The 2023-24 Budget: Medi-Cal Fiscal Outlook

2023-24 BUDGET The 2023-24 Budget: Medi-Cal Fiscal Outlook GABRIEL PETEK | LEGISLATIVE ANALYST | NOVEMBER 2022 SUMMARY This brief describes our fiscal outlook for Medi-Cal, the major factors that we expect to drive changes in General Fund spending in Medi-Cal, and key uncertainties of our projections. Specifically, this brief concerns projections of Medi-Cal local assistance spending within the Department of Health Care Services (DHCS). Estimate Downward Revision for the Current Year. We estimate that Medi-Cal General Fund spending will be $35.5 billion in 2022-23, a decline of around $900 million compared to the 2022-23 Budget Act estimate. This adjustment is driven by the extension of the national COVID-19 public health emergency (PHE) into January 2023, which (among other impacts) provides Medi-Cal more federal funding to offset General Fund costs than anticipated at budget act. Project Net Reduction for the Budget Year. From our estimated level in 2022-23, we project General Fund spending to decline in 2023-24 by $1.3 billion to $34.2 billion. Technical adjustments associated with one-time costs in 2022-23 largely drive the reduction in spending. The fiscal impact of these technical adjustments is partially offset by a number of upward spending pressures related to the unwinding of the PHE, the end of certain offsetting fund sources, underlying growth in utilization and service costs, and other factors. Project Longer-Term Growth. We project Medi-Cal General Fund spending to increase over the remainder of the outlook period, rising to over $38 billion by 2026-27. This longer-term growth primarily is driven by changes in caseload, continued growth in underlying per-enrollee utilization and service costs, and expanded health coverage for income-eligible undocumented persons. BACKGROUND the federal government’s share of cost for most Medicaid services for the duration of the PHE. Medi-Cal Provides Health Coverage for In addition, the same federal legislation effectively Low-Income Californians. Medi-Cal, the state’s prohibits the state (as a condition of receiving the Medicaid program, provides health care coverage enhanced federal funding) from terminating the to over 14 million of the state’s low-income eligibility of current Medi-Cal enrollees, except residents. In a typical year, the General Fund covers in limited circumstances, until after the PHE a little more than 20 percent of total Medi-Cal costs, ends. This prohibition, known as the “continuous with federal funds and other state and local funds coverage requirement,” increases overall Medi-Cal respectively covering the remaining 65 percent and caseload from what it otherwise would be if the 15 percent of total costs. eligibility requirements, such as those pertaining PHE Notably Impacted Medi-Cal. The national to income, continued to be enforced with respect PHE was first declared in early 2020 and has been to the current caseload. The 2022-23 Budget Act extended numerous times. There are a number of assumed the PHE would expire in October 2022. temporary policy and financing rule changes within The federal government later extended the PHE the Medi-Cal program that generally remain in place at least into January 2023—thereby extending for the duration of the PHE. For example, Congress the enhanced federal funding and the continuous approved a 6.2 percentage point increase in coverage requirement. www.lao.ca.gov 1 2023-24 BUDGET OVERVIEW OF PROJECTIONS budget, we estimate increases in the number of seniors enrolled in Medi-Cal (who typically have Below, we summarize our projected adjustments higher General Fund costs). We also estimate a to the Medi-Cal budget and describe the major decrease in what is commonly referred to as the drivers of these changes in the current year Patient Protection and Affordable Care Act (ACA) (2022-23), budget year (2023-24), and longer term optional expansion population (which typically has (2024-25 through 2026-27). Our outlook assumes lower per-enrollee General Fund costs). current laws and policies remain in effect over this period of time. Budget Year (2023-24) Current Year (2022-23) Outlook Anticipates Overall Spending Decline in 2023-24. We project Medi-Cal General Estimate Spending Declines From Enacted Fund spending to be $34.2 billion in 2023-24—a General Fund Level. Our outloo k estimates $1.3 billion decline from our revised 2022-23 $35.5 billion General Fund support for Medi-Cal estimate. As Figure 1 shows, this reduction in in 2022-23—a net decline of around $900 million spending is the net effect of several key downward General Fund relative to the enacted General Fund and upward adjustments. Below, we summarize level for 2022-23. Below, we describe two major each adjustment. factors driving the net reduction in spending. Two Large Technical Adjustments Drive Notable Savings Due to Enhanced Federal Overall Decline. We project that two key technical Funding… The extension of the PHE into adjustments will impact General Fund spending January 2023 results in additional enhanced federal in Medi-Cal. First, we project reductions in funding for Medi-Cal beyond what was assumed limited-term funding will result in a General Fund in the enacted budget. We estimate General Fund spending decrease of $4.1 billion in the budget savings of around $1 billion resulting from the year. The decreases are primarily driven by additional enhanced federal funding in 2022-23. the ramp down of a handful of large behavioral …Which Will Be Partially Offset by Increased health initiatives, such as the Behavioral Health General Fund Costs for Caseload. The savings Continuum Infrastructure, Behavioral Health Bridge from the additional months of enhanced federal Housing, and Children and Youth Behavioral funding will be partially offset by increased Health initiatives. Second, we project a reduction caseload costs resulting from the extension of the in General Fund spending related to federal continuous coverage requirement. Specifically, repayments and deferrals. These adjustments occur we estimate that the extension of the PHE into when the federal government identifies claims that January 2023 will result in increased spending of the state made in error. In these cases, the federal $130 million General Fund on caseload costs in government requires repayment from the state for 2022-23. Despite the extension of the continuous past erroneous claims or defers federal funding for coverage requirement, we do not anticipate overall potentially erroneous claims. These repayments caseload levels to be notably different than what and funding deferrals normally result in low was assumed in the enacted budget. Based on hundreds of millions of dollars of General Fund more recent caseload data, we find that slower spending each year. DHCS, however, estimates underlying caseload growth than was assumed associated General Fund spending to be $2.5 billion in the budget offsets the increase in caseload in 2022-23, with the large increase primarily due resulting from the continuous coverage requirement to a one-time issue with past erroneous claims. being extended. As a result, our net caseload We assume these adjustments return to previous estimate is similar to the budget act. We do levels in 2023-24, resulting in a net General Fund anticipate that there will be changes in the mix of spending decline of $2.1 billion. the Medi-Cal caseload, however, which increases caseload costs. For example, relative to the enacted 2 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Figure 1 LAO Outlook Projects Decline in Medi-Cal Spending in 2023-24 General Fund Ramping Down -$4.1 Billion of Limited-Term Initiatives Reductions to -$2.1 Billion Federal Repayments and Deferrals Unwinding of $1.5 Billion Public Health Emergencyª $1.5 Billion End of MCO Tax Per-Enrollee $1.4 Billion Cost Growth $470 Million Other 2023-24 2022-23 Projection Estimate $34.2 Billion -$1.3 Billion $35.5 Billion a Consists of the unwinding of certain COVID-19-related policies, such as enhanced federal funding and the continuous coverage requirement. MCO = managed care organization. Unwinding of PHE Increases Net General End of Managed Care Organization (MCO) Tax Fund Spending in Budget Year. Assuming the Also Increases General Fund Spending. For over PHE ends in January 2023, we estimate that a decade and following multiple renewals, the net General Fund costs will increase by about state has imposed a tax on MCOs (managed care $1.5 billion in 2023-24 due to the end of the health plans that arrange and pay for the services enhanced federal funding and the unwinding of of their beneficiaries) and used the revenues to certain PHE-related policies. We project that the offset General Fund costs in Medi-Cal. The current end of the enhanced federal funding will increase MCO tax has been in place since January 2020 and General Fund spending by about $3.1 billion. is scheduled under current law to end in December However, we project that about $1.7 billion of 2022. We project the end of this tax will increase this increase will be offset by a reduction in General Fund spending by $1.5 billion in 2023-24. overall Medi-Cal costs due to unwinding certain Assume Continued Growth in Per-Enrollee PHE-related policies. Most notably, once the Costs. Underlying per-enrollee cost growth in continuous coverage requirement ends, caseload Medi-Cal is driven by changes in health care will decline over the following 14 months. utilization and service costs. Under our outlook, We project that the decline in caseload will reduce we assume per-enrollee costs increase by spending by about $1.3 billion General Fund $1.4 billion (around 4 percent). This projection in 2023-24. assumes Medi-Cal utilization and costs, as well as their underlying drivers (such as inflation), generally continue to follow past trends. www.lao.ca.gov 3 Various Other Factors Impact General Assume Caseload Increases for Remainder of Fund Spending. We expect various other Outlook Period. Following the decline in caseload upward and downward spending pressures in due to eligibility redeterminations that recommence Medi-Cal, with a net impact of about $470 million after the PHE ends, we project caseload will in 2023-24 in General Fund spending. Most increase gradually for the remainder of the outlook notably, income-eligible undocumented residents period, primarily as a result of demographic and between the ages of 26 through 49 will be eligible economic factors. More specifically, our outlook for comprehensive Medi-Cal services beginning assumes that California’s overall population will no later than January 1, 2024. Currently, these increase and that unemployment rates over the individuals only are eligible for emergency- and outlook period will be somewhat higher than in pregnancy-related services. The expansion is 2022-23. These demographic and economic expected to cost roughly $630 million General Fund factors likely will result in an increase in the number in 2023-24. of people who are income-eligible for Medi-Cal and do not have access to employer-sponsored Longer-Term (2024-25 Through 2026-27) health coverage. As Figure 2 shows, we estimate Outlook Anticipates Increases in General that most of the associated caseload growth will be Fund Spending. We project Medi-Cal General concentrated among the ACA optional expansion Fund spending to increase in the remaining years population, as well as seniors and persons of the outlook period, rising to more than $38 billion with disabilities. in 2026-27. Below, we describe the major drivers of this increase in spending. Figure 2 Following Eligibility Redeterminations, Caseload Is Expected to Increase LAO Projections by Caseload Category (In Millions) Total Families 16 8 15 7 6 14 Actual Projected 5 13 4 12 3 2 11 1 10 2018-19 2020-21 2022-23 2024-25 2026-27 2018-19 2020-21 2022-23 2024-25 2026-27 ACA Optional Expansion Seniors and Persons With Disabilities 5 2.5 4 2.4 2.3 3 2.2 2 2.1 1 2.0 1.9 1.8 2018-19 2020-21 2022-23 2024-25 2026-27 2018-19 2020-21 2022-23 2024-25 2026-27 ACA = Patient Protection and Affordable Care Act. 4 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Assume Per-Enrollee Costs Continue to Rise. by November 12, 2022. Since no such notice has been We assume that underlying per-enrollee utilization provided as of the time of this publication, we now and service costs continue to rise over the outlook expect the PHE to be extended beyond January 2023.) period, with the increase each year ranging from Demographic and Employment Trends 3 percent to 4 percent. Additionally, our outlook also Could Vary From Assumptions. As discussed anticipates overall per-enrollee costs to increase earlier, following the decline in caseload due to as seniors and persons with disabilities (a relatively eligibility redeterminations, we project the Medi-Cal high-cost group) become a larger share of Medi-Cal’s caseload and associated costs to rise beginning overall caseload. We project this group to rise from in 2024-25. These increases are primarily a result 15 percent to 18 percent of Medi-Cal caseload over of our assumptions about demographic and the outlook period. economic trends such as population growth and General Fund Cost of Eligibility Expansion Will the unemployment rate. Should the future unfold Ramp Up. The General fund costs of expanding differently than we have assumed, caseload and eligibility for comprehensive Medi-Cal services to associated General Fund costs could be higher, lower, otherwise income-eligible undocumented residents or more volatile than we project. between the ages of 26 and 49 are expected to Overall Impact of Upcoming Policy Changes Is increase substantially after 2023-24. In 2024-25, the Difficult to Quantify. The state recently adopted a first full year of the expansion, General Fund costs are series of major changes to the way Medi-Cal services expected to be about $1.5 billion. Costs are expected are delivered and paid. Some of these changes to continue increasing through the outlook period and have been implemented, whereas other changes beyond, reaching over $2 billion General Fund at full are scheduled to begin during the outlook period. implementation in 2028-29. Generally, our outlook assumes these enacted policy Limited-Term Initiatives Will Continue to Ramp changes go into effect, though in some cases we Down. We project another $1 billion in General Fund were not able to fully quantify their fiscal impact. spending reductions in 2024-25 associated with For example, over the outlook period, DHCS plans to limited-term initiatives. The reductions primarily will implement a number of changes affecting managed be from the winding down of the Behavioral Health care health plans in Medi-Cal, including which plans Bridge Housing initiative, as well as the end of various will participate in Medi-Cal and how their rates will be other initiatives. set. Depending how these changes impact service costs, utilization, and quality, they could, on net, KEY UNCERTAINTIES increase or reduce overall General Fund Medi-Cal spending. In addition, many of these policy changes At Time of Outlook, Uncertain End Date of are interrelated, further adding to the uncertainty. PHE. At the time we completed our outlook, it was uncertain whether the federal government would Inflation and Its Impacts on Medi-Cal Spending extend the PHE beyond January 2023. To the extent Are Uncertain. Inflation in the overall state economy the PHE is extended beyond January 2023, General has been considerably higher over the last several Fund spending will differ from our estimates and months than average historical levels. Factors that projections. For example, if the PHE is extended for tend to predict future inflation suggest there is a an additional 90 days (into April 2023), we estimate considerable risk inflation will remain elevated for an net General Fund savings for Medi-Cal in the low extended period of time. Should inflation continue hundreds of millions of dollars in 2022-23 (primarily to be higher than historical levels, General Fund due to more enhanced federal funding), but project spending in Medi-Cal could be higher than we net costs of a similar amount in 2023-24 (primarily project. The extent of this impact on Medi-Cal’s due to the extension of the continuous coverage budget, however, is uncertain. Some key components requirement). We emphasize, however, that these of Medi-Cal’s budget—such as managed care estimates are subject to considerable uncertainty. spending—are adjusted over time to account for (Based on the federal government’s commitment to factors such as inflation. In contrast, other key providing at least a 60-day notice before the end of the components—such as fee-for-service payments to PHE, such notice would need to have been provided providers—are not. www.lao.ca.gov 5 6 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET www.lao.ca.gov 7 LAO PUBLICATIONS This report was prepared by Jason Constantouros, Luke Koushmaro, Joshua Lin, and Will Owens, 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. 8 LEGISLATIVE ANALYST’S OFFICE