Analysis of the 2007-08 Budget Bill: Health and Social Services

Medi-Cal (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 federal funds for (1) disproportionate share hospital payments and other supplemental payments, which provide additional funds to certain hospitals that serve Medi-Cal or other low-income patients; and (2) matching funds for state and local funds in other related programs.

Effective July 1, 2007, the budget plan implements Chapter 241, Statutes of 2006 (SB 162, Ortiz), which creates a new state Department of Public Health and renames the existing Department of Health Services as the Department of Health Care Services (DHCS). We use the new name for the department throughout our Analysis.

Overview of Medi-Cal Budget Proposal

The budget proposes Medi-Cal expenditures totaling $38 billion from all funds for state operations and local assistance in 2007-08. Figure 1 displays a summary of Medi-Cal General Fund expenditures in the DHCS budget for the past, current, and budget years. The General Fund portion of the spending for local assistance ($14.6 billion) increases by about $980 million, or 7.2 percent, compared with estimated General Fund spending in the current year. The bulk of this increase is for benefit costs, which will total an estimated $14 billion General Fund in 2007-08. Significant factors contributing to this increase are (1) higher costs for services provided to Medi-Cal beneficiaries and (2) required rate increases for managed care plans, nursing facilities, and certain long-term care facilities. Some of these higher rates are offset by fees assessed on those providers, which are not reflected here.

The remaining expenditures for the program are mostly federal funds, which are budgeted at $22 billion, or 4.4 percent more than estimated to be received in the current year. In addition, the spending total for the Medi-Cal budget includes an estimated $607 million in local government funds for certain payments to hospitals. About $5.3 billion of total Medi-Cal spending consists of federal funds budgeted for programs operated by other departments or counties.

The 2007-08 budget proposal does not include any resources for the Governor’s recently announced health care coverage expansion plan. If enacted, the coverage plan could substantially increase spending for Medi-Cal and other health care services. Although the administration has not presented a timeline for implementing its coverage plan, it appears unlikely that significant additional budget resources would be needed in 2007-08. We discuss the Governor’s plan in The 2007-08 Budget: Perspectives and Issues (Part V).

Key Changes in Current-Year Spending

Spending Below Budgeted Levels. The Governor’s Budget projects that actual current-year spending will fall $128 million General Fund below the level budgeted by the 2006-07 Budget Act. Significant factors contributing to the lower-than-anticipated spending include a decrease of $48 million General Fund due to lower-than-expected costs for Medicare premiums paid on behalf of Medi-Cal beneficiaries who are also eligible for Medicare. Also, costs for services provided by adult day health centers are projected to be $28 million General Fund less than budgeted due to a continuation of the moratorium on new facilities and Medi-Cal antifraud efforts. The collection of additional federal funds in the current year related to prenatal services provided in 2005-06 is expected to lower costs by an additional $18 million General Fund.

Governor’s 2007-08 Budget Proposal

The Governor’s proposed budget estimates that total General Fund spending for Medi-Cal local assistance will be $14.6 billion in 2007-08, a net increase of about $1 billion, or 7.2 percent, above the estimated spending for the current year. As summarized in the “Health and Social Services Overview” of this chapter of the Analysis, the spending plan proposes a number of significant adjustments and policy changes that are reflected in the budget-year totals.

• Baseline Estimates ($465 Million Cost). The budget plan proposes a $465 million increase in General Fund expenditures for “baseline” costs, which are costs unrelated to any change in state policy and are due to estimated increases in caseloads, costs, and utilization of services, mostly for prescription drugs and hospital inpatient care.

• Hospital Financing Payments ($93 Million Cost). Medi-Cal payments for inpatient services provided by certain public hospitals changed significantly as a result of a federal hospital financing waiver negotiated by DHCS and enacted through Chapter 560, Statutes of 2005 (SB 1100, Perata). The budget estimates that 2007-08 costs will increase by a net $93 million General Fund because payments for some inpatient care provided by these hospitals in 2005-06 and 2006-07 will be made in the budget year as a result of delays in implementing the new payment methods.

• Medicare Premiums ($87 Million Cost). The Medi-Cal Program pays the premiums for Medi-Cal beneficiaries who also are eligible for Medicare, thereby obtaining 100 percent federal funding for those services covered by Medicare. (This arrangement is favorable to the state because it generally has the net effect of reducing state costs for Medi-Cal.) The budget estimates that the General Fund cost of these so-called “buy-in” payments will increase by $87 million in 2007-08.

• Managed Care Plans Cost and Caseload Increases ($82 Million Cost). Medi-Cal managed care plans are expected to experience increased costs of nearly $82 million General Fund, primarily due to growth in the number of enrollees, rate increases for certain long-term care services, and the restoration of the 5 percent provider payment reduction implemented in 2003-04.

• Long-Term Care Rate Increases ($114 Million Cost). Rate increases provided to certain long-term care facilities (typically skilled nursing facilities), as required by Chapter 875, Statutes of 2004 (AB 1629, Frommer), are expected to increase General Fund expenditures by more than $93 million in the budget year, partially offset by savings of almost $17 million resulting from a proposed rate reduction of 1.5 percent to be implemented in the budget year. The Governor’s budget also proposes rate increases for all other long-term care facilities of almost $38 million General Fund, in part to offset higher costs incurred by the increase in California’s minimum wage.

• Shift in Pharmaceutical Pricing ($46 Million Savings). The federal Deficit Reduction Act of 2005 mandated a shift in how pharmaceuticals are priced, moving from the Average Wholesale Price to the Average Manufacturer Price as a means of setting the Federal Upper Limit. The Governor’s budget expects this shift to result in General Fund savings of $46 million.

• Eligibility Processing Changes ($29 Million Cost). The budget plan reflects higher costs of $29 million General Fund as a result of two recent policy changes related to eligibility processing. Costs are expected to increase by $19 million General Fund due to the simplification of the Medi-Cal annual redetermination form approved as part of the 2006-07 Budget Act. Also, Chapter 328, Statutes of 2006 (SB 437, Escutia), authorized a new Medi-Cal pilot program allowing applicants and beneficiaries in two counties to self-certify their income and assets. The budget plan estimates that this program, which is scheduled to begin July 2007, will increase costs by $10 million General Fund in the budget year.

Budget Projects Modest Caseload Growth

While the administration’s overall Medi-Cal caseload projection is reasonable, we believe that the budgeted caseload shows risk of being slightly overstated. We will monitor caseload trends and recommend appropriate adjustments at the May Revision.

Administration’s Caseload Projections. The budget projects that the average monthly caseload of individuals enrolled in Medi-Cal will remain nearly flat in the current year and grow modestly in the budget year. As regards the current year, the caseload is estimated to be nearly 71,000 below the caseload assumed in the 2006-07 Budget Act, resulting in minimal estimated caseload growth of 0.3 percent from 2005-06 to 2006-07. The budget plan estimates caseload growth to be 1.6 percent in 2007-08, which is well above the caseload growth in 2006-07 and somewhat above the forecasted growth rate for the overall state population.

Nonwelfare Families Caseload Growth Flattening. Figure 2 shows the budget’s forecast for the Medi-Cal caseload in the current year and 2007-08. Slightly over one-half of the projected Medi-Cal caseload increase in 2007-08 occurs in the families and children eligibility categories. The budget plan estimates that the caseload for this group will remain largely unchanged in the current year and increase by 1.2 percent in the budget year, although these overall changes represent the net effect of underlying trends within these categories. Nonwelfare families continue to show growth, with the budget estimating that the caseload of Medi-Cal eligible nonwelfare families will increase by 1.5 percent in the current year and an additional 1.4 percent in the budget year. However, caseload for the California Work Opportunity and Responsibility to Kids (CalWORKs) families is expected to decline by 4.8 percent in the current year and remain flat in the budget year. The budget attributes a portion of the caseload growth for families and children to the implementation of recent changes to simplify annual eligibility redetermination forms and to allow self-certification of assets and income on a pilot basis.

Moderate Growth in Medically Needy Aged and Disabled. Caseloads for the aged, blind, and disabled are expected to grow by about 27,000 beneficiaries, or about 1.6 percent, in the current year, and by an additional 50,000 beneficiaries, or about 2.9 percent, in the budget year. The increases in the current year and budget year are consistent with underlying population growth trends.

Caseload increases for the aged and disabled are being driven primarily by those aged and disabled individuals who qualify as medically needy. (The medically needy category includes those who do not quality for, or choose not to participate in, Supplemental Security Income/State Supplementary Program (SSI/SSP), such as low-income noncitizens or individuals who must pay a certain amount of medical costs themselves before Medi-Cal begins to pay for their care.) The budget estimates that in 2007-08 the aged caseload in this eligibility category will grow by about 18,000, or 8.6 percent, and that the disabled caseload will grow by about 8,000 or 7.3 percent. Some of the projected growth in the aged and disabled population that qualifies as medically needy is also expected to result from the implementation of the simplified annual eligibility redetermination form noted above.

The public assistance and long-term care eligibility categories project modest growth of less than 2.2 percent for the aged, blind, and disabled in 2007-08. This growth is consistent with previous trends.

Assessing the Governor’s Proposal. Our review of the most recent Medi-Cal caseload data available indicates that the Governor’s 2007-08 request may be slightly overstated. While caseload forecasts are inherently subject to a certain degree of uncertainty, our review also indicates that the Governor’s January budget requests have tended to overstate caseload in recent years. The requests for 2004-05 and 2005-06 overstated Medi-Cal caseload by 4.7 percent and 3.5 percent, respectively, and, as noted above, the administration has lowered its estimate for 2006-07 caseload from the level assumed in the 2006-07 Budget Act.

Analyst’s Recommendations. Our analysis indicates that the Governor’s budget request is reasonable overall, but shows risk of being slightly higher than justified by the limited Medi-Cal caseload data available at this time. The updated data expected to be available at the time of the May Revision will provide additional information for the Legislature to assess the proposed Medi-Cal caseload prior to making any adjustments. Given this situation, we withhold recommendation regarding caseload at this time. We will continue to monitor Medi-Cal caseload trends and will recommend any appropriate adjustments to the budget estimate at the May Revision.

Data Match Increases Veterans’ Access To Benefits and Reduces State Costs

Our analysis indicates that there are approximately 144,000 military veterans in California who could be receiving comprehensive medical benefits from the Veterans Administration (VA) health care system but who are enrolled instead in the Medi-Cal Program funded in part by state monies. It is possible that the state could eventually save as much as $250 million General Fund annually from a voluntary shift of veterans from Medi-Cal into VA health care. We recommend that the state implement a federal data matching system which would allow California to identify veterans who could transfer to the VA health care system.

Introduction

Our analysis of population survey data indicates that approximately 144,000 veterans who are entitled to comprehensive medical care and health services through the federal Veterans Administration (VA) health care system are enrolled in the state’s Medicaid Program (known as Medi-Cal in California). We believe it makes fiscal sense for the state to examine the possibility of encouraging veterans to seek medical care from the VA instead of from Medi-Cal. This might permit them to obtain comprehensive medical care in an entirely federally funded system at no expense to the state. To facilitate this process, we have identified a federal computer data matching process known as the Public Assistance Reporting Information System (PARIS).

The PARIS is a computer data matching process to help states share information with one another about individuals enrolled in state and federal health and social services programs. It identifies public assistance recipients in participating states who are eligible for federal benefits, including VA benefits. The process also identifies individuals who are simultaneously enrolled in and receiving benefits from Medicaid, SSI/SSP, Temporary Assistance for Needy Families (known as TANF or CalWORKs in California) and/or Food Stamps in more than one state.

This analysis examines how the state’s participation in PARIS could benefit both the state and veterans by reducing Medi-Cal costs and increasing veterans’ access to medical services. This analysis also examines how the state’s participation in PARIS could improve program integrity and result in a cost reduction in certain state health and social services programs. We conclude by making recommendations that would result in state savings and improve access to services for veterans.

Background

Veterans and Their Families Are Entitled to a Range of Benefits. The Veterans Health Care Eligibility Reform Act of 1996, passed by Congress in October 1996, expanded many of the services provided to veterans. Veterans generally are entitled to a range of benefits, some of which we list below.

• California’s veterans receive access to the VA system of healthcare, which includes 10 medical centers and 50 outpatient and community clinics throughout the state.

• Disabled veterans may qualify for federally funded pensions of up to $1,395 monthly.

• Disabled veterans may also qualify for Aid and Assistance payments to offset the cost of institutional and community-based care of up to $590 monthly.

• Disabled veterans may qualify for vocational rehabilitation.

Veterans’ families are also generally entitled to the following benefits:

• Pensions for the widows and children of deceased veterans.

• The Civilian Health and Medical Program of the Department of Veteran’s Affairs (CHAMPVA) is a VA health care benefit for the spouse, widow, widower, or children of a veteran who is or was totally disabled due to a service-connected disability, died from that disability, or died while on active duty.

• TRICARE is a Department of Defense managed health care program for retired veterans, their families, and survivors.

VA Medical Benefits Often Greater Than Those Provided by Medi-Cal. As shown in Figure 3 and discussed in the nearby box, participation in the VA health care system provides veterans with access to a wide range of coordinated health care services. Once enrolled in the VA healthcare system, veterans may also have greater access to some medical benefits, such as mental health counseling and treatment for alcohol and substance abuse, than they would have under Medi-Cal. For example, the VA does not place a cap on the cost of dental services or limit the number of days a patient can be hospitalized for inpatient stays on a yearly basis. Unlike Medi-Cal, the VA system does not require that a beneficiary pay down his or her assets until they become “medically needy” before covering the costs of long-term care.

 

Quality and Access of Veterans Administration (VA) Healthcare Services VA Health Care Rivals Private Health Care Plans. Several recent studies have shown that the VA health system currently is equal to or outperforms many privately run healthcare systems in almost all performance measures. The VA, for example, has developed software allowing doctors and nurses to quickly access a patient’s records from any VA hospital or clinic the patient has used, dating back to the 1980’s. This system has helped to reduce, in a dramatic fashion, the number of pharmaceutical dispensing errors, misdiagnoses, and the prescription of drugs that may interact poorly with one another. For example, after the implementation of an electronic prescription system at a VA hospital in Kansas, the hospital saw its error rate drop by over 70 percent in five years. All other VA hospitals have since adopted the same system. The system has also allowed the doctors to track and monitor systemic breakouts of illnesses, making it easier to diagnose the cause, and to easily identify the patients who might most benefit from procedures such as flu shots. The VA Has Greatly Improved Access to Healthcare. The VA has also made significant strides in improving accessibility of care for its patients. In a recent study of waiting times for certain cardiovascular procedures, the researchers found patients in the VA system received the procedures significantly sooner than patients in some private and other government-operated health care systems such as Medicaid and Medicare. Other studies have shown the VA has drastically reduced waiting times for appointments in many clinics, in some cases by as much as 78 days. Patient Satisfaction. The improvements in care are reflected in the level of satisfaction patients of the VA have expressed with their care. More than one survey has shown that patients of the VA system expressed higher levels of satisfaction with their care than patients of private health care systems.

Medi-Cal Screens for Veterans

As part of the regular Medi-Cal eligibility screening process, workers in county welfare offices are required to ask applicants whether they have served in the armed forces and have veteran’s status. If a county eligibility worker determines that an applicant is a veteran, the eligibility worker has the applicant fill out a form, which is then forwarded to a County Veterans Service Office (CVSO) where a case worker will contact the VA to determine the benefits to which the applicant is entitled. The CVSO will perform any necessary follow-up, such as notifying the county welfare office of an applicant’s income status and/or contact the veteran for follow-up. The referral process is intended to ensure that all possible outside sources of income are obtained and available to help reduce costs to the Medi-Cal Program. Medi-Cal currently reimburses the CVSOs approximately $800,000 annually for these activities.

Not all veterans enroll in Medi-Cal through county welfare offices. Some Medi-Cal eligibility determinations are handled on the state’s behalf by the U.S. Social Security Administration (USSSA). Many veterans, especially those who automatically qualify for Medi-Cal through the grant of SSI/SSP benefits, may not receive a referral to a CVSO from the Social Security office where they applied. Unlike county welfare offices, Social Security offices do not file any forms with the CVSOs or provide them with any notification that would alert the CVSO that it needs to perform outreach to a veteran. Instead, CVSOs have indicated that they receive walk-in referrals from Social Security offices.

Data Suggests Many Veterans Use Medi-Cal. Under federal law, the Medicaid Program is intended to be the payor of last resort, meaning that all other available sources for a beneficiary’s provision of care, such as private insurance or other federal programs (such as the VA), must be exhausted before Medi-Cal can provide services. Although county welfare workers are supposed to screen for veterans when processing Medi-Cal applications, a 2005 survey performed by the US Census Bureau indicates that approximately 144,000 veterans in California received Medi-Cal benefits. We estimate the cost of such benefits totals approximately $500 million ($250 million General Fund). Because approximately 90,000 of the 144,000 veterans served in World War II, the Korean War, and the Vietnam War, they likely fall into the aged and disabled category of beneficiaries. The costs to treat the aged and disabled are generally higher than costs to treat other groups of beneficiaries, such as children. If some portion of these veterans received medical services through the VA, the state could potentially save many tens of millions of dollars.

PARIS Could Identify Veterans Enrolled in Medi-Cal

How Does PARIS Work and Which States Participate? The U.S. Department of Health and Human Services operates PARIS and provides the data transmission and matching report at no cost to participating states. The PARIS matches public assistance recipients in participating states against various federal and state databases on a quarterly and annual basis, generating a report of duplicate Social Security numbers from the different databases.

The three databases compared under the PARIS match are:

• Veterans Administration. This match determines if an individual is a veteran and whether or not the individual is collecting VA benefits.

• Interstate. This match determines if an individual is simultaneously collecting benefits in more than one state for Medicaid, SSI/SSP, TANF, and/or the Food Stamps program.

• Federal. This match determines whether an individual receiving public assistance benefits is a former federal or military employee collecting a retirement pension payment or a current federal or military employee.

States voluntarily choose to participate in the PARIS system. To do so, they must sign an agreement governing the interstate exchange of information. Currently, 42 states participate, including New York, Florida, Nevada, Arizona, and Oregon. Of the Western and Southwestern states, only California and Texas do not currently participate. In our discussions with DHCS staff, they indicate that they are currently studying PARIS implementation.

Paris Capabilities Could Be Enhanced by Improving DHCS’ Computer Systems. Currently, the DHCS computer system that tracks beneficiaries, known as the Medi-Cal Eligibility Determination System (MEDS), does not identify Medi-Cal beneficiaries by their veterans’ status. If the computer system had the ability to identify veterans, the DHCS could potentially provide this information to CVSOs so that these beneficiaries could be targeted for CVSO outreach efforts.

Implementing PARIS Could Lower Medi-Cal Costs Related to Veterans

The ability to identify veterans enrolled in Medi-Cal would allow DHCS to work with CVSOs to promote a voluntary shift of veterans from Medi-Cal to the VA system of healthcare. If all of the 144,000 veterans currently enrolled in Medi-Cal shifted to VA healthcare, we estimate this would result in savings to the Medi-Cal Program of about $250 million from the General Fund. However, it is more likely that there would be a more gradual shift. If 10 percent of veterans switched from Medi-Cal to VA healthcare, we estimate the state General Fund savings could be approximately $25 million.

Implementing PARIS Could Also Improve Program Integrity for Certain Health and Social Services Programs

Our analysis indicates that the greatest potential for reducing state costs through implementation of PARIS could be achieved through the voluntary shift of veterans out of Medi-Cal and into VA health care that we described above. However, program integrity in Medi-Cal, SSI/SSP, TANF, and/or Food Stamps also could be improved through implementation of PARIS.

Payments to Medi-Cal Managed Care Plans. In the Medi-Cal managed care system, the state pays Medi-Cal managed care plans an average fixed monthly payment of about $150 for each beneficiary regardless of whether the beneficiary receives any services. If a Medi-Cal beneficiary moves out of state and fails to promptly report a change of address, the state may continue to make unnecessary monthly payments to a Medi-Cal managed care plan, though the beneficiary will not use the plan’s medical services. Based on other states’ experiences, we estimate that cessation of these unnecessary payments could result in an estimated annual savings of $6 million ($3 million General Fund).

Other Public Assistance Programs Pay Avoidable Costs. Additional savings from the implementation of PARIS could arise from avoided costs for duplicate payments made through the CalWORKs and Food Stamp programs. Savings for the CalWORKs and Food Stamps programs are estimated to reach around $7 million ($4 million General Fund) annually. Cessation of SSP payments for the federal SSI program, which average around $300 per person monthly, could also achieve unknown savings.

Implementation Plan Key to Ensure Effectiveness of PARIS

The experience of other states in implementing PARIS has shown that a carefully planned startup can significantly affect the initial success of the program. Discussions with these states have yielded several key practices in regards to implementation.

Other States’ Experiences

Designation of a Lead Department to Coordinate PARIS Implementation. To ensure that the necessary follow-up on matches occurs, other states have designated a lead agency to coordinate activities between state departments. This agency also serves as the liaison to other states researching matches.

Follow-Up Is Critical. Ensuring resources exist to provide follow-up on the matches identified by PARIS is essential. A Government Accountability Office report on PARIS found its effectiveness has been somewhat diminished because states have not adequately prioritized following up on reported matches of individuals residing in other states. States which have experienced success using the PARIS system have found that they require designated staff resources to facilitate interactions with other states and to communicate the match results to appropriate staff in the field to perform follow-up duties.

Filter PARIS Matches to Ensure Efficiency. In order to prioritize workload and ensure that staff spends their time following-up on matches with the greatest potential for savings, states commonly apply “filters” to the matched records. For example, some states have applied filters weeding out matches with benefits savings less than $50. States also utilize filters to eliminate matches that have already occurred, so that no duplicate work is performed.

Outreach Important. Washington has achieved significant success in obtaining additional benefits for veterans and their families. The success of their program is in large part due to focused outreach activities. These outreach activities include PARIS coordinators attending veteran’s groups and meetings and explaining the benefits of VA healthcare, particularly emphasizing the coverage of nursing home care and payments for long-term care. Washington has also made a concerted effort to target the children and spouses of veterans to notify them of their eligibility for TRICARE and CHAMPVA. Washington State estimates that it achieved savings of $4.3 million in 2004-05 while ensuring veterans received federal benefits to which they were entitled.

Some Additional Resources Necessary to Implement PARIS

Computer Programming Costs. Computer systems at DHCS and the Department of Social Services (DSS) would require programming changes to allow interaction with the PARIS system in order to receive match data. Other states have incurred relatively low costs to change their data systems.

While California’s computer systems are generally larger and more complex than those of most other states because California’s programs serve a comparatively larger population, we believe the cost to perform programming changes would be modest. The first year savings generated from the avoidance of duplicate payments in the affected health and social services programs should be sufficient to offset initial start-up costs. The federal government currently offers grants to qualified states to help offset programming costs. If available, the grants would partially offset programming costs.

Staffing. The DHCS would need to hire staff to oversee the implementation of PARIS, coordinate between different departments and states, and distribute match data to the different counties for follow-up. Based on experiences in other states, including New York and Pennsylvania, we estimate two additional staff members and related operating support would be required at a cost of roughly $200,000 from the General Fund.

Once the match data is received and sorted in a central location and forwarded to counties, then county eligibility workers would perform the necessary research and follow-up. As county workers must already make periodic redeterminations, processing a match is consistent with existing workload.

Analyst’s Recommendations

To ensure veterans receive the full scope of their earned benefits and ensure program integrity and the effective use of state resources, we recommend that the state participate in the PARIS computer matching process. We recommend several steps the state should take to ensure successful implementation.

Establish a Lead Agency and Determine the Entity to Review the Matches. Participating states have emphasized the need for each state to establish a central point of contact to ensure quick communication between states regarding matches. We recommend DHCS act as the lead department because the potential for savings in the Medi-Cal program resulting from successful PARIS implementation is significantly greater than potential savings for other programs.

Matched cases need prompt review to ensure success. We recommend the county welfare offices be designated to complete the follow up when a PARIS match indicates that a person is receiving duplicate benefits.

Provide Resources to Implement PARIS. Funding will be needed to make system changes in various health and social services computer programs so they can interact with PARIS. We recommend that DHCS and DSS report at budget hearings on the estimated savings that are likely to result from PARIS and the resources required at the state and local level to implement PARIS. We further recommend the departments identify federal funding available to offset these costs.

Report at Budget Hearings on Feasibility of Implementing DHCS Data System Changes. We recommend that the Legislature require DHCS to report at budget hearings on the feasibility of changing the DHCS’ MEDS system to allow county eligibility workers and DHCS to flag veterans during intake and allow DHCS to flag veterans identified by PARIS. Though not necessary to the implementation of the PARIS data match process, this change would allow the state to regularly identify all of the veterans enrolled in Medi-Cal and thereby facilitate outreach to them.

Utilize the CVSOs in Outreach Efforts for Veterans. County welfare departments are supposed to refer veterans to CVSOs. However, it appears this is not always happening. We recommend DHCS report at hearings on ways to improve coordination of referrals between local county welfare departments and CVSOs.

Renegotiate MOU With Social Security Field Offices. The current memorandum of understanding (MOU) with USSSA does not require that Social Security eligibility workers refer veterans to CVSOs. We recommend that the DHCS work with DSS to modify the MOU between DSS and USSSA requiring these eligibility workers to refer all eligible veterans to CVSOs as is the practice with county eligibility workers.

Significant Medi-Cal Fraud Continues

Despite a series of efforts and increased resources to combat Medi-Cal fraud since 2000-01, a recent study estimates that hundreds of millions in annual Medi-Cal costs are likely attributable to error or fraud. In order to better assess antifraud efforts by the Department of Health Care Services, we recommend that the Legislature adopt supplemental report language directing the department to submit a forthcoming evaluation of its antifraud efforts to the Legislature by August 15, 2007.

Errors and Fraud Significantly Higher in Latest Report. The Legislature provided DHCS with resources in the 2003-04 Budget Act to conduct an annual study measuring the level of fraud in Medi-Cal fee-for-service care (in which Medi-Cal pays a health care provider for each service rendered to a Medi-Cal beneficiary). We discussed this and other antifraud issues in our Analysis of the 2004-05 Budget Bill (see page C-111). The department released its second such study, the 2005 Medi-Cal Payment Error Study, in July 2006. This study indicated that $1.4 billion ($700 million General Fund), or 8.4 percent, of total Medi-Cal fee-for-service dollars paid were at risk of being paid inappropriately. Of this amount, $542 million ($272 million General Fund) showed evidence of being fraudulent. These amounts were significantly higher than the 2004 study’s estimates of 3.6 percent and 1.6 percent for inappropriate and fraudulent payments, respectively. The department attributes the increases to more accurate measurement of errors in the 2005 study rather than to an actual increase in erroneous payments.

Fraud Varies Significantly by Provider Type. The 2005 study indicates that the combination of errors and fraud vary greatly by type of care provider. As shown in Figure 4, payments to adult day health centers (ADHCs) showed the highest percentage of errors, while inpatient hospital care showed none. Errors in pharmacy payments accounted for the highest amount of inappropriate payments.

Evaluation Could Provide Useful Information. In response to the findings of the 2005 report, DHCS indicated that it expanded its antifraud activities in certain areas. Discussions with the department indicate that it has also engaged Acumen LLC, a public policy consulting firm, to evaluate its antifraud efforts. This evaluation, which is scheduled for completion by July 2007, should provide useful information regarding how the department may improve its antifraud strategy.

Analyst’s Recommendation. Our review indicates that the Legislature would benefit from additional information regarding DHCS’s antifraud activities. We recommend that the Legislature adopt supplemental report language to direct the department to make the report being prepared by Acumen LLC available to the Legislature by August 15, 2007. The following supplemental report language is consistent with this recommendation.

The State Department of Health Care Services shall provide to the Joint Legislative Budget Committee, the fiscal committees, and the appropriate policy committees of the Legislature by August 15, 2007, copies of the independent consultant’s evaluation of its antifraud activities and strategies.

Some Requests for Added Staff Excessive

The budget request for the Department of Health Care Services includes $26.5 million ($16.1 million General Fund) to implement various proposals generally related to the administration of the Medi-Cal Program. We recommend that some of the funding requests for additional staff be approved, but recommend a reduction of $1.9 million General Fund because others are not justified on a workload basis. We further recommend a $2.7 million General Fund reduction in Medi-Cal local assistance to properly reflect certain county administration costs. (Reduce Item 4260-001-0001 by $1.9 million and Item 4260-101-0001 by $2.7 million.)

Governor’s Budget Proposal. The 2007-08 Governor’s Budget proposes 176.5 additional staff positions and corresponding contract resources in DHCS to implement various proposals generally related to the administration of the Medi-Cal Program. Of these additional staff positions, 73.5 positions are proposed to implement legislation enacted during 2006.

This analysis examines the staff proposed for DHCS, as summarized in Figure 5. The figure shows the general purpose of each request, the number of associated staff positions, and the total costs and General Fund amount requested.

Evaluating the Governor’s Budget Requests

Our analysis of these budget requests for DHCS included a review of the department’s overall staffing resources as well as an analysis of the justification offered by the administration for these specific proposals. The information we reviewed supports some of DHCS’s proposals, but raises concerns about others.

Department Already Has More Positions Than It Can Fill

High Vacancy Rate. The 2006-07 Budget Act provided the funding to support about 3,000 positions associated with DHCS operations. It is not unusual for a portion of a department’s authorized positions to be vacant during the course of a fiscal year, as staff members leave state service, transfer to other departments, or retire. The customary vacancy rate (known as “salary savings”) which is incorporated into the budgets for most state staffing functions, is about 5 percent. However, based on our review of staffing data provided by the department, about 12 percent of DHCS authorized staff positions were vacant as of January 2007.

DHCS Has Some Flexibility to Meet Its Staffing Priorities. A number of factors can lead to this high staffing vacancy rate. These include a surge of staff members reaching retirement age and difficulties in recruiting for specialized positions such as pharmacists where public sector and other agency competition is high. However, this situation means that DHCS has more position authority and funding in the 2006-07 Budget Act than it is likely to use in the current year.

Justification Lacking for Some Budget Requests

Our analysis indicates that some of the specific requests for position authority and contract resources for Medi-Cal administrative activities are not justified on a workload basis at this time. We discuss the specific budget requests about which we have concerns below and summarize our position recommendations in Figure 5. We also note that some staffing requests presented by the administration describe positions sought beginning in 2008-09, although funding and position authority for these positions are not included in the requested totals for 2007-08. It is premature at this time for the Legislature to consider these positions, and our analysis does not address them.

Resolution of Drug Rebate Disputes. The administration proposes to continue its efforts to resolve an outstanding backlog of disputes over rebates owed to the state from drug makers and to continue its efforts towards collecting current rebates by converting 5.5 limited-term positions to permanent positions and continuing another 5.5 limited-term positions for an additional year. We take no issue with the conversion of the 5.5 limited-term positions to permanent positions, but withhold recommendation on the continuation of the 5.5 limited-term positions until the time of the May Revision so that we can review whether any of these limited-term positions are vacant. The DHCS has indicated these positions have an approximately nine-month training period and a high turnover rate. At the time of the May Revision, the request should be adjusted to eliminate any vacant positions because it is unlikely that newly hired staff will become productive over a one-year period.

Implementation of Federal Deficit Reduction Act (DRA) of 2005 Requirements. The DRA requires the state to implement new policies to verify a Medi-Cal applicant’s citizenship and identity. It will also require an additional asset eligibility determination when an applicant applies for long-term care and selected other services. Most of the workload related to implementing DRA requirements is one-time in nature and includes the development of policies and procedures. The 2007-08 Governor’s Budget proposes five additional positions, two permanent and three limited-term, for implementation of these new requirements. As the bulk of the workload related to implementation of the new citizenship requirements has already occurred, we believe that only three of the five positions requested are warranted, and that these three positions should be filled on a limited-term basis.

Staff to Continue Implementing Federal Health Information Law. The 2007-08 budget proposes the continuation of 13 limited-term positions and the addition of six limited-term positions to implement additional provisions of the federal Health Insurance Portability and Accountability Act. This law establishes new requirements for the privacy and use of certain health information. Our review finds that the proposed workload for one of the requested analyst positions is duplicative of workload for other analyst positions proposed in this budget. Additionally, DHCS has departmental vacancy rates for certain position classifications in this request that significantly exceed budgeted salary savings, and we find it reasonable that DHCS could redirect positions from a different unit within DHCS to fill seven of these positions. Therefore, we recommend that the Legislature reject eight of the requested positions.

Information Technology Support for Third Party Liability Medicare Operations. The Governor’s budget proposes to add five new permanent positions and $180,000 for Data Center use to meet the mandates required by the federal Medicare Modernization Act in the processing of transactions for beneficiaries who are both Medi-Cal and Medicare eligible (known as dual eligibles). The staffing request does not reflect that many of the functions these five positions would perform are one-time in nature. For example, the modification of existing Medi-Cal automated systems to interface properly with Medicare Part D systems should need to occur only once. Furthermore, some of the workload cited to justify these positions should be completed before the start of the budget year. Our analysis indicates that only three of the five additional positions requested are warranted given the expected ongoing workload. We do not raise any issues with the $180,000 for Data Center use.

Planning and Development for a Replacement Medicaid Management Information System (MMIS). The 2007-08 budget requests 22 limited-term positions to complete preliminary work necessary to re-procure the Medi-Cal Fiscal Intermediary contract. The new contract will include replacement of the Medicaid Management Information System (MMIS), which pays Medi-Cal claims. The budget also requests funding for a contractor who will assist DHCS in the preliminary work. Our analysis indicates that a substantial portion of the workload DHCS staff will be required to perform will depend upon the work the contractor is able to perform and, as such, remains undetermined until the contractor begins its work. (The DHCS has indicated the contract will be awarded in April 2007.) We find that seven of the requested 22 positions are currently not justified due to uncertainty about what the workload will be in 2007-08 and therefore should be deleted.

Implementation of Medi-Cal Self-Certification Pilot Project. The Governor’s budget includes three new positions to implement a Medi-Cal pilot program authorized by Chapter 328. The two-year pilot program, which is scheduled to begin in July 2007 in two counties, will allow persons submitting new applications or annual eligibility redetermination forms to self-certify their income and asset information. Our review indicates that one of the proposed positions is not justified on a workload basis. Additionally, we find that DHCS could redirect positions from a different unit within DHCS to fill the other two proposed positions. As such, we recommend that the Legislature deny the requested positions.

Our analysis also indicates that the Medi-Cal budget request does not account for local assistance savings likely to result from the reduced processing time per eligibility case associated with the self-certification pilot program. Properly reflecting these savings would lower county administration costs by $2.7 million General Fund ($5.3 million all funds).

The California Discount Prescription Drug Program. The administration proposes to establish 16 positions and appropriate $6.8 million General Fund to implement the California Discount Prescription Drug Program (CDPDP) enacted by Chapter 619, Statutes of 2006 (AB 2911, Nuñez). We believe 15 of the 16 positions requested are justified at the current time. Furthermore, one of these justified positions is only needed on a one-year limited-term basis as the functions performed are mostly one-time in nature.

The budget also includes a request for $6.8 million General Fund for operational costs involved in implementation of the CDPDP. This funding is only for vendor and systems development and does not include the cost for the “float,” which is the amount of money the state will need to purchase the drugs for the program. The float is required because drug manufacturers pay rebates to the state on a quarterly basis. However, the state must reimburse pharmacies for rebates within two weeks of a consumer’s purchase of a drug. Therefore, the state will be obligated to pay out rebates to pharmacies before it actually collects the rebate funds from a drug manufacturer. The DHCS estimates that the payments for drugs will be an ongoing cost as more consumers enroll in the program. At the time of this analysis, DHCS has no estimate of what the float amount might be. We do not have any concerns with the $6.8 million requested for operational costs involved in implementation of the CDPDP, but note that additional funding will be required to provide the float.

Adult Day Health Center Program Restructuring. The Governor’s budget proposes additional staff to conduct antifraud activities related to ADHC services and to implement the ADHC reforms enacted by Chapter 691, Statutes of 2006 (SB 1755, Chesbro). The proposal seeks 46 full-time positions, of which 26 would be limited term. However, because 15.5 of these positions would not start until January 2008, the proposal only seeks one-half-year funding and authority in 2007-08. Our analysis indicates that a substantial portion of the proposed audit and appeal workload related to the antifraud activities would not commence until 2008-09 or later. As such, we find that 13 positions (11 full-time equivalent positions) are not justified for 2007-08.

Development of Pediatric Palliative Care Pilot. The budget plan proposes three positions to develop a pilot pediatric palliative care program authorized by Chapter 330, Statutes of 2006 (AB 1745, Chan). Our review indicates that the proposed payment rate development workload is not justified at this time, and we recommend that the Legislature deny one of the positions associated with this work.

Implementation of Hospital “Fair Pricing” Policies. The budget plan proposes 4.5 limited-term positions at DHCS to audit hospitals’ compliance with new pricing policies required for licensing under Chapter 755, Statutes of 2006 (AB 774, Chan). This proposal would support the positions from the General Fund and matching federal funds. Our review indicates that it would be appropriate to fund these positions using fees assessed on hospitals for licensing activities. The department has the authority to adjust these fees to fund its staffing needs for licensing functions. Additionally, we find that the workload standard used by DHCS in determining the positions proposed for this work is lower than standards used in other proposals for auditors in recent years. Thirdly, we find that at least a portion of this workload will be ongoing in nature, rather than limited term. As such, we recommend that 3.5 of the requested positions be approved and funded by licensing fees. Two of these positions should be permanent.

Analyst’s Recommendations

As noted above, some administration requests warrant approval, but others lack justification on a workload basis. In addition, the 12 percent vacancy rate now being experienced by DHCS calls into question whether the addition of a large number of staff is appropriate at this time.

Accordingly, we recommend that some of the administration proposals be approved as proposed, and that others be modified (in most cases to reduce the number of positions requested and the associated operating expenses and equipment). In summary, our recommendations would result in a reduction of 43.5 of the 176.5 requested positions. The amount of funding provided for these specific ten proposals would be reduced by $1.9 million General Fund and $4.8 million from all fund sources. However, we withhold recommendation regarding the requested extension of the 5.5 limited-term positions for the drug rebate program. Additionally, we recommend that local-assistance funding be reduced by $2.7 million General Fund and $5.3 million total funds in order to reflect lower county administration costs associated with the self-certification pilot program.

Our specific recommendations for each of the DHCS budget requests are summarized in Figure 6.

Residential Care Models Allow Shift From Institutions to Community

The Department of Health Care Services has requested three positions, on a two-year limited-term basis, to develop a State Plan Amendment adding the Intermediate Care Facility for the Developmentally Disabled-Continuous Nursing (ICF/DD-CN) pilot program as a permanent state benefit. While we take no issue with the request for positions, we recommend the Legislature adopt supplemental report language directing the Department of Health Care Services to submit a report based on a comprehensive evaluation of the ICF/DD-CN pilot program. Such an evaluation will help ensure the Legislature has sufficient information upon which to base decisions about the future of this pilot program.

We discuss our recommendations in the “Department of Developmental Services” analysis in this chapter.

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