In this brief, we discuss key factors driving the changes in estimated and proposed Medi-Cal spending in 2016-17 and 2017-18; evaluate the Governor’s updated caseload estimates; update several key proposals from the January budget and the May Revision. We make recommendations to the legislature regarding future funding of the Major Risk Medical Insurance Program; modifications to the Governor’s proposed plan to cancel the planned transition of Newly Qualified Immigrants from Medi-Cal to Covered California; a technical adjustment to the 2017-18 May Medi-Cal Estimate.
The Governor’s May Revision Medi-Cal budget estimates 2016‑17 Medi-Cal spending to be $18.9 billion in General Fund and $89.2 billion in total funds. For 2017‑18, the May Revision proposes $18.6 billion in General Fund and $105.6 billion in total funds. For both fiscal years, the administration estimates or proposes lower General Fund Medi-Cal spending compared to the Governor’s January budget proposal.
The Governor’s May Revision budget proposal features few changes in policy related to Medi-Cal. As such, the reductions in estimated and proposed Medi-Cal spending (relative to the January budget) are largely driven by changes in the underlying year-to-year costs of the program. Below, we provide an overview of several of the key factors driving the changes in estimated and proposed Medi-Cal spending in 2016‑17 and 2017‑18; our evaluation of the Governor’s updated caseload estimates; an update on several key proposals from the January budget, some of which have been modified at May Revision; and a recommended technical adjustment to the Governor’s May Revision Medi-Cal budget proposal.
Lower Estimated General Fund Spending in Medi-Cal in 2016‑17 Compared to January Budget Estimates. The Governor’s May Revision budget proposal estimates Medi-Cal General Fund spending in 2016‑17 to be $18.9 billion, a $620 million reduction compared to the Governor’s January budget estimate of General Fund Medi-Cal spending. Lower General Fund spending in Medi-Cal in 2016‑17 is attributable to many different factors, including lower caseload estimates, higher than anticipated prescription drug rebates, and managed care capitated rate adjustments resulting in greater General Fund savings.
2016‑17 Estimated Medi-Cal General Fund Spending Remains Over $1 Billion Higher Than the 2016‑17 Medi-Cal General Fund Appropriation… Although estimated Medi-Cal General Fund spending in 2016‑17 has been revised downward from the Governor’s January estimate, 2016‑17 General Fund spending in Medi-Cal is estimated to be about $1.2 billion higher than the program’s 2016‑17 General Fund appropriation. This $1.2 billion deficiency is to a large degree due to the Medi-Cal budgeting error that was revealed to the Legislature at the time of the release of the Governor’s January budget.
…Which Could Require Supplemental Funding for Medi-Cal in 2016‑17. Current state law allows Medi-Cal to receive loans of up to $1 billion from the General Fund in years when Medi-Cal General Fund spending exceeds the program’s appropriation. However, because Medi-Cal’s expected $1.2 billion deficiency in 2016‑17 exceeds the program’s General Fund loan authority of $1 billion, Medi-Cal payments could be disrupted unless the Legislature takes action to either (1) increase Medi-Cal’s General Fund loan authority, or (2) enact a supplemental appropriation. The administration has indicated that they will work with the Legislature in the coming weeks on a proposal that increases the amount of funding available to Medi-Cal and prevents any disruption in Medi-Cal payments.
Lower Estimated Federal Funding in 2016‑17 Compared to January Budget Proposal. The Governor’s May Revision budget proposal estimates Medi-Cal federal funding in 2016‑17 to be $57.7 billion, a $9.1 billion reduction compared to the Governor’s January budget estimate of federal funding in Medi-Cal. Much of this reduction is attributable to shifts in hospital quality assurance fee payments and intergovernmental transfer payments to public hospitals from 2015‑16 and the first half of 2016‑17 into 2017‑18, as well as to higher than anticipated prescription drug rebates in 2016‑17. Since these reductions in federal funding are primarily due to the timing of certain federal payments in Medi-Cal, lower estimated federal funding in 2016‑17 is not expected to result in higher General Fund spending in either 2016‑17 or 2017‑18.
Lower Proposed Medi-Cal General Fund Spending in 2017‑18. The Governor’s May Revision proposes $18.6 billion in General Fund funding for Medi-Cal in 2017‑18, a $540 million reduction compared to the Governor’s January budget proposal. Lower caseload estimates and shifts in the timing of certain payments that have the effect of reducing General Fund Medi-Cal spending are the main drivers of lower proposed spending in 2017‑18. Although, on net, proposed General Fund spending is down relative to the January budget, certain factors are resulting in significantly higher Medi-Cal spending. Notably, higher managed care capitated rates for certain seniors and persons with disabilities (SPDs) appear to be causing higher spending in 2017‑18 in the hundreds of millions of dollars.
Between 2016‑17 and 2017‑18, General Fund spending in Medi-Cal is projected to decline from $18.9 billion to $18.6 billion, a 2 percent reduction in spending. This year-over-year decline does not appear to reflect declining overall costs in the Medi-Cal program. Rather, the decline is largely attributable to the availability of higher special fund revenues used to support the Medi-Cal program in 2017‑18 compared to 2016‑17. These special funds include revenues from the managed care organization tax, the hospital quality assurance fee, and Proposition 56. A portion of these higher revenues reflect the timing of payments, rather than an increase in ongoing revenues.
Medi-Cal Caseload Growth Not as High as Previously Projected. The Governor’s May Revision budget projects continued Medi-Cal caseload growth from both 2015‑16 to 2016‑17 and 2016‑17 to 2017‑18, though not as high of growth as previously projected. Total average monthly enrollment is projected to be about 13.6 million enrollees in 2016‑17 and 13.7 million enrollees in 2017‑18. These caseload estimates are significantly lower than the Governor’s January estimates, which projected average monthly caseload to be 14 million in 2016‑17 and 14.3 million in 2017‑18. According to the administration, the lower caseload projections in the May Revision result in Medi-Cal savings in the low hundreds of millions of dollars in both 2016‑17 and 2017‑18, savings which have been incorporated into the budget.
LAO Assessment: Updated Caseload Numbers Appear Reasonable. We have reviewed the Governor’s May Revision caseload estimates and find them to be reasonable. We have reviewed recent months’ data on actual Medi-Cal enrollment, and believe that they support the lower caseload growth projections that have been incorporated into the Governor’s revised Medi-Cal budget.
May Revision Budget Proposes to Eliminate Transition of All NQIs From Medi-Cal to Covered California. Current state law calls for the transition of Patient Protection and Affordable Care Act (ACA) optional expansion NQIs from the state-only Medi-Cal program into Covered California coverage with a Medi-Cal wraparound. The Governor’s January budget proposal included additional NQIs—namely, parents and caretaker relatives—in the transition. (For further background on issues related to the NQI proposal, refer to our report, The 2017‑18 Budget: Analysis of the Medi-Cal Budget.) The May Revision budget proposal reflects the administration’s intent to no longer pursue the transition of all NQIs into Covered California at a cost of $48 million General Fund in 2017‑18 ($100 million General Fund annually). The administration cites operational and programmatic challenges, similar to what we outlined in our analysis of the Governor’s January Medi-Cal budget, as its reason for no longer pursuing the transition. The administration has indicated that the Department of Health Care Services (DHCS) will apply for the Centers for Medicare and Medicaid Services (CMS) to certify the state-only Medi-Cal program for NQIs as minimum essential coverage (MEC) to protect NQIs against any potential tax liabilities under the ACA’s individual mandate. If CMS certifies the state-only Medi-Cal program for NQIs as MEC, these individuals would no longer be eligible for federal funding through Covered California. Without federal funding, the state would have no fiscal rationale to transition NQIs into Covered California, provided it wishes to maintain comparable health coverage for this population.
LAO Assessment: Consider Conforming Changes to State Law to Reflect May Revision Budget Proposal, if Approved. The administration suggests that changes to state law may not be required to implement the changes in the May Revision budget proposal. Should the Legislature approve the proposal, we recommend that the Legislature adopt new trailer bill language to repeal existing state statutory language that calls for the transition of certain NQIs from Medi-Cal into Covered California, thus ensuring consistency between state law and legislative intent.
Governor’s January Budget Proposal. The Governor’s January budget proposed to abolish MRMIF and transfer the remaining fund balance—along with any of the ongoing revenues from the Managed Care Administrative Fines and Penalties Fund that are deposited into MRMIF—into a newly created Health Care Services Plans and Penalties Fund to first support any ongoing program expenditures of the Major Risk Medical Insurance Program (MRMIP), with the balance going to support Medi-Cal. We found the Governor’s January budget proposal to be reasonable given the high remaining MRMIF balance and ongoing revenues that could be used to address pressing budgetary funding requirements.
Governor’s May Revision Budget Proposal Revises Estimate of Available Funding for Medi-Cal From MRMIF. The May Revision budget proposal estimates available funding of $47 million from the new Health Care Services Plans and Penalties Fund to support Medi-Cal in 2017‑18, $19 million less than estimated in the January budget proposal. This downward revision reflects a lower MRMIF balance to support Medi-Cal due to higher estimated MRMIP expenditures in 2017‑18. Given these higher estimated MRMIP expenditures, before approving the Governor’s proposal, we would recommend the Legislature ask DHCS during upcoming budget deliberations to clarify:
What portion of the $19 million represents potential ongoing annual expenditures for MRMIP (thus potentially reducing the funding support available to Medi-Cal)?
Given that it appears that the most recent annual MRMIF revenues are $3.5 million, are ongoing revenues in MRMIF sufficient to cover ongoing MRMIP expenditures?
If the revenues are insufficient, what is the administration’s plan to meet MRMIP’s funding requirements?
The CCI is a joint state-federal demonstration project that began in 2012‑13 and is intended to improve the coordination of health care and long-term services and supports (LTSS) and reduce the overall costs of providing care for SPDs. The CCI made a variety of changes, most of them in the seven “demonstration counties” where it was implemented. These include, but are not limited to:
Integrating Medi-Cal and Medicare benefits under Cal MediConnect;
Mandatory enrollment of SPDs who receive both Medi-Cal and Medicare benefits (known as dual eligibles) into Medi-Cal managed care for the Medi-Cal portion of their benefits;
Integration of LTSS under Medi-Cal managed care—these LTSS benefits include care in skilled nursing facilities, In-Home Supportive Services (IHSS), adult day health care benefits (the Community-Based Adult Services Program [CBAS]), and health care case management (the Multipurpose Senior Services Program [MSSP]).
CCI Discontinued Following Administration’s Determination That CCI Does Not Generate Net General Fund Savings. CCI-related legislation established a “poison pill” that automatically discontinues the major components of the CCI if the administration determines that the CCI does not generate net General Fund savings. In January, the administration triggered the poison pill following a determination that the CCI does not result in net General Fund savings.
However, the Governor’s January Budget Proposed Continuing Certain Major CCI Components. Despite the automatic termination of the CCI, the Governor’s January budget proposed continuing certain major CCI components, including: (1) Cal MediConnect, (2) mandatory enrollment in managed care for dual eligibles for their Medi‑Cal benefits, and (3) the integration of LTSS other than IHSS under managed care. In effect, the Governor proposed continuing the CCI absent its IHSS components.
Governor’s May Revision Proposal to Continue Certain Major Components of the CCI Is Consistent With January Proposal. The Governor’s May Revision maintains the proposed continuation of Cal MediConnect, the mandatory enrollment of dual eligibles in managed care for their Medi-Cal benefits, and the integration of LTSS other than IHSS under Medi-Cal managed care. As we discussed in our report, The 2017‑18 Budget: The Coordinated Care Initiative: A Critical Juncture, we are supportive of the Governor’s proposal to extend these components of the CCI. The major changes in the May Revision compared to the January budget proposal relate to IHSS financing, which we discuss in detail in a separate Budget and Policy Post, The 2017‑18 Budget: The Governor’s May Revision In-Home Supportive Services Cost-Sharing Proposal.
May Revision Revises Cal MediConnect Savings Downward. Estimated savings under Cal MediConnect were revised downward from around $20 million to around $8 million in 2016‑17 and 2017‑18. Lower savings in Cal MediConnect are largely attributable to decreasing enrollment in Cal MediConnect managed care plans, a result of high continued opt-out rates. The administration has indicated that they are continuing to explore strategies for improving enrollment in Cal MediConnect. In our CCI report, we lay out a couple of options to improve Cal MediConnect enrollment. These are to (1) introduce ongoing passive enrollment into Cal MediConnect for Medi-Cal managed care enrollees at age 65 when they become eligible for Medicare benefits and (2) provide funding for outreach and engagement activities that encourage enrollment by outlining the benefits of coordinated care under the Cal MediConnect program.
Governor’s May Revision Proposal for Proposition 56 Revenues in Medi-Cal Is Largely Consistent With the January Proposal to Fund Year-Over-Year Program Growth. As required by Proposition 56, a voter-approved initiative which raised state taxes on tobacco products, the Governor’s May Revision allocates around $1.3 billion in Proposition 56 revenue to Medi-Cal in 2017‑18, a $20 million increase over the amount projected in the Governor’s January proposal. Consistent with the Governor’s January Proposition 56 proposal, the Governor does not propose using Proposition 56 revenues to pay for new policy changes in the Medi‑Cal program, such as higher provider rates. Instead, Proposition 56 revenues would largely support anticipated spending increases from growth in the Medi‑Cal program between the 2016 Budget Act and the 2017‑18 May Revision budget proposal. While the Governor’s proposed uses of Proposition 56 revenues within Medi-Cal in the May Revision proposal are generally consistent with the Governor’s January budget proposal in terms of their paying for year-over-year program growth, there are several new areas within the existing Medi-Cal program where the Governor’s May Revision proposes to allocate Proposition 56 revenues to pay for year-over-year growth. These include, for example, dental services, substance use treatment services, and specialty mental health services. Because the Governor’s budget allocates Proposition 56 revenues to fund growth in the existing Medi-Cal program, other funding sources would have to be identified should the Legislature choose to reallocate Proposition 56 revenues to fund any new policy changes in Medi-Cal.
The Governor’s January budget proposal assumes federal CHIP funding will be reauthorized in federal fiscal year (FFY) 2016‑17 at the historical 65 percent federal medical assistance percentage (FMAP), instead of the enhanced 88 percent FMAP authorized under the ACA through FFY 2018‑19. As we noted in our analysis of the Governor’s January budget proposed for Medi-Cal, the Governor’s approach to budgeting CHIP funding is reasonable given the significant uncertainty around the Congressional reauthorization of CHIP funding beyond FFY 2016‑17. The May Revision budget proposal assumes an increase in General Fund spending of $396 million in 2017‑18 relative to what would be the cost if California received the enhanced 88 percent FMAP. This is $139 million less than estimated in the January budget proposal. This downward revision is a technical adjustment to the January estimate.
The Governor’s January budget proposed to delay the implementation of the palliative care program (established pursuant to 2014 legislation) to no sooner than July 1, 2018. The May Revision budget proposal differs from the January budget proposal in that it would implement the program beginning in January 2018, with estimated net General Fund costs of $1.3 million in 2017‑18. We have also reviewed an associated budget change proposal (BCP) to convert one limited-term position to a permanent position to implement the program. We have no concerns with the BCP.
We have reviewed the Governor’s May Revision IT BCPs for DHCS—two that request positions and funding for the California Medicaid Management Information System (CA-MMIS), and one that requests contract funding to upgrade the department’s Enhanced Medi-Cal Budget Estimate Redesign (EMBER) system. We have no concerns with any of these BCPs.
Reduce 2017‑18 May Medi-Cal Estimate By $62 Million in General Fund. In our review of the May 2017 Medi-Cal Estimate, we identified the need for a technical adjustment. We recommend a reduction in the 2017‑18 May Medi-Cal Estimate of $62 million General Fund. We have conferred with the Department of Finance, who has agreed on the need for this technical adjustment.