|Budget Issue:||Analysis of settlement agreement reached by the state and plaintiffs for two IHSS lawsuits|
|Program:||In-Home Supportive Services (IHSS)|
|Finding or Recommendation:||We recommend that the Legislature give serious consideration to effectuating the general thrust of the settlement agreement, as it appears to be a reasonable compromise between the state's and the plaintiffs' interests. However, because of the lack of specificity provided in the settlement for an assessment on home care services, we withhold our recommendation on this aspect of the settlement.|
The state’s IHSS program provides in-home personal care as well as domestic and related care services for individuals to help them remain in their own homes and communities. Recipients are eligible to receive up to 283 hours per month of assistance with tasks such as bathing, housework, meal preparation, and dressing. In most cases, the recipient is responsible for hiring and supervising a provider—oftentimes a family member or relative.
Several previously enacted IHSS program reductions—intended to realize ongoing General Fund savings and initiated during a period of budget deficits—have not been implemented because the reductions were challenged in class-action lawsuits and subsequently enjoined (prevented from being implemented) on a preliminary basis by court orders while the lawsuits proceed. These three enacted-but-enjoined reductions include: (1) establishing a stricter threshold of need to receive IHSS, (2) reducing IHSS hours by 20 percent, and (3) reducing state participation in IHSS provider wages and benefits. In March 2013, the state’s Department of Social Services (DSS) and Department of Health Care Services (DHCS) reached a settlement agreement with plaintiffs that would resolve the lawsuits by repealing the three enjoined reductions and implementing a new reduction plan intended to realize some General Fund savings while lessening the magnitude of service cuts. The presiding federal district court judge has granted preliminary approval to the terms of the settlement agreement. Once the settlement receives final judicial approval, the Legislature can enact legislation to effectuate the terms of the settlement agreement. While both sides in the litigation—the state and plaintiffs—support passage of the necessary legislation to effectuate the settlement, the Legislature is not bound to enact the terms of the settlement agreement.
The lawsuit settlement was not agreed to until March 2013, after the 2013-14 Governor’s Budget was submitted in January. The budget assumed the implementation in 2013-14 of one of the three reductions subject to litigation (the 20 percent reduction in hours). The administration is now seeking the Legislature’s approval of the settlement agreement.
This analysis serves to update our February analysis of the Governor’s January IHSS budget proposal for 2013-14. We provide: background on the enacted IHSS reductions challenged by lawsuits (including their potential fiscal impact to the state General Fund), our fiscal and policy analysis of the terms of the settlement agreement, and our recommendations.
The three enacted IHSS reductions described above that were challenged in litigation are the subject of two separate lawsuits (one lawsuit was amended to include additional issues). If the two lawsuits were to proceed and the state were to prevail in both cases, then, according to the Department of Finance (DOF), the three enacted reductions would yield annual General Fund savings totaling $436 million when fully implemented. We note that realizing these savings is subject to significant uncertainty due to the number of legal issues involved. The savings estimate also does not take into account caseload growth and the county IHSS maintenance of effort (MOE) requirement, both of which serve to increase the level of General Fund savings from the reductions if and when implemented.
Below, we describe the three enacted-but-enjoined IHSS reductions and the General Fund savings each would yield if implemented.
Stricter Threshold of Need for IHSS. When a county social worker conducts an IHSS assessment, he/she ranks the recipient’s impairment to perform activities of daily living on a 5-point scale known as the functional index ranking. A functional index ranking of 1 is considered the lowest impairment level while a 5 is the highest. The weighted average of the functional index rankings for the various activities are used to create a functional index score. The 2009-10 Budget Act established a stricter threshold of need to receive IHSS hours based on (1) a recipient’s assessed functional index score and (2) a recipient’s functional index ranking for domestic and related care services (such as housework, meal preparation, and laundry). The enacted reduction required IHSS recipients to have an overall functional index score equal to or greater than 2 on the 5-point scale in order to qualify for IHSS hours and further required a functional index ranking greater than 4 for each domestic and related care services activity in order to receive service hours to assist with the task.
This reduction was legally challenged in Oster v. Lightbourne, et al. (commonly referred to as Oster I) and was preliminarily enjoined by a federal district court judge. The legal issues raised include alleged violations of federal Medicaid requirements, the federal Americans with Disabilities Act (ADA), and the federal Rehabilitation Act (which prohibits discrimination on the basis of disability in programs receiving federal reimbursement). The 2013-14 Governor’s Budget submitted in January does not assume any savings from this reduction in 2013-14. However, DOF’s multiyear budget forecast at that time assumed that the state would prevail in this litigation by January 1, 2015, for partial-year General Fund savings of $26 million in 2015-16 and $64 million annually thereafter. We note that these savings estimates do not adjust for caseload growth and the county IHSS MOE, and therefore are likely understated.
Reduction of 20 Percent to IHSS Hours. The 2011-12 budget package contained a statutory mechanism, or “trigger,” for further reducing General Fund program expenditures if General Fund revenues were re-estimated to fall short of the amount assumed in the 2011-12 Budget Act. One of these reductions was a 20 percent reduction to IHSS hours effective January 1, 2012. Ultimately, the trigger was pulled and the 20 percent reduction was enacted. This reduction is structured to include a supplemental care application process, enabling IHSS recipients to apply for and receive a full or partial restoration of reduced hours based on functional need.
This reduction was also legally challenged in an amendment to the complaint filed in Oster v. Lightbourne, et al.(commonly referred to as Oster II) and it too was preliminarily enjoined by a federal district court judge. The legal issues raised include alleged violations of federal Medicaid requirements, the ADA, the Rehabilitation Act, and due process requirements under the 14th Amendment of the United States Constitution. (For more background on the Oster II litigation, including our analysis of the legal risks as well as our fiscal and policy concerns with the 20 percent reduction, please refer to “The 20 Percent Across-the-Board Reduction” section of The 2013-14 Budget: Analysis of the Health and Human Services Budget.) The 2013-14 Governor’s Budget submitted in January assumed that the state would prevail in the Oster II litigation and begin implementing the 20 percent reduction on November 1, 2013, for partial-year General Fund savings of $180 million. (This savings estimate has been updated to account for the county IHSS MOE.) The DOF estimates that the 20 percent reduction would result in full-year General Fund savings of $272 million if implemented (an estimate that does not account for caseload growth and the county IHSS MOE, and therefore is likely understated).
Reduction of State Participation in IHSS Provider Wages and Benefits.In the 2009-10 budget package, the Legislature enacted a reduction to the state’s contribution to IHSS provider wages and benefits from a maximum of $12.10 per hour to $10.10 per hour effective July 1, 2009. At the time this reduction was enacted, 50 percent of most IHSS program costs (including provider wages and benefits) were paid for by the federal government, with about 32.5 percent paid for by the state and 17.5 percent by the counties. The IHSS provider wages and benefits are determined by collective bargaining negotiations at the county level and therefore vary by county. This reduction would have required the state to contribute 32.5 percent to IHSS provider wages and benefits up to a maximum of $10.10 per hour. Any provider wages and benefits above $10.10 per hour would have been split 50-50 between the county and the federal government.
This reduction was legally challenged in Dominguez v. Schwarzenegger, et al. (now known as Dominguez v. Brown, et al.) and preliminarily enjoined by a federal district court judge. The legal issues raised include alleged violations of federal Medicaid requirements (including the requirement for the state to conduct an analysis on the potential impact of a rate reduction on access to services), the ADA, and the Rehabilitation Act. The 2013-14 Governor’s Budget submitted in January does not assume any savings from this reduction in 2013-14. However, DOF’s multiyear budget forecast at that time assumed that the state would prevail in the Dominguez litigation and begin implementing the reduction of state participation in IHSS provider wages and benefits on July 1, 2015, for annual General Fund savings of about $100 million (an estimate that does not adjust for caseload growth and the county IHSS MOE, and therefore is likely understated).
The settlement agreement reached between the state and plaintiffs on March 27, 2013 resolves the two outstanding lawsuits—Oster v. Lightbourne, et al. (both Oster I and II) and Dominguez v. Brown, et al related to the three budget reductions at issue. At the time of this analysis, the terms of the settlement agreement have received preliminary approval by the presiding federal district court judge.
The settlement calls for the repeal of the three budget reductions at issue in the litigation. In place of these reductions, the settlement calls for implementing an 8 percent reduction to IHSS hours beginning July 1, 2013 for the duration of 2013-14 (or for 12 consecutive months), followed by an ongoing 7 percent reduction to IHSS hours in future years (subject to a “trigger off” provision discussed below). In contrast to the enacted 20 percent reduction, the 8 percent and 7 percent reductions would apply to all IHSS recipients and would not include a supplemental care application process for full or partial restoration of reduced hours. If an IHSS recipient chooses to appeal the 8 percent or 7 percent reduction, the settlement agreement provides that his/her request can be administratively denied. The recipient, in such an appeal of the 8 percent or 7 percent reduction, would not receive what is known as “aid-paid-pending”—service hours provided at the same level as before the reduction while the recipient awaits an appeal decision. We note that the settlement agreement provides that IHSS recipients retain their rights under existing law to request a reassessment of service hours based on a change in personal circumstances.
Because an existing 3.6 percent reduction to service hours will sunset on June 30, 2013, the settlement agreement intends to avoid any time lapse between the elimination of the 3.6 percent reduction and the implementation of the 8 percent reduction. In effect, the settlement intends for recipients to experience an additional 4.4 percent reduction on top of the existing 3.6 percent reduction implemented in 2012-13 (and two prior years) for a total 8 percent reduction beginning July 1, 2013. Similarly, from the perspective of recipients, the ongoing 7 percent reduction would implement as an additional 3.4 percent reduction on top of the existing 3.6 percent reduction.
The settlement includes what we refer to as the “trigger off” provision for the ongoing 7 percent reduction. That is, the agreement intends for the 7 percent reduction to be partially or fully offset by General Fund savings resulting from a new “assessment” on home care services, including home health care and IHSS. Such an assessment, if enacted by the Legislature and approved by the federal Centers for Medicare and Medicaid Services (CMS), would presumably be structured to yield increased federal Medicaid matching funds that would be used to offset General Fund expenditures on IHSS, thereby producing savings. We note that the settlement agreement does not explicitly address how such an assessment would generate General Fund savings to facilitate the ratcheting down of the 7 percent reduction. (For a detailed description of how a health care provider assessment can leverage additional federal funds, please refer to “Quality Improvement Fees” in our 2004-05 Analysis for Health and Social Services.) If CMS approves retroactive implementation of the assessment on home care services, the settlement calls for the accompanying one-time savings to be used for the benefit of IHSS recipients.
Legislature’s Role. The settlement agreement specifies that the state and plaintiffs “support” the Legislature’s passage of legislation no later than May 24, 2013 to repeal the enjoined reductions and enact the one-time 8 percent reduction and the ongoing 7 percent reduction—with the latter’s reduction or elimination contingent upon General Fund savings resulting from a new assessment on home care services that would require CMS approval. If the Legislature fails to enact such legislation by June 1, 2013 or enacts legislation that “substantively” alters the terms of the settlement agreement, then both sides—the state and plaintiffs—will meet and confer to discuss appropriate next steps. Further, if the Legislature fails to enact legislation to effectuate the terms of the settlement agreement, or enacts legislation that substantively alters the terms of the settlement agreement, or if the legislation is not delivered to the Governor by November 1, 2013, then both sides will meet and confer to determine whether they can find a mutually acceptable solution. If the parties cannot reach such a solution, then either party may declare the settlement agreement null and void. In such circumstances, the two class-action lawsuits that would otherwise have been resolved by the settlement would proceed through the courts. It is our understanding that a substantive alteration to the terms of the settlement agreement would be any change enacted by the Legislature with which either the state or plaintiffs took issue. An example mentioned in the settlement is a change to the agreed upon percentage reductions.
Legislature Has Options for How to Proceed. While the settlement agreement’s lack of specificity regarding the new assessment on home care services makes it difficult to evaluate that component of the agreement, we find the general thrust of the settlement to be reasonable. As discussed further below, the settlement agreement appears to us to be a reasonable compromise between both parties because it (1) achieves a certain level of budgetary savings, which is in the state’s interest; and (2) lessens the service reductions experienced by IHSS recipients (when compared to the enacted-but-enjoined reductions), which is in plaintiffs’ interest. The latter also aligns better with the policy goal of the Coordinated Care Initiative (CCI)—enacted by the Legislature in 2012—to rebalance long-term services and supports (LTSS) toward home- and community-based services (HCBS) such as IHSS and away from institutional care settings.
Assuming the settlement agreement receives final approval by the federal district court judge, the Legislature appears to have three main options for how to proceed:
If the Legislature wishes to enact legislation to effectuate the terms of the settlement agreement so the 8 percent reduction begins as intended on July 1, 2013, we note that there is a short timeframe in which the Legislature must take action. The terms of the settlement agreement specify that the 8 percent reduction will be implemented for 12 consecutive months, meaning that a later implementation date—resulting from a longer period of legislative deliberation—would delay but not reduce savings associated with the 8 percent reduction.
Reductions of 8 Percent and 7 Percent to IHSS Hours Give State Budgetary Certainty. In “The 20 Percent Across-the-Board Reduction” section of The 2013-14 Budget: Analysis of the Health and Human Services Budget released in February 2013, we raised fiscal and policy concerns with the 20 percent reduction to IHSS hours. Fiscally, we found that the legal challenge in Oster II called into question the state’s ability to ultimately implement the 20 percent reduction and achieve the January budget’s assumed partial-year General Fund savings of $180 million in 2013-14. We also noted that the savings estimate could be subject to erosion should a greater-than-anticipated number of IHSS recipients apply for and receive a full or partial restoration of reduced hours through the supplemental care application process. The lawsuits challenging a stricter threshold of need for IHSS and the reduction of state participation in IHSS provider wages and benefits similarly call into question the state’s ability to ultimately realize General Fund savings from these enacted reductions. Given that the new reduction plan of 8 percent in 2013-14 followed by 7 percent is the result of a settlement agreement reached between the state and plaintiffs, the estimated savings therefrom are much more certain than those stemming from the three enjoined budget reductions. We note that the final settlement agreement is binding on members of the class-action lawsuits, meaning they may not legally challenge its terms. The savings estimates for the 8 percent and 7 percent reductions are also subject to less erosion than the 20 percent reduction because they do not provide for a supplemental care application process for recipients to seek a restoration of reduced hours.
The DSS estimates that the 8 percent reduction would save approximately $160 million General Fund in 2013-14 and that the 7 percent reduction would save approximately $159 million General Fund in 2014-15. (These savings estimates incorporate the impact of caseload growth and the county IHSS MOE and reflect that the reductions do not allow for a full or partial restoration of hours through a supplemental care application process and do not provide for aid-paid-pending service hours in the event of a recipient’s appeal.) When compared to the annual savings that could be realized by all three enacted-but-enjoined reductions if the state ultimately prevailed in all litigation—$436 million General Fund—the annual General Fund savings associated with the settlement of approximately $160 million might appear to be a substantial reduction. However, as we have noted, we find that the savings estimates associated with the enacted-but-enjoined reductions are subject to significant uncertainty stemming from the legal challenges. If the state were not to prevail in one or both lawsuits if they were to proceed, then assumed General Fund savings would significantly erode—potentially to zero—in out-years. We therefore find that the reductions agreed upon in the settlement provide the substantial fiscal benefit of a certain level of savings.
Reductions of 8 Percent and 7 Percent to IHSS Hours Align Better With Policy Objective of CCI. Our February 2013 budget analysis noted that subsequent to the 20 percent reduction’s enactment in 2011, the Legislature enacted CCI in Chapter 33, Statutes of 2012 (SB 1008, Committee on Budget and Fiscal Review), and Chapter 45, Statutes of 2012 (SB 1036, Committee on Budget and Fiscal Review). One of the policy objectives of CCI specified in Chapter 33 is to align financial incentives so as to shift utilization away from institutional care settings and toward HCBS, such as IHSS. The IHSS program is the most commonly utilized form of HCBS among seniors and persons with disabilities (SPDs), and therefore critical to maintaining SPDs in their homes and communities. We found that an ongoing reduction of 20 percent to IHSS hours may have put some recipients at risk of institutionalization, which would have worked against one of the stated policy goals of CCI. We did not address in our February 2013 budget analysis the policy impacts of the stricter threshold of need for IHSS and the reduction of state participation in IHSS provider wages and benefits because the 2013-14 Governor’s Budget did not assume savings for these two reductions in 2013-14. However, we now find that the three enacted reductions that are the subject of the lawsuits—taken together—would likely place IHSS recipients at greater risk of institutionalization than the reductions agreed upon in the settlement. The new reduction plan in the settlement agreement—which would impact IHSS recipients by reducing their service hours by an additional 4.4 percent in 2013-14 (above the level of reduction in 2012-13) and at most an additional 3.4 percent (above the level of reduction in 2012-13) thereafter—strikes an appropriate balance between achieving budgetary savings while diminishing the risk of institutionalization associated with much larger reductions. We therefore find that the 8 percent reduction in 2013-14 followed by the 7 percent reduction thereafter are more likely to allow IHSS recipients to remain safely in their homes and communities relative to the case where the three budget reductions being litigated were implemented, aligning better with a key policy objective of CCI.
Lack of Specificity for New Assessment on Home Care Services Makes Evaluation Difficult. The settlement agreement intends for the 7 percent reduction to be partially or fully offset by General Fund savings resulting from a new assessment on home care services. The assessment base includes but is not limited to home health care services broadly and IHSS. No further details about the structure of the assessment are provided by the settlement agreement. If the assessment is enacted by the Legislature, the settlement intends for the state to submit a request for authorization to CMS by October 1, 2014. It is uncertain whether CMS will approve the assessment on home care services, particularly given the current lack of details about the assessment. Previously, the Legislature enacted an IHSS provider tax in Chapter 725, Statutes of 2010 (AB 1612, Committee on Budget), as a fee equivalent to the state’s sales tax if applied to the gross salary of IHSS providers. This action has not yet received CMS approval.
If enacted by the Legislature and approved by CMS, the new assessment on home care services—if structured appropriately—might enable the state to draw down additional federal Medicaid matching funds, which can be used to create General Fund savings. In the past, the state has successfully done something similar by extending a general tax to health care providers or by levying a provider tax on health care providers. For example, in terms of extending a general tax to health care providers, the state has extended the gross premiums tax levied on all types of insurance companies to include all health plans contracting with Medi-Cal—this tax extension is known as the Managed Care Organization (MCO) tax. The state also currently levies a health care provider tax on three classes of providers—hospitals, skilled nursing facilities, and intermediate care facilities for the developmentally disabled—which is used to draw down federal funds. In the case of the new assessment on home care services included in the settlement agreement, federal Medicaid matching funds could be leveraged and used to offset General Fund expenditures for IHSS. The estimate of General Fund savings that could result from such an assessment is uncertain because details of the assessment level and the estimated number of home care services providers impacted have not been developed. Because operational details for the assessment on home care services are to be determined, we are unable to provide further analysis for this aspect of the settlement agreement at this time.
Support General Thrust of Settlement Agreement, but Withhold Recommendation for New Assessment on Home Care Services. In summary, we find the general thrust of the settlement agreement to be a reasonable compromise that achieves a certain level of budgetary savings while lessening the service reductions experienced by IHSS recipients (when compared to the enacted-but-enjoined reductions). The certain level of budgetary savings associated with the settlement is beneficial when compared to the budgetary risk that arises from proceeding with the class-action lawsuits. Further, the reductions in service hours agreed upon in the settlement are more likely to allow IHSS recipients to remain safely in their homes and communities than the deeper enacted-but-enjoined reductions, better aligning with a key policy objective of CCI to rebalance LTSS toward HCBS such as IHSS and away from institutional care settings. Accordingly, we recommend that the Legislature give serious consideration to effectuating the general thrust of the settlement agreement. However, because of the lack of specificity provided in the settlement agreement for the new assessment on home care services, the potential fiscal and policy implications upon which to evaluate the assessment are uncertain at this time. We therefore withhold our recommendation on this aspect of the settlement agreement.