LAO 2004-05 Budget Analysis: General Government

Analysis of the 2004-05 Budget Bill

Legislative Analyst's Office
February 2004

Public Health

The Department of Health Services (DHS) delivers a broad range of public health programs. Some of these programs complement and support the activities of local health agencies in controlling environmental hazards, preventing and controlling disease, and providing health services to populations who have special needs. Other programs are solely state-operated programs such as those that license health facilities.

The Governor's budget proposes $2.6 billion (all funds) for public health programs in the budget year, a 10 percent ($293 million) decrease from the previous year. The budget proposes $485 million from the General Fund in the budget year, a 4 percent ($22.6 million) decrease from the current year. This decrease is largely due to the administration's proposals that would cap enrollment and reduce provider rates and expenditures for various public health programs.

Budget Proposals

The Governor's proposed budget for public health programs includes the following significant changes.

Community Challenge Grant Program (CCG): Elimination. The CCG provides grants to community-based organizations for programs intended to reduce the number of teenage and unwed pregnancies and to promote responsible parenting. In the past, federal Temporary Assistance for Needy Families funds to support CCG have been included within the budget of the Department of Social Services (DSS) and subsequently transferred to DHS for the operation of the program. The proposed 2004-05 DHS budget, however, does not include the $20 million in federal funding to continue the CCG.

Child Health and Disability Prevention Program (CHDP): Gateway Implementation. The CHDP provides preventive health, vision, and den tal screens to children and adolescents in families with incomes at or below 200 percent of the Federal Poverty Level (FPL). The Governor's budget proposes $4.2 million ($3.9 million General Fund) in total expenditures for CHDP. This is a 76 percent decrease in all funds and a 48 percent decrease in General Fund expenditures from the previous year. This dramatic reduction is primarily due to the implementation of the CHDP "gateway" program. Later, in this section of the Analysis, we provide more details regarding this proposal.

California Children's Services (CCS): Enrollment Cap and Rate Reduction. The CCS program provides diagnostic and treatment services, medical case management, and medical and occupational therapy services to eligible children and young adults under 21 years of age. The Governor's budget includes $142 million ($67 million from the General Fund) in funding for the CCS. This reflects a 3 percent decrease in all funds and a 10 percent decrease in General Fund expenditures compared to the previous year.

The budget plan includes two measures intended to decrease expenditures in the CCS program. The administration has proposed to cap enrollment in the CCS program for "CCS-only" children—those who are not eligible for benefits under Medi-Cal or the Healthy Families Program—at the January 2004 caseload level. The enrollment cap is projected to total 37,600 children and result in approximately $1.9 million in state savings. The administration projects that on average the enrollment cap would result in a monthly waiting list of 1,256 children in 2004-05. Clients on the CCS waiting list would be served on a "first-come, first-served" basis once the cap has been reached and existing clients leave the program. The administration has also proposed comparable caseload limits for other health and social services programs. We provide a more detailed analysis of enrollment caps as an approach to reducing state costs in the "Crosscutting Issues" section of this chapter of the Analysis.

Additionally, the administration has proposed a provider rate reduction of 10 percent, which in addition to the previous 5 percent provider rate reduction included in the 2003-04 Budget Act would result in approximately $5.4 million in savings ($2.7 million from the General Fund).

Genetically Handicapped Persons Program (GHPP): Enrollment Cap. The GHPP provides health coverage for Californians 21 years of age and older who have certain specific genetic diseases, including cystic fibrosis, hemophilia, and certain neurological and metabolic diseases. The GHPP also serves children under the age of 21 with GHPP-eligible medical conditions who are not financially eligible for CCS. Although there are no maximum income eligibility requirements, families with incomes exceeding 200 percent of the FPL pay program fees based upon their family size and income.

The Governor's proposal provides $49.5 million for GHPP ($49.3 million from the General Fund) in 2004-2005, which reflects a 13 percent decrease compared to the previous year. As in the CCS program, the administration has proposed to cap enrollment for GHPP-only clients and reduce provider rates by 10 percent in GHPP. The proposal would cap enrollment at the January 2004 caseload level (estimated to be 842 clients) and is projected to result in approximately $194,000 in savings. The administration projects that on average the enrollment cap would result in a monthly waiting list of three clients in 2004-05. Additionally, the Governor's budget includes the implementation of a GHPP copayment structure. Under this proposal, the copayment would be deducted from the amount that the state pays the provider for each service. The provider in turn would collect the copayment from the patient. Clients would be required to pay $10 per service providing approximately $576,000 in savings to the General Fund.

AIDS Drug Assistance Program (ADAP): Enrollment Cap. The ADAP is a drug subsidy program for persons with HIV with incomes up to $50,000 annually who have no health insurance coverage for prescription drugs and are not eligible for Medi-Cal. Currently, clients with incomes up to 400 percent of the FPL (about $36,000 for a single childless adult) pay no copayment or premium, while individuals with incomes above that level pay a "sliding scale" copayment that increases with a client's income level.

The budget proposes about $207 million for ADAP ($64 million from the General Fund) in 2004-05. While this would provide a $8.3 million increase in overall funding for the program over the previous year, General Fund support for the program would decrease by $550,000.

The spending plan would cap enrollment of ADAP clients at about 24,000 individuals beginning January 2004. Individuals applying for ADAP benefits once the cap has been reached would be placed on a waiting list and served on a first-come, first-served basis as existing clients left the program. The administration estimates that the waiting list would total 1,392 by the end of the budget year. The administration estimates that the cap would result in savings totaling $550,000 in the budget year.

California Nutrition Network for Healthy, Active Families: Increased Federal Funds. The California Nutrition Network for Healthy, Active Families is a broad-based marketing campaign that focuses on encouraging low-income Californians to adopt healthy eating and physical activity patterns. 

Currently, $15.6 million is provided for the support of the network, with this funding provided on a one-time basis. The Governor's budget proposal would permanently increase the funding level by $39.7 million with federal funds awarded by the U.S. Department of Agriculture to the DSS.

Expansion of Federally Funded Bioterrorism Efforts. In response to the September 11, 2001 terrorist attacks and a heightened threat of bioterrorism, the federal government authorized funding through the Centers for Disease Control and Prevention and the Health Resources and Services Administration to support state and local activities that would strengthen states' public health systems and improve the coordination of emergency response in the event of bioterrorist acts or outbreaks of infectious disease.

The Governor's budget plan includes an additional $66 million in the current year and $77 million in the budget year in federal funds to complete a number of threat assessment, planning, and preparedness activities at the state and local levels. About $29 million of the additional 2004-05 funds would be appropriated for state operations and $47 million would be distributed as local assistance to counties and other local government entities.

Proposition 99: Declining Resources. The Tobacco Tax and Health Protection Act (Proposition 99, enacted by voter initiative in 1988) assessed a $0.25 per pack tax on cigarette products that is allocated for specified purposes. These include various tobacco education and prevention efforts, tobacco-related disease research, environmental protection and recreational resource programs, and health care services for low-income uninsured Californians. The success of anti-smoking initiatives, including tax increases on cigarette purchases, has resulted in a 44 percent decline in Proposition 99 revenues—from the $573 million received in 1989-90 to an estimated $321 million in 2004-05.

The Governor's proposed budget would align 2003-04 and 2004-05 expenditures with this anticipated revenue. For 2003-04, the administration has proposed reductions totaling $4.9 million in the anti-tobacco media campaign ($2.2 million), tobacco cessation competitive grants ($1 million), and the California Healthcare for Indigents Program known as CHIP ($1.7 million). The Governor's proposal for 2004-05 includes a total reduction of about $23 million affecting the anti-tobacco media campaign ($3.7 million), tobacco cessation competitive grants ($3.7 million), certain local contracts for tobacco control activities ($3.7 million), CHIP ($5.9 million), and the Breast Cancer Early Detection Program ($6.1 million).

County Medical Services Program (CMSP): General Fund Suspension. The CMSP provides medical and dental care to low-income adults between 21 and 64 years of age who are not eligible for the state's Medi-Cal Program and reside in one of 34 participating small California counties. Funds from the 34 counties are pooled to provide services to CMSP clients. The CMSP governing board sets eligibility requirements, benefit levels, and provider reimbursement rates, but contracts with DHS to administer a program offering uniform benefits and to provide claims processing functions.

Funding for CMSP includes realignment revenues (from the 1991-92 realignment), Proposition 99 revenues, county funds, and hospital settlements (audit recoveries for overpayments to hospitals). Until 1999-00, the state General Fund was also a fund source, with the amount capped at $20.2 million. The General Fund appropriation for CMSP was suspended in 1999-00, and in subsequent fiscal years. The Governor's budget proposes legislation to again suspend in 2004-05 the state's General Fund appropriation of $20.2 million to CMSP.

Cancer Treatment and Research Programs: General Fund Reductions. The budget plan reflects a reduction of $4.3 million in General Fund support for a prostate cancer treatment program, as well as the elimination of the remaining $3.1 million for cancer research activities. Both of these reductions were accomplished in response to requirements in Control Section 4.10 of the 2003-04 Budget Act.

Repeal of Prior Legislation. The administration indicated that it will propose a repeal of various statutory requirements for DHS activities for which no new funding would be provided in the 2004-05 budget. The legislation that would be repealed include the following measures:

Breast and Cervical Cancer Treatment Program

Transfer of Eligibility Work to Counties Would Be More Expensive

The 2004-05 budget plan proposes to transfer eligibility determinations for the Breast and Cervical Cancer Treatment Program to the counties effective January 1, 2005, and to increase funding for the program to address a backlog in processing applications for these benefits. We recommend that the Legislature reject the administration's proposal and adopt a less costly approach that would maintain this function within the Department of Health Services.

Background. The 2001-02 Budget Act and related legislation established two new state programs for individuals who have a diagnosis of breast or cervical cancer. The two programs together are known as the Breast and Cervical Cancer Treatment Program (BCCTP).

The first new program expanded Medi-Cal eligibility to specified women who were previously ineligible for these benefits. Specifically, full-scope services became available for women under age 65 with no other health coverage, who are in need of treatment for breast and cervical cancer, and whose incomes are below 200 percent of the federal poverty level (FPL). Federal matching funds equal to about 66 percent of the cost of these services are used to match state funds.

The second step was the expansion of existing state programs to provide a comparable "state-only" breast and cervical cancer treatment program for individuals who did not qualify for Medi-Cal. The state-only program provides only cancer treatment and cancer-related services that are limited to 18 months of coverage for breast cancer treatment and 24 months of coverage for cervical cancer treatment. Women and men of any age including undocumented persons who may or may not have another source of health coverage, and whose incomes are below 200 percent of the FPL, are eligible for the state-only program.

The new Medi-Cal program is unusual in that most applicants are granted immediate, temporary Medi-Cal eligibility from the doctor's office through an internet-based application and eligibility determination process administered by Department of Health Services (DHS) staff. (The same process is also followed for the state-only program.) In contrast, most eligibility determinations for Medi-Cal are administered by the counties with funding provided by the state.

The Governor's 2004-05 Budget Proposal. The budget plan proposes to transfer BCCTP eligibility determinations for both components of the program to the counties effective January 1, 2005, because the caseload for both is much higher than originally anticipated—almost triple the estimate initially used to determine the staffing needs. As a result, there are now insufficient state staff to complete eligibility determinations on time.

As we noted earlier, some BCCTP applicants were supposed to receive only temporary admission (two months) to Medi-Cal, with a subsequent determination during that period to assess whether they were eligible for ongoing Medi-Cal benefits. However, some applicants have remained in this "temporary" status for more than a year, even though they may not be eligible to do so. In addition, ongoing regular redeterminations of eligibility are not being completed for these Medi-Cal beneficiaries as required by federal law. The state is at risk of disallowances of claims for federal Medicaid reimbursements because it is not complying with these and other federal eligibility rules.

The DHS currently has 12 staff dedicated to completing BCCTP eligibility determinations and redeterminations at a cost of about $1 million ($480,000 General Fund). The administration proposal is to eliminate one of these positions beginning January 2005 and to strike all but two of the remaining positions by June 30, 2005. The budget plan estimates that this would result in General Fund savings of $20,000 in the budget year, increasing significantly to about $800,000 ($400,000 General Fund) in 2005-06.

The administration further proposes to increase Medi-Cal program spending for county eligibility activities by $2.4 million ($1.2 million General Fund) in 2004-05 and by $5.4 million ($2.7 million General Fund) in 2005-06 due to the shift to counties of the BCCTP workload. The state would continue to operate and financially support the Internet-based application system, so that signed applications for BCCTP benefits could be forwarded to counties for completion of the eligibility process.

Governor's Proposal Increases State Costs More Than the Addition of State Staff. The DHS indicates that if eligibility determinations are not shifted to the counties, it would need at least 11 new positions to manage the BCCTP workload at an estimated cost of $460,000 in 2004-05 and $920,000 in 2005-06. Combined with the annual cost of the existing staff, this would bring the total cost to DHS for administering BCCTP eligibility to $1.5 million ($710,000 General Fund) in 2004-05 and about $1.9 million ($940,000 General Fund) in 2005-06.

The Governor's proposal, however, to shift most eligibility processing activities for BCCTP to the counties would be more expensive. The total cost (including the retention of some DHS activities) would be $3.3 million ($1.7 million General Fund) in 2004-05 and $5.6 million ($2.8 million General Fund) in 2003-04.

A comparison of the cost of the two alternatives is shown in Figure 1. The Governor's proposal would cost nearly $1.9 million more (about $950,000 General Fund) in 2004-05 and about $3.6 million more ($1.8 million General Fund) in 2005-06 than adding DHS staff for the same purpose.

Figure 1

Retaining State Eligibility Process for
BCCTP Costs Less Than Shift to Counties

(In Thousands)

Eligibility Process

2004-05

 

2005-06

General Fund

Total Funds

General Fund

Total Funds

State Staffa

 

 

 

 

 

Current staff (12 positions)

$480

$1,000

 

$480

$1,000

Additional staff (11 positions)

230

460

 

460

920

  Total costs

$710

$1,460

 

$940

$1,920

Governorís Proposalb

$1,660

$3,310

 

$2,780

$5,560

  Net Savings From Keeping       Eligibility Work at DHS

-$950

-$1,850

 

-$1,840

-$3,640

 

a  Current process.

b  Shift eligibility process to the counties. For comparison purposes, includes cost of staff that would be retained by the state after the shift.

Trend in Caseload Growth Is Uncertain. The DHS' estimates of the additional staff persons it will need to manage the BCCTP workload could be either too high or too low.

The estimate of the Medi-Cal and state-only program caseload of 6,400, as of June 2003, is at risk of being in error because of the present backlog of eligibility determinations and redeterminations. Once this backlog is resolved, the BCCTP caseload numbers could change abruptly, as some individuals were granted ongoing eligibility in Medi-Cal and others were removed from the program because they were determined to be ineligible. The caseload growth trend is also at a significant risk of projection error because the program is new. As we noted, the demand for services so far has been much higher than originally anticipated.

Analyst's Recommendation. We recommend that the Legislature not adopt the Governor's proposal to shift BCCTP eligibility determinations to the counties because, as we have discussed above, this approach is more costly than the alternative of increasing DHS staff for this same purpose. Accordingly, we recommend that the proposed increase in the Medi-Cal budget for county eligibility activities be deleted. Because the existing DHS staff is clearly insufficient to handle the BCCTP workload, we recommend that the Legislature instead approve 11 additional staff. This would require an augmentation to the DHS operations' budget of $460,000 ($230,000 General Fund) for 2004-05.

We estimate that the adoption of our proposal would result in net savings to the state General Fund of $950,000 ($1.9 million all funds) in 2004-05 in comparison to the Governor's budget proposal.

We further propose that any new DHS positions for BCCTP be established as two-year limited-term positions. During the next two years, DHS should be able to complete the processing of the backlog of BCCTP eligibility determinations and redeterminations and to more clearly assess the caseload growth trend for the program. At that point, DHS and the Legislature would be in a better position to assess whether more or fewer DHS staff are needed to administer BCCTP.

Child Health and Disability Prevention Program

Background

Medical Screens and Immunizations Provided. The state CHDP program was established by Chapter 1069, Statutes of 1973 (AB 2068, Brown), to provide preventive health, vision, and dental screens to children and adolescents in low-income families who do not qualify for Medi-Cal. The CHDP program reimburses providers for completing health screens and immunizations for children and youth less than 19 years of age with family incomes at or below 200 percent of the FPL.

The program is jointly administered by the state DHS and county health departments. The DHS provides statewide oversight of the program, including making payments to providers. The county health departments develop local plans to recruit CHDP providers, ensure CHDP provider outreach and education, and handle client referrals and follow-up.

State Implements CHDP Gateway. Almost all children receiving CHDP services are eligible to enroll either in the Medi-Cal or Healthy Families programs, unless they are ineligible for these programs, most often because they are undocumented immigrants. The 2002-03 Budget Act provided the initial funding and staffing to DHS to improve CHDP's role as a "gateway" to move children into Medi-Cal and Healthy Families. This was done by establishing an Internet-based system to more systematically identify and bill the Medi-Cal and Healthy Families programs for services to children who are already enrolled in those programs.

The gateway program also "preenrolls" in Medi-Cal any child who is not already enrolled in Medi-Cal or Healthy Families. For preenrolled children, the costs of the CHDP screen as well as the medical services they receive are partially paid through the Medi-Cal Program using either federal Medicaid or State Children's Health Insurance Program funds. By contrast, if the CHDP health screens and immunizations are paid for under CHDP, the state pays for almost all of these costs.

The gateway program aims to permanently enroll preenrolled children in either Medi-Cal or Healthy Families by providing families with an application for these programs. Children who are determined not to be eligible for coverage in either program would continue to be able to receive CHDP services consistent with the allowable number of doctor's visits. Moreover, the same children are permitted to preenroll again in Medi-Cal each time they receive a CHDP screen.

Governor's Budget Proposal

Budget Plan Reduces CHDP Funding Due to Gateway. The Governor's budget proposes to allocate approximately $17 million from all fund sources ($8 million from the General Fund) in the current year for an estimated 300,000 CHDP health screens. For the budget year, about $4.2 million would be provided from all fund sources ($3.9 million from the General Fund) for an estimated 71,000 CHDP health screens.

A small part of this dramatic decrease in proposed program expenditures is due to the proposed reductions in reimbursement rates for CHDP providers. The 2003-04 Budget Act reduced provider rates by 5 percent, and a further 10 percent rate reduction is proposed in the Governor's budget plan.

By far, most of the proposed decrease in the CHDP budget is due to the assumed full implementation of the CHDP gateway in the budget year. We discuss this budget assumption in more detail below.

Major Uncertainties in Gateway Budget Proposal

The budget's assumption of a sharp decline in the size of the CHDP program due to the implementation of the gateway to the Medi-Cal and Healthy Families programs is based largely on preliminary data and assumptions about how this major program change will be implemented. As a result, it is possible that the budget request significantly overestimates or underestimates the funding needed for these programs. Accordingly, we withhold recommendation at this time on the funding requests related to the CHDP gateway, pending receipt of the May Revision.

Budget Assumes the Gateway Reduces CHDP Expenditures. As noted above, the Governor's budget plan assumes that the gateway will shift children from CHDP to the Medi-Cal and Healthy Families programs. Accordingly, the Governor's budget plan proposes to reduce the General Fund budget for CHDP by more than $54 million in 2004-05.

These savings in the CHDP budget would be more than offset under the Governor's budget plan by increased expenses in the Medi-Cal and Healthy Families programs. The budget would provide $405 million in additional funds for Medi-Cal ($197 million in state funds) and $42 million for Healthy Families ($15 million in state funds) due to implementation of the gateway. After taking into account previous reductions already incorporated into the CHDP budget, these increases in Medi-Cal and Healthy Families program expenditures result in a net fiscal cost to the state of $358 million when all fund sources are considered (with a $122 million net cost in state funds).

Impact of Caseload Shifts Still Uncertain. The administration estimates that about 712,000 children will be temporarily preenrolled in Medi-Cal, about 76,000 children will be enrolled on an ongoing basis in Medi-Cal, and that about 39,000 children will be enrolled in the Healthy Families Program in the budget year as a result of the gateway program.

Because the gateway has only been fully implemented since January 2004, the caseload and funding estimates are based on preliminary data and various assumptions regarding the number and characteristics of the children enrolling through the gateway. For example, the estimates contain significant assumptions about the rate at which parents of children who have received CHDP services will submit an application for their child's permanent enrollment in the Healthy Families or Medi-Cal programs. To the extent that the actual application rate was lower or higher than assumed in the budget, the amount of funding required for the Medi-Cal and Healthy Families programs could be underbudgeted or overbudgeted, potentially in the tens of millions of dollars.

Analyst's Recommendation. As we have noted, the budget plan proposes a substantial reduction in the CHDP program, as well as significant increases in Healthy Families and Medi-Cal, based on largely unproven assumptions regarding the gateway program's impact on caseloads. More information about these impacts will be available to the Legislature in the coming months. Accordingly, we withhold recommendation at this time on the CHDP budget proposal, as well as the proposed budget adjustments related to the gateway in the Medi-Cal and Healthy Families programs, until more information is available to assess how much funding will be needed for these purposes. We will monitor gateway enrollment trends and recommend appropriate adjustments at the time of the May Revision.

Genetic Disease Testing Program

Reports on Information System Project Not Submitted

The Department of Health Services (DHS) has not provided to the Legislature reports detailing the costs, schedules, and status of the Genetic Disease Branch Screening Information System Project required as a condition of its approval last year. Since these reports would have provided needed information about the finances and status of the project, we recommend that the Legislature deny a proposal for an additional $5 million loan from the General Fund for this project unless the reports are submitted and DHS is able to demonstrate its ability to manage the project. (Delete Item 4260-011-0001.)

The budget proposes a $5 million General Fund loan to the Genetic Disease Testing Fund for the ongoing development of the Genetic Disease Branch Screening Information System (GDB SIS) Project. The purpose of the project is to replace an obsolete automation system used to screen newborns for genetic diseases.

Project Funding. In 2002, the GDB SIS Project was estimated to cost $32 million ($17 million for its development and $15 million to maintain and operate the system over seven years). That same year, the administration increased the fees collected through the Genetic Disease Testing Fund by $4 per newborn for each screening test to fund the project's costs. Since this special fund did not have a sufficient revenue balance to pay the project's up-front costs, the Legislature approved a $5.3 million General Fund loan as part of the 2003-04 Budget Act to help fund the project. The Governor's 2004-05 budget plan proposes an additional $5 million General Fund loan to pay for additional development costs. By June 2009, it is anticipated that sufficient revenues would be available from the Genetic Disease Testing Fund to repay the two General Fund loans.

Project and Financial Reports Have Not Been Received. As a condition of approval of the initial loan, DHS is required by law to provide several reports to the Legislature detailing costs, schedule, and status of the GDB SIS Project. At the time the project started in 2003, up-to-date costs and a schedule for the project were unknown. For this reason, the first report, due July 2003, was to provide updated project schedules and cost estimates.

In addition, since DHS has struggled in the past in its management of a number of other information technology projects, the Legislature has been concerned about DHS' ability to manage the project. For this reason, a second set of reports was required to be submitted quarterly to the Legislature, beginning in October 2003, to provide (1) project status and oversight reviews and (2) expenditures, revenues, and the overall fund condition status of the Genetic Disease Testing Fund.

While DHS has shared a report containing some preliminary information about the project's costs and schedule with our office, the Department of Finance has advised us that the report neither represents its decisions on these matters, nor does it constitute a response to the legislative reporting requirements established last year. Thus, the department has not complied with the reporting requirements that were a condition of the loan approved last year by the Legislature.

Analyst's Recommendation. Because the Legislature has not been provided with the information it needs to assess the status of the project and the financial condition of the Genetic Disease Testing Fund, we recommend that the Legislature deny the proposed $5 million General Fund loan for the GDB SIS Project unless (1) the required reports are submitted and (2) DHS is able to demonstrate in those reports its ability to manage the project.


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