Legislative Analyst's Office Analysis of the 2002-03 Budget Bill

California Medical Assistance Program (4260)

In California, the federal Medicaid Program is administered by the state as the California Medical Assistance Program (Medi-Cal). This program provides health care services to welfare recipients and other qualified low-income persons (primarily families with children and the aged, blind, or disabled). Expenditures for medical benefits are shared about equally by the General Fund and by federal funds. The Medi-Cal budget also includes additional federal funds for (1) disproportionate share hospital (DSH) payments, which provide additional funds to hospitals that serve a disproportionate number of Medi-Cal or other low-income patients, and (2) matching funds for state and local funds in other related programs.

At the state level, the Department of Health Services (DHS) administers the Medi-Cal Program. Other state agencies, including the California Medical Assistance Commission, the Department of Social Services, the Department of Mental Health, the Department of Developmental Services, the California Department of Aging, and the Department of Alcohol and Drug Programs receive Medi-Cal funding from DHS for eligible services that they provide to Medi-Cal beneficiaries. At the local level, county welfare departments determine the eligibility of applicants for Medi-Cal and are reimbursed by DHS for the cost of those activities. The federal Centers for Medicare and Medicaid Services (formerly known as the Health Care Financing Administration) oversees the program to ensure compliance with federal law.

Proposed Spending. The budget for DHS proposes Medi-Cal expenditures totaling $27.2 billion from all funds for state operations and local assistance in 2002-03. The General Fund portion of this spending ($10.2 billion) increases by $367.3 million, or 4 percent, compared with estimated General Fund spending in the current year. The remaining expenditures for the program are mostly federal funds ($15.2 billion) or 1 percent less than the federal funds estimated to be received in the current year.

The Governor's spending plan assumes that the state will receive $400 million in federal funds in the current fiscal year to offset a projected decrease in the federal cost-sharing ratio (Federal Medicaid Assistance Percentage [FMAP]) for the state's Medicaid payments. The FMAP is based on per-capita income and revised by the federal government each year. In the budget year this decrease in the federal sharing ratio would require an increase in state funding of $174 million from the General Fund for the Medi-Cal Program. The impact of the FMAP change on other state departments in the budget year is estimated to be $48.2 million. The budget plan does not indicate how this $400 million in anticipated relief would be allocated among the different health programs.

The spending total for the Medi-Cal budget includes an estimated $1.8 billion (federal funds and local matching funds) for payments to DSH hospitals, and about $3.5 billion budgeted elsewhere for programs operated by other departments, counties, and the University of California.

Medi-Cal Benefits and Eligibility

What Benefits Does Medi-Cal Provide?

Federal law requires the Medi-Cal Program to provide a core of basic services, including hospital inpatient and outpatient care, skilled nursing care, doctor visits, laboratory tests and x-rays, family planning, and regular examinations for children under the age of 21. California also has chosen to offer 34 optional services, such as outpatient drugs and adult dental care, for which the federal government provides matching funds. Certain Medi-Cal services--such as hospitalization in many circumstances--require prior authorization from DHS as medically necessary in order to qualify for payment.

How Medi-Cal Works

Based on recent caseload information, half (51 percent) of the Medi-Cal caseload consists of participants in the state's two major welfare programs, which include Medi-Cal coverage in their package of benefits. These programs are (1) the California Work Opportunity and Responsibility to Kids (CalWORKs) program, which provides assistance to fami lies with children and replaces the former Aid to Families with Dependent Children program, and (2) the Supplemental Security Income/State Supplementary Program (SSI/SSP), which assists elderly, blind, or disabled persons. Counties administer the CalWORKs program through county welfare offices which determine eligibility for CalWORKs benefits and Medi-Cal coverage concurrently. Counties also determine Medi-Cal eligibility for persons who are not eligible for (or do not wish) welfare benefits. The federal Social Security Administration determines eligibility for SSI/SSP, and the state automatically adds SSI/SSP beneficiaries to the Medi-Cal rolls.

Generally, persons who have been determined eligible for Medi-Cal benefits (Medi-Cal "eligibles") receive a Medi-Cal card, which they use to obtain services from providers who agree to accept Medi-Cal patients. Medi-Cal provides health care through two basic types of arrangements--fee-for-service and managed care.

Fee-for-Service. This is the traditional arrangement for health care in which providers are paid for each examination, procedure, or other service that they furnish. Beneficiaries generally may obtain services from any provider who has agreed to accept Medi-Cal payments. The Medi-Cal Program employs a variety of "utilization control" techniques (such as requiring prior authorization for some services) designed to avoid costs for medically unnecessary or duplicative services.

Managed Care. Prepaid health plans generally provide managed care. The plans receive monthly "capitation" payments from the Medi-Cal Program for each enrollee in return for providing all of the covered care needed by those enrollees. These plans are similar to health plans offered by many public and private employers. More than half (2.9 million of the total of 5.6 million Medi-Cal eligibles in August 2001) are enrolled in managed care organizations. Beneficiaries in managed care choose a plan and then must use providers in that plan for most services. Since payments to the plan do not vary with the amount of service provided, there is much less need for utilization control by the state. Instead, plans must be monitored to ensure that they provide adequate care to enrollees.

Who Is Eligible for Medi-Cal?

Almost all Medi-Cal eligibles fall into two broad groups of people. They either are aged, blind, or disabled or they are in families with children. More than half of Medi-Cal eligibles are welfare recipients. Figure 1 shows for each of the major Medi-Cal eligibility categories, the maximum income limit for eligibility for health benefits and the estimated caseload and total benefit costs for 2001-02. The figure also indicates, for each category, whether an asset limit applies and whether eligible persons with incomes over the limit can participate on a "spend down" basis. If spend down is allowed, then Medi-Cal will pay the portion of any qualifying medical expenses that exceed the person's "share-of-cost," which is the amount by which that person's income exceeds the applicable Medi-Cal income limit.

Aged, Blind, or Disabled Persons. About 1.4 million low-income persons who are (1) at least 65 years old or (2) disabled or blind persons of any age receive Medi-Cal coverage--about 23 percent of the estimated total Medi-Cal caseload for the current year. Overall, the disabled make up more than half (61 percent) of this portion of the Medi-Cal caseload. Most of the aged, blind, or disabled persons on Medi-Cal (83 percent) are recipients of SSI/SSP benefits and receive Medi-Cal coverage automatically.

The other aged, blind, or disabled eligibles are in the "medically needy" category. They also have low incomes, but do not qualify for, or choose not to participate in SSI/SSP. For example, aged low-income noncitizens generally may not apply for SSI/SSP (although they may continue on SSI/SSP if they already were in the program as of August 22, 1996). As another example, some of the medically needy persons in this category have incomes above the Medi-Cal limit and participate on a share-of-cost basis.

Included in the number of eligibles in the "medically needy" category are aged and disabled persons with incomes up to 133 percent of the poverty level. Beginning January 1, 2001, these persons could receive Medi-Cal coverage without a share-of-cost.

The number of Medi-Cal eligibles in long-term care is small--only 66,900 people, or 1 percent of the total caseload. Because long-term care is very expensive, benefit costs for this group total $2.8 billion, or 14 percent of total Medi-Cal benefit costs.

Almost 60 percent of the aged or disabled Medi-Cal eligibles also have health coverage under the federal Medicare Program. Medi-Cal generally pays the Medicare premiums, deductibles, and any copayments for these "dual beneficiaries," and Medi-Cal pays for services not covered by Medicare, such as drugs and long-term care. Medi-Cal also provides some limited assistance to a small number of Medicare eligibles who have incomes somewhat higher than the medically needy standard.

Families with Children. Medi-Cal provides coverage to families with children in three eligibility categories. The first two categories were created by Section 1931(b) of the Social Security Act, which required states to grant Medicaid eligibility to anyone who would have been eligible for cash-assistance under the welfare requirements in place on July 16, 1996. One of these categories consists of CalWORKs welfare recipients who automatically receive Medi-Cal. The second category--referred to as the 1931(b)-only group--consists of families who are eligible for CalWORKs, but who choose only to receive Medi-Cal services. The income limit for families in this second category is 100 percent of the federal poverty level (FPL). However, once enrolled in Section 1931(b) coverage, families may work and remain on Medi-Cal at higher income levels (up to about 155 percent of the FPL indefinitely, or a higher amount for up to two years).

A third eligibility category referred to as the medically needy, consists of families who do not qualify for CalWORKs, but nevertheless have relatively low incomes. These families have incomes up to 80 percent of the FPL, have less than $3,300 in assets, and meet additional requirements. Families whose incomes are above the medically needy limits, but who meet all of the other medically needy qualifications, may receive Medi-Cal benefits on a share-of-cost basis.

About 27 percent of all Medi-Cal eligibles are CalWORKs welfare recipients. Although CalWORKs recipients constitute the largest single group of Medi-Cal eligibles by far, they account for only 17 percent of total Medi-Cal benefit costs. This is because almost all CalWORKs recipients are children or able-bodied working-age adults, who generally are relatively healthy. Similarly, 1931(b)-only and medically needy families who are Medi-Cal eligible account for 39 percent of all Medi-Cal eligibles and only 15 percent of total benefit costs.

Women and Children. Medi-Cal includes a number of additional eligibility categories for pregnant women and for children. Medi-Cal covers all health care services for poor pregnant women in the medically indigent category, which has the same income and asset limits and spend-down provisions as apply to medically needy families. However, pregnancy-related care is covered with no share-of-cost and no limit on assets for women with family incomes up to 200 percent of the FPL (an annual income of $35,300 for a family of four).

The medically indigent category also covers children and young adults under age 21. Several special categories provide coverage without a share-of-cost or an asset limit to children in families with higher incomes--200 percent of the FPL for infants, 133 percent of the FPL for children ages 1 through 5, and 100 percent of the FPL for children ages 6 through 18. Pregnant women and the FPL-group children also may use a simplified mail-in application to apply for Medi-Cal or Healthy Families Program coverage (for children above the Medi-Cal income limits). Medi-Cal also provides family planning services for women or men with income up to 200 percent of FPL who do not qualify for regular Medi-Cal.

Emergency-Only Medi-Cal. Noncitizens who are undocumented immigrants, or are otherwise not qualified immigrants under federal law, may apply for Medi-Cal coverage in any of the regular categories. However, benefits are restricted to emergency care (including labor and delivery). Medi-Cal also provides prenatal care and long-term care to undocumented immigrants. These services, as well as nonemergency services for recent legal immigrants, do not qualify for federal funds and are supported entirely by the General Fund.

Most Medi-Cal Spending Is For the Elderly or Disabled

The average cost per eligible for the aged and disabled Medi-Cal caseload (including long-term care) is much higher than the average cost per eligible for families and children on Medi-Cal. As a result, almost two-thirds of Medi-Cal spending is for the elderly and disabled, although they account for only about one-fourth of the total Medi-Cal caseload, as shown in Figure 2.

Medi-Cal Expenditures

Moderate Overall Spending Growth in the Current Year

Figure 3 presents a summary of Medi-Cal General Fund expenditures in the DHS budget for the past, current, and budget years.

The budget estimates that for the current year the General Fund share of Medi-Cal local assistance costs will increase by about $537 million (5.9 percent), compared with 2000-01. The bulk of this increase is for benefit costs, which will total an estimated $9.1 billion in 2001-02. Other local assistance costs will also increase in the current year compared with 2000-01. For example, county administrative costs for eligibility determinations will go up about $80 million (about 20 percent) and costs related to claims processing by the fiscal intermediary will increase by about $18 million (about 22 percent).

Caseload Increase Reflects Eligibility Expansions and Simplification. Most of the $537 million increase in benefit costs will accommodate an estimated additional 900,000 Medi-Cal eligibles, about a 17 percent increase over the prior year. The major factors driving the caseload growth are policy decisions to simplify enrollment procedures. This includes decisions to provide continuous eligibility for medical benefits to children 19 years of age and younger and persons leaving the CalWORKs program, as well as the elimination of the quarterly status reports.

Caseloads are also growing because of the prior decision to expand eligibility for families with children in the so-called 1931(b) category with income at or below 100 percent of the FPL, as well as the decision to provide Medi-Cal benefits without a share-of-cost to aged, blind, and disabled persons with current income equivalent to 133 percent of FPL or less. The budget pays for these two program expansions from the Tobacco Settlement Fund in the current year.

Settlement of Hospital Litigation. The settlement of a ten-year-old lawsuit (Orthopaedic Hospital v. Belshe') and other related lawsuits over the amount Medi-Cal pays for hospital outpatient services was originally proposed to be paid in 2000-01. However, the settlement was not paid at that time because of a delay in federal approval of the retroactive portion of the settlement. Final agreement is now expected to be reached in the current fiscal year, which would increase expenditures in that period by $255 million General Fund. The settlement provides for a lump-sum payment of $350 million ($175 million General Fund) for retroactive payments and $80 million General Fund for 30 percent rate increases. Under the agreement, rates are to be increased 3.3 percent annually in the following three years.

Other Costs Increasing Current-Year Expenditures. The remainder of the cost increase reflects items funded in the 2001-02 Budget Act to provide a state contribution of $24 million annually to the Los Angeles Medicaid Demonstration Project, rate increases for nursing facilities, and supplemental reimbursements of about $7 million from the General Fund for freestanding long-term care facilities.

General Fund Deficiency in 2001-02$54 Million

The Governor's budget proposes a net increase in Medi-Cal spending of $54 million above the levels anticipated in the 2001-02 Budget Act. This is primarily because DHS has determined that savings the Legislature included in the 2001-02 budget cannot accrue to the current fiscal year--specifically, anticipated savings of about $24 million for the collection of drug rates and $25 million for antifraud savings. In addition, the fiscal intermediary's costs are expected to increase by $5.5 million for the inclusion of half-year costs for the implementation of the Health Insurance Portability and Accountability Act (HIPAA) that were previously budgeted in the HIPAA Fund Item 9909.

The net cost of the deficiency is projected to be $54 million because there are also some savings from new proposals that partly offset additional costs that would be increases in the Medi-Cal Program in the cur rent year. For example, effective October 1, 2001, Medi-Cal has begun covering the cost of tests that allow for the early detection of preterm labor. The DHS anticipates that this will save $18 million General Fund in the current year (and also result in full-year savings of $24 million General Fund in 2002-03).

Budget-Year Expenditure Growth

The Governor's proposed budget estimates that total General Fund spending for Medi-Cal local assistance will be $10.1 billion in 2002-03, an increase of $367 million, or 3.8 percent, above the estimated spending in the current year. If $400 million in financial relief were provided by the federal government--as assumed under the Governor's budget plan--and the Medi-Cal Program received $174 million of that sum, the year-to-year growth in Medi-Cal expenditures would be $541 million or 5.7 percent rather than the smaller increase shown in Figure 3. The budget estimates that the Medi-Cal caseload will increase by 300,000 (about 5 percent) in 2002-03 to a total of almost 6.5 million average monthly eligibles--roughly 18 percent of the state's population. Most of the added spending in 2002-03 is for benefit costs. General Fund costs for Medi-Cal benefits would increase by $338 million (nearly 4 percent) in 2002-03. Figure 4 shows the major components of the change in benefit costs, which we discuss below.

Increased Utilization and Cost-of-Services. The increase in Medi-Cal benefit costs in the budget year is due in large part to higher costs for drugs. This includes price and utilization increases of about $230 million for existing drugs and for new drugs added to the Medi-Cal formulary. These costs are partly offset by rebates of about $61 million obtained through the ongoing drug-rebate program.

Medi-Cal "buy-in" payments for Medicare premiums also are increasing. Medi-Cal pays Medicare premiums for Medi-Cal enrollees who also are eligible for Medicare (dual eligibles) in order to obtain 100 percent federal funding for those services covered by Medicare. The budget estimates that the General Fund cost of these buy-in payments will increase by $52 million in 2002-03. The budget also projects a $5 million increase in the monthly premium that the Medi-Cal Program pays to health maintenance organizations that have enrolled beneficiaries eligible for both the Medi-Cal and Medicare programs.

Caseload Increases. The $42 million in caseload-related cost increases is primarily due to two components--previous eligibility expansions for the working poor and the aged, blind, and disabled. 

First, the phase-in of the program to expand 1931(b) eligibility to cover both children and parents in families with incomes at or below 100 percent of the FPL was initially slower than anticipated, but the caseload growth is now expected to eventually exceed the original estimates. Continuing caseload growth in this eligibility group is expected to increase General Fund costs by $22 million. 

Second, legislation enacted in 2000 expanded Medi-Cal benefits for aged, blind, and disabled persons. Effective January 2001, Medi-Cal benefits are being provided without a share-of-cost to all aged, blind, and disabled persons with current income equivalent to 133 percent of the FPL or less. The approximately $20 million increase in the budget year for this eligibility group is due to continued growth in the number of persons over age 65 applying for this program.

Past and present simplifications in the eligibility process are anticipated to further increase the caseload in the budget year and result in additional costs of about $35 million to the General Fund. This includes an increase of about $21 million to fund additional caseload increases from implementation of continuous eligibility to children 19 years of age and younger, and $9.6 million for caseload increases resulting from eliminating quarterly status reporting requirements for parents--both effective January 1, 2001. In addition, under the provisions of the Healthy Families parental expansion waiver, children applying for Medi-Cal through the so-called single point of entry will be eligible for accelerated eligibility at an increased General Fund cost of $4.1 million.

About $21 million in caseload growth is expected to result from the implementation of Chapter 894, Statutes of 2001 (AB 59, Cedillo) and Chapter 897, Statutes of 2001 (SB 493, Sher) in July 2002. Chapter 894 establishes "Express Lane Eligibility" for children by deeming that any child enrolled in the National School Lunch Program has met the eligibility requirements for the Medi-Cal Program. Both new laws require county welfare departments to provide notices regarding Medi-Cal to persons applying for nonassistance food stamps.

Pass-Through Funding for Other Departments and Programs. Costs are expected to increase for some of the health programs that are funded by Medi-Cal but are administered by other state departments. The cost of mental health services administered under the Department of Mental Health, including services provided to children under the Early and Periodic Screening, Diagnosis, and Treatment Program, are expected to increase about $85 million. In addition, costs for the Multipurpose Senior Services Program and the Adult Day Health Care Program are expected to go up by $34 million because of an increase in the number of providers and allowable patients per site.

Changes in Payments. Each year, the federal government calculates its cost-sharing ratio for each state's Medicaid program. This sharing-ratio referred to as the FMAP is based on per-capita income. The budget assumes that in October 2002, the federal sharing ratio will decrease due to recalculations of per-capita income based on the 2000 Census. This will result in a General Fund increase of $174 million to replace the lost federal funding. As noted earlier, the Governor's budget assumes that the federal government will provide, in the current year, a lump-sum payment of $400 million to offset the effect of the FMAP decline on Medi-Cal and other affected health programs.

New Proposals to Reduce Costs. The budget contains a number of steps anticipated to produce Medi-Cal savings. About $100 million in General Fund savings would be captured through strategies to reduce drug costs, including:

• Negotiation of contracts with generic drug manufacturers that include a rebate (estimated $27 million savings).
• Ensuring that the Medi-Cal list of approved antipsychotic and antiinflammatory drugs includes the most cost-effective drugs without compromising patient needs (estimated $23 million savings).
• Negotiation of contracts that include a rebate for nutritional products (estimated $9 million savings) and a reduction of pharmacy reimbursement for these products (estimated $11 million savings).
• Negotiation with medical supply manufacturers of blood glucose strips to obtain a lower price (estimated $9 million savings).
• Monitoring the number and types of prescriptions filled by beneficiaries to identify patterns of misuse (estimated $8 million savings).
• Negotiation with manufacturers of AIDS and cancer drug suppliers to obtain rebates (estimated $7 million savings).
• Addressing the existing backlog of drug rebate contract disputes (estimated $7 million savings).

Sixteen additional positions and four contract staff are proposed to be added to the Medi-Cal Drug program at a cost of $2 million ($634,000 General Fund) to achieve these savings.

The budget plan also reduces the rates paid to selected providers of medical services for adults by $78 million. The reductions target the ser vices that had received rate increases in 2000-01 and are allocated in such a manner to leave intact the rate increases for providers of children's services and long-term care services. The budget also proposes to impose copayments on adult patients receiving specific Medi-Cal outpatient services and reduce the provider rates for these services by the copayment amounts for estimated savings of $31 million General Fund. Under this proposal, copayments will not be required for some services such as those for individuals under 18, women receiving pregnancy services, and emergency services. In addition, a $55 million savings would result from replacing General Fund resources with an increase in the state's "takeout" from the DSH state administrative fee. These reduction proposals will be discussed in more detail later in this Analysis.

Medi-Cal Cost and Caseload Trends

Figure 5 illustrates how Medi-Cal caseload and per-eligible costs have changed since 1992-93, along with projections of these measures for 2001-02 and 2002-03 based on the budget estimates.

Budget Forecasts Continued Caseload Growth and Dropping Costs

The budget projects that in the current year the number of eligibles will grow and the cost of benefits per eligible will decline. This trend is projected to continue in the budget year.

Caseload. Between 1992-93 and 1995-96, the Medi-Cal average monthly caseload grew from 5 million eligibles to 5.5 million eligibles. The Medi-Cal caseload subsequently leveled off, and then dropped by almost 300,000 eligibles (5.4 percent) in 1997-98. The change in the Medi-Cal caseload roughly paralleled changes in the CalWORKs welfare caseload. Caseload began a sharp drop at that time in response to the turnaround in the state's economy, and greater emphasis on moving families from welfare-to-work in the wake of the enactment of state and federal welfare reform legislation. Another factor contributing to declining welfare and Medi-Cal caseloads was probably the reluctance among immigrant Californians to make use of public benefits because of concerns about whether such use might adversely affect their ability to naturalize or to sponsor the immigration of family members in the future.

From 1997-98 through 1999-00, the Medi-Cal caseload remained relatively flat even though the CalWORKs caseload continued to decline. The Medi-Cal caseload did not decline during this period primarily because of the backlog of eligibility determinations for former CalWORKs recipients that resulted from the delay in implementation of Section 1931(b) Medi-Cal eligibility by DHS and the counties. In the current year and 2002-03, the budget estimates that the Medi-Cal caseload will grow once more, primarily due to a variety of eligibility expansions and simplified eligibility processes.

Cost Per Eligible. While the caseload has gone up and down, the cost trend per eligible had been almost steadily upward until 2000-01. The average annual growth rate of the estimated cost of benefits per eligible (excluding pass-through funding to other departments and local governments) is 4 percent during the period of 1992-93 through 2002-03, which is twice the rate of general inflation during this period, as measured by the Gross Domestic Product deflator.

The temporary dip in the cost per eligible that occurred in 1994-95 and 1995-96 was partly the result of a change in the caseload mix, rather than an underlying drop in health care costs. This is because the rapid increase in the number of families on welfare (whose health care costs are relatively low) temporarily reduced the proportion of aged and disabled persons (relatively high-cost groups) in the Medi-Cal caseload, and this change in the mix tended to reduce the average cost per eligible. As the CalWORKs welfare caseload subsequently fell, the elderly and disabled share of the Medi-Cal caseload returned to its earlier level of about 26 percent, and the cost per eligible resumed its growth in 1996-97. Between 1996-97 and 2000-01 the average annual estimated cost per eligible increased by 8 percent.

Based on the Governor's budget, these costs would decrease by 7 percent in the current year and further decrease by 2 percent in the budget year. The turnaround in the trend seen in 2001-02 and 2002-03 appears to be the result of an increase in the number of healthy beneficiaries rather than a decrease in health care costs. The simplification that has occurred in the eligibility process means that the Medi-Cal Program probably is retaining a greater number of children and families on its caseload who do not regularly need health care services. In the past, these individuals might not have submitted quarterly status reports because they did not need health care services at that time and, as a result, they were dropped from Medi-Cal coverage. These individuals would probably reenroll later when they needed health care services. With continuous eligibility, these individuals are much less likely to leave the program. Therefore, the Medi-Cal caseload increase will include a larger segment of the population that is healthy, resulting in fewer additional program costs compared to other beneficiaries, such as the aged, blind, and disabled.

Overall Caseload Estimate Reasonable

We find that the budget's overall estimate for the Medi-Cal caseload is reasonable. We will monitor caseload trends and recommend appropriate adjustments at the time of the May Revision.

Figure 6 shows the budget's forecast for the Medi-Cal caseload in the current year and 2002-03. The majority of the projected Medi-Cal caseload growth consists of families and children. The budget estimates that the caseload for this group will increase by 22 percent in the current year and about 6 percent in the budget year. Nonwelfare families account for most of the projected increase in Medi-Cal eligible families and children. The budget estimates that the caseload of Medi-Cal eligible nonwelfare families will increase by about 59 percent in the current year, and an additional 11 percent in the budget year. While the projected growth is significant, our analysis found that recent caseload estimates by DHS have tracked caseload growth fairly closely.

The projected caseload increase for the families and children caseload is primarily the result of the implementation of new continuous eligibility rules for children, elimination of the quarterly status reporting requirements for adults, and growth in the 1931(b) program. Some additional growth in this caseload is the result of the elimination of the Childhood Health and Disability Prevention program which the Governor's budget projects will add 54,000 eligibles to the Medi-Cal Program.

Caseloads for the aged, blind, and disabled are expected to grow by about 55,000 in the current year and 30,000 in the budget year. This budget forecast also appears reasonable, given the recent expansions of eligibility for this group and recent caseload trends.

Major Uncertainty: The Economy. It is highly uncertain at this time whether the caseload trends will be sustained. There are a number of factors that could result in higher caseloads as well as factors that could produce lower caseloads. The biggest single factor contributing to this uncertainty is the current economic downturn. This is the first significant recession since the expansion and simplification of eligibility in the Medi-Cal Program and federal welfare reform in 1996. It is possible that a number of the individuals who may have recently become unemployed as a result of the recession are already enrolled in Medi-Cal. Although such individuals and their families would shift between Medi-Cal eligibility categories, their impact on overall Medi-Cal caseload and costs would be minimal. Alternatively, children of newly unemployed persons who were not on Medi-Cal previously may now enroll instead in the Healthy Families program.

Potential Risks to Accuracy of Caseload Projections and Cost Estimates. The accuracy of the department's caseload projections and cost estimates are also dependent upon a number of other more general factors. Among the factors that could cause the Medi-Cal program's caseload and cost to vary from the projections are:

• Federal actions such as a federal minimum wage rate increase or the enactment of laws expanding Medi-Cal eligibility and benefits.
• Further changes in state laws and regulations adopted by the Legislature and the Governor or through the initiative process. For example, pursuant to legislation, regulations setting new minimum nurse-to-patient staffing ratios are likely to be finalized this year that could affect hospital and managed care rates. Also, the state minimum wage was increased in January 2002.
• Effect of the Governor's Budget Proposals. The Governor's proposal to impose copayments on beneficiaries for the use of certain medical services could reduce utilization of those services (for example, requiring copayments for services in nongovernment health care plans has reduced the use of some services) and further increase the estimated savings. The proposal to reduce funding for media campaigns and other outreach activities for the Medi-Cal and Healthy Families Programs could minimize caseload growth.

In summary, we do not recommend a specific budget adjustment at this time because we believe that there is both upside and downside risk to the caseload estimate. That is because it is not yet clear whether the economic downturn will significantly impact the Medi-Cal caseload. Accordingly, we will continue to monitor the Medi-Cal caseload trends and recommend appropriate adjustments at the time of the May Revision.

Assessing the Governor's Budget Reduction Proposals

Assumption on Federal Relief is Risky

The Governor's budget assumes that federal legislation will be enacted to provide California with an additional $400 million in federal funds to offset the cost of medical services. However, there is a significant risk that the state will receive only some or none of the anticipated federal relief. We recommend that the Legislature closely monitor the prospects of a federal stimulus package that offers Medicaid relief and consider other ways to achieve savings if these funds are not forthcoming.

The Governor's Proposal. As we discussed earlier, the federal cost-sharing ratio for the Medi-Cal Program will decrease in the budget year and 2003-04. The Governor's budget assumes the enactment of federal legislation that would provide California with an additional $400 million in federal funds in the current year to offset the cost of medical services--in effect, a 2 percent increase in the federal cost-sharing ratio in the current year. The Department of Finance estimates the FMAP decrease would otherwise result in cost increases of $222 million in the budget year in the various departments that provide services to Medi-Cal eligibles, as shown in Figure 7. Notably, while the majority of the impact of the FMAP shift actually occurs in the budget year and 2003-04, the Governor's budget assumes that the federal relief will be provided in the current year.

State Medicaid Matching Rates and Federal Relief. Other states, like California, are experiencing a reduction in their federal Medicaid matching rates and are seeking relief from Congress in order to avoid reductions in coverage and benefits for Medicaid recipients. One estimate of the potential impact of the FMAP reduction on California will be a loss of several hundreds of millions of dollars in the federal fiscal year 2003 (October 2002 to September 2003).

Several ways to provide federal relief have been under consideration. For example, a federal stimulus package proposed last fall included $1.4 billion in relief nationwide to boost the federal match to states' Medicaid programs. Others have proposed that the relief could take the form of an across-the-board short-term 1 percent increase in the FMAP rate. Raising the FMAP by 1 percent would increase California's federal Medicaid funding by $292 million. A number of other approaches to the provision of federal relief are possible. For example, the National Governor's Association has proposed that the federal government could hold states harmless for the decrease for half of the 2002 federal fiscal year. Relief could be targeted to states with high unemployment or higher percentages of nonelderly, nondisabled adults and children--the persons most likely to suffer from higher unemployment.

However, at the time this analysis was prepared, there were few public indications that Congress would approve any version of an economic stimulus package or federal relief related to changes in the FMAP. Given this situation, the prospects for substantial federal relief that will benefit California are highly uncertain.

Analyst's Recommendation. We recommend that the Legislature closely monitor federal activity and gauge the likelihood of federal relief for changes in the federal Medicaid matching rate. Because the receipt of federal relief is highly uncertain, we recommend that the Legislature consider other ways to help close the state's budget gap if these funds are not forthcoming. Our office has offered other budget reduction options in a separate report.

Provider Rate Reductions Could Reduce Access to Care

We recommend that the Legislature not adopt the Governor's proposal to cut provider rates by $78 million General Fund because Medi-Cal rates are generally so low that further reductions might reduce patient access to care. There are other, better options the Legislature could consider to reduce General Fund expenditures for the Medi-Cal Program. We further recommend the Legislature require the Department of Health Services to establish a rational rate-setting process for fee-for-service provider rates so that the state can ensure reasonable access in the future to health care services. (Increase Item 4260-101-0001 by $78 million and Item 4260-101-0890 by $78 million.)

Background. The Medi-Cal Program will spend an estimated $1.1 billion ($500 million General Fund) during 2001-02 for physician services in the traditional "fee-for-service" portion of the program in which providers are paid for each examination, procedure, or other service that they furnish. In addition, a significant portion of the estimated $4.6 billion ($2.2 billion General Fund) in premiums that Medi-Cal provides to health plans for beneficiaries in managed care indirectly pays for physician services. About half of the persons eligible for Medi-Cal are enrolled in managed care organizations while the remainder receive services under the fee-for-service portion of the program.

Proposed Rate Reductions Partially Roll Back Recent Increases. The 2000-01 Budget Act included provider rate increases for a variety of medical services totaling approximately $800 million ($403 million General Fund). These substantial increases in rates generally targeted services for which Medi-Cal physician rates were relatively low in comparison to the Medicare Program (as well as private purchasers of health care). The 2000-01 budget increased payments for long-term care services by 10 percent, increased rates for medical procedures performed by physicians by 16.7 percent, and various other rates increased from 7 percent to 250 percent. The amount paid to managed care plans for the services they provide was adjusted to reflect these increases. These were the first across-the-board rate increases in the Medi-Cal Program since 1985-86.

The Governor's budget proposes provider rate reductions of $155 million ($78 million General Fund). The proposed rate reductions which are summarized in Figure 8 represent the overall savings that would occur in each service category and, thus, assume savings both from fee-for-service and managed care providers. The actual percentage rate reductions for specific services within each service category has not yet been determined by DHS. For example, DHS could reduce the rate physicians are paid for adult office visits, but not change the amount paid for children's examinations. The Administration has indicated that it intends to restore funding for provider rates when the state's fiscal condition improves.