The 2024-25 Budget: Medi-Cal Analysis

2024-25 BUDGET The 2024-25 Budget: Medi-Cal Analysis GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2024 SUMMARY Under Governor’s Budget, Budget Solutions Help Reduce General Fund Spending on Medi-Cal. The Governor’s budget includes $35.9 billion General Fund spending in 2024-25 on Medi-Cal, the state’s Medicaid program. This amount reflects a $1.4 billion (3.8 percent) reduction from the previous-year level. The net decline in General Fund spending primarily is driven by a series of proposed fund shifts, delays, and reductions to help address the state’s budget problem. Absent these proposals, spending in Medi-Cal would grow by $1.3 billion in 2024-25 under the Governor’s budget. State’s Efforts to Limit Impacts of Continuous Coverage Unwinding Appear to Be Working. The Governor’s budget estimates that Medi-Cal caseload will decline by about 1 million enrollees in 2024-25 over the previous year—to 13.7 million. This decline reflects that the state and counties currently are redetermining eligibility for a historic high number of Medi-Cal enrollees, as a result of the unwinding of a federal policy that resulted in rapid caseload growth since the start of the pandemic. The state has in place several federally approved flexibilities meant to maximize continuity of coverage for enrollees during this time. Based on our review of recently released data, the state’s efforts appear to be working. Specifically, caseload is coming in much higher than was previously assumed to be the case—both by the administration and our office. The Governor’s budget caseload estimates are broadly reflective of the recent data on continuous coverage unwinding and therefore are reasonable. Proposed Managed Care Organization (MCO) Tax Budget Solution Is Worth Considering. As a budget solution, the Governor proposes to modify last year’s MCO tax package by (1) increasing the tax rate on Medi-Cal enrollment and (2) shifting funds out of a reserve for planned augmentations in Medi-Cal and other health programs. The administration states that the proposal, which would provide an additional $4.6 billion in General Fund savings through 2026-27, would advance the timing of when the reserve is expected to be depleted. In light of the fiscal constraints facing the state in the near term, we recommend the Legislature consider approving the proposal after the administration shows that it stands a reasonable chance of receiving federal approval. That said, it also would be prudent to begin planning for the long-term sustainability of the MCO package after the reserve is depleted. There Are Many Issues to Weigh Around Proposed Provider Payment Increases. In response to direction from the Legislature in last year’s budget package, the Governor proposes a plan to increase Medi-Cal payments for several kinds of services. The proposed plan also would make several changes to the way Medi-Cal pays providers. In concept, several aspects of the proposed package could make Medi-Cal’s provider payment system more rational, equitable, and efficient. That said, these impacts depend on many forthcoming details and there are risks and uncertainties associated with the package. We offer five key concepts for the Legislature to keep in mind as it weighs its own options to increase Medi-Cal provider payments and learns more about the Governor’s proposal in the coming months. Other Proposed Budget Solutions Are Reasonable but Additional Solutions Likely Needed. Outside of the MCO tax package, the Governor proposes $1.2 billion in budget solutions across 2023-24 and 2024-25. Given the substantial budget problem facing the state, these proposed solutions are warranted. Moreover, considering additional options now would be wise in light of the state’s deteriorating budget condition. For example, if voters approve Proposition 1 in March, we recommend the Legislature consider shifting the remaining $481 million General Fund for the Behavioral Health Continuum Infrastructure Program to bond funds. www.lao.ca.gov 1 2024-25 BUDGET INTRODUCTION This brief analyzes the Governor’s proposals estimates and projections, (2) other major in the 2024-25 budget for Medi-Cal, California’s current law adjustments, (3) proposed managed Medicaid program. It first provides an overview of care organization (MCO) tax budget solution, Medi-Cal and its proposed budget. It then provides (4) proposed MCO tax-funded provider payment our analyses of the administration’s (1) caseload increases, and (5) other proposed budget solutions. OVERVIEW In this section, we provide key background on The state provides managed care plans monthly the Medi-Cal program, describe Medi-Cal’s overall payments to enroll Medi-Cal beneficiaries, while budget picture, and summarize the key changes the plans in turn are required to arrange for the in General Fund spending in the current year health care of their enrollees. While most services (2023-24) and budget year (2024-25). are delivered in the managed care system, some are delivered in other ways. For example, Medi-Cal Background pays for some health care services, such as Medi-Cal Provides Health Coverage for pharmacy benefits, by reimbursing providers Low-Income Californians. Medi-Cal, the state’s directly—known as the “fee-for-service” delivery Medicaid program, provides health care coverage system. County governments also play a key role in for low-income Californians. Health care services delivering certain services, particularly behavioral covered by Medi-Cal include visits to the doctor’s health care. office, stays at the hospital, prescription drugs, Overall Budget Picture behavioral health services, long-term care, and dental services, among many other areas. Overall Spending Is Up Over Enacted The Governor’s budget assumes an average Level. As Figure 1 shows, the Governor’s monthly Medi-Cal caseload level of 14.8 million in budget estimates overall Medi-Cal spending to 2023-24, over one-third of Californians. be $157 billion in 2023-24, up from $152 billion at Medi-Cal Is a Sizable Portion of California’s budget enactment. Overall spending in 2024-25 Budget. More than half of Medi-Cal’s budget is is projected to decline slightly from the revised supported by federal funds, with the remainder 2023-24 level. supported by the General Fund and other state General Fund Spending in Medi-Cal Is Down, and local government sources. The General Fund With Proposed Budget Solutions a Key Reason. portion of Medi-Cal comprises a sizable share Among Medi-Cal’s various sources of funding, the of overall state General Fund spending, ranging administration projects federal funding to increase between 13 percent and 17 percent in most of but General Fund support to decrease. Specifically, the last ten years. As a share of General Fund General Fund spending under the Governor’s spending, Medi-Cal is the state budget’s second budget is revised slightly downward in 2023-24 to largest program (after Proposition 98 [1988], $37.3 billion and then declines to $35.9 billion in the California Constitution’s minimum spending 2024-25. While many factors impact General Fund requirement for K-14 education). spending in the Governor’s budget (described Medi-Cal Delivers Services in Many Ways. further in the following sections), much of the The primary way Medi-Cal delivers services to decline is because the Governor proposes several beneficiaries is by contracting with health insurance budget solutions in Medi-Cal. (There are proposed plans, also known as managed care plans. budget solutions in other programs as well. 2 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Figure 1 Governor’s Budget Projects Growth in Overall Spending Over Enacted Level Medi-Cal Budget (Dollars in Billions) 2023-24 Change From 2023-24 Revised 2024-25 Enacted Revised Proposed Amount Percent Total Spending $151.8 $157.5 $156.6 -$0.9 -0.5% By Fund Source Federal funds $90.5 $95.8 $97.6 $1.8 1.9% General Fund 37.5 37.3 35.9 -1.4 -3.8 Other funds 23.8 24.4 23.2 -1.2 -5.1 By Program Managed care $77.0 $79.6 $80.9 $1.3 1.7% Fee-for-service 35.2 37.5 35.4 -2.0 -5.5 Other programs 32.4 33.0 33.4 0.4 1.1 Local administration 7.2 7.4 6.9 -0.5 -6.9 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. Our recent publication, The 2024-25 Budget: Two Factors Largely Drive Increase in Overview of the Governor’s Budget, provides more Spending Under Current Law. We estimate two information on the overall package of proposed key factors primarily drive the upward revision in budget solutions.) While some of the budget spending under current law. First, the administration solutions impact overall spending in Medi-Cal, anticipates limited-term spending to be higher in the others reduce General Fund spending without current year than originally assumed in the 2023-24 necessarily impacting federal funding (such as budget. Some of this increase is the result of by replacing General Fund spending with other higher costs associated with a one-time retroactive fund sources). repayment to the federal government. The timing of some one-time spending also shifts from 2022-23 Current-Year General Fund Changes to 2023-24, further contributing to the upward General Fund Spending Down Due to Budget revision. Second, the administration estimates Solutions. As Figure 2 shows, the Governor’s caseload to be higher than assumed when the budget estimates General Fund spending in budget was enacted, resulting in increased 2023-24 would be $1 billion higher than the enacted General Fund spending. level, absent adopting budget solutions. The Governor’s budget Figure 2 solutions, some of which would Current-Year Spending Is Down Slightly begin in 2023-24, more than offset General Fund Changes in Medi-Cal (In Billions) these upward revisions. (Figure 4 on the next page summarizes Item Amount the Governor’s proposed budget 2023-24 Enacted $37.5 solutions.) The net result of these Adjustments, Before Applying Budget Solutions changes is a slight reduction in Increased limited-term spending $0.7 General Fund spending. Higher caseload 0.6 Other adjustments (net) -0.3 Total Adjustments $1.0 Budget Solutions -$1.2 Total Changes -$0.2 2023-24 Revised $37.3 www.lao.ca.gov 3 2024-25 BUDGET Budget-Year General Figure 3 Fund Changes Spending Declines in Budget Year Budget Solutions Also General Fund Changes in Medi-Cal (In Billions) Offset Growth in Budget Year. As Figure 3 shows, prior to Item Amount accounting for proposed budget 2023-24 Revised $37.3 solutions, the Governor’s budget Adjustments, Before Applying Budget Solutions anticipates General Fund spending Backfill of declines in other fund sourcesa $3.0 in Medi-Cal to grow in 2024-25. Per-enrollee cost growth 1.8 Full-year impact of 26-49 undocumented expansion 1.6 The growth is the net result of Other (net)b -0.1 several factors. After including Reduction in caseload -1.8 the proposed solutions, General Ramp down of limited-term spending -3.2 Fund spending decreases in the Total Adjustments $1.3 Budget Solutions -$2.7 budget year. Total Changes -$1.4 Budget Solutions Increase in 2024-25 Proposed $35.9 Budget Year. As Figure 4 shows, a Primarily consists of (1) reduction in General Fund offset in the MCO tax package, before applying the largest proposed budget the MCO tax budget solution; (2) the end of a one-time boost in support in 2023-34 from the Hospital Quality Assurance Fee; and (3) a projected reduction of Proposition 56 funds. solution in Medi-Cal involves the b In addition to various adjustments under current law, amount consists of two new proposals: MCO tax. This budget solution first (1) $6 million to reimburse counties for costs associated with an existing justice-involved initiative and (2) $4.1 million for a new wellness coach benefit. impacts General Fund spending in MCO = managed care organization. 2023-24 and ramps up in 2024-25. The Governor also proposes several other budget solutions Figure 4 in Medi-Cal, most of which are Governor’s Budget Includes Several Budget Solutions one time and impact spending in Medi-Cal in 2024-25. General Fund Solutions (In Millions) 2023-24 2024-25 MCO Tax Budget Solutiona Shift in funds from provider payment reserve $625 $2,081 Increase in size of the tax 395 698 Totals $1,020 $2,779 Other Budget Solutions Withdrawal of end of checkwrite hold — $533 Delay in behavioral health initiatives — 375 Medi-Cal Drug Rebate Fund reserve sweep $135 28 Reduction in supplemental physician payments — 77 Reversion of clinic workforce stabilization payments 15 — Totals $150 $1,013 Grand Totals $1,170 $3,792 a In addition to amounts in this table, this budget solution also impacts General Fund spending in 2025-26 and 2026-27. The total impact from 2023-24 through 2026-27 is $4.6 billion. MCO = managed care organization. 4 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET CASELOAD In this section, we assess the administration’s Effect of Eligibility Redeterminations estimates of Medi-Cal caseload. We first provide First Observed in July 2023 Caseload Data. context on (1) the federal continuous coverage Prior to continuous coverage, annual eligibility requirement that lead to a substantial increase redeterminations for existing enrollees were in caseload since the beginning of the pandemic staggered throughout the year. The continuous and (2) the state’s strategy to limit the impact of coverage requirement expired at the end of the unwinding of that requirement on Medi-Cal March 2023. The redetermination process for a enrollees. We then assess the Governor’s budget given enrollee generally takes up to about three estimates of caseload, which are considerably months. Thus, when counties resumed processing higher than previous projections produced by our eligibility redeterminations on a monthly basis office and the administration, and are consistent beginning April 1, 2023, it was for enrollees whose with continuous coverage unwinding apparently renewal month was June 2023. This means that the having a smaller impact on caseload than was first individuals determined to be no longer eligible previously assumed to be the case. While the for Medi-Cal lost coverage on July 1, 2023. Governor’s budget caseload estimates are State Planned Extensively and Supplemented reasonable, estimates based on updated caseload County Funding in Preparation for data will be available to incorporate into the budget Redeterminations. For most of the pandemic, after the May Revision. the precise end date of the continuous coverage requirement was unknown because the federal Background government acted several times to continue its Federal COVID-19 Policies Led to Substantial enforcement. However, given the long duration Increase in Caseload. In 2020, Congress of the requirement, DHCS and counties were approved a temporary increase in federal funding able to plan for its eventual end. In May 2022, for most Medicaid costs. To be eligible for this DHCS released the Medi-Cal COVID-19 Public increased federal funding, states were required to Health Emergency Operational Unwinding Plan, comply with several requirements on top of standard Medicaid rules, the most important being the Figure 5 continuous coverage requirement, Medi-Cal Caseload Increased Rapidly which prohibited states from Due to Continuous Coverage Requirement terminating eligibility for existing beneficiaries except in limited (In Millions) circumstances. Largely as a result of these policies, caseload and 16 Continuous Coverage Period associated Medi-Cal spending across all fund sources have 15 increased substantially since the beginning of the pandemic. 14 As shown in Figure 5, Medi-Cal caseload increased by over three million (25 percent) between 13 March 2020 and June 2023— roughly the effective term of the 12 continuous coverage requirement. 6/1/2016 6/1/2017 6/1/2018 6/1/2019 6/1/2020 6/1/2021 6/1/2022 6/1/2023 www.lao.ca.gov 5 2024-25 BUDGET which detailed how the state intended to resume the Governor’s budget (estimated as of November normal eligibility operations. In addition, DHCS 2023) with the most recent projections from our has communicated its plans through stakeholder office (estimated as of November 2023) and the engagement and direction to counties. That said, administration at May Revision (estimated as of Medi-Cal caseload is extraordinarily high relative April 2023). As shown in the figure, the Governor’s to historical levels, making the unwinding of budget reflects a significant upward revision to continuous coverage a huge administrative effort for caseload compared with the administration’s counties. In recognition of this, the 2022-23 budget 2023 May Revision estimates. Specifically, the supplemented county administration funding with administration now projects caseload will decline to $146 million ($73 million General Fund) over multiple 13.8 million at the end of 2023-24, about 1 million fiscal years to support the increase in county enrollees higher than for the same month as of the workload to process eligibility determinations. 2023 May Revision. The Governor’s budget also (County administration funding is over $2 billion per reflects substantially higher caseload than our year, with about 30 percent coming from the state office projected in our November Fiscal Outlook General Fund.) report. The administration now projects caseload Several Waivers and Flexibilities Meant to to bottom out at around 13.7 million at the start Limit Disruption to Enrollees and Simplify of 2024-25, about 1.6 million (12 percent) more Process for Counties and Enrollees. A stated enrollees than our projected low point in caseload. goal of the administration during the unwinding We estimate that this higher caseload results of continuous coverage is to maximize continuity in increased General Fund costs of more than of coverage for those enrolled in Medi-Cal. $2 billion in 2024-25 relative to our estimates. In addition, DHCS has sought to increase county Assessment capacity to process redeterminations in light of the extraordinary administrative task they face. LAO and Administration November To achieve these goals, the state has secured Estimates Completed When Limited Data on federal approval for a number of flexibilities. Redeterminations Were Available. Statute requires DHCS to submit the Medi-Cal Estimate These flexibilities are detailed in the nearby box. (which includes caseload estimates for the Governor’s Budget Caseload Estimates upcoming budget year) to the Department of Modest Decline in 2023-24 Followed by Finance by November 1 (for preparation of the Decline of About 1 Million in 2024-25, Reflecting Governor’s budget). This is around the same time Redeterminations. Figure 6, on page 8, details our office typically finalizes Medi-Cal caseload the administration’s estimates of caseload built projections for our Fiscal Outlook report. At this into the Governor’s budget. As shown in the figure, time, enrollment data were only available the administration estimates a 7 percent decline through July 2023, reflecting only one month of in overall caseload from 2023-24 to 2024-25, redeterminations. In addition to enrollment data, reflecting the result of redeterminations. The DHCS has published a monthly dashboard and caseload decline is almost exclusively concentrated posted its monthly reports to the Centers for in the ACA optional expansion (largely childless Medicare and Medicaid Services (CMS) that detail adults) and families and children categories. This initial redeterminations data. The administration concentration is unsurprising, given that 94 percent indicates that they were able to factor these early of the cumulative increase in caseload during the redetermination results into their Governor’s continuous coverage period (March 2020 through budget caseload projections. Our estimates, on June 2023) was in the ACA optional expansion the other hand, were based upon projections of (53 percentage points) and families and children caseload given economic and demographic factors (41 percentage points) categories. rather than incorporating early redeterminations data, which were of limited use for projecting Comparison to Recent Administration caseload principally because of the large number of and LAO Projections. Figure 7, on page 8, redeterminations still shown as pending. compares caseload estimates incorporated into 6 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Flexibilities Intended to Minimize Impacts of Continuous Coverage Unwinding In light of the massive task of continuous coverage unwinding, the state has received federal approval for several waivers intended to minimize disruption in health care coverage for enrollees and simplify processes for enrollees and counties. Generally, these flexibilities are in place at least through December 31, 2024, although the Department of Health Care Services has indicated its intent to extend some of them (to the extent allowable by the federal government). It is not fully clear at this time which flexibilities are likely to continue. Increasing Use of an Automatic Renewal Process. The “ex-parte” review process allows counties to automatically renew enrollees in Medi-Cal in cases in which eligibility-related information from federal and state sources allow for renewal without any contact with the beneficiary. Ex-parte renewals are a key tool in increasing the overall number of county redeterminations per month. Flexibilities that increase ex-parte renewals allow: • Ex-parte renewals in certain cases in which income under 100 percent of the federal poverty level was verified in the previous 12 months. • Ex-parte renewals for households with income generally derived from stable sources, such as Social Security or pensions. • Expanded use of asset verification reports for ex-parte renewals until the elimination of the asset test on January 1, 2024. Reducing Documentation Requirements. The state has also received approval for flexibilities that reduce county workload and simplify processes for enrollees. Specifically: • When self-attested information cannot be verified with electronic data sources, a beneficiary can provide a reasonable explanation for the discrepancy in lieu of needing to provide documentation. • Counties can assume no change in assets (and renew on an ex-parte basis) when asset verification data returns no information within a reasonable time frame (20-30 days depending upon the circumstance) rather than seek additional verification from the enrollee. • Counties can use updated contact information provided by managed care plans, Program of All-Inclusive Care for the Elderly (PACE) organizations, and the United States Postal Service in lieu of requiring confirmation by the beneficiary. • Counties can extend a renewal date by 12 months when contact is made with certain hard-to-reach populations, including individuals experiencing homelessness, seniors, and persons with disabilities. • The amount by which income reported by a beneficiary can deviate from that shown in federal data sources is increased from 10 percent to 20 percent. • The requirement that applicants apply for certain types of available income (such as unemployment or veteran’s benefits) and medical support from a non-custodial parent within 90 days of approval is waived. www.lao.ca.gov 7 2024-25 BUDGET Figure 6 Governor’s Budget Estimates of Medi-Cal Caseload Average Monthly Enrollment Change From 2023-24 2022-23 2023-24 2024-25 Number Percent Families and Children 7,835,000 7,492,000 6,950,100 -541,900 -7% ACA Optional Expansion 5,085,400 4,925,300 4,493,100 -432,200 -9 Seniors 1,203,200 1,218,900 1,209,900 -9,000 -1 Persons With Disabilities 1,087,100 1,062,900 1,044,200 -18,700 -2 Other 63,300 64,700 64,100 -600 -1 Totals 15,274,000 14,763,800 13,761,400 -1,002,400 -7% ACA = Patient Protection and Affordable Care Act. Wide Gap Between Figure 7 Projections Illustrates Extent of Uncertainty of Continuous Comparing Recent Projections of Medi-Cal Caseload Coverage Unwinding. Historically, (In Millions) most categories of Medi-Cal caseload have tended to follow 16 long-term trends, meaning they can typically be projected in the 15 near term within a relatively small 14 Governor's Budget 2024 margin of error. (Exceptions to this have occurred historically, such as 13 with uncertainty surrounding the May Revision 2023 ACA optional expansion.) In the 12 LAO November 2023 years immediately preceding the pandemic, our office and 11 7/1/2022 1/1/2023 7/1/2023 1/1/2024 7/1/2024 1/1/2025 the administration had differing assessments of caseload from time to time, but generally those In addition, we now have caseload data through differences—and the resulting January 2024. While near-term caseload is still impacts on the budget—were relatively minor. subject to an unusual degree of uncertainty, these The wide gap between recent projections truly is a updated data now provide a clearer picture of what notable occurrence. That said, it is illustrative of the caseload will look like through the end of 2024-25. extraordinary circumstance in which the state finds itself after three years of continuous coverage. About Three-Quarters of Redeterminations Have Resulted in Renewals. Through December, A Clearer Picture of Redeterminations Is Now about three-quarters of processed redeterminations Emerging. Since our office and the administration have resulted in renewals. Assuming that trends each produced our most recent projections of observed in recent data continue, we project that Medi-Cal caseload, DHCS has released additional the share of enrollees renewed in the program months of initial redeterminations data and updates would exceed 80 percent. As of late-January 2024, to the June 2023 through August 2023 reports that only five states and the District of Columbia have reveal the outcome of most previously pending renewal rates exceeding 80 percent, based on redeterminations. These recently released data national redeterminations data compiled by KFF. show enrollees being retained in the program at a higher rate than was the case in previous reports. 8 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Administration Caseload Estimates the unwinding period. We did not factor in early Reasonable, but Full Caseload Impact of months of preliminary data on redeterminations, Continuous Coverage Unwinding Still Uncertain. nor did we make explicit assumptions about Based on information available to us through late the extent to which the state’s several federally January, the Governor’s budget caseload estimates approved flexibilities would impact caseload. are reasonable. Our assessment is predicated The Governor’s budget projects that caseload will on a key assumption—that the increased rates of bottom out around 1.6 million enrollees higher than enrollee renewals shown in recently released data we projected in November 2023. This appears to continue. If this assumption does not come to be an indication that the state’s efforts to maximize pass, caseload could wind up lower than under the the continuity of coverage for Medi-Cal enrollees Governor’s budget estimates, resulting in General are working. Another indication of the success of Fund savings. While we now have a clearer picture these efforts is the state’s performance relative to of caseload through 2024-25 than our office or the other states. administration had last fall, waiting to approve any ...But What Happens to Enrollees If change to the Medi-Cal budget until after release of Flexibilities Expire? In December 2023, CMS the May Revision would be prudent, as the picture announced that it will extend flexibilities past the will become even clearer by then. We will make our end of continuous coverage unwinding through at final assessment and recommendations based on least the end of 2024. DHCS has communicated its the administration’s revised estimates at that time. intent to continue some of the eligibility flexibilities Administration’s Caseload Estimates (to the extent permitted by the federal government) Possibly an Indication of Positive Impact of while letting others expire. Depending upon future Flexibilities… As described earlier, our November federal and state actions, the state’s recent success Fiscal Outlook projections of Medi-Cal caseload in minimizing the impact of continuous coverage were based upon our office’s projections of unwinding on enrollees may only be temporary. economic and demographic factors. In general, The extent to which the state’s efforts continue to we estimated what Medi-Cal caseload would have be successful or, alternatively, caseload begins been absent the continuous coverage requirement to return to more normal levels over the next few and brought caseload down to that level over years, will be an important issue to watch. MCO TAX BUDGET SOLUTION In this section, we analyze the Governor’s of the tax’s cost. Instead, most of the cost of the tax proposed MCO tax budget solution. We first is covered by the Medi-Cal program, using a portion provide background on the MCO tax and last of MCO tax proceeds and federal funds. Because year’s MCO tax package. Next, we describe federal funds help cover the cost of the tax, the tax the Governor’s proposed budget solution. still provides the state a net fiscal benefit. The state We then conclude with our assessment must receive approval from the federal government and recommendations. to use the tax to draw down federal funds. Last Year’s Budget Package Enacted New, Background Much Larger MCO Tax. The Legislature has not MCO Tax Provides Net Fiscal Benefit to permanently authorized the MCO tax. Instead, it State, While Imposing Minimal Cost to Health has authorized and renewed it for limited periods Insurance Plans. The MCO tax is a tax on health of time. Most recently, the Legislature enacted insurance enrollment in the Medi-Cal program Chapter 13 of 2023 (AB 119, Committee on Budget), and in the commercial sector. Though MCOs establishing a new version of the MCO tax from (organizations that offer health insurance plans April 2023 through December 2026. The tax is to consumers) pay the tax, they bear very little structured similarly to the version preceding it, www.lao.ca.gov 9 2024-25 BUDGET with one key difference—the tax rate on Medi-Cal Package Anticipated Funding Shortfall in enrollment is more than triple that of the previous Future, After Reserve Funds Are Fully Spent. version. As a result, the new tax is expected to At the time the Legislature enacted the new generate $19.4 billion in net fiscal benefit over its version of the MCO tax, DHCS staff emphasized term, which is several billion dollars more than past the next version following this one likely would versions. (Our past post, The 2023-24 California not be as large. This is because DHCS reported Spending Plan: Health, provides more detail on the that federal administrators, in private discussions enacted MCO tax package.) with the department, signaled intent to change New Tax Is to Offset General Fund Spending the rules around approving taxes like the MCO in Medi-Cal and Support Health Program tax in the future. Recognizing this risk, last year’s Augmentations. As Figure 8 shows, the 2023-24 package anticipated some funds in the Medi-Cal budget designated two key uses for the new Provider Payment Reserve Fund would be held MCO tax’s net fiscal benefit. The first purpose is in reserve and be available, along with funds to offset General Fund spending in the existing from a much smaller future MCO tax, to sustain Medi-Cal program. The second purpose is to the augmentations after the end of the term of support augmentations in Medi-Cal and other this tax. The administration stated at the time health programs. Funds for this second purpose that the reserve would be fully spent around the are deposited into a new special fund called the end of 2029. Absent the Legislature modifying Medi-Cal Provider Payment Reserve Fund. Some the augmentations or identifying another fund augmentations were enacted by the Legislature source, the shortfall would fall on the General Fund as part of the 2023-24 budget, comprising a small to backfill. portion of available funding in the reserve. Last Federal Government Recently Approved year’s health trailer bill (Chapter 42 of 2023 [AB 118, Enacted Tax… Very shortly after budget Committee on Budget]) directed the administration enactment, DHCS submitted a new MCO to propose a plan for the remaining funds as part tax-related waiver to the federal government of the 2024-25 budget process. (We describe the for approval. In December 2023, the federal Governor’s proposed augmentations further in the government announced its approval of this waiver, “MCO Tax-Funded Provider Payment Increases” enabling the MCO tax to into effect under California section that follows.) law and for the tax to draw down federal Medicaid funds under federal law. Figure 8 There Are Two Key Intended Uses of the MCO Tax MCO Tax Package Enacted in 2023-24 Budget (In Millions) 2023-24 2024-25 2025-26 2026-27 Totals Net State Fiscal Benefit Total revenue $8,269 $8,527 $8,762 $6,704 $32,261 Portion of tax on Medi-Cal enrollment covered by statea -3,860 -3,415 -3,507 -2,077 -12,860 Totals $4,410 $5,112 $5,254 $4,626 $19,402 Uses of Net State Fiscal Benefit Offset of General Fund spending in Medi-Cal $3,389 $1,858 $2,019 $1,050 $8,316 Reserve for augmentations 1,021 3,254 3,235 3,576 11,086 Totals $4,410 $5,112 $5,254 $4,626 $19,402 a Remaining portion of tax on Medi-Cal enrollment will be covered by federal funding. MCO = managed care organization. 10 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET …But Also Signaled Intent to Change Rules to The tax rate on commercial enrollment would Approve Tax in the Future. As part of its approval remain unchanged from the enacted levels. With letter, the federal government noted its concern an increase in the rate on Medi-Cal enrollment, the that the MCO tax, while technically meeting current MCO tax would yield more revenue and a larger net federal rules, falls disproportionately on Medi-Cal fiscal benefit ($1.5 billion over the multiyear). services. That is, the tax derives 99 percent of its Reduces Overall Funding in Provider Payment revenue from Medi-Cal enrollment, even though Reserve. The administration proposes to deposit Medi-Cal comprises around 50 percent of taxable less funding in the Medi-Cal Provider Payment enrollment. This is of concern to the federal Reserve Fund than originally planned, freeing up government because nearly all of the cost of the more MCO tax funds to further offset General tax falls on the Medi-Cal program—which is partly Fund spending in Medi-Cal ($3.1 billion over the supported by federal funds—rather than more multiyear). According to the administration, the proportionately between Medi-Cal and private change would not reduce annual spending levels insurance. To address this concern, the letter states for Medi-Cal augmentations, but instead would intent to change the rules around approving the shift the timing of when the reserve funds would MCO tax. The letter does not specify the scope of be fully spent. Specifically, the administration the rule changes or the timeline to enact them. indicates that the reserve would be fully spent at around mid-2028, rather than at the end of 2029 as Proposals originally anticipated in the 2023-24 budget. Proposes MCO Tax Budget Solution to Leaves Small Reserve by the End of the Increase General Fund Offset. As part of the Term of the Tax. Accounting for the proposed Governor’s package of proposed budget solutions budget solution, the administration has submitted a intended to address the state’s budget problem, the multiyear spending plan for the MCO tax package. Governor proposes to modify the recently enacted As Figure 10 on the next page shows, under the MCO tax package. The proposal, which would plan, the annual offset to General Fund spending increase the General Fund offset by $4.6 billion from would begin to decline in 2025-26, as the cost 2023-24 through 2026-27, is the result of two key of the proposed augmentations ramp up. When actions, described further below. the tax ends in 2026-27, the state would have Increases Size of MCO Tax. The administration $841 million of MCO tax funds left in reserve. proposes early action trailer bill legislation to This reserve would be available to help sustain— increase the MCO tax rate on Medi-Cal enrollment. but not fully cover—the augmentations in the MCO As Figure 9 shows, the increase would be effective tax package in 2027-28 (potentially shifting up to January 2024, assuming it receives federal approval. the low billions of dollars of cost pressure to the General Fund). By contrast, without the proposed fund shift, the Figure 9 reserve would be around $4 billion Proposal Would Increase Rate on in 2026-27, enough to cover the Medi-Cal Enrollment in Most Years augmentations over a somewhat MCO Tax Rate on Medi-Cal Enrollmenta longer period of time. (The reserve would be even larger in 2026-27 2023a 2024 2025 2026 were the state to renew the MCO Enacted in 2023-24 budget $182.50 $182.50 $187.50 $192.50 tax in 2027, with the amount of Proposed in 2024-25 Governor’s Budget 182.50 205.00 205.00 205.00 funds depending on the size of the Percent increase — 12% 9% 6% future version of the tax.) a Rate applies to each plan’s aggregate monthly enrollment level between 1,250,001 and 4,000,000 member months during calendar year 2022, with certain adjustments. The tax rate on commercial enrollment, which ranges between $1.75 and $2.25 depending on the year, remains at the enacted levels in the Governor’s budget. b Rate applies from April through December 2023. MCO = managed care organization. www.lao.ca.gov 11 2024-25 BUDGET Figure 10 Multiyear Plan Leaves Small Reserve to Help Sustain Proposed Augmentations Revised MCO Tax Package Proposed in the Governor’s Budget (In Millions) 2023-24 2024-25 2025-26 2026-27 Totals Net Fiscal Benefit $4,805 $5,810 $5,721 $4,524 $20,859 Uses of Net Fiscal Benefit Offset to General Fund spending in Medi-Cal $4,409 $4,637 $2,485 $1,349 $12,880 Augmentations Medi-Cal provider payment increases $121 $1,065 $2,267 $2,399 $5,852 Other augmentations 275 105 450 450 1,280 State administrative costs — 2 2 2 7 Totals $4,805 $5,809 $5,205 $4,200 $20,019 Remaining Funds at the End of the Year — $1 $516 $324 $841 MCO = managed care organization. Assessment fiscal constraints in the near term, tapping into the reserve to help address the immediate situation is In Concept, Tax Increase Worth Considering. reasonable. That said, it also would be prudent for As we emphasized in The 2023-24 Budget: the Legislature to begin planning for the long-term Analysis of the Medi-Cal Budget, enacting an sustainability of the MCO tax package. Were the MCO tax makes budgetary sense. The tax is a key General Fund to have limited capacity when the source of support for the Medi-Cal program while MCO tax shortfall begins, the Legislature could imposing a minimal cost on the health insurance face pressure at that time to pull back some of the industry. Following this same logic, it also makes package’s augmentations or to sustain them by sense for the state to maximize the benefit it can identifying reductions elsewhere. achieve from the tax. Moreover, increasing the size of the MCO tax is a particularly attractive Recommendation budget solution relative to other options as it Consider Proposed Budget Solution as a does not necessitate scaling back core programs Starting Point. Given the fiscal challenges in or imposing substantial new costs to California the state budget, we recommend the Legislature taxpayers. In considering the proposed increase, consider adopting the proposed MCO tax budget the Legislature will want to ensure the revised tax solution. The Legislature likely will want to condition still complies with federal rules and therefore stands such action on the administration demonstrating a reasonable chance of receiving federal approval. that the proposed tax increase stands a reasonable Reducing Provider Payment Reserve Also chance of receiving federal approval. To the extent Worth Considering, Though Fiscal Risks the Legislature does not adopt some or all of the Remain. The Governor’s proposed reduction to the proposal, it will need to identify a like amount of provider payment reserve would help address the budget solutions in other areas of the budget. state’s budget problem over the next few years, but Alternatively, the Legislature could consider using also accelerate when the potential MCO tax funding even more MCO tax funding to address the budget shortfall occurs by around one year. The best problem, potentially avoiding reductions in other available data strongly suggest the state is facing areas. The Legislature likely would want to weigh a notable budget problem now and likely faces such an action against its interest in increasing budget deficits over the next few years. The state’s provider payments in Medi-Cal, further described in fiscal situation in the longer term, when the shortfall the next section. is expected, is less certain. Because of the likely 12 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET MCO TAX-FUNDED PROVIDER PAYMENT INCREASES In this section, we analyze the Governor’s Medi-Cal Takes Several Approaches to proposed provider payment increases in the MCO Pay for Services. While fee-for-service often is tax package. We first provide background on described as a single delivery system, there is the existing way Medi-Cal pays providers in the not one approach to pay providers. Rather, as fee-for-service and managed care systems, as well Figure 11 shows, payment approaches vary, as the provider payment increases enacted in last depending on the service. For example, physician year’s budget. Next, we describe the proposed and professional services are paid based on the package of payment increases. We then provide our procedure provided. Medi-Cal contains thousands initial assessment and recommendations. of codes for each kind of procedure, with different rates tied to each code. For other services, such BACKGROUND as inpatient services at University of California (UC) and county hospitals and long-term care services, Provider Payments in providers are paid based on their reported costs Fee-for-Service System to provide care to patients. Still in other cases, Medi-Cal uses a prospective payment system, in In Fee-for-Service, Medi-Cal Pays Providers which payment is provided for an episode of care. Directly. Under the fee-for-service system, DHCS As an example, private and district hospitals are oversees a network of providers across the paid for each inpatient stay, with the rate depending state, approves the delivery of certain services, on the patient’s diagnosis and acuity. The payment and—critically—directly pays providers. While it is generally does not change depending on the Medi-Cal’s traditional delivery system, over time patient’s length of stay or utilization of services. the state has shifted most beneficiaries out of Thus, in this system, hospitals bear the risk of costs fee-for-service. Around 5 percent of Medi-Cal’s being higher or lower than expected. enrollment, as well as 23 percent of program spending, is projected to be in the fee-for-service system in 2024-25. Figure 11 Several Approaches Exist to Pay Providers Summary of Key Base Provider Payment Approaches in Medi-Cal Fee-for-Service Service How Rates Are Set How Rates Are Adjusted Physician and professional Set rate for each procedure. Generally not adjusted. services Hospital outpatient services Set rate for each procedure. Generally not adjusted. Inpatient services at UC and Cost-based reimbursement. Adjusted based on changes in cost. county hospitals Inpatient services at private Global payment for each stay, based on patient Set to maintain overall spending at around and district hospitals diagnosis and acuity. $3.2 billion total funds each year. Services at federally Rate for each visit, with rates tied to the average cost Adjusted using the Medicare Economic Index, qualified health centers of care. a measure of medical cost inflation. Long-term care Projected cost of care, including state mandated Generally adjusted based on projected services. changes in cost. Pharmacy Cost to acquire drug and rate for dispensing drug. Generally adjusted based on changes in drug acquisition costs. www.lao.ca.gov 13 2024-25 BUDGET Some Rates Are Adjusted Over Time, but • Supplemental Payments. The state tends Others Generally Have Remained Unchanged. to use non-General Fund sources to support Medi-Cal takes different approaches to adjust supplemental payments. For example, fee-for-service rates for providers. For example, Proposition 56 (2016), which increased taxes cost-based payments are adjusted over time on tobacco products, supports supplemental based on changes in actual or projected payments to physicians, family planning costs. By contrast, payments for physician and providers, and several other providers. Quality professional services tend to not be adjusted over assurance fees charged to private health care time. Instead, these rates usually are set initially providers also are used to draw down federal at 80 percent of the comparable rate paid by funds for supplemental payments. Moreover, Medicare, a federal program that covers health some public providers use their local funds to care for the elderly and disabled. The rates then draw down supplemental federal funding. remain at their initially enacted levels, unless the Legislature explicitly provides funding for a Provider Payments in Managed Care rate increase. Managed Care Is Medi-Cal’s Primary Many Providers Receive Supplemental Delivery System. In the managed care Payments. Over the years, the state has system, the state contracts with MCOs to enroll established supplemental payments in Medi-Cal for Medi-Cal beneficiaries in health plans. The plans certain providers. Sometimes these payments add are responsible for arranging for the care of to the base rate and therefore are allocated based beneficiaries, primarily using their networks of on the relevant base payment methodology (such providers. Managed care plans are responsible as utilization or reported costs.) In other cases, for providing most of the same services as in the the approach is tied to other criteria. For example, fee-for-service system, with some exceptions. some supplemental payments are tied to meeting Managed care is now Medi-Cal’s primary certain performance outcomes, delivering delivery system, projected to serve 95 percent of high-value services, or serving disproportionate beneficiaries in 2024-25. numbers of Medi-Cal or uninsured patients. State Pays Managed Care Plans, Which Medi-Cal Uses Different Fund Sources to in Turn Pay Providers for Services. Critically, Support Base and Supplemental Payments. The Medi-Cal does not directly pay health care cost of fee-for-service payments generally is shared providers in the managed care system. Instead, by federal funds and state and local government Medi-Cal pays the managed care plans on a sources. For most services, the federal share of monthly basis for each enrollee and plans in cost is 50 percent, but can be higher in some turn use the resulting funds to pay providers in cases (for example, 90 percent for family planning their networks. The federal government annually services) and lower in other cases (for example, approves the methodology to pay managed federal funds generally are not provided for care plans. abortion services). The state tends to use different Managed Care Plans Have Different Ways of sources to cover the nonfederal share of cost, Paying Providers. Historically, the state has not described below: mandated how managed care plans are to pay for • Base Payments. The General Fund most services. Rather, the plans are responsible covers the nonfederal share of cost of for negotiating payments as part of their contracts base fee-for-service payments, with some with providers, including the payment methodology exceptions. In particular, UC and county and how much to pay. These arrangements hospitals, which are considered government are confidential and therefore comprehensive agencies under Medi-Cal rules, use their own information is not available. Many managed care local funds to cover the nonfederal share plans have told our office that at least some of of cost. That is, Medi-Cal only pays for the their provider payments are set at 100 percent or federal share of cost for these providers. more of the relevant Medi-Cal fee-for-service rate. 14 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Managed care plans also attest to having many A Provider Payment Increase for Specified other kinds of arrangements. For example, some Services Was Enacted in the 2023-24 Budget. managed care plans subcontract with other plans Under the trailer legislation, the MCO tax package or provider groups to oversee the care of some of supports a provider payment increase, effective their enrollees. In these arrangements, the plans January 2024. The increase, currently estimated provide monthly per-enrollee payments, much like to cost $291 million MCO tax funds annually, how Medi-Cal pays the plans. specifically sets Medi-Cal fee-for-service rates for State Also Can Provide Directed Payments. primary care, maternity care, and non-specialty Federal rules allow states to provide what are mental health services at least at 87.5 percent of known as “directed payments” in the managed the comparable rate in Medicare. The legislation care system. Most commonly, directed payments also requires managed care plans to pay at this work like supplemental payments, with the level for these services. In the box on the next page, state providing additional funds to plans to be we describe how DHCS has implemented the new directed toward specific providers and services. policy. (In addition to increasing Medi-Cal provider In fact, many fee-for-service supplemental payments, the legislation enacted two other MCO payment programs, such as those supported tax-funded augmentations—$75 million ongoing for by Proposition 56 funds, also support managed graduate medical education programs at UC and care directed payment programs. States also can $200 million one time in 2023-24 for hospital relief establish minimum fee schedules for managed care programs at the Department of Health Care Access plans to pay for services. For example, California and Information.) law currently requires plans to pay for long-term Legislature Tasked Administration With care and certain transplant services at the Medi-Cal Developing Plan for Remaining Increases. fee-for-service rate. The trailer bill legislation did not set forth what Different Fund Sources Also Support augmentations would be supported from the Payments to Managed Care Plans. Like remaining MCO tax funds. Rather, the legislation fee-for-service payments, the cost of payments to directed the administration to propose which managed care plans is covered by federal funds augmentations to support as part of the 2024-25 and other sources. For base payments, the state budget process. The legislation stated intent generally covers the nonfederal share of cost that the proposal advance access, quality, and using General Fund. Much like fee-for-service equity for Medi-Cal beneficiaries and promote supplemental payments, the nonfederal share provider participation in the Medi-Cal program. of cost for supplemental directed payments The legislation also specified which areas should be tends to be covered by other sources, such increased. As Figure 12 on the next page shows, as Proposition 56 funds, quality assurance fee these areas cut across several parts of Medi-Cal revenue, and local government contributions. and health programs. Administration Released Initial Allocation Provider Payments in Plan After Budget Enactment, With More Details Recent MCO Tax Package to Be Released in 2024. Shortly after budget MCO Tax Package Included Plan to Increase enactment in June 2023, DHCS submitted a Provider Payments. As part of the recently summary plan of how it proposed to allocate MCO enacted MCO tax package (described further in the tax funds annually toward each area. The summary, “MCO Tax Budget Solution” section of this report), which totaled $2.7 billion in annual spending the Legislature established a plan to spend the from MCO tax funds, identified allocations for resulting funds in trailer bill legislation (Chapter 42 augmentations enacted in 2023-24 and proposed of 2023 [AB 118, Committee on Budget]). Under augmentations in 2024-25. Pursuant to the direction the plan, a sizable portion of funds are designated in the trailer bill legislation, the administration to support augmentations to Medi-Cal and other planned to release more information on the 2024-25 health programs. Below, we describe the major augmentations as part of the Governor’s budget Medi-Cal augmentations. in January. www.lao.ca.gov 15 2024-25 BUDGET Implementation Update on 2024 Provider Payment Increases Department Recently Released Fee-for-Service Rate Schedule. On December 1, 2023, the Department of Health Care Services (DHCS) published new fee-for-service rates for codes related to primary care, obstetric care, and non-specialty mental health care. DHCS set these rates at 87.5 percent of what Medicare pays, as required under state law. To set these rates, DHCS included both existing base rates and Proposition 56-supported supplemental rates. The rates also were set at the lowest regional Medicare rate. (Medicare varies its rates for California among 32 localities, intended to reflect differences in regional cost.) As an exception, DHCS did not adjust rates (after accounting for Proposition 56 funds) that already exceeded the Medicare benchmark. Managed Care Plans Have Longer Time Line to Adopt Payment Increases. State law also requires managed care plans to pay at least the same as the fee-for-service rates for these services. Implementing these rate increases will not be a simple task for many plans, as they will have to update their payment systems and provider contracts. Accordingly, DHCS has signaled that plans will have several months to comply with the new requirements. Specifically, plans with fee-for-service payment arrangements with providers will not be required to implement the rate increases on a go-forward basis until July 31, 2024. However, plans also will be required to make retroactive payments from January through July 2024, with those payments due by the end of October 2024. For plans that make contracted monthly payments to other plans and providers, plans must attest to DHCS that their payments align with the new policy by the end of December 2024. DHCS indicates that it will provide more guidance to plans on how to implement the provider rate increases in these arrangements at a future date. Figure 12 Legislature Specified Several Areas for Augmentations Areas Specified in Chapter 42 of 2023 (AB 118, Committee on Budget)a 9 Physician and Professional Services • Primary care. • Obstetric care and doula services. • Non-specialty mental health services. • Emergency physician services. • Specialty care. 9 Hospital-Based Services • Outpatient procedures and services. • Emergency room services. • University of California and county hospital services. 9 Other • Family planning services and women’s health providers. • Ground emergency transport services. • Behavioral health care in hospital and long-term care settings. • Health care workforce initiatives. a Abridged by Legislative Analyst’s Office. 16 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET PROPOSAL As Figure 13 shows, the proposal would not solely increase payments to providers. In many cases, Proposes Increases to Payments and it also would change the way Medi-Cal pays Changes to Payment Methodologies. On providers. Below, we describe some of the major January 19, 2024, DHCS released a policy brief features of this package. describing a plan for most of the $2.7 billion package in annual augmentations. As Figure 13 Further Ties Physician and Professional shows, the administration’s brief includes Payments to Medicare Level. Under the plan, information for augmentations totaling $1.9 billion most base payments for primary care, obstetrics, MCO tax funds ($4.6 billion total funds). (In non-specialty mental health care, specialty care, addition to support for ongoing augmentations and emergency physician services would be tied totaling $366 million enacted last year, the to a percent of the Medicare level on an ongoing $2.7 billion estimate includes $375 million in basis. The payments would range from 80 percent MCO tax funds for two proposals—behavioral to 100 percent of Medicare, depending on the health and health care workforce—where more service. In addition, the department proposes information is forthcoming.) The proposed to vary rates by geographic area to account for Medi-Cal increases would be effective January 2025. regional differences in costs, another feature of Medicare’s payment system. Figure 13 Medi-Cal Provider Payments and Payment Methodologies Would Change in Several Ways Major Components of Governor’s MCO Tax-Funded Provider Payment Proposal (In Millions) Amount MCO Total Servicea Tax Funds Proposal Physician and $1,075 $2,688 Tie most payments for primary care, obstetric care, non-specialty mental professional services health care, specialty care, and emergency physician services to 80 percent to 100 percent of what Medicare pays, depending on the service. Adopt Medicare payment structure, including by adjusting rates for regional variations in cost. Adopt new equity adjustment to incentivize service delivery in underserved areas. Hospital outpatient and 500 1,215 For outpatient services, transition toward Medicare prospective payment emergency services system and Medicare adjustments for regional variations in cost. Adopt new equity adjustment to incentivize service delivery in underserved areas. For emergency services, explore extent to which prospective payment system can be applied. Enact interim rate adjustments ranging on average from 10 percent to 40 percent prior to roll out of prospective payment system. UC and county hospital 150 375 Transition to prospective payment system, similar to the way Medi-Cal pays inpatient services for inpatient services at private and district hospitals. Abortion 90 90 Increase existing rates to a minimum of $1,150, with higher rates for certain geographic areas. Also sustain support for existing limited-term supplemental payment for abortion services at non-hospital clinics. Ground emergency 50 130 Increase rates to around 50 percent to 60 percent of Medicare and adopt medical transportation Medicare payment structure. Clinics 50 125b Expand and convert existing supplemental payment program for non- hospital 340B providers into utilization and performance-based managed care directed payment. Totals $1,915 $4,623 a Excludes proposed MCO tax allocations for behavioral health services and health care workforce initiatives, as the administration has not released detail on these proposals. b Maximum amount estimated by Department of Health Care Services. MCO = managed care organization. www.lao.ca.gov 17 2024-25 BUDGET Establishes New Prospective Includes Several Other Approaches for Payment Systems for Hospital Services. Increases. Outside of physician and hospital The administration’s proposal would change the services, the administration proposes various way some hospital services are paid. Generally, approaches to increase payments. For example, these changes would adopt prospective payment the administration also proposes to tie ground systems, which pay for an episode of care instead emergency transportation rates to a percent of of the volume of services. Specifically, DHCS Medicare. For abortion services, which generally proposes to establish a prospective payment do not have comparable Medicare rates, the system for outpatient services no sooner than administration proposes to increase rates to at 2027 and explore whether to adopt such a system least $1,150. According to DHCS, this level is what for emergency room services. The department Oregon’s Medicaid program pays for abortion would model these payment systems largely services and is among the highest rates paid based on the approach used in Medicare. In the among state Medicaid programs. The rates for both interim, the department proposes to increase ground emergency medical transportation and outpatient rates by an average of 10 percent and abortion services also would vary by geographic emergency room rates by an average of 40 percent. area. For nonhospital clinics, the administration The administration also proposes to adopt a proposes to replace and expand funding for an prospective payment system for inpatient services existing supplemental payment program. The new at UC and county hospitals, similar to the approach program would be a managed care directed Medi-Cal currently uses for private and district payment, with funds being allocated to clinics hospitals. This approach would replace the existing based on service utilization and performance cost-based reimbursement system and also replace outcomes. The Governor also proposes to extend a a portion of local contributions with MCO tax funds. limited-term fee-for-service supplement payment to Adopts New Equity Adjustment for Certain nonhospital clinics for providing abortion services. Services. For physician and hospital outpatient Sets New Payment Requirements on services, the administration also proposes Managed Care Plans. In addition to increasing and establishing new equity adjustments. These changing the structure of fee-for-service payments, adjustments would increase the level of payment to the proposal also would enact new requirements providers delivering services in certain geographic on managed care plans. For example, managed areas. The administration has not specified the care plans would be required to pay the same exact parameters of the equity adjustment, but fee-for-service rates for primary care, obstetric states that it could consider factors such as care, non-specialty mental health care, specialty whether an area is a federally recognized health health care, and emergency physician services. shortage area, whether an area is rural or is an As another example, plans would be required to urban health desert, the proportion of an area’s increase their hospital patient and emergency room population that is enrolled in Medi-Cal, and payments by 10 percent to 40 percent, similar to measures of the social determinants of health the proposed interim fee-for-service rate increases. in an area. According to the administration, the goal of this proposal is to boost provider ASSESSMENT participation in Medi-Cal in these geographic areas. Much of Proposal Remains Conceptual. The administration estimates the equity adjustment In many ways, the administration’s proposal is for physicians would cost $80 million MCO tax conceptual, with key details still forthcoming. funds ($200 million total funds), or 7 percent of For example, the administration also has not physician payments. The administration has not determined key details of the proposed equity estimated how much funding would be devoted to adjustment. In some cases, the time line to the hospital outpatient equity adjustment. implement changes has not been finalized. Moreover, some aspects of the package—such as augmentations for behavioral health and health care workforce—are forthcoming. 18 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Legislature Has Opportunity to Assess Broad Future federal decisions are uncertain, and they Aspects of Proposal. The administration states may not always align with the needs of the Medi-Cal that it is planning to release a package of trailer bill program, which serves a different population legislation on the proposed increases. Over the than Medicare. coming months, the Legislature likely will have more Proposed Prospective Payment Systems Also opportunity to weigh the details of each proposed Worth Considering, Though Further Analysis increase. With more information forthcoming, we Is Warranted. In concept, prospective payment focus our assessment on the broad architecture of systems have certain advantages over traditional the package. procedure-based reimbursements for hospitals. Most importantly, because these systems pay for Proposed Package Raises Several an episode of care, rather than for every procedure, Major Issues to Consider for hospitals have incentives to avoid unnecessary Medi-Cal Program services and treat patients efficiently. That said, Tying Payment Increases to Medicare Worth designing effective prospective payment systems Considering… The administration’s proposed is a complex exercise. Research and analysis approach of tying certain provider payments to a from DHCS is warranted to ensure these new percent of the Medicare level on an ongoing basis systems provide the intended incentives and avoid has a few advantages. First, such an approach unintended consequences. Also, time likely will would allow for a more rational basis to adjust be needed for hospitals to adjust to these new rates than what currently exists. Under the current systems, particularly for those hospitals that have approach, many rates generally are not adjusted little experience billing Medicare for services. annually, allowing them to lag behind inflation. Moreover, because Medi-Cal also provides Also, tying these payments to Medicare would supplemental payments to hospitals, some of which address differences across rates that lack a clear are allocated based on cost, the overall impact policy basis. As a result, the administration’s of the new base payment systems on hospital proposed approach would help mitigate inequities behavior is uncertain. and set forth a consistent approach for annual Proposed Equity Adjustment Worth adjustments. Moreover, using Medicare payments Considering, but Impact Is Uncertain. Medi-Cal as a benchmark for Medi-Cal rates in concept is beneficiaries have different access to services reasonable, as Medicare is a publicly funded health depending on where they live in the state. Some coverage program and comprises a sizable share of regions have fewer primary care or behavioral the health care market. health providers per capita than others, likely …But Trade-Offs Exist. While the Medicare affecting access to care. The supply of specialists program often is used as a benchmark for state also varies by region. Partly in response to these Medicaid payment levels, there are trade-offs to supply constraints, managed care plans apply tying Medi-Cal’s provider payments to Medicare. for alternative time and distance standards in Most notably, such an approach would tie some localities. An equity adjustment could better Medi-Cal’s provider payment adjustments to target resources and incentivize providers to serve federal policy decisions. A March 2023 nonpartisan Medi-Cal beneficiaries in these regions. That said, analysis concluded that Medicare payments whether the adjustment as proposed would be of a for physician and professional services appear sufficient size to alter provider behavior is uncertain. adequate to enable patients to access care. Moreover, it is uncertain how long it would take for That said, the analysis also found that annual providers to respond to these new incentives. adjustments to these payments since 2010 have In Many Cases, Assessment of Proposal not kept pace with the growth in medical costs, Depends on Details. In many cases, more though spending per beneficiary (which accounts information likely will be critical to fully weigh the for the volume and intensity of services rendered, administration’s proposed approach. For example, in addition to costs) kept closer pace with inflation. in contrast to other areas of the proposal, the www.lao.ca.gov 19 2024-25 BUDGET administration has not clarified how abortion Future Uncertainties rates would be adjusted following the increase in Could Impact Proposal January 2025. While the sizable increase in 2025 Package Lacks Long-Term Funding Strategy. might mitigate the need for annual adjustments in As we noted in the “MCO Tax Budget Solution” the short term, over the longer term, rates likely will section of this report, there is an expected, though lag again behind inflation if they are not consistently not certain, shortfall in the proposed MCO tax adjusted. As another example, more information package, estimated by the administration to begin likely is needed to assess the proposed directed mid-2028. The risk of a shortfall exists because payment program for nonhospital clinics. As we future federal rule changes may require the state to noted in our past publication, The 2020-21 Budget: adopt a much smaller MCO tax in 2027, relative to Analysis of the Medi-Cal Budget, the existing the current version. In discussions with our office, fee-for-service supplemental payment program, the administration has emphasized that it intends which is intended to backfill lost clinic pharmacy for the provider rate increases to be ongoing but revenues, lacks a clear public purpose. Replacing has not identified a permanent funding source. this program with a directed payment tied to service State’s Uncertain Budget Condition delivery and performance could better incentivize Heightens Funding Risks. Since the 2023-24 access and quality. The extent of the impact, budget and the MCO tax package were enacted, however, likely depends on how the funds will be the state’s budget picture has deteriorated. Under allocated and what performance measures will the Governor’s budget, the state is addressing a be considered. significant budget problem in the near term and is Proposal’s Overall Impact on Managed Care projected to face deficits in the out-years. Absent System Difficult to Assess. Historically, the state corrective measures, the state likely will not have has sought to maintain payment adequacy in the enough budget capacity to fund all of its ongoing managed care system by setting actuarially sound commitments over the next few years. Were fiscal rates to plans and by holding plans accountable to constraints to persist in the future, and were the access and quality standards. When plans find it is next version of the MCO tax to be much smaller warranted to increase provider payments to ensure than the current one, the Legislature could face access and quality, the associated costs eventually pressure to pull back some of the augmentations are incorporated into the rates paid by the state in the MCO tax package and reverse some to the plans, so long as the state deems these payment changes. Doing so likely would pose costs to be reasonable. Given this overarching challenges for managed care plans and providers, system and the risk born by managed care plans after having spent considerable time adjusting in serving Medi-Cal patients, plans historically their contracts and operations to the proposed have had flexibility to negotiate payment levels with changes. Moreover, such actions could require their providers. Over time, however, the state has the state to rescind plans for future changes after become more prescriptive in the level of payment having spent considerable effort researching and managed care plans provide for services—a developing them. For example, the administration practice that the administration proposes to proposes to adopt a new approach for paying for expand. Such an approach could better ensure hospital outpatient services no sooner than 2027— provider payment increases are targeted to potentially not long before the provider payment high-priority areas, but also potentially complicate reserve is depleted. state oversight and health plan administration of If Enacted by Voters, New Voter Initiative payments and services. Could Require Changes to Proposed MCO Tax Package. After the state enacted the 2023-24 budget package, an initiative was submitted to permanently authorize the MCO tax and codify how the funds would be spent. As with many other initiatives, it is uncertain whether the measure will qualify for the November 2024 ballot and, if 20 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET so, if voters would enact it. If the measure were Data and Assessment Will Be Key for enacted, it could require some adjustments to Legislature in Coming Years. Because of the the proposed MCO tax package. The extent to uncertainties around the MCO tax package and the which changes would be needed, however, is state’s fiscal condition in the future, the Legislature uncertain. In conversations with our office, DHCS may face difficult decisions around which increases indicated that it has not fully studied the differences to sustain. To ensure its decisions are well between the Governor’s proposal and initiative, informed, the Legislature likely will want to have or the programmatic and fiscal implications of data and analysis assessing which of the proposed these differences. It likely will be important for the augmentations had the greatest impact on access, Legislature to better understand these differences quality, and equity. and keep them in mind as it weighs its own plans for the MCO tax package. RECOMMENDATIONS Focus on Several Key Principles. Given Legislative Oversight Will Be Key the many issues and policy trade-offs raised by Major Changes Warrant Legislative Approval the proposal, we recommend the Legislature and Oversight. Because the administration has begin thinking about its plans for the MCO tax not released its proposed trailer bill legislation, it is package. As Figure 14 shows, we think several key uncertain what role is intended for the Legislature principles could guide legislative decision making. and how much flexibility will be proposed for DHCS. We describe each principle further below. The Legislature likely will want to be involved in Target Increases to Highest Need Areas of the design and approval of key elements of the Medi-Cal. We recommend the Legislature first proposed payment changes, given the package’s consider which areas of Medi-Cal to target for potentially far-reaching and long-term impacts augmentations. Though last year’s enacted trailer to the Medi-Cal program. For example, the bill legislation set forth specific areas for increases, Legislature likely will want to review the parameters the Legislature could consider how much funding of proposed equity adjustments before they go to allocate and how to structure these allocations. into effect. For example, the Legislature could consider Department and Managed Care Plans Could how much funding to allocate for base payment Face Hurdles to Implement Increases. Much of increases and how much funding to allocate for the proposal would require substantial changes equity adjustments. to the way Medi-Cal pays providers both in Focus on Changes That Make Medi-Cal fee-for-service and managed care. Experience with Payment Methodologies More Rational. To the the recently enacted provider payment increases extent the Legislature would like to use these in 2024 suggest that the department and managed increases to also change the way Medi-Cal pays care plans could face challenges going forward. providers, we recommend it focus on approaches Managed care plans have told our office that the that make the existing methodology more rational. 2024 rate increases are requiring changes to their contracts with providers, involving months of work. Given the much Figure 14 more expansive nature of this year’s Key Principles Could Guide Legislative Decisions proposal, it is possible unexpected LAO Recommended Principles for MCO Tax-Funded Provider Payment challenges and disruptions could Increases arise, potentially delaying the timing of when payment increases are • Target increases to highest need areas of Medi-Cal. disbursed to providers. Legislative • Focus on changes that make Medi-Cal payments more rational. oversight will be key to monitor the • Implement realistic implementation schedule. • Develop plan for oversight. implementation of the proposed • Develop sustainable long-term plan for the future. MCO tax package. www.lao.ca.gov 21 2024-25 BUDGET For example, the Legislature could consider tying components of any provider payment changes certain provider payments to a percent of the before they go into effect. In cases where further Medicare level, as proposed, which would help to study is warranted before implementing a change mitigate existing inequities and allow for a consistent in payment methodology (such as adopting approach to adjust rates over time. The Legislature new hospital prospective payment systems), we could consider many other approaches as well, recommend the Legislature authorize DHCS to such as tying payments to delivering high-value study these effects and direct the department services or meeting performance outcomes. to report on its findings before enacting the new Implement Realistic Implementation system. In addition, we recommend the Legislature Schedule. During budget hearings, we recommend be kept apprised of the package’s implementation the Legislature solicit more information from the by establishing reporting requirements in trailer department, managed care plans, and providers bill legislation or supplemental reporting language. on the implementation of the recently enacted At a minimum, we recommend two reports: (1) an payment increases and any anticipated challenges implementation update of approved rate increases, to implement proposed increases in 2025. To the due March 2025, and (2) an initial analysis of how extent this information suggests the proposed any enacted rate increases have affected access, timing of augmentations may not be feasible, we quality, and equity in the Medi-Cal program, due recommend the Legislature consider approving March 2026. increases over a longer time frame. For example, Develop Sustainable Long-Term Plan for the Legislature could delay the timing of certain the Future. In crafting its MCO tax package, we increases and payment methodology changes, recommend the Legislature develop a sustainable allowing more time for DHCS and managed care long-term plan that keeps in mind future plans to prepare. Alternatively, the Legislature uncertainties. For example, we recommend the could phase in payment increases and changes Legislature plan for the possibility that the next over multiple years, such as by enacting a multiyear MCO tax is smaller than this one and adopt an schedule to ramp up rate increases to the desired overall budget package with adequate capacity in level. Such an approach could have the added the General Fund to sustain ongoing augmentations benefit of spreading the fiscal risks of the proposed in the future. Such a plan also would consider the package over a longer period of time, including by timing of when new augmentations and payment delaying the timing of when the provider payment changes would begin and ensure these changes reserve is depleted. are not disrupted by the potential depletion of the Develop Plan for Oversight. As the provider payment reserve. Moreover, the Legislature administration releases proposed trailer bill may wish to consider the possibility that the voter legislation, we recommend the Legislature ensure initiative qualifies for the ballot and is enacted by it has an opportunity to review and approve key voters and plan accordingly. OTHER BUDGET SOLUTIONS In this section, we analyze the Governor’s Background proposed budget solutions in Medi-Cal, other In Recent Years, State Has Supported Major than those related to the MCO tax (discussed Limited-Term Initiatives in Medi-Cal. Much of the earlier). We first provide background on the state’s recent limited-term spending in Medi-Cal package of Medi-Cal budget solutions enacted has focused on behavioral health. For example, in the 2023-24 budget. Next, we describe each the 2021-22 budget provided $1.7 billion General of the non-MCO tax-related budget solutions Fund ($2.2 billion total funds) for the Behavioral proposed in the Governor’s budget. We then Health Continuum Infrastructure Program (BH-CIP), provide our assessment of the package and which supports grants for behavioral health-related our recommendations. 22 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET infrastructure projects. Relatedly, the 2022-23 Delays Funding Rounds of Behavioral Health budget package provided $1.5 billion General Fund Grant Initiatives. The Governor proposes to further over two years for the Behavioral Health Bridge delay $140 million of the final round of BH-CIP grant Housing (BHBH) initiative, which supports the funding to 2025-26, with the remaining $100 million development of transitional housing for people who to still be provided in 2024-25. In addition, the are experiencing homelessness and have serious Governor proposes to delay $235 million for BHBH behavioral health conditions. These initiatives have from 2024-25 to 2025-26. (Separately, and not been implemented over multiple rounds of grant as a budget solution, the Governor proposes to funding. There are other, smaller one-time initiatives transfer $265 million for the third round of BHBH covering other areas of Medi-Cal as well. funding back to the General Fund from the MHSF. Last Year’s Budget Included Medi-Cal Budget The administration states this action is needed Solutions. As part of a package of budget solutions because of declining MHSF revenues, resulting in across state programs, the 2023-24 budget included insufficient funding to support the initiative.) $5 billion in reductions, delays, funding shifts, and Sweeps Medi-Cal Drug Rebate Fund. new revenue in Medi-Cal in 2022-23 and 2023-24. The Governor proposes to further sweep the More than half of this amount was from enacting a Medi-Cal drug rebate reserve to offset General Fund new MCO tax, of which some of the revenues are spending. The reserve account was established used to offset General Fund spending in Medi-Cal. in the 2019-20 budget package to help offset Other notable actions were one time. For example, unexpected cost increases in Medi-Cal. The 2023-24 the state delayed $716 million in planned spending budget swept the reserve account as a budget for BH-CIP and BHBH to 2024-25 and 2025-26. solution. According to the administration, however, Another $265 million for BHBH was shifted to the state is expected to receive more drug rebate the Mental Health Services Fund (MHSF). Other funds than anticipated in last year’s budget, one-time actions included deferring the planned providing more funds to sweep from the reserve end to a two-week deferral of Medi-Cal provider account. The proposal provides $163 million in payments to 2024-25 and sweeping a Medi-Cal drug General Fund savings, with most of the impact rebate reserve account. in 2023-24. Reduces Physician Supplemental Payments. Proposals The Governor proposes to reduce General Fund Proposes Additional Medi-Cal Budget spending on an existing supplemental payment Solutions. Outside of the MCO tax package, the program for physician services. The program Governor proposes an additional $1.2 billion in was established in the 2017-18 Budget Act and budget solutions in Medi-Cal across 2023-24 and originally supported entirely by Proposition 56 (2016) 2024-25. Many of the budget solutions are similar revenues. Since then, Proposition 56 revenues have to those taken last year and mostly are one time. declined, resulting in the General Fund backfilling a Below, we describe each proposal. portion of the program’s costs. The administration Continues Provider Payment Deferral. states that the reduction in General Fund spending The Governor proposes to withdraw the scheduled would be more than offset by increased funding end of a two-week deferral in fee-for-service for physician payments in the proposed MCO tax payments. The deferral, which was initially enacted package. (We provide more information on this to help address a budget problem in the 2006-07 package in the “MCO Tax-Funded Provider Payment budget, was originally scheduled to end in 2022-23. Increases” section.) The 2023-24 budget delayed its end to 2024-25. Reverts Unspent Funds for Clinic Workforce The Governor’s budget assumes that withdrawing Retention Payments. The Governor proposes to the scheduled end of the deferral in 2024-25, revert back to the General Fund unspent funds from thereby allowing it to continue, provides $533 million a one-time retention payment initiative. The initiative, one-time General Fund savings. which was focused on clinic workers, initially received $70 million General Fund in 2022-23. www.lao.ca.gov 23 2024-25 BUDGET Under current law, any unspent funds would transfer If Budget Situation Worsens, Additional to the Department of Health Care Access and One-Time Funding Could Be Pulled Back. Information for workforce initiatives. The administration As we noted in our recent report, The 2024-25 instead proposes to revert the unspent funds, which Budget: Overview of the Governor’s Budget, total $15 million. (The 2022-23 budget also provided the state’s budget condition is likely to worsen in $1.1 billion in California Emergency Relief Fund for May, necessitating additional budget solutions beyond retention payments to hospital and skilled nursing those proposed in the Governor’s budget. To minimize facility workers. The Governor also proposes reverting the impact to ongoing service levels, the Legislature $57 million unspent funds for this initiative, which could consider pulling back additional one-time ultimately would revert to the General Fund.) funding in Medi-Cal. For example, we estimate around $100 million in grants in 2024-25 could be reduced Assessment and Recommendations or delayed from the Children and Youth Behavioral Given Fiscal Constraints, Proposed Budget Health Initiative, another behavioral health-related Solutions Are Warranted. Given the substantial initiative in Medi-Cal that the Governor proposes budget problem facing the state, the Governor’s to maintain. The Legislature also has opportunities proposed Medi-Cal budget solutions are warranted. to reconsider General Fund support for BH-CIP, The proposed budget solutions are reasonable, as described further below. they focus primarily on one-time actions that would Recommend Shifting BH-CIP Support if not disrupt or reduce the core Medi-Cal program. Proposition 1 Bond Is Approved. Proposition 1 on We therefore recommend adopting the Governor’s the March 2024 ballot would authorize $4.4 billion in other proposed budget solutions in Medi-Cal as a general obligation bond authority for BH-CIP—double starting point. the amount that has been appropriated thus far for the Reductions, Rather Than Delays, May Be More program. (The total general obligation bond authority Reflective of the Budget Situation. A number of the is $6.4 billion.) With this large potential infusion of Governor’s proposed budget solutions, particularly funding, and in light of the General Fund budget in Medi-Cal, are delays of limited-term spending. situation, we recommend that the Legislature shift While these solutions are warranted to address the the remaining General Fund for the program—totaling current budget problem, we estimate that the state is $481 million across 2024-25 and 2025-26—to bond likely to face significant operating deficits in the coming support if Proposition 1 is passed by the voters. While years. With lower revenues and higher ongoing this action would reduce overall planned funding for spending obligations projected beyond the budget BH-CIP by a like amount, the shift would provide year, it may be difficult to fund programs that were much needed General Fund relief with only relatively delayed to future years. For this reason, funding delays minor near-term consequences. The Legislature could enacted in this year’s budget may ultimately become revisit the state of behavioral health infrastructure reductions in the future. Therefore, in evaluating the in the future when the bond funds are exhausted Governor’s proposals to delay limited-term spending, or when discretionary General Fund resources are it may be more realistic for the Legislature to consider again available. the proposals as spending reductions. LAO PUBLICATIONS This report was prepared by Jason Constantouros, Karina Hendren, 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. 24 LEGISLATIVE ANALYST’S OFFICE