons with disabilities 139 - 250 15,000 From $20 to $250 per personc a Generally counted as household income. b Counties include San Francisco, San Mateo, and Santa Clara. c Amounts reflect premiums for an individual rather than for a couple and vary based on income. FPL = federal poverty level. www.lao.ca.gov 7 2022-23 BUDGET Unclear How Policy Would Impact Potential 80 percent—or roughly 4.7 percent per year— Enrollees Who Owe Backpay. At the time of this between 2000 and 2017.) For comparison, inflation analysis, how the proposal would impact potential in the price of nonmedical services grew by roughly enrollees who owe past-due premiums is unclear. 4 percent per year in both Greater Los Angeles and If left unaddressed, these enrollees would still need the Bay Area over the same time period. to pay the past-due premiums before they can To some extent, health care—like other parts of re-enroll in Medi-Cal, even after premiums have the service sector—is structurally predisposed to been eliminated. greater growth in costs. (For example, the inflation in nonmedical service sectors discussed above Recommendation is still higher than overall inflation over the same Request Additional Information Before time period.) Nevertheless, growth in health care Approving. Due to the potential impact this could costs is attributed at least in part to distinctive have on improving access and affordability for market conditions that particularly impact health low-income Californians, we agree with the policy care prices such as reduced competition among basis for the proposal. However, before approval, health care payers and providers due to mergers we recommend that the Legislature ask the and acquisitions in the health care sector. As administration why their assumption of no caseload discussed earlier, these increased health care impact is reasonable and how past-due premiums costs have led to Californians foregoing or deferring would be handled. This information will be key to needed medical care. fully understanding both the budget and policy Some States Have Created Entities to implications of the proposal—and to determining Control Health Care Costs. One approach to whether the proposal should be approved as is controlling health care cost growth is to establish or with modifications to the cost estimates and/or a regulatory body or independent entity tasked trailer bill language. with implementing a strategy for doing so. To achieve the goal of controlling health care cost ESTABLISH OFFICE OF growth, these regulatory bodies or independent HEALTH CARE AFFORDABILITY entities could perform several functions, such as In this section, we (1) provide additional (1) collecting detailed financial information from background on how overall health care costs have a comprehensive set of health care payers and grown in California over time, (2) give context to providers, (2) providing incentives to encourage efforts in recent years to establish the state Office health care payment models based on the quality of of Health Care Affordability to control rising overall care provided rather than strictly costs, (3) setting health care costs, (3) describe the Governor’s targets for health care cost growth, and (4) levying proposal to establish—through budget-related penalties on health care entities that do not meet legislation and an associated re-appropriation health care cost growth targets. Some states— of funds—an Office of Health Care Affordability including Massachusetts, Maryland, Rhode Island, housed within the Department of Health Care and Oregon—have created entities that perform Access and Information (HCAI) to control health some or all of the cost control functions described care cost growth, and (4) provide issues for above. The efforts implemented in Maryland, Rhode legislative consideration regarding this proposal. Island, and Oregon are relatively new. Accordingly, a comprehensive picture of how effective they have Background been at controlling health care costs in these states Health Care Costs in California Generally is not available. However, the independent entity Have Grown Significantly Over Time. Increases in Massachusetts has been in place since 2012. in both health care prices and utilization of health In the decade since, Massachusetts stayed within care services generally have led to higher health its state health care cost growth targets for the first care costs over time. (For example, there was several years of implementation. However, it has substantial growth in health insurance premiums exceeded its growth targets in two consecutive for employer-sponsored health plans of nearly years since then. 8 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Prior Efforts to Create Office of Health Care in health care costs to identify underlying causes Affordability Were Either Delayed or Stalled. for health care cost growth (including by reviewing The Governor first proposed the establishment of mergers and acquisitions in the health care an Office of Health Care Affordability—to be housed sector). It also would publicly report total health in the California Health and Human Services care spending and factors contributing to health Agency (CalHHS)—in the January 2020 budget. care cost growth, and publish an annual report This proposal subsequently was withdrawn after and conduct public hearings about its findings. the onset of the COVID-19 pandemic. However, the In addition, the office broadly would encourage the 2020-21 budget package included budget-related adoption of health care payment models based on legislation authorizing the establishment of the the quality of care provided, as well as monitor the Health Care Data Payments Program (HPD). effects of health care cost targets on the health The HPD—currently housed within HCAI—is care workforce. intended to function as a large research database Within the office, the Governor also proposes derived from individual health care payment to establish a Health Care Affordability Board transactions. When it comes online in 2023, the composed of eight members, as follows: database will be used to analyze total health • Four members appointed by the Governor and care expenditures statewide to identify key cost confirmed by the Senate. drivers and inform recommendations on how to • One member appointed by the Senate mitigate rising costs. The HPD is envisioned as Committee on Rules. a key component of the Office of Health Care Affordability. The Governor’s January 2021 budget • One member appointed by the Speaker of re-proposed the establishment of the Office of the Assembly. Health Care Affordability, to be housed instead • The CalHHS Secretary or their designee. within the Office of Statewide Health Planning and • The Chief Health Director (or their deputy) of Development (later reorganized and reconstituted the California Public Employees’ Retirement into HCAI). In addition to the Governor’s System (as a nonvoting member). January 2021 proposal, there was (and remains) The proposed board would be charged with a legislative proposal to establish this office key implementation decisions for the office. being considered in the policy process. While no For example, it would be tasked with approval of the budget-related or policy legislation has been office’s health care cost targets. enacted to establish the office, the 2021-22 budget Proposed Statutory Language Includes did include an appropriation of $30 million one-time Several Revisions to Prior-Year Proposal. General Fund to establish the office. The Governor’s proposed statutory language to Proposal implement the Office of Health Care Affordability Establish Office of Health Care Affordability includes several revisions compared to the Through Budget-Related Legislation. administration’s proposal last year. These revisions The Governor re-proposes establishing the Office include, for example, (1) changes to the size of of Health Care Affordability within HCAI (through the internal board (from 11 members in last year’s the enactment of budget trailer bill legislation). proposal to 8 members in the current proposal), To fulfill its goal of controlling statewide health care (2) the addition of authority for the affordability costs, the office broadly is intended to increase board—rather than the HCAI director—to approve health care price and quality transparency, health care cost targets, (3) the addition of develop specific strategies and cost targets for certain conditions under which cost targets different health care sectors, and impose financial could be adjusted for health care entities that consequences on health care entities that fail to demonstrate substantial growth in labor costs, meet these targets. The office would rely heavily (4) updates to financial information required to be on data collected by the HPD to analyze key trends collected (to include nonclaims based payments), (5) additions of exemptions for provider groups of www.lao.ca.gov 9 2022-23 BUDGET certain sizes from the office’s requirements, and states. In addition, although other states—in (6) modifications to the type of financial statements particular Massachusetts—have established similar that would be accepted by the office (to include models to control health care costs, these efforts unaudited statements). generally do not have a clear and consistent track Re-Appropriate $30 Million General Fund One record of success. To some extent, this proposed Time for Establishment of Office. The Governor office will need to develop its own best practices to proposes to re-appropriate the $30 million General ensure that health care cost growth remains within Fund one time to establish the Office of Health the specified targets. Care Affordability provided in the 2021-22 budget. …But Continued Monitoring of This amount is intended to fund the first two years Implementation Necessary to Ensure Office of implementation of the office. The 2021-22 budget Achieves Goals. In light of the considerations assumed that the General Fund eventually would we raise above, continued monitoring of the be reimbursed for this cost by the California Health implementation of the Office of Health Care Data and Planning Fund, which is supported by Affordability would be necessary to ensure it fee revenues collected from health care facilities. is successful at controlling health care costs This special fund is intended to support the ongoing statewide. This would allow the state to identify costs of the office. areas where adjustments to the office—such as in Legislative Proposal to Establish Office Will its staffing levels and regulatory authority—would Be Revised to Mirror Governor’s Proposal. increase the likelihood that it would achieve its As discussed earlier, there also is a legislative intended goals. proposal to establish an Office of Health Care Issues for Legislative Consideration Affordability currently being considered in tandem Consider Where Further Adjustments to with the Governor’s proposal. We understand that Proposal Are Needed to Address Legislative it is the author’s intent is to modify this proposal to Priorities. As discussed earlier, the Governor’s mirror the Governor’s proposal, so this will be the proposal includes a number of changes relative single proposal for legislative consideration. to last year’s proposal. The Legislature may wish Assessment to ask the administration to explain the rationale In Concept, Creating the Proposed Office for these changes and then consider the extent to a Reasonable Yet Ambitious Step Toward which it agrees with the changes to the proposed Controlling Health Care Cost Growth office. If it does not agree with all or some of Statewide… Establishing an Office of Health Care the revisions relative to last year’s proposal, the Affordability—tasked with collecting comprehensive Legislature may wish to make its own adjustments financial information from across the health care to the proposed statutory language to establish sector, resourced with the internal expertise the office. necessary to analyze the data it collects, and Consider Putting a Regular Process in empowered to enforce targets for health care cost Place to Ensure Legislative Oversight of growth—would be a reasonable step for the state Implementation Given continued monitoring to take in an effort to control health care costs. of implementation for this office is warranted However, this proposal also is quite ambitious. (if enacted), the Legislature may wish to consider Due to its geographic size, population, and regional putting a process in place to ensure legislative diversity, California’s health care system—and its oversight of its implementation and ongoing efforts. total health care spending—is much larger and The proposed statutory language to establish the more complex than those of the other states that office broadly requires that the Office of Health Care have attempted to establish independent entities Affordability be responsive to legislative requests or regulatory bodies to control health care costs. for information and testimony. Given the ambitious Accordingly, carrying out the office’s core functions nature of this proposal, the Legislature may wish may be more challenging than it has been in other to consider creating a more defined process to 10 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET carry out its oversight functions. This could include In addition, SB 852 requires reporting by the requiring regular check-ins, such as on a biannual administration regarding the potential impacts and basis, with the administration to gain information on feasibility of a partnership. First, by July 1, 2022, how implementation is going. SB 852 requires the administration to report on its findings related to the status of drugs being REDUCE THE COST OF INSULIN targeted and how state efforts could impact THROUGH STATE PARTNERSHIP competition, access to drugs, and their costs. Second, by July 1, 2023, SB 852 requires the Background administration to produce a report on the feasibility of directly manufacturing and selling generic drugs. Addressing High Pharmaceutical Costs Has Been a Key Priority of the Governor and Governor’s Forthcoming Proposal Legislature. High pharmaceutical costs have been The Governor has announced a forthcoming identified as a concern of both the Legislature and proposal for a potential partnership to manufacture Governor. These costs have been attributed to a insulin. The stated intent is to increase the variety of factors, including a lack of competition availability of insulin that is priced at a fraction within the pharmaceutical industry. The state has of current market prices. According to the taken a number of efforts to address prescription administration, more detail on this proposal will be drug costs. For example, the Governor signed released in the spring. executive orders in 2019 directing various actions to address high pharmaceutical costs. These Assessment orders included directing the state to (1) expand Insulin Could Be an Appropriate Focus for a statewide bulk purchasing program to include a Partnership… Insulin costs have increased nonstate entities such as local governments and substantially over the last two decades. Currently, (2) transition the Medi-Cal pharmacy services even with insurance, patients can end up paying benefit from managed care to fee for service (a thousands of dollars in annual out-of-pocket change now known as “Medi-Cal Rx”) in order to costs for insulin. In addition, the production achieve state savings and standardize the Medi-Cal of insulin is heavily dominated by a handful of pharmacy services benefit. In 2020, the Legislature companies. Due to the high prices and market passed Chapter 207 of 2020 (SB 852, Pan) which consolidation, a state partnership to produce and authorized efforts to expand the state’s role distribute generic insulin has the potential to be in securing lower cost drugs for Californians. an appropriate focus under SB 852. Moreover, Specifically, SB 852 directed CalHHS to enter SB 852 explicitly requires that at least one into partnerships resulting in the production or partnership the state enters into shall be for the distribution of generic prescription drugs with the production of insulin, provided that there is a intent of making these drugs widely available to the viable pathway to manufacturing a more affordable public and private purchasers. form of insulin and that the partnership meets the SB 852 Includes Criteria to Ensure SB 852 criteria previously discussed. Partnerships Are Viable and Able to Achieve … But Uncertainty Remains Regarding Established Goals. Senate Bill 852 requires Whether Proposal Would Meet SB 852 Criteria that before a partnership is entered into, CalHHS for Viability and Other Factors. While the must (1) only enter into a partnership to produce a proposed partnership has the potential to be generic prescription drug at a price that results in an appropriate focus, whether the partnership savings, targets failures in the market for generic would meet the criteria under SB 852 is unclear. drugs, and improves patient access to affordable As noted earlier, SB 852 requires the administration medications, and (2) examine the extent to which to examine legal, market, policy, and regulatory legal, market, policy, and regulatory factors could factors that could impact the viability of the impact the viability of the proposed partnership. proposed partnership. While the administration www.lao.ca.gov 11 2022-23 BUDGET notes that these efforts are underway, they have Recommendation not yet been completed. In addition, if the state Withhold Any Necessary Approvals Until ultimately would be able to produce generic insulin Additional Information Provided. While we at a price that results in savings and improves acknowledge that a partnership to produce patient access to affordable medication as required and distribute insulin has the potential to be by SB 852 remains unclear. an appropriate partnership under SB 852, we Reporting Required by SB 852 Likely Critical recommend that the Legislature hold off on to Assessing Feasibility of the Proposal. approving the proposal until information is provided As noted earlier, SB 852 requires the administration to ensure that the proposed partnership meets the to report on both (1) its findings related to the criteria included in the legislation. This information status of drugs being targeted and how state should include (1) an evaluation of legal, market, efforts could impact competition, access to policy, and regulatory factors that could impact drugs, and their costs, and (2) the feasibility of the viability of the partnership, and (2) whether the directly manufacturing and selling generic drugs. state would be able to produce generic insulin at a This reporting (which is due later in 2022 and 2023) price that results in savings and improves patient likely would be critical to assessing the feasibility access to affordable medication. The Legislature of the proposal. As such, why the administration also might want to consider awaiting the legislative appears to be moving forward with this proposal evaluation of the reporting required by SB 852 ahead of this reporting is unclear. before providing the authority to the administration to enter into any partnerships. OPTIONS TO IMPROVE COVERED CALIFORNIA AFFORDABILITY During last year’s budget process, the Background Legislature directed Covered California to Federal Patient Protection and Affordable develop options, for consideration during the Care Act (ACA) Substantially Changed 2022-23 budget process, to improve affordability Individual Health Insurance Market Landscape. for Californians who have purchased health The ACA—most of the provisions of which became insurance through Covered California and make effective in 2014—brought about significant up to 400 percent of the federal poverty level changes to the way that health insurance coverage (FPL). On January 10, 2022, Covered California is provided in California. This included significant released a report with affordability options for changes within the individual health insurance consideration by the administration and Legislature. market. Notably, the ACA provided for the At this time, there are no budget proposals establishment of state health benefit exchanges, before the Legislature regarding these options. such as Covered California. Consumers who shop The administration has stated that it is still reviewing for coverage on Covered California can choose the options. As such, if the administration decides among health insurance plans organized into to propose affordability options for Covered standardized metal tiers, including bronze, silver, California, the proposal would be later in the budget gold, and platinum. These tiers vary in the amount cycle. Regardless of whether the administration of monthly premiums they charge and out-of-pocket ultimately comes forward with a proposal, the costs they require households to pay, such as Legislature could consider the options in the annual deductibles and co-pays for medical visits. Covered California report and decide whether to Bronze plans have the lowest premiums but have take action regarding the affordability of plans the highest out-of-pocket costs. For example, offered through Covered California. bronze plans feature a large deductible that 12 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET must be met before many medical services are the requirement for insurers to offer enhanced covered. Silver, gold, and platinum plans require silver plans that included cost-sharing progressively lower out-of-pocket costs, but also reductions. In order to accommodate the come with higher premiums. increased cost of silver plans, insurers raised To improve affordability, the ACA created two premiums for silver plans. (We note that due to types of subsidies that work together to reduce the APTC, the federal government ultimately the cost of health insurance for households who paid for the increased premium costs for purchase coverage through Covered California consumers making less than 400 percent if they meet certain income-eligibility criteria of the FPL.) and do not otherwise have access to affordable ACA Created Individual Mandate That Was coverage—such as through an employer, Medi-Cal, Subsequently Set to Zero. As originally enacted, Medicare, or another qualifying program. (The the ACA imposed a requirement, referred to as the federal government currently considers coverage individual mandate, that most individuals obtain to be affordable if self-only premium costs [that is, specified minimum health insurance coverage or excluding other family members] are no higher than pay a penalty. The individual mandate was intended 9.6 percent of household income.) to discourage people from going without health • Advance Premium Tax Credit (APTC). insurance coverage, particularly younger and The APTC—as structured under the ACA— healthier individuals who have lower risk of incurring offsets the cost of health insurance premiums health care costs and who otherwise would be less for households with incomes between likely to enroll in coverage. Increased coverage 100 percent and 400 percent of the FPL. of younger, healthier populations leads to a more This tax credit effectively limits a household’s balanced insurance risk pool and allows the costs net premium for a silver plan (after accounting of covering higher-risk populations to be spread for the tax credit) to between 2 percent and more broadly. This, in turn, reduces the average 10 percent of annual income. (This percentage cost of coverage and helps to offset the increased increases as income increases.) cost of making individual market coverage more • Cost-Sharing Reductions. While the comprehensive under the ACA. However, due to APTC offsets premium costs, cost-sharing subsequent federal legislation, the penalty for reductions are subsidies that reduce violating the individual mandate has been reduced households’ out-of-pocket costs such to zero, effectively eliminating the requirement. as co-pays, deductibles, and annual State Introduced Individual Mandate Penalty out-of-pocket maximums. Under the initial and Established Three-Year Premium Subsidy years of the ACA, the federal government Program. In 2019-20, the Legislature enacted provided funding for cost sharing reductions a state individual mandate penalty as well as a for insurers in Covered California to offer three-year state premium subsidy program intended various “enhanced” silver plan options to supplement federal subsidies through Covered to households with incomes between California. The state’s individual mandate penalty, 100 percent and 250 percent of the FPL. which was modeled on the federal individual These plans are often referred to by the mandate penalty, went into effect in 2020 and is average percent of a member’s health care ongoing. The subsidy program was designed as a costs that the plan pays. For example, on three-year program from 2020 through 2022 that average, a Silver 94 plan pays 94 percent would reduce premium costs for most Covered of member health care costs. Plans with California enrollees—including those making higher numbers—which have a lower income between 400 percent and 600 percent of the threshold for enrollment—are considered FPL who were not eligible for the federal premium more generous because the consumer pays subsidies. The state subsidies were structured lower out-of-pocket costs. In 2017, the federal to limit premium costs to a percentage of income government stopped providing funding for (with the percentage increasing with income) for cost-sharing reductions but did not remove households making up to 600 percent of the FPL. www.lao.ca.gov 13 2022-23 BUDGET Enhanced Federal Premium Subsidies in Pending Federal Legislation Could Extend Effect Supplanted State Subsidies in 2021 ARP Act Premium Subsidies and Provide and 2022. The American Rescue Plan (ARP) Act Additional Cost-Sharing Reductions. As noted was passed by Congress in 2021 in response to above, the increased federal support through the COVID-19. As part of this act, the level of federal ARP Act only extends through 2022. However, support for premium subsidies for coverage pending federal legislation (referred to as the Build purchased on health benefit exchanges have Back Better Act) would extend the increased been temporarily increased for the 2021 and 2022 federal support through 2025. The legislation also plan enrollment years. As seen in Figure 5, the would provide a total of $10 billion nationwide increased federal premium subsidies substantially annually between 2023 and 2025 to support new lower the cost of premiums Californians need to pay cost-sharing reductions. (The likelihood of the for plans purchased through Covered California— pending federal legislation—or legislation with including for households whose incomes made similar provisions—ultimately being approved by them ineligible for the preexisting premium Congress is highly uncertain at this time.) subsidies under the ACA. In total, the increased Affordability Remains an Issue for federal support has resulted in about $1.6 billion in Households With High Out-of-Pocket Costs. reduced premium costs for Californians annually in Even with the federal premium subsidies and each of 2021 and 2022. the cost-sharing reductions established through State Set Aside Funding for Future the ACA, affordability remains an issue for both Affordability Program and Required Report low-income consumers who are eligible for plans on Affordability Options. The increased federal support Figure 5 effectively supplanted the state premium subsidies because it ARP Reduced Premium Costs in Covered California, reduced premium costs as a Supplanting State Premium Subsidies percent of income below the Maximum Required Contribution Toward Silver Plan Premiums as a thresholds established in the state Share of Income by FPL Group program. This freed up General Fund that otherwise would have 20% gone toward the state premium program. As part of the 2021-2 State Subsidy Program (Expires December 31, 2022) budget package, Chapter 143 of 15 2021 (AB 133, Committee on Budget) set aside $333.4 million of this freed-up General Fund Preexisting Federal Subsidies to support future affordability 10 (Ongoing) efforts. Assembly Bill 133 also required Covered California to develop options for reducing 5 out-of-pocket costs for enrollees ARP Subsidies (Expires December 31, 2022) making up to 400 percent of the FPL and to provide these options to the Legislature and Under 138- 150- 200- 250- 300- Over 138a 150 200 250 300 400 400%b Governor for consideration in the 2022-23 budget process. a Because individuals with incomes below 138 percent of the FPL generally are eligible for Medi-Cal, Californians below this income level rarely, but sometimes, receive subsidized coverage through Covered California. b Federal subsidies were not previously available for individuals with incomes over 400 percent of the FPL. Eligibility for the California state subsidy program ends at 600 percent of the FPL, while the ARP has no such income limit for eligibility. ARP = American Rescue Plan and FPL = federal poverty level. 14 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET that include the ACA cost-sharing reductions as These options are laid out in more detail in Figure 7 well as higher-income households. As shown in on the next page, but generally involve eliminating Figure 6, households at various income levels deductibles (which are primarily assessed for who are enrolled in silver plans potentially can end inpatient services) and providing at least some up paying a high percent of their annual income portion of enrollees with more “generous” plans on health expenditures. For example, a family of than they would otherwise qualify for—which would four making about $40,000 per year and enrolled reduce out-of-pocket costs. (The generosity of a in an enhanced Silver 87 plan (with cost-sharing plan refers to the percentage of a member’s health reductions) could end up paying $5,700 out of care costs that it is assumed to cover.) At this time, pocket (over 14 percent of their income) over the the administration has not put forward a proposal course of a year and potentially within a much regarding these options. shorter period of time. A four-person household, Funding Issues making roughly $67,000 per year and enrolled in a standard Silver 70 plan (with no cost-sharing Affecting Affordability Options reductions) could end up paying $16,400 (almost The section below discusses some issues for 24 percent of their income) in out-of-pocket costs legislative consideration regarding potential changes over the course of a year. in the amount of federal funding available to improve affordability in Covered California and other potential Recent Report Provides Various sources of funding. Options to Improve Affordability Will Federal Support for Premium Subsidies Report Highlights Various Options to Improve in ARP Act Be Extended? As noted earlier, pending Affordability. On January 10, 2022, Covered federal legislation potentially would extend the federal California released a report with various options for support for enhanced premium subsidies provided cost-sharing reductions to improve affordability for through the ARP Act through 2025. However, if the silver plans purchased through Covered California enhanced premium subsidies are not extended and in response to AB 133’s reporting requirement. the state took no action in response, this would result Figure 6 Silver Plan Out-of-Pocket Maximums as a Percent of Annual Household Income Family of Four, 2022 25% 20 15 $16,400 10 $12,600 Out-of-Pocket Maximum $5,700 5 Annual Household Income (In Thousands) www.lao.ca.gov 15 006,1$ 40 45 50 55 60 65 70 75 80 85 90 95 100 $105 2022-23 BUDGET in a substantial increase in premium costs for households enrolled in Covered California. Figure 7 Covered California noted in its report that if Summary of Options Presented in faced with increased premiums, thousands Covered California Report of existing enrollees might choose to drop coverage. In the event the federal premium Estimated State subsidies under ARP are not extended, Options Fiscal Impacta,b the Legislature may wish to consider Option 1 reestablishing a state premium subsidy Households with incomes above 150 percent up to $475 million to $626 million 600 percent of the FPL would be upgraded to more program before considering adopting generous plans. state-funded cost-sharing reductions (such All deductibles would be eliminated. as the options provided in the Covered Option 2 California report) due to the potential adverse Households with incomes above 150 percent up to $463 million to $604 million impact increased premium costs could have 400 percent of the FPL would be upgraded to more on affordability and thus access to coverage. generous plans. Will the Federal Government Provide All deductibles would be eliminated. Funding for Cost-Sharing Reductions? Option 3 The pending federal legislation would Households with incomes above 150 percent up to $386 million to $489 million 400 percent of the FPL would be upgraded from provide $10 billion in federal funding existing plans to plans somewhat less generous than in for additional cost-sharing reductions. Option 2. California’s share could potentially exceed All deductibles would be eliminated. $1 billion, although the amount of funding Option 4 and level of discretion provided to the state Similar to Option 3 but with less generous upgrades for $362 million to $452 million remains uncertain. In the event this funding is households with incomes above 250 percent up to 300 percent of the FPL. approved, the state would have considerably All deductibles would be eliminated. more resources to address affordability of Option 5 plans provided through Covered California. Households with incomes above 150 percent up to $278 million to $322 million However, the Legislature would need to 250 percent of the FPL would be upgrade to more take into consideration potential federal generous plans. requirements on how this funding is utilized. All deductibles would be eliminated. In addition, the Legislature will want to take Option 6 into consideration that even if the pending No change for households at or below 200 percent of the $128 million to $189 million federal legislation is approved, the federal FPL. Households above 200 percent and up to 400 percent of the FPL would be upgraded to a more funding for cost-sharing reductions would generous plan. only be provided through 2025. All deductibles would be eliminated. Beyond Federal Funding, What Other Option 7 Funding Could Be Used? Aside from No change for households up to 250 percent of the $37 million to $55 million the potential for enhanced federal FPL. Relative to Option 6, somewhat less generous upgrades for households above 250 percent up to funding, the Legislature could choose to 400 percent of the FPL. authorize General Fund for the purpose Deductibles would not be eliminated. of implementing affordability options in a Estimates provided by Covered California with low to high estimates varying by the extent to which Covered California. For example, the existing enrollees shift to more generous plans as a result of the option. Legislature may wish to spend an amount b Estimated costs do not assume any new enrollment resulting from the plans. To the extent options encourage new enrollment into Covered California, state costs could be higher than listed in the similar to the estimated revenues from the table. state’s individual mandate penalty for a FPL = federal poverty level. state subsidy program. Revenues from the penalty for the 2020 tax year were about $400 million. 16 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Other Issues for California include eliminating deductibles and Legislative Consideration providing consumers with more generous plans that reduce various out-of-pocket costs. Only Regardless of what sources of funding are used, one option would provide more generous plans we suggest the Legislature consider various other but would not eliminate deductibles. The options issues if it chooses to establish a state cost-sharing that eliminate deductibles are considerably reduction program (such as one of the options more expensive. However, the Legislature might provided in the Covered California report). A few want to consider these options for two reasons. issues for consideration are discussed below. First, inpatient deductibles are substantially higher What Specific Affordability Goals Should Be than other forms of out-of-pocket costs. While Pursued? If the Legislature decides to establish a many consumers do not utilize these services, cost-sharing reduction program, determining what those who do are much more likely to reach their specific affordability goals should be pursued will out-of-pocket maximums. Second, deductibles be important. For example, the Legislature could can have a deterrent effect on consumers. Notably, focus on improving affordability for lower-income if consumers are confused about when such households who, despite being eligible for deductibles apply, they may avoid enrolling in plans federal cost-sharing reductions, can still pay a or receiving health care, including services that are significant portion of their income on health care not subject to inpatient deductibles. due to deductibles and out-of-pocket maximums. Would the Cost-Sharing Reduction Program Alternatively, the Legislature could focus on Be Limited Term or Ongoing? The Legislature expanding cost-sharing reductions to households also may want to consider what duration a with incomes above 250 percent of the FPL who state-funded cost-sharing reduction program do not currently qualify for federal cost-sharing should be. A one-year or limited-term program reductions and, as a result, potentially could end would reduce the state’s fiscal exposure and paying an even higher percent of their income on potentially avoid exceeding the $333.4 million that health care. was set aside in 2021-22. In addition, if the pending While Covered California’s report is heavily federal legislation to provide funding for cost focused on affordability for existing enrollees, in sharing is approved, the associated federal funding 2023, about 700,000 Californians are projected would expire in 2025. As such, a limited-term state to be uninsured but eligible for subsidized program could be better aligned with that funding Covered California plans while an additional source and later restructured or eliminated when 200,000 uninsured Californians would be eligible the federal funding goes away. However, there are for unsubsidized Covered California plans. trade-offs of a limited-term program. For example, Encouraging these Californians to enroll in Covered consumers may be less willing or able to make any California could significantly reduce the number of necessary changes to their health plans in order to uninsured Californians. Accordingly, the Legislature benefit from a program that has a short duration. might want to focus on affordability options that promote further take-up of insurance coverage. Legislative Next Steps While Covered California provides detailed While no specific proposal has been put information about the impacts of its options on forward by the administration, action would affordability for different income groups, however, need to be taken within the 2022-23 budget the report does not consider potential impacts the process in order to take effect in Covered options would have on enrollment. California’s 2023 plan year. We recommend that What Out-of-Pocket Costs Should a State the Legislature take into consideration the issues Cost-Sharing Reduction Program Address? raised above when considering what actions to The Legislature also may wish to consider what take—either in reviewing any potential proposal type of out-of-pocket costs should be focused from the administration that might be released on by such a cost-sharing reduction program. at May Revision or in developing direction to the The majority of the options put forward by Covered administration on what options to implement. www.lao.ca.gov 17 2022-23 BUDGET VARIOUS ACCESS AND AFFORDABILITY ISSUES REMAIN The Governor’s proposals—if approved by the Reasons for churning can be due to short-term Legislature—would improve significantly access to changes in circumstances such as temporary comprehensive health coverage and to some extent increases in income, but it also can be due to improve affordability. In addition, potential actions administrative issues such as failure to respond taken to improve affordability in Covered California to Medi-Cal eligibility redetermination notices would reduce health costs for impacted households. within a given amount of time. The Legislature However, various issues regarding access to could consider asking the Department of Health comprehensive health coverage and affordability of Care Services for other options to streamline health care would remain even if the above actions the eligibility redetermination process from were all taken. We provide a few notable examples of a beneficiary perspective for the purpose of these issues below. reducing churn. Alternatively, the Legislature Examples of Issues Impacting Access could consider adopting a continuous coverage to Comprehensive Coverage. These access policy to allow enrollees to remain on Medi-Cal issues include: for a period of time, such as a year, without being subject to an eligibility redetermination • Access to Covered California for (this would require a federal waiver). Undocumented Residents. While the Governor’s proposal would expand Medi-Cal Examples of Issues Impacting Affordability. coverage to all income-eligible undocumented These affordability issues include: residents, access to coverage would remain • Addressing Share of Costs in Medi-Cal. an issue for undocumented residents who Certain individuals who would otherwise not are not income-eligible for Medi-Cal. While be eligible for Medi-Cal due to their income are there is considerable uncertainty about the allowed to enroll in the program but must pay size of this population, we estimate there likely a share of cost before enrolling in Medi-Cal. are 300,000 people affected. Due to federal Most share-of-cost Medi-Cal recipients are requirements, such individuals are excluded enrolled in the medically needy program from purchasing coverage through Covered which is largely comprised of persons with California. However, the state potentially could disabilities as well as people who are aged or seek a federal waiver to allow such individuals blind. In contrast to the payment of premiums, to purchase coverage. Even with a waiver, individuals who pay a share of cost must meet however, costs of plans purchased likely would a monthly deductible before Medi-Cal begins to either need to be unsubsidized or the state pay for health care. The amount of deductible would need to pay for any subsidies that would that must be paid each month is calculated as otherwise be funded by the federal government. the enrollee’s net nonexempt income minus • Reducing Number of People Eligible a basic amount determined to be necessary for but Not Enrolled in Medi-Cal. for cost of living, known as the “maintenance Roughly 500,000 people are eligible for but need level.” California has not applied not enrolled in Medi-Cal, although it is not cost-of-living adjustments to the calculation of necessarily the same 500,000 people at a the maintenance need level since 1989, even given time due to an issue known as “churning.” though federal law allows for such adjustments, Churning refers to when individuals lose resulting in a current maintenance need level eligibility for Medi-Cal on a temporary basis of only $600. Introducing inflation adjustments before resuming coverage, often within a into the program could help mitigate increasing year. The lapses in coverage due to churning affordability challenges for its enrollees. can result in issues with continuity of care. 18 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET • Fixing the “Family Glitch.” Under the ACA, • Reducing Pharmaceutical Costs. households that have access to affordable This publication discusses the Governor’s health insurance through other sources such proposal to address high insulin costs. Even as an employer are ineligible for federally if that proposal is approved and implemented subsidized health plans through exchanges successfully, high pharmaceutical costs such as Covered California. Under the ACA, likely will remain a challenge—even after households are considered to have access to considering he state’s other efforts to affordable insurance if at least one member of reduce such costs. Attempting to address the household has access to health insurance this issue could require additional market in which the cost of self-only coverage is less interventions—such as attempting to increase than a certain percent of household income competition, consolidating the purchase of (currently 9.66 percent). The definition does pharmaceuticals to a greater extent than today not consider the cost of coverage for other to increase bargaining power, or passing household members and accordingly has legislation to regulate costs. However, the become known as the family glitch because feasibility of any such intervention is uncertain of its potentially adverse impact on families and could lead to unintended consequences, being able to access affordable coverage such as reduced availability if manufacturers through the health benefit exchanges. In some choose to reduce the availability of their drugs circumstances, such as if an employer to Californians due these state interventions. contributes little to nothing for the coverage To the extent the Legislature would like to further of spouses and dependents, households the goals of improving access and affordability, it may find it cost-prohibitive to either add other could consider looking into ways to address the family members to an employer-sponsored issues identified above. This could include asking plan or purchase nonsubsidized coverage the administration during budget deliberations through Covered California. While this issue about its plans, if any, to address the issues could be addressed through a change in identified, as well as about the feasibility of options federal legislation, Minnesota recently passed to address them. We recognize that options to legislation to address the family glitch at the address some of these remaining access and state level. (However, we note that Minnesota’s affordability issues may be costly and complicated equivalent to Covered California is structured and come with significant trade-offs that warrant very differently—and as such, attempting to serious consideration before proceeding. fix the family glitch in California could require a different approach and be more complicated.) www.lao.ca.gov 19 2022-23 BUDGET LAO PUBLICATIONS This report was prepared by Luke Koushmaro, Ben Johnson, and Corey Hashida, 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. 20 LEGISLATIVE ANALYST’S OFFICE