The 2023-24 Budget: Analysis of the Medi-Cal Budget

2023-24 BUDGET The 2023-24 Budget: Analysis of the Medi-Cal Budget GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2023 SUMMARY Governor’s Budget Includes Major Increase to Medi-Cal General Fund Spending. The Governor’s budget includes $38.7 billion General Fund spending on Medi-Cal, the state’s Medicaid program, in 2023-24. This amount reflects a $6.4 billion (20 percent) net increase over the revised 2022-23 level. The net increase primarily is driven by current law and policy adjustments as opposed to new budget proposals. The Governor’s budget also includes several proposals that would require a change in state law, new authorization from the federal government, or both. These proposals, on net, yield a relatively small impact on Medi-Cal General Fund spending in 2023-24, though some have more notable impacts in later years. (We analyze the Governor’s major Medi-Cal and non-Medi-Cal behavioral health proposals in a forthcoming companion report—The 2023-24 Budget: Analysis of the Governor’s Major Behavioral Health Proposals.) Largely Due to Recent Federal Actions, Caseload and Associated Costs Likely Overstated in Governor’s Budget. In 2020, the federal government declared the COVID-19 national public health emergency (PHE). Congress also approved policies that significantly impacted Medi-Cal while the PHE is in effect, including policies that impacted caseload and associated costs while providing enhanced federal funding. Recent federal actions decoupled these policies from the PHE and provided a time line for ramping down the policies over the next several months. However, due to the timing of the development of the Governor’s budget, the administration was not able to incorporate these recent federal actions into its projections of caseload and General Fund spending for Medi-Cal. In our assessment of the administration’s projections, after taking into account the recent federal actions and more recent caseload data, we estimate a $1 billion reduction in General Fund spending in 2023-24 relative to the Governor’s budget. Governor’s Proposed Managed Care Organization (MCO) Tax Warrants Serious Legislative Consideration. State authorization and federal approval of the most recent MCO tax expired at the end of December 2022. The Governor proposes adopting a new version of the MCO tax from January 2024 to December 2026, which would offset around $2 billion of Medi-Cal General Fund spending annually. (In 2023-24, the associated offset to Medi-Cal General Fund would be $317 million due to only receiving a partial year of revenues.) In concept, adopting a new MCO tax has merit, as past versions of the tax have been a key source of support for Medi-Cal and a new tax would help address broader state budget shortfalls. That said, the Governor’s proposal is preliminary and the administration states that it is exploring ways to increase the level of the tax relative to the most recent version. We recommend the Legislature direct the administration to provide more robust information on the proposal during the budget process, including potential increases to the level of the MCO tax and the associated offset to the General Fund. www.lao.ca.gov 1 2023-24 BUDGET INTRODUCTION This brief analyzes the Governor’s 2023-24 (2) the Governor’s proposed MCO tax. A forthcoming budget proposals for Medi-Cal, California’s Medicaid companion report—The 2023-24 Budget: Analysis of program. It first provides an overview of Medi-Cal the Governor’s Major Behavioral Health Proposals— spending under the Governor’s budget. It then analyzes the Governor’s major Medi-Cal and analyzes (1) the administration’s assumptions non-Medi-Cal behavioral health proposals. around caseload and COVID-19-related policies and OVERVIEW In this section, we provide key background on decoupled the end dates of these policies from the Medi-Cal program, describe Medi-Cal’s overall the PHE. In addition, while the end date of the PHE budget picture, and summarize the key changes has been a source of considerable uncertainty in General Fund spending in the current year in recent years, the federal administration (2022-23) and budget year (2023-24). recently announced its intent to end the PHE on May 11, 2023. We will discuss these changes and Background their impacts to Medi-Cal in more detail later in Medi-Cal Provides Health Coverage for this publication. Low-Income Californians. Medi-Cal, the state’s State Is Implementing Series of Major Medicaid program, provides health care coverage Changes Known as California Advancing and to about 15 million of the state’s low-income Innovating Medi-Cal (CalAIM). Adopted in the residents. As a joint state-federal program, 2021-22 budget package, CalAIM is a large set costs are shared among federal, state, and local of reforms in Medi-Cal to expand access to new governments. The share of costs paid by each and existing services and streamline how services level of government varies by the type of service are arranged and paid. For example, as part of provided and the characteristics of the enrollees CalAIM, managed care plans are authorized to being served. Overall, the federal government’s provide certain nonmedical community supports share of cost typically is 50 percent, but is higher (such as housing support and transitional services) or lower for certain populations and services. that address the social determinants of health. Federal COVID-19 Policies Notably Impacted CalAIM also includes initiatives that help counties Medi-Cal. In early 2020, the federal government and other stakeholders build capacity to provide a declared a national PHE in response to the continuum of care for individuals. emerging COVID-19 pandemic. As part of related Overall Budget legislation, Congress temporarily enhanced the federal share of cost for most Medicaid services by Proposes Increase in Overall Spending. 6.2 percentage points. The same federal legislation Under the Governor’s budget, overall Medi-Cal also prohibited the state (as a condition of receiving spending (all fund sources) would be $139 billion the enhanced federal funding) from terminating the in 2023-24, a $1.2 billion (0.9 percent) increase eligibility of current Medi-Cal enrollees, except in over the revised 2022-23 level. Of this amount, limited circumstances. This prohibition is known $39 billion is General Fund spending, reflecting as the “continuous coverage requirement.” Up until a $6.4 billion (19.9 percent) increase over the recently, the end dates of the continuous coverage revised 2022-23 General Fund level in Medi-Cal. requirement and the enhanced federal funding As Figure 1 shows, this overall increase in were tied to the end date of the PHE. However, spending primarily reflects a lower level of federal legislation enacted in late December 2022 federal funds and a higher level of General Fund. 2 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Figure 1 Overall Medi-Cal Spending Grows Under Governor’s Budget (In Billions) 2022-23 Change From 2022-23 Revised 2023-24 Enacted Revised Proposed Amount Percent Total Spending $137.9 $137.7 $138.9 $1.2 0.9% By Fund Source Federal funds $88.6 $91.0 $86.1 -$4.9 -5.4% General Fund 36.4 32.3 38.7 6.4 19.9 Other funds 12.9 14.4 14.1 -0.3 -2.3 By Program/Delivery System Managed care $61.5 $60.2 $67.5 $7.4 12.2% Fee for service 39.0 36.9 34.8 -2.0 -5.5 Other programs 31.1 33.8 29.9 -3.9 -11.5 Local administration 6.4 6.9 6.7 0.3 4.4 Note: Reflects local assistance spending in the Department of Health Care Services. Excludes state operations to administer Medi-Cal, as well as state and local spending budgeted outside of the department used to claim federal Medicaid funds. Much of the anticipated decline in federal funds the federal government defers releasing funds to over the period is due to the administration’s the state for claims potentially made in error. In assumptions around the end of enhanced federal cases where the federal government subsequently funding related to COVID-19, which we describe determines the claiming was not done in error, the later in the report. deferred federal funds will be released and made Projected Increases Are Concentrated in available to the state. Both situations can temporarily Managed Care. Managed care comprises the increase General Fund spending, either to repay largest share of Medi-Cal spending. Under the the federal government or backfill deferred federal administration’s estimates, managed care’s share funds until they are released. Normally, the annual of Medi-Cal spending grows from 44 percent impact of these repayments and deferrals is in the of revised 2022-23 spending to 49 percent of low hundreds of millions of dollars. However, the proposed spending in 2023-24. Many factors drive 2022-23 Budget Act included $2.5 billion General managed care’s relatively notable spending growth. Fund for federal payments and deferrals—largely due For example, beginning in January 2023, the state to a one-time repayment to the federal government is taking actions that shift certain caseload and for erroneous claims within managed care. The benefits from fee for service and into managed Governor’s budget now assumes that most of these care. The Governor’s budget also proposes repayments will be made in 2023-24, rather than increases to managed care rates. 2022-23. In addition, the administration anticipates receiving more federal funding in 2022-23 due to 2022-23 General Fund Changes resolving certain deferred claims. The overall impact Estimates Downward Revision in General of these adjustments in 2022-23 is a $2.8 billion Fund Spending. The Governor’s budget estimates downward revision in General Fund spending. (As we Medi-Cal General Fund spending to be $32.3 billion, will discuss later, there will be a need for increased a reduction of $4.1 billion (11.2 percent) relative to spending in 2023-24 due to the shift in timing for the level enacted in the 2022-23 Budget Act. We the repayments.) summarize the key drivers of the reduction below. Assumes Extension of Policies Related to Shifts Timing of Federal Repayments and COVID-19. Because the administration largely Resolves Certain Deferrals. Federal Medicaid rules concluded its development of the Medi-Cal require the state to repay the federal government budget by early December 2022, the Governor’s when federal funding is claimed in error. In addition, budget does not reflect the recent federal actions www.lao.ca.gov 3 2023-24 BUDGET impacting COVID-19-related policies. Instead, the • Partial Delay of Funding for Behavioral proposed budget assumes that the PHE would end Health Continuum Infrastructure Program. in April 2023, six months later than assumed in the The 2021-22 budget package included 2022-23 Budget Act. Consistent with federal law at $1.7 billion one-time General Fund ($2.2 billion the time the budget was prepared, the administration total funds) over 2021-22 and 2022-23 for assumed the end of the PHE also would initiate the grants to develop new behavioral health end of various COVID-19-related policies including treatment facilities. The Governor proposes the continuous coverage requirement and the to delay the sixth and final round of grants enhanced federal funding. Relative to the 2022-23 intended for remaining needs not addressed Budget Act, the administration’s assumptions result by the prior rounds of grants, totaling in a $774 million downward revision in General $481 million and previously budgeted for Fund spending, largely due to additional months of 2022-23. Half of the delayed funds would enhanced federal funding. be provided in 2024-25 with the remaining Recognizes Reduced General Fund Needed amount provided in 2025-26. to Backfill Proposition 56 (2016) Revenues. • Partial Shift of Funding for Behavioral The 2022-23 Budget Act provided $296 million Health Bridge Housing Into 2023-24. The one-time General Fund support to hold harmless 2022-23 budget package included $1 billion Proposition 56-funded provider payments from General Fund in 2022-23 and $500 million declines in Proposition 56 revenues (tobacco General Fund in 2023-24 for grants to local taxes). Due mostly to lower estimated net spending entities to develop transitional housing for on Proposition 56-funded provider payments, the individuals experiencing homelessness who Governor’s budget eliminates the $296 million also have serious behavioral health conditions. General Fund backfill in 2022-23. The Governor’s budget shifts $50 million for Delays Funding for Three Sets of Planned grants to tribal entities previously budgeted in Spending. As part of a package of solutions 2022-23 to 2023-24. intended to address a projected state budget shortfall, the Governor proposes delaying or 2023-24 General Fund Changes partially delaying current-year spending for three Proposes Increase in General Fund sets of planned spending in 2022-23. We describe Spending. Under the Governor’s budget, Medi-Cal each proposed funding delay below. General Fund spending would be $38.7 billion, a $6.4 billion (19.9 percent) increase over the revised • Delay of Funding for Elimination of 2022-23 level. As Figure 2 shows, this net increase End-of-Year Provider Payment Processing in spending is the result of several key upward and Hold. As a budget solution in 2006-07, the downward adjustments, most of which are intended state implemented a hold in processing to implement current law and policy. We describe fee-for-service provider payments for the last each major adjustment below. two weeks of the fiscal year—a practice which remains in effect today. Because Medi-Cal Provides for Shift and Increase in Federal is budgeted based on when payments are Repayments and Deferrals. The Governor’s made, the hold generated one-time savings budget provides $3.4 billion General Fund for in 2006-07 by shifting payments into the spending associated with federal repayments next fiscal year. The 2022-23 Budget Act and deferrals. This amount primarily reflects the included one-time General Fund support to shift in the timing of repayments from 2022-23 to eliminate the delay beginning in 2022-23. 2023-24, as well as an overall increase in estimated The Governor’s budget proposes to shift repayment amounts based on updated data. the elimination of the delay in provider Ramps Down Impacts From payment processing until 2024-25, which COVID-19-Related Policies. As previously noted, frees up $378 million one-time General Fund the administration was not able to incorporate in 2022-23. recent federal actions impacting the end dates of 4 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET COVID-19-related policies in its development of Anticipates End of Most Recent MCO Tax. the Governor’s budget. Instead, the Governor’s For over a decade and following multiple renewals, budget assumes the PHE ends in April 2023, the state has imposed a tax on managed care followed by eligibility redeterminations resuming plans (also known as MCOs). The state has in May 2023 and enhanced federal funding used the tax to claim additional federal Medicaid expiring in June 2023. Relative to 2022-23, these funds, which the state receives on a matching assumptions result in a net increase of roughly basis. The additional federal funds, in turn, have $2.7 billion in General Fund costs due to increased helped offset General Fund costs in Medi-Cal. state spending to backfill the expiration of the Current law authorized the most recent MCO enhanced federal funding, which is partially tax from January 2020 through December 2022. offset by lower caseload costs once eligibility The administration projects the end of this redeterminations resume. version of the MCO tax, unless mitigated by the Supports Per-Enrollee Cost Growth. Under reauthorization of a new MCO tax, will increase the Governor’s budget, underlying per-enrollee General Fund spending by $1.5 billion in 2023-24. costs rise due to changes in fee-for-service Implements Scheduled Eligibility utilization, managed care rates, Medicare premiums Expansion for Undocumented Adults. (which Medi-Cal pays for beneficiaries enrolled in Historically, undocumented immigrants both delivery systems), and other pressures. Based who were income-eligible for Medi-Cal only on the administration’s budget information, we qualified for coverage for their emergency- and estimate this cost growth to represent $1.6 billion pregnancy-related services. Over the last several of the overall increase in Medi-Cal General Fund years, and in a number of steps, the Legislature spending, reflecting a 4 percent increase over has expanded comprehensive Medi-Cal coverage baseline spending. to income-eligible undocumented immigrants. Most recently, the 2022-23 budget package expanded eligibility to all income-eligible Figure 2 Several Cost Pressures Drive Net Increase in Medi-Cal Spending General Fund Changes From Current Year to Budget Year Federal Repayments and Deferrals $3.4 Billion Ramp Down of COVID-19 Policies $2.7 Billion Per-Enrollee Cost Growth $1.6 Billion End of Most Recent MCO Tax $1.5 Billion Eligibility Expansion for $635 Million Undocumented Adults (26-49 Year Olds) Other Changes (Net) $405 Million Ramp Down of Limited-Term Initiatives -$3.5 Billion New MCO Tax -$317 Million 2022-23 Revised 2023-24 Proposed $32.3 Billion $38.7 Billion $6.4 Billion MCO = managed care organization. www.lao.ca.gov 5 2023-24 BUDGET undocumented residents aged 26 through 49 timely process for receiving federal Medicaid beginning no later than January 1, 2024. The funds for behavioral health-related services. Governor’s budget includes $635 million General Under the new process, counties will transfer Fund ($844 million total funds) to cover the costs funds covering their nonfederal share of cost associated with implementing this expansion into a state account, which will be used to in 2023-24. draw down the associated federal funds. Ramps Down Limited-Term Initiatives. To help implement this change, the Governor The Governor’s budget includes a $3.5 billion proposes $375 million in one-time General reduction in Medi-Cal spending due to a number Fund in 2023-24. The one-time General Fund of limited-term initiatives ramping down in roughly covers counties’ share of cost for 2023-24. The limited-term spending reductions are the first three months of 2023-24, mitigating concentrated in various behavioral health initiatives potential disruptions to counties’ cash-flow including the Behavioral Health Continuum during the transition. Infrastructure Program and Behavioral Health • Partial Delay of Funding for Behavioral Bridge Housing. These scheduled spending Health Bridge Housing. In addition to reductions are separate from the administration’s the shift in 2022-23 funding, the Governor proposed delays in the behavioral health area. proposes to delay $250 million of funding Includes Several New Proposals and Program for bridge housing previously budgeted in Changes, Some With Mostly Out-Year Impacts. 2023-24 to 2024-25. The Governor’s budget includes several proposals • Federal Match for Designated State that would require a change in state law, new Health Programs. In late January 2023, the authorization from the federal government, or both. Department of Health Care Services received While most of these initiatives affect Medi-Cal federal waiver approval allowing the state spending in the budget year, some would not begin to claim federal matching funds for certain until after 2023-24 and others notably ramp up over existing programs that would otherwise time. We describe each new proposal below. be funded solely with state funds. (The Governor’s budget assumed approval of this • New MCO Tax Proposal. The Governor waiver.) Under the waiver, the state must use proposes implementing a new MCO tax from the federal matching funds to help support January 2024 through December 2026. Similar state costs associated with the CalAIM to previous versions of the tax, a portion of the Providing Access and Transforming Health resulting revenues would help offset Medi-Cal (PATH) program. The waiver generates total General Fund costs. As the tax would begin General Fund savings of $646 million over five half way through the budget year, and due to years, including $153 million in 2023-24. a fiscal lag associated with the state’s practice of budgeting for Medi-Cal on a cash basis, the • New Behavioral Health Community-Based associated offset to the General Fund would Continuum Demonstration. The Governor be $317 million in 2023-24. After the tax ramps proposes $314 million General Fund ($6 billion up in subsequent years, the administration total funds) over five years to Medi-Cal and estimates the annual offset to the General the Department of Social Services for the Fund to be around $2 billion through 2026-27. new Behavioral Health Community-Based We provide a more detailed analysis of the Demonstration project. In the budget year, Governor’s MCO tax proposal in a later the Governor’s budget specifically provides section of this report. $311,000 General Fund ($6 million total funds) to Medi-Cal. The demonstration would allow • Support for CalAIM Behavioral Health for federal reimbursement for eligible services Payment Reform. As part of CalAIM, provided in Institutes for Mental Disease (often beginning in 2023-24, counties will transition referred to as IMDs) to certain individuals with away from cost-based reimbursement to a high-acuity mental health needs. To qualify less administratively burdensome and more 6 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET for reimbursement, the state—along with and transitioning out of institutional levels of counties that opt into the demonstration— care, a correctional facility, or the foster care must establish a robust continuum of system. The Governor’s budget provides community-based services that reduces the $6 million General Fund ($18 million total need for institutional care. We provide an funds) in 2025-26 to support the new benefit, in-depth analysis of this proposal, as well as of with the amount eventually ramping up to the aforementioned behavioral health-related $41 million ongoing General Fund ($117 million spending proposals and budget solutions, total funds) at full implementation. in our forthcoming companion report—The • New Reproductive Health Services 2023-24 Budget: Analysis of the Governor’s Demonstration. The Governor proposes to Major Behavioral Health Proposals. seek federal approval for a new three-year • New CalAIM Transitional Rent Benefit. demonstration waiver to support access The Governor proposes seeking federal and provider capacity for services related approval under CalAIM authorizing a new to family planning for existing enrollees and managed care community support benefit, Medicaid-eligible nonresidents beginning providing up to six months of rent or in 2024. To support services provided temporary housing. The benefit would be through the demonstration, the Governor available to certain individuals experiencing proposes $15 million one-time General Fund homelessness or at risk of homelessness ($200 million total funds) in 2024-25. CASELOAD AND COVID-19-RELATED POLICIES In this section, we (1) provide additional costs for individuals enrolled as part of the ACA background about the impact of federal optional expansion, as opposed to 50 percent for COVID-19-related policies on the Medi-Cal most other beneficiary populations. caseload and General Fund costs; (2) describe the Federal COVID-19 Policies Increased assumptions in the Governor’s budget regarding Caseload but Reduced General Fund Costs. caseload, enhanced federal funding, and General As previously discussed, in 2020, Congress Fund costs; and (3) assess these assumptions and approved a temporary increase in federal funding provide alternative estimates. for most Medicaid costs. To be eligible for this increased federal funding, states must comply with Background several requirements on top of standard Medicaid Medi-Cal Serves Distinct Populations rules, the most important being the continuous With Varying Costs. Medi-Cal serves a number coverage requirement, which prohibits states from of distinct populations, including families with terminating eligibility for existing beneficiaries children, seniors aged 65 or older, persons with except in limited circumstances. Largely as a disabilities, and childless adults. The last group also result of these policies, caseload and associated is known as the Patient Protection and Affordable Medi-Cal spending across all fund sources have Care Act (ACA) optional expansion population. increased substantially since the beginning of the These populations have varying characteristics and PHE. However, to date, the General Fund costs costs. Seniors and persons with disabilities tend have been more than offset by the enhanced to have greater needs than some other Medi-Cal federal funding. populations, and therefore tend to have higher Recent Federal Actions Establish End per-enrollee costs. The ACA optional expansion Dates of COVID-19-Related Policies. In late population and families, by contrast, tend to have December 2022, Congress enacted legislation lower per-enrollee costs. In addition, the federal that decouples the end dates of the continuous government currently pays 90 percent of Medi-Cal www.lao.ca.gov 7 2023-24 BUDGET coverage requirement and enhanced federal Governor’s Budget Assumptions funding from the PHE. In addition, in late Assumes PHE Ends in April and Does Not January 2023, the federal administration Account for Recent Federal Actions. Due to announced an intended end date to the PHE in May. the timing of the development of the Governor’s We describe these changes and their impacts on budget, the administration was not able to consider Medi-Cal below. the impacts of the recent federal actions on • Continuous Coverage Requirement caseload and General Fund spending for Medi-Cal. Expires in March 2023. As a result of Instead, the administration assumed that the PHE recent federal legislation, the continuous would end in April 2023, resulting in the eligibility coverage requirement will expire at the end of redeterminations beginning in May 2023. Using March 2023. Counties will resume processing these assumptions, the administration estimated eligibility redeterminations on a monthly average monthly caseload would be about basis beginning April 1, 2023, with the first 15.2 million in 2022-23 before declining to an individuals determined to be no longer eligible average monthly caseload of a little over 14.4 million for Medi-Cal expected to lose Medi-Cal in 2023-24. The administration also assumed coverage on July 1, 2023. To comply with that enhanced federal funding would remain at federal requirements, counties must complete 6.2 percentage points before expiring entirely in all eligibility redeterminations by May 31, 2024. June 2023, offsetting $4.4 billion in General Fund Thereafter, annual eligibility redeterminations costs for Medi-Cal across 2022-23 and 2023-24 (not will be staggered throughout the year, similar including enhanced federal Medicaid funding for to practices before the PHE. In-Home Supportive Services and the Department of Developmental Services). • Enhanced Federal Funding Ramps Down Beginning April 2023. Prior to the Assessment of Caseload Assumptions recent federal legislation, the enhanced Overall Caseload Levels Reasonable in federal funding would have remained at 2022-23, Likely Overstated in 2023-24. Using 6.2 percentage points until being fully more recent information, such as enrollment eliminated at the end of the quarter that the data through September 2022, we examined the PHE expires. Instead, as a result of the federal administration’s caseload projections and associated legislation, the enhanced federal funding costs. We find that the administration’s assumed will ramp down over the course of calendar overall level of caseload in 2022-23 generally year 2023. Beginning in April 2023, the to be reasonable. However, we project that the enhanced rate for most services will drop from average Medi-Cal caseload in 2023-24 will be 6.2 percentage points to 5 percentage points, about 270,000 enrollees (2 percent) lower than the then to 2.5 percentage points by July 2023, administration’s estimates. Our lower estimate in 1.5 percentage points by October 2023, 2023-24 primarily reflects the continuous coverage and will be fully eliminated by January 2024. requirement ending one month earlier than assumed After this point, the federal share of Medi-Cal by the administration. In addition, as discussed costs will return to the rates provided before in the following paragraphs, we differ from the the PHE. administration’s projections of certain subgroups of • PHE Ends in May 2023. The federal the Medi-Cal caseload. government recently announced intent to Continuous Coverage Requirement Ending end the PHE on May 11, 2023. While the Will Impact Some Populations More Than Others. continuous coverage requirement and We expect the decline in caseload associated with enhanced federal funding no longer will be the earlier end date of the continuous coverage impacted by the end date of the PHE, certain requirement will be concentrated primarily among COVID-19-related policies such as revised the ACA optional expansion and family caseloads. reimbursement rates for certain behavioral These caseloads experienced the largest enrollment health services will be impacted by the end growth during the PHE. Similarly, enrollees in date of the PHE. 8 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET these populations are most likely to have changes disabilities caseload. For 2023-24, we estimate in circumstances—like employment—that could General Fund costs to be around $650 million lower result in eligibility losses when the continuous than the administration—of which about $400 million coverage requirement ends. As a result, relative to is attributable to the earlier end date of the the administration, we estimate 2023-24 caseload continuous coverage requirement and $250 million for the ACA optional expansion population to be is attributable to the lower estimated persons with 80,000 enrollees (1.5 percent) lower and the family disabilities caseload. caseload to be 150,000 enrollees (2.5 percent) lower. Assessment of Enhanced Federal Persons With Disabilities Caseload—a Funding Assumptions Population With Relatively Higher Per-Enrollee Costs—Likely Overstated. As Figure 3 shows, Ramp Down of Enhanced Federal Funding our estimate for the number of persons with Will Increase General Fund Costs in 2022-23… disabilities enrolled in Medi-Cal differs from the Beginning in April 2023, the ramp down of the administration’s. The administration estimates that enhanced federal funding will result in somewhat the number of persons with disabilities enrolled lower federal funding in 2022-23 than assumed in Medi-Cal will be somewhat higher than current by the administration. We estimate the ramp enrollment levels in both 2022-23 and 2023-24. down of the enhanced federal funding will result However, this caseload group has been declining in $150 million of higher General Fund costs than consistently since 2014. Without any clear policy assumed by the administration. mechanism or external factors indicating a reversal …But Reduce General Fund Costs in 2023-24. in this trend, we expect this caseload will continue The ramp down schedule for the enhanced to decline. As such, we estimate the persons with federal funding will result in six additional months disabilities caseload to be about 12,000 enrollees of enhanced federal funding in 2023-24 than (1 percent) lower than the administration’s estimate assumed by the administration. Relative to the in 2022-23 and about 26,000 enrollees (2.5 percent) Governor’s budget, we estimate the additional lower than the administration’s estimate in 2023-24. months of enhanced federal funding will reduce While these differences might appear small, persons General Fund costs for Medi-Cal costs by over with disabilities tend to have higher per-enrollee General Fund costs Figure 3 compared to other caseload groups. As a result, small differences in the Persons With Disabilities Caseload persons with disabilities caseload Likely Lower Than Administration’s Projections can have disproportionate impacts Persons With Disabilities Caseload by Month on General Fund costs for Medi-Cal. Under LAO Projections, 1,150,000 Lower Level of General Fund 1,140,000 Spending on Caseload Relative 1,130,000 to Governor’s Budget. Relative Actual to the administration, we expect 1,120,000 caseload-related General Fund 1,110,000 costs in Medi-Cal to be more 1,100,000 DHCS than $800 million lower across 1,090,000 2022-23 and 2023-24. For 1,080,000 2022-23, we estimate the reduction LAO 1,070,000 in General Fund costs to be 1,060,000 roughly $150 million lower than June June June June June June June 2018 2019 2020 2021 2022 2023 2024 the administration’s estimates— largely driven by the persons with DHCS = Department of Health Care Services. www.lao.ca.gov 9 2023-24 BUDGET $400 million. (Including enhanced federal Medicaid caseload costs combined with additional months of funds in the In-Home Supportive Services and enhanced federal funding, both of which will reduce Department of Developmental Services budgets, General Fund spending in 2023-24. (We note that we estimate the ramp down of the enhanced federal because the federal administration has stated an funding increases General Fund spending by over intent to end the PHE one month later than assumed $200 million in 2022-23 and reduces General Fund in the proposed budget, policies that remain tied to spending by more than $650 million in 2023-24 the PHE end date will continue for one month longer relative to the Governor’s budget, for a net offset than assumed by the administration. However, any of General Fund of about $450 million across the resulting budget impacts will be relatively minor.) two years.) Recommendation Net Impact of LAO Alternative Withhold Action Until May Revision. Despite Estimates finding that General Fund costs could be around Lower General Fund Spending in 2023-24. $1 billion lower in 2023-24 than assumed in the Relative to the Governor’s budget, we estimate Governor’s budget, we recommend withholding that lower caseload costs effectively will offset the action on these adjustments until after the General Fund impact from the ramp down of the May Revision. By that point, the administration enhanced federal funding in 2022-23. However, will have had time to update their estimates to relative to the Governor’s budget, we project a incorporate additional months of caseload data and net reduction of about $1 billion General Fund the recent federal actions. We will make our final in 2023-24 for Medi-Cal. Our difference with the assessment and recommendations based on the administration is due to further reductions in administration’s revised estimates at that time. MCO TAX PROPOSAL In this section, we provide background To receive approval, the state must prove to the on the MCO tax, describe the Governor’s federal government that the burden of paying proposal, and offer our preliminary assessment the tax does not fall too disproportionately on and recommendation. Medicaid as opposed to non-Medicaid services. In addition, the state may not hold managed care Background plans harmless by providing them direct or indirect MCO Tax Has Helped Offset General Fund payments that do so, as determined by the federal Medi-Cal Spending. For over a decade and government. In some years, the federal government following multiple renewals, the state has imposed rejected the state’s proposed tax, necessitating a tax on managed care plans (also known as changes to the structure and resubmission to the MCOs). The structure of the tax has changed over federal government before it could go into effect. time. For example, earlier versions imposed a tax Recent Versions of Tax Have Imposed on managed care plans’ revenues, whereas later Relatively Small Net Cost on Health Insurance versions imposed a tax on managed care plans’ Industry. While the structure of the MCO tax has enrollment. The state has used the MCO tax to changed over time, recent versions have taxed claim additional federal Medicaid matching funds, both Medi-Cal and non-Medi-Cal enrollment. which help offset the General Fund cost to provide The rates charged on Medi-Cal enrollment have payments to Medi-Cal managed care plans. been substantially higher than the rates on Tax Requires Federal Approval. Federal non-Medi-Cal enrollment. The Medi-Cal tax liability approval of the MCO tax is necessary for the state is cost neutral to plans, as Medi-Cal includes to use it to draw down federal Medicaid funds. the associated cost of the tax in its payments to 10 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET managed care plans (as allowed under federal industry. Because of the tax’s longstanding role in law). The non-Medi-Cal tax liability, by contrast, is supporting Medi-Cal, the administration’s proposal not covered by the state and reflects a net cost to to pursue federal approval for a new MCO tax has the health insurance industry. Analyses of recent merit. Moreover, this is a particularly opportune versions of the MCO tax estimated the net cost to time to pursue a new tax in light of the state’s the health insurance industry to be in the low tens of current budgetary constraints. (We describe the millions of dollars annually. state’s budget condition in The 2023-24 Budget: Most Recent MCO Tax Has Expired. The Overview of the Governor’s Budget.) most recent MCO tax began in January 2020 and Key Details of Proposal Remain Outstanding. generated annual General Fund savings of over We understand the proposal at this time to be $1.5 billion. The tax was enrollment-based, with preliminary. That said, as of the timing of this rates charged on tiers of each plan’s cumulative publication, key uncertainties remain with the monthly enrollment in the 2018 calendar year. State proposal. Most notably, the administration has authorization and federal approval of the MCO tax not clarified what opportunities it is exploring expired at the end of December 2022. to increase the level of the MCO tax relative to the most recent tax. Without knowing where the Proposal administration has landed from its exploration of Proposes New Tax. The Governor proposes these opportunities, the resulting implications a new MCO tax extending from January 2024 to the health insurance industry, the extent to through December 2026. The Governor’s budget which the increased tax would offset Medi-Cal assumes the new tax will have a similar structure General Fund spending, and whether the increased to the most recent version, with rates applied to tax meets federal rules remain unknown. Until tiers of cumulative monthly enrollment in the 2021 the administration provides this information, calendar year and an adjustment to account for the Legislature cannot fully weigh the merits of planned Medi-Cal managed care changes in 2024. the proposal. The Governor’s Budget Summary also states Recommendation intent to explore opportunities over the next few months to increase the level of the MCO tax. The Authorizing New MCO Tax Warrants Serious administration also indicates that the proposal Legislative Consideration, but More Information will include trailer legislation establishing the tax’s Needed. Given the potential benefits to the General parameters. As of the publication of this report, Fund of adopting a new MCO tax and the state’s the administration has not submitted associated current budget situation, adopting a new tax trailer legislation to the Legislature. Because the tax warrants serious legislative consideration. To that would begin part way through 2023-24, and due to end, we recommend the Legislature direct the a fiscal lag from the state’s practice of budgeting for administration during the budget process to provide Medi-Cal on a cash basis, the Governor’s budget more robust information about the proposal. estimates the proposed tax would yield $317 million First, the Legislature will want to know where the in General Fund savings in 2023-24. In future years, administration has landed in terms of increasing the administration projects annual General Fund the level of the MCO tax and the associated savings of around $2 billion. offset to the General Fund. With this information, the Legislature will then want to be informed Assessment of (1) the proposed structure of the new tax, In Concept, Adopting a New MCO Tax (2) year-by-year projections of the new tax revenues Makes Budgetary Sense. Since its adoption, and associated offset to the General Fund, (3) the the MCO tax has been a key source of support year-by-year net cost to the health insurance for Medi-Cal. Past versions of the tax have helped industry, and (4) an analysis demonstrating the offset Medi-Cal General Fund costs while imposing proposed tax structure likely meets federal rules. a relatively small net cost to the health insurance www.lao.ca.gov 11 2023-24 BUDGET LAO PUBLICATIONS This report was prepared by Luke Koushmaro and Jason Constantouros, with contributions from Ryan Miller 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. 12 LEGISLATIVE ANALYST’S OFFICE