Legislative Analyst's Office Analysis of the 2003-04 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 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 oversees the program to ensure compliance with federal law.

Proposed Spending. The budget for DHS proposes Medi-Cal expenditures totaling $28 billion from all funds for state operations and local assistance in 2003-04. The General Fund portion of this spending ($7 billion) decreases by $3.6 billion, or 34 percent, compared with estimated General Fund spending in the current year. The remaining expenditures for the program are mostly federal funds, which are budgeted at a level ($17 billion) that is about 4 percent less than estimated to be received in the current year.

Most of the reduction in General Fund spending is based upon an assumption in the Governor's spending plan that about $3 billion in Medi-Cal expenditures will be shifted to the counties—along with revenues—as part of a larger realignment of state and county funding and program responsibility. This includes shifting to the counties 15 percent of the nonfederal cost of Medi-Cal health care services ($1.6 billion) and all nonfederal costs for Medi-Cal long-term care ($1.4 billion). The realignment proposal is discussed in more detail in "Part V" of The 2003-04 Budget: Perspectives and Issues.

The spending total for the Medi-Cal budget includes an estimated $1.7 billion (federal funds and local matching funds) for payments to DSH hospitals, and about $4.5 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, 43 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 families 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 that 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 determined eligible for Medi-Cal benefits (Medi-Cal "eligibles") receive a Medi-Cal card, which they use to obtain services from providers. 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 (3.2 million of the total of 6.1 million Medi-Cal eligibles in July 2002) are enrolled in managed care plans. 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 are 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 2002-03. 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 1.6 million low-income persons who are (1) at least 65 years old or (2) blind or disabled persons of any age receive Medi-Cal coverage—about 24 percent of the estimated total Medi-Cal caseload for the current year. Overall, the disabled make up more than half (62 percent) of this portion of the Medi-Cal caseload. Most of the aged, blind, or disabled persons on Medi-Cal (79 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 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 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, blind, 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.

More than 870,000 or about 60 percent of the aged or disabled Medi-Cal eligibles are also beneficiaries of Medicare—the federal health insurance program for persons 65 and older and for younger persons with disabilities who cannot work. Medi-Cal generally pays the Medicare premiums and any copayments or deductibles for these "dual eligibles," and Medi-Cal pays for services not covered by Medicare, such as prescription drugs and long-term care. Medi-Cal also provides some limited assistance to a small number of dual eligibles with incomes somewhat higher than the medically needy standard.

The number of Medi-Cal eligibles in long-term care is small—only 68,900 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 13 percent of total Medi-Cal benefit costs.

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 24 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 12 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 38 percent of all Medi-Cal eligibles and only 16.5 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 about $36,200 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 incomes 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

Spending Growth in Current Year Despite Cuts

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 $863 million (8.8 percent), compared with 2001-02. The bulk of this increase is for benefit costs, which will total an estimated $10 billion in 2002-03.

General Fund Deficiency in 2002-03. The 2002-03 Budget Act increased General Fund spending only modestly from 2001-02—almost $100 million or 1 percent—and included significant changes intended to hold down the overall growth in expenditures for the Medi-Cal Program. The Governor's January budget proposes a General Fund deficiency in Medi-Cal of $925 million from the levels of spending anticipated in the 2002-03 Budget Act due to increases in caseload, cost and utilization of services, and other factors discussed below. The Governor's package of mid-year revisions would reduce this by about $170 million to a deficiency of $756 million General Fund in the current year if adopted by the Legislature.

Unanticipated Increases in Caseload. Nearly half of the $756 million increase in program costs is for the purpose of accommodating an additional 564,000 Medi-Cal eligibles, about a 10 percent increase over the prior year. The major factors driving the caseload upward are continued growth in the medically needy families caseload resulting from 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 also continue to grow 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. Other caseload growth is attributable to the settlement of a lawsuit that requires the department to continue benefits to recently terminated SSI/SSP patients.

Unexpected Increases in Cost and Utilization of Services. Increases in the costs and utilization of services are projected to increase spending by about $220 million. These include continued growth of $78 million in mental health services claims, especially for Early and Periodic Screening, Diagnosis and Treatment services for children. Other significant cost increases include a rise in the number of prescriptions and physician visits per beneficiary, and an increase in the cost per unit of these services. Together these account for an increase of approximately $69 million.

Unrealized Savings Increase Costs. The Governor's budget anticipates that some savings proposed in the 2002-03 Budget Act will not be realized, such as $122 million in projected additional savings from antifraud activities and a $23 million adjustment for caseload savings. The DHS has also determined that there will be a lag in achieving other savings proposals enacted in the 2002-03 budget because of the delay in its passage until September 2002. Specifically, about $81 million was added to 2002-03 spending to reflect savings that cannot be achieved in 2002-03, from various changes in the way the state purchases drugs and certain medical supplies—savings of at least $189 million had been anticipated.

Federal Funds Did Not Materialize. The 2002-03 spending plan assumed that federal legislation would be enacted to provide California with an additional one-time $400 million in federal funds to offset the decrease in the federal cost-sharing ratio (known as the Federal Medicaid Assistance Percentage or FMAP) for the state's Medicaid payments. However, the federal government did not provide such relief to offset state costs. The Governor's budget plan no longer assumes the receipt of these funds.

Other Costs Increasing Current-Year Expenditures. The Governor's restoration in September of a provider rate reduction that was part of the 2002-03 Budget Act will result in an increase in 2002-03 expenditures of $71 million. (As we discuss below, his January 10 budget plan subsequently proposed to impose a more broadly applied reduction in rates for providers in both the current and budget years.) Also affecting the current-year expenditure total is a policy change to increase county administrative funding by about $36 million in order to process annual redeterminations in a timely manner. The administration estimates that this policy change will result in savings of $194 million in the budget year as a result of reduced caseload.

Mid-Year and January 10 Budget Reduction Proposals. A package of mid-year budget reductions proposed by the Governor as well as additional proposals in the Governor's January 10 budget plan would, if adopted, offset part of the additional current-year Medi-Cal costs by nearly $170 million. As noted earlier, the Governor proposed a provider rate reduction of 10 percent affecting physicians, nursing homes, and certain other providers that is expected to reduce state costs by $90 million in the current year. He also proposed the elimination of various optional services for adult beneficiaries to achieve an estimated savings of $68 million, as well as the rescission of the 1931(b) expansion and reinstatement of quarterly status reports. These latter two proposals, which would achieve $11 million in state savings in the current year, are discussed in more detail below.

Budget-Year Expenditure Reduction

The Governor's proposed budget estimates that total General Fund spending for Medi-Cal local assistance will be $7 billion in 2003-04, a decrease of $3.6 billion, or 34 percent, below the estimated spending in the current year. If $3 billion in Medi-Cal expenditures were not shifted to the counties as assumed under the Governor's budget plan, the decrease in Medi-Cal expenditures from the previous year would be much smaller—a decline of $572 million or 5.4 percent, rather than the much larger reduction shown in Figure 3. The budget estimates that the Medi-Cal caseload will decrease by 209,100 (about 3 percent) in 2003-04 to a total of almost 6.3 million average monthly eligibles—roughly 18 percent of the state's population.

Aside from the shift of costs and revenues to the counties, most of the reduction in 2003-04 expenditures results from various proposals to cut benefits. General Fund spending for Medi-Cal benefits would decrease by $3.7 billion (37 percent) in 2003-04. Figure 4 (see next page) shows the major components of the change in benefit costs, which we discuss below. 

Realignment. The Governor's most significant proposal is a realignment or shift of some of the cost of Medi-Cal services to the counties. Under the Governor's realignment proposal, funding responsibility for 15 percent of the state share of the cost of services provided to Medi-Cal beneficiaries would be shifted to the counties for an estimated state savings of $1.6 billion. The entire state cost for skilled nursing services for Medi-Cal patients would also be shifted to the counties for an estimated state savings of $1.4 billion. We are advised by the Department of Finance that these savings to the state from realignment are understated by nearly $500 million because budgetary figures do not take into account the effects of other savings proposed in the Governor's budget in the Medi-Cal program. (The realignment proposal is discussed later in this Analysis and in "Part V" of The 2003-04 Budget: Perspectives and Issues),

Savings From Cuts in Rates and Services. The spending plan takes into account the estimated ongoing effect of several significant budget reductions proposed for the current fiscal year. For example, in addition to a 10 percent provider rate cut imposed in the current fiscal year to save $338 million, the Governor proposes an additional 5 percent rate cut in the budget year to achieve additional state savings of $242 million. The rate reduction would affect nursing home facilities, Intermediate Care Facilities for Developmentally Disabled (ICF-DDs), physician services, pharmaceuticals, dental services, managed care plans, home health care, medical transportation, and certain other medical services. The rate reduction also affects certain non-Medi-Cal programs, including the California Children's Services (CCS) Program; the Family Planning, Access, Care and Treatment Program (Family PACT); the State-Only Family Planning Program; the Genetically Handicapped Persons Program; and the Breast and Cervical Cancer Early Detection Program.

The elimination of various optional services for adults who are not in long-term care, a step proposed by the Governor as a reduction in the current year, would be expanded in 2003-04 to eliminate additional services for increased savings estimated at $304 million. Additional savings of $89 million are expected to result from the full-year implementation in 2003-04 of various strategies included in the 2002-03 Budget Act to reduce costs for prescription drugs, durable medical equipment, and medical supplies. These proposals are also intended to reduce the utilization of services. Savings from an ongoing drug-rebate program are expected to grow by an additional $79 million in the budget year.

Finally, the budget also assumes that about $38 million in General Fund savings would be captured through new utilization controls and various other strategies to reduce the cost of Medi-Cal services.

Proposal to Reduce Caseload Costs. The budget plan would increase funding for county administration of Medi-Cal eligibility activities—the cost of completing eligibility determinations and annual redeterminations—by $113 million. This augmentation is expected to provide counties with the full amount of funding they would need to hire enough staff to process the annual redeterminations in a timely manner. The budget plan assumes this step-up in the completion of redeterminations would result in the disenrollment of 560,000 ineligible Medi-Cal beneficiaries by the end of 2003-04. Because this activity would be phased in over the course of the budget year, the projected effect on the Medi-Cal caseload is a decline of 305,000 monthly eligibles and a state savings of $194 million in 2003-04 as summarized in Figure 4.

The Governor's mid-year revision proposed to reduce caseload by tightening eligibility rules, including rescinding the 1931(b) expansion of Medi-Cal eligibility to working poor families and reinstatement of requirements that parents file quarterly reports to reaffirm their eligibility. The continuation of the 1931(b) rescission in the budget year is anticipated to decrease the average monthly caseload by 185,000 for savings of $112 million. Similarly, the continuation of the Governor's current-year proposal to reinstate quarterly reporting of eligibility for adults is expected to decrease the average monthly caseload by 134,000 for savings of $80 million in 2003-04.

Savings of $64 million are expected from the proposed rollback of the 2001 expansion of coverage for the aged, blind, and disabled persons with income up to 133 percent of poverty. Under the Governor's proposal, individuals with an annual income up to about $8,500 and couples with an income up to $14,700 would be eligible for Medi-Cal without a share of cost.

Caseload Increases. Without the reduction proposals discussed above, the Governor anticipates that caseload costs would increase in 2003-04 by $395 million. These increases are due in part to continued growth from previous eligibility expansions for the working poor and for the aged, blind, and disabled. Also driving up the Medi-Cal caseload are the continued effects of past simplifications in the eligibility process. These include the implementation of continuous eligibility for children 19 years of age and younger. A portion of this growth in caseload has also been attributed to ineligible beneficiaries not being disenrolled on a timely basis.

Medi-Cal caseload costs are expected to increase by about $112 million due to the implementation of a program that will pre-enroll children in Medi-Cal and the Healthy Families Program who are screened for medical problems through the Children's Health and Disability Prevention program. Caseload increases related to other health programs, such as Adult Day Health Care, Family Pact, and the Breast and Cervical Cancer Treatment Program, are expected to increase Medi-Cal costs by nearly $50 million.

Changes in Payments. Revenue estimates underlying the 2002-03 Budget Act anticipate the sale of a state bond backed by future revenues coming to the state from the national tobacco settlement. As a result, $235 million that had been used from tobacco settlement funds to support the Breast and Cervical Cancer Treatment Program and part of the 1931(b) expansion in 2002-03 would not be available in the budget year. Accordingly, the budget plan backfills these lost funds with an increase in support from the General Fund.

Increased Utilization and Cost-of-Services. In line with a continuing trend that has significantly bolstered Medi-Cal Program expenditures in recent years, the 2003-04 budget plan assumes an increase in the cost of pharmaceuticals of $144 million.

Medi-Cal "buy-in" payments for Medicare premiums would also continue to grow. The Medi-Cal Program 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 so-called buy-in payments will increase by $54 million in 2003-04.

In addition to the cost increases identified in Figure 4, costs are also expected to go up for some of the health programs that are passed through the DHS Medi-Cal budget but actually administered by other state departments. Notably, the cost of mental health services administered by the Department of Mental Health, including children's services provided under the Early and Periodic Screening, Diagnosis and Treatment Program, are expected to increase about $35 million. In addition, costs for the Adult Day Health Care Program administered by the Department of Aging are expected to go up by $32 million because of an increase in the number of persons using these services.

Medi-Cal Cost and Caseload Trends

Figure 5  illustrates how Medi-Cal caseload and per-eligible costs have changed since 1993-94, along with projections of these measures for 2002-03 and 2003-04 based on the budget estimates.

Budget Forecasts Caseload Decline 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. The decline in the cost per eligible for the program is projected to continue in the budget year. However, the trend in the number of eligibles is expected to reverse and begin to drop.

Caseload. Between 1993-94 and 1996-97, the Medi-Cal average monthly caseload was relatively constant, averaging about 5.4 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. The 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 2000-01, 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 fact, the caseload began to grow rapidly during 2001-02 and 2002-03 primarily due to a variety of eligibility expansions and simplified eligibility processes. Without the Governor's current-year and budget-year proposals to reduce the caseload, the number of people enrolled would continue to grow in the budget year.

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 3.1 percent during the period of 1993-94 through 2003-04. This is greater than the rate of general inflation during this period (1.9 percent) 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 5 percent.

The slight 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 compared to other beneficiaries, such as the aged, blind, and disabled.

Based on the Governor's budget plan, these costs would decrease by less than 1 percent in the current year but further decrease by nearly 7 percent in the budget year. This sharp decrease can be partly attributed to the Governor's proposals to phase in a provider rate reduction over the current year and budget year of 15 percent, as well as to his proposal to eliminate various optional services for adults.

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 2003-04. It reflects the Governor's various proposals to reduce caseload, which otherwise would increase by about 5 percent during the budget year.

The majority of the projected Medi-Cal caseload changes occur in the families and children eligibility categories. The budget estimates that the caseload for this group will increase by 10 percent in the current year but subsequently decrease by 4 percent in the budget year. Nonwelfare families account for most of the changes in Medi-Cal eligible families and children. The budget estimates that the caseload of Medi-Cal eligible nonwelfare families will increase by about 20 percent in the current year, but then decrease by 8 percent in the budget year. While the caseload growth projected in the Governor's budget is significant, our analysis found that recent caseload estimates by DHS have tracked caseload growth fairly closely.

The current-year projected caseload increase for families and children is primarily the result of the continued implementation of continuous eligibility for children, the elimination of the quarterly status reporting requirements for adults, and growth in the 1931(b) program. However, these caseload increases would be reversed in the budget year if the Governor's proposals for the reinstatement of the quarterly status reports for parents and for the rollback of the 1931(b) expansion were adopted. Some additional budget-year growth in this caseload is projected to result from the implementation of a so-called "gateway" in the Children's Health and Disability Prevention (CHDP) program. The Governor's budget estimates that efforts to expedite the enrollment of CHDP children into more comprehensive health care coverage will add 90,000 eligibles to the Medi-Cal Program during 2003-04.

Caseloads for the aged, blind, and disabled are expected to grow by about 100,000 in the current year and an additional 10,000 in the budget year. The growth in the current year is due to underlying caseload growth trends as well as a projected increase in caseload due to a Superior Court ruling in a case known as Craig v. Bonta. This ruling requires DHS to provide Medi-Cal benefits to persons terminated from the federal SSI/SSP program retroactively to June 30, 2002. The slower pace of growth in the budget year is primarily due to a rollback of the January 2001 expansion of eligibility for the aged and disabled.

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 continuing softness in the economy. This is the first period of economic sluggishness 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 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 the enactment of laws affecting Medi-Cal eligibility and benefits. For example, the federal Administration recently proposed Medicaid reform that would change Medicaid, State Children's Health Insurance Program, and Disproportionate Share Hospital payments into a formula based allotment.
• Further changes in state laws and regulations adopted by the Legislature and the Governor or through the initiative process. For example, last year regulations set new minimum nurse-to-patient staffing ratios that will increase hospital and managed care costs.
• Effect of the Governor's Budget Proposals. The Governor's proposal to increase county administrative funding might not have the intended effect of reducing the Medi-Cal caseload. If the assumed caseload savings failed to materialize, the end result could be an increase in administrative funding for the counties. It is also uncertain to what extent caseloads would decrease as a result of adoption of the Governor's proposal to reinstate quarterly status reports for adults, because some individuals disenrolled by this process due to their failure to return the required paperwork might be eligible for re-enrollment in the program.

Analyst's Recommendation. 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. This is because it is not clear if the economic downturn will continue and it is uncertain if baseline caseloads will continue to increase as rapidly as projected.

Moreover, at the time this analysis was prepared, the Legislature had not taken action on several of the Governor's major December revision proposals that were intended to reduce program eligibility. Proposals to modify Medi-Cal eligibility rules often require federal approval and there is typically some delay before they can be implemented by counties.

Given this situation, we will continue to monitor the Medi-Cal caseload trends and the Legislature's actions on the Governor's December revision proposals, and will recommend appropriate adjustments at the time of the May Revision.

Eligibility Administration Issues  

County Eligibility Determinations: Options for Cost Savings

The administration of eligibility rules is one of the most critical functions for the operation of the Medi-Cal Program. However, over the years, the state has had some significant concerns about the increasing cost of these activities and the performance of the counties, to whom the state has delegated these functions. We analyze and comment on the Governor's proposal to increase county funding and establish state performance standards to ensure that redeterminations of eligibility are completed on a timely basis. We also discuss alternative approaches to reforming the eligibility system. (Decrease Item 4260-101-0001 by $41.3 million and decrease Item 4260-101-0890 by $41.3 million.)

Background

Work Delegated to Counties. One of the most critical functions for the operation of the Medi-Cal Program is the administration of eligibility determinations and redeterminations for applicants and enrollees in the program. The way these functions are carried out has significant ramifications for access for the poor to health care, compliance with federal Medicaid requirements, and overall state costs for the provision of Medi-Cal benefits. The state currently delegates most of this important task to the counties, which are reimbursed by the state for these activities. Counties pay no share of these costs at the present time.

The Governor's budget proposes to provide $494 million from the General Fund ($1.7 billion all funds) in 2002-03 for county administration costs and $607 million from the General Fund ($2 billion all funds) for these activities in 2003-04.

Issues With the Existing System

Our analysis indicates that there are a number of issues regarding the current Medi-Cal arrangement by which the state delegates to the counties the duties and funding for eligibility activities.

Costs Are High and Vary Significantly From County to County. Over the years, the state has had concerns with the increasing costs of eligibility determinations. Notably, the cost per Medi-Cal beneficiary to the state for obtaining these services from the counties has been increasing during the past nine years at an average annual rate of 10 percent, as shown in Figure 7. The average annual cost in 2002-03 of Medi-Cal eligibility determinations is expected to be $147.79 per eligible. This amount includes costs related to determining whether applicants are eligible for Medi-Cal, maintenance of case files, outreach activities, and the provision of certain case management services. This cost is significant, especially when compared to the $68.50 average annual cost of eligibility determinations in the state's other major health coverage program for low-income families, the Healthy Families Program.