Analysis of the 2008-09 Budget Bill: Health and Social Services

Department of Health Care Services (4260)

The 2007–08 Budget Act implemented Chapter 241, Statutes of 2006 (SB 162, Ortiz), which created a new state Department of Public Health and renamed the then Department of Health Services as the Department of Health Care Services (DHCS). The DHCS is responsible for protecting and improving the health of all Californians.

The department finances and administers three health care services programs: (1) the California Medical Assistance Program (Medi–Cal), which is the state’s federal Medicaid Program; (2) Children’s Medical Services, which coordinates and directs the delivery of health care services to low–income and seriously ill children; and (3) Primary and Rural Health Care, which coordinates and directs the delivery of health care to Californians in rural areas and to underserved populations. Most of the DHCS budget is allocated to the provision of benefits under the Medi–Cal Program.


The Medi–Cal 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 (DSH) 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.

Overview of Medi–Cal Budget Proposal

Since the release of the Governor’s budget on January 10, the administration has made technical adjustments to the estimated level of savings in the Medi–Cal Program generated by various budget–balancing proposals resulting in an overall reduction in the level of savings proposed for both the current and budget year. As a result, of these changes, the dollar amounts in our Analysis may not match the numbers in the Governor’s January 10 budget document.

The budget proposes Medi–Cal expenditures totaling $36.4 billion from all funds for state operations and local assistance in 2008–09. 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 ($13.7 billion) decreases by about $402 million, or 2.9 percent, compared with estimated General Fund spending in the current year. The largest decreases are from proposals to reduce payments for certain providers which total $649 million in the budget year and a reduction of $143.5 million from the discontinuation of some optional Medi–Cal benefits. These decreases are partially offset by increases in other areas.


Figure 1

Medi-Cal General Fund Budget Summarya
Department of Health Care Services

(Dollars in Millions)




Change From








Local Assistance














County administration







Fiscal intermediaries
(claims processing)







Local Assistance














(state operations)
















Excludes General Fund Medi-Cal budgeted in other departments.

   Detail may not total due to rounding.


The remaining expenditures for the program are mostly federal funds, which are budgeted at $21.7 billion, or 2 percent, less than estimated for the current year. In addition, the spending total for the Medi–Cal budget includes an estimated $596 million in local government funds for certain payments to hospitals. About $5.9 billion of total Medi–Cal spending consists of funds budgeted for programs operated by other departments, counties, and the University of California.

Key Changes in Current–Year Spending

The Governor’s budget projects that actual current–year spending will be $201.1 million General Fund below the level appropriated in the 2007–08 Budget Act, despite expected growth in current–year caseload over the budgeted amount. This decrease is due to the budget–balancing reductions (BBRs) proposed to begin in the current year. As mentioned previously, technical adjustments to some of the BBRs since the release of the Governor’s budget reduce the overall level of General Fund savings proposed in the current year by $5.5 million.

Current–Year Caseload Slightly Higher Than Forecasted. The Governor’s budget projects that the 2007–08 caseload will grow in the current year by 51,600 beneficiaries, almost 1 percent, over the budgeted amount. This is estimated to increase program costs by approximately $130 million General Fund. The group of individuals who are estimated to experience the greatest growth are those in the 100 percent Federal Poverty Level (FPL) category. This Medi–Cal group, which consists of children from the ages of 6 to 19 years whose family income is at or below 100 percent of FPL, is estimated to increase by 13,000 beneficiaries, or 14.4 percent. Slightly higher–than–anticipated growth also is expected in other beneficiary categories. Program costs as a result of this caseload growth are offset by lower–than–expected costs in other areas.

Budget–Balancing Reductions. In addition to the regular programmatic changes affecting expenditures, the Governor’s budget proposes many current–year budget reductions that, if adopted, would decrease current–year spending by a total of $42 million General Fund. They include the following:

The Governor’s 2008–09 Budget Proposal

Medi–Cal Local Assistance

The Governor’s proposed budget estimates that total General Fund spending for Medi–Cal local assistance will be $13.7 billion, a net decrease of approximately $402 million, or 2.9 percent, below the estimated spending for the current year. Technical adjustments to some of the BBRs provided to us by the administration decrease the overall amount of savings proposed in the Governor’s budget by $76.4 million. 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.

Most Medi–Cal expenditure reductions proposed by the 2008–09 budget result from the continuation of various current–year proposals included in the Governor’s budget to reduce local assistance funding for benefits provided to Medi–Cal beneficiaries. Savings increase in the budget year because of the continuation of the proposed reductions and the effect of full–year implementation. General Fund spending for the provision of Medi–Cal benefits would decrease by $353.5 million, or 2.8 percent, from the current year. Figure 2 shows the major components of the Governor’s budget reductions, which we discuss below.


Figure 2

Medi-Cal Local Assistance
Major General Fund Spending Changes
2008-09 Governor’s Budget

(In Millions)



Savings From Cuts in Rates and Services


10 percent rate reductions


Reduction in hospital payments


Elimination of various optional services


Discontinuation of payment of Medicare Part B premiums
for Medi-Cal share of cost beneficiaries


Caseload Reduction Proposals


Reinstatement of quarterly status reports for parents


Reinstatement of quarterly status reports for parents and
cessation of continuous eligibility


Caseload Increases


Implementation of SB 437


Reductions in County Administration Funding


Elimination of 2008-09 cost-of-living increase


Reduction of funding for eligible growth


Reduction in county administration base funding


Increased Cost of Services


Increased cost for payment of Medicare premiums


Increased cost for Medicare Part D “clawback”



Some numbers may not match text due to rounding.


Rate Reductions ($561 Million Savings). The spending plan takes into account the estimated ongoing effect of several significant budget reductions proposed for the current fiscal year. For example, the Governor’s budget proposes a 10 percent provider rate reduction in the current year that would continue in the budget year, resulting in $504 million General Fund savings. Rate reductions for certain long–term care providers would also go into effect in the budget year, producing additional savings of $57 million General Fund. Skilled nursing facilities (SNFs) and Intermediate Care Facilities for the Developmentally Disabled (ICF–DD) are exempt from the rate reductions because they are subject to quality assurance fees, which generate state revenues. These rate reduction proposals are discussed in more detail later.  

Elimination of Certain Optional Benefits ($206 Million Savings). The budget plan proposes, beginning in the current year, to eliminate various optional services for adults who are not in long–term care, with the ongoing effect of this proposal generating savings of $139 million General Fund in the budget year. The majority of these savings result from the elimination of optional dental services for adults, which is expected to result in General Fund savings of $120 million. The budget plan also includes savings of $67 million General Fund for the continuation of the current–year proposal to stop paying the Medicare Part B premium for beneficiaries who owe a share of cost.

Tightening Eligibility Rules ($92 Million Savings). The budget plan includes proposals to tighten eligibility rules beginning July 1, 2008 to reduce the total Medi–Cal caseload and associated costs. The proposals call for reinstatement of a quarterly reporting requirement for parents and children, which would require Medi–Cal beneficiaries to report changes in income and assets. The quarterly status reporting requirement was eliminated in January 2001 by Chapter 945, Statutes of 2000 (AB 2900, Gallegos). Additionally, the proposal calls for elimination of continuous eligibility for children whose families exceed the income and asset requirements, which began in 2001. The department estimates that these proposals combined will reduce the average monthly caseload by 172,000 individuals for General Fund savings of $92 million in 2008–09.

Reductions in Hospital Inpatient Payments ($88 Million Savings). The budget proposes to reduce some payments to hospitals for inpatient services to generate savings of $88 million General Fund, or 2 percent, of Medi–Cal inpatient General Fund spending. This total consists of the following specific proposals:

A reduction of 10 percent, or $34 million, in federal “Safety Net Care Pool” funds for public hospitals. These funds would be redirected to offset General Fund spending for four other DHCS health care programs: the California Children’s Services Program, the Genetically Handicapped Persons Program, the Breast and Cervical Cancer Treatment Program, and the Medically Indigent Adult–Long–Term Care Program.

A decrease of 10 percent, or $30 million, General Fund in reimbursements to hospitals that provide Medi–Cal services without state contracts.

A reduction of 10 percent, or $24 million, General Fund in supplemental payments to private hospitals and small public hospitals, who currently receive these funds as DSH payments or “DSH replacement” payments.

Reductions in County Administration Funding ($70 Million Savings). The 2008–09 budget proposes to reduce funding to counties for the determinations of Medi–Cal eligibility by $70 million General Fund. This proposal would reduce the counties’ base payment for eligibility determination processing ($15 million savings), eliminate funding for anticipated growth in caseload determinations ($33 million savings), and eliminate the 2008–09 cost–of–living increase ($22 million savings).

Medicare Premiums ($59 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 $59 million General Fund, mainly as a result of increased premium costs.

Medicare Part D ($49 Million Cost). Medi–Cal payments for the Medicare prescription drug benefit program, known as Medicare Part D, continue to rise, mainly as a result of growth in the number of beneficiaries who qualify for the benefit and the rising cost of pharmaceuticals. Under the Medicare Part D program, the state no longer pays the cost for drugs for beneficiaries who are eligible for both Medi–Cal and Medicare. These costs are paid for by the federal government. However, the federal government requires that the states pay back much of the savings on dual eligible drug coverage, a payment known as the “clawback.” The Governor’s budget estimates that the state’s clawback payment will be $1.2 billion in the budget year, an increase of $49 million over the prior year’s payment.

Implementation of New Pilot Program Allowing Self–Certification of Assets ($13 Million Cost). The Governor’s budget assumes implementation of Chapter 328, Statutes of 2006 (SB 437, Escutia), which authorized a pilot program allowing applicants and beneficiaries to self–certify their income and assets. The 2008–09 budget includes a General Fund increase of $11.4 million for increased caseload growth of 17,000 individuals, $900,000 for counties to administer Chapter 328, and $700,000 for an evaluation of the program’s implementation and necessary computer systems’ changes.

DHCS State Operations

Reductions in State Staffing Levels Proposed ($7 Million Savings). The Governor’s budget proposes $143 million General Fund for state operations. This includes savings of nearly $7 million General Fund in the budget year, mostly due to the elimination of 113 positions and other associated funding.

Budget Forecasts Decline in Caseload

The budget’s overall estimate for the Medi–Cal caseload is reasonable and we will monitor caseload trends and recommend appropriate adjustments at the time of the May Revision. However, we believe that implementation of a pilot program allowing for self–certification of income and assets is inconsistent with the Governor’s other proposals to reduce caseload and recommend delaying implementation. (Decrease Item 4260–001–0001 by $13 million and Item 4260–001–0890 by $13 million.)

Administration’s Caseload Projections

The budget projects that the average monthly caseload of individuals enrolled in Medi–Cal will grow slightly over anticipated levels in the current year and decline in the budget year. As regards the current year, the caseload is estimated to be 51,600 individuals over the caseload assumed in the 2007–08 Budget Act, resulting in minimal caseload growth of 1.4 percent from 2006–07 to 2007–08. The budget plan projects a decrease of nearly 74,000 individuals, or a decrease in the caseload of 1.1 percent, largely as a result of the budget proposals discussed above. Without these reduction proposals, the Governor anticipates that caseload would grow by 1.4 percent, which is somewhat above the forecasted growth rate for the overall state population.

Tightening of Eligibility Rules Decreases Non–Welfare Families Caseload. Figure 3 shows the budget’s forecast for the Medi–Cal caseload in the current year and 2008–09. As shown in the figure, the families and children caseload is expected to decline by 122,000 individuals or 2.6 percent. The majority of this decline occurs within the nonwelfare families


Figure 3

Budget Forecasts Increased Caseload Growth in
Current Year, Decreased Growth in Budget Year

(Eligibles in Thousands)




Change From


Change From























Nonwelfare families








Pregnant Women
































Disabled (includes blind)








Undocumented Personsb















a    California Work Opportunity and Responsibility to Kids.

b    Persons placed into a dedicated undocumented aid category. Other caseload groups also include undocumented persons. Services available to undocumented immigrants are generally limited to prenatal care, long-term care, and emergency care.

Detail may not total due to rounding.


caseload as a result of the reinstatement of quarterly status reports and the cessation of continuous eligibility for children in the budget year. The nonwelfare families caseload is expected to grow by 0.9 percent in the current year and decline by 3.8 percent in the budget year. The nonwelfare families caseload would be expected to grow by 142,000 individuals, or 4 percent, without the decreases in caseload resulting from this tightening of eligibility rules.

Caseload for the California Work Opportunity and Responsibility to Kids families is expected to decrease slightly, by 1.4 percent in the current year, and remain largely unchanged in the budget year.

Moderate Growth in Medically Needy Aged and Disabled. Consistent with current population trends, caseloads for the aged, blind, and disabled are expected to grow by about 43,000 beneficiaries, or roughly 2.5 percent in the current year, and by an additional 46,000 beneficiaries, or 2.6 percent in the budget year.

Caseload increases for the aged, blind, and disabled are driven primarily by those aged and disabled individuals who qualify as medically needy. (The medically needy category includes those who do not qualify for, or choose not to participate in the Supplemental Security Income/State Supplementary Program, such as low–income 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 2008–09 this caseload for the medically needy aged will grow by about 14,700 individuals, or 6.7 percent, and that the medically needy disabled caseload will grow by about 7,700 individuals or 6.5 percent.

The public assistance and long–term care eligibility categories project modest growth of less than 1.6 percent for the aged, blind, and disabled in 2008–09. This growth is consistent with previous trends.

Evaluation of the Governor’s Caseload Proposals

Tightening of Eligibility Requirements May Not Achieve Proposed Level of Savings. As discussed in the prior section, the Governor’s budget proposes reinstatement of quarterly status reporting for parents and children and the elimination of continuous eligibility for children. Though the Governor’s proposals will likely result in a decrease in the number of Medi–Cal beneficiaries, the extent to which caseload will decline is uncertain because some individuals disenrolled by this process due to their failure to return the required paperwork might be eligible for reenrollment when medical services are needed.

Savings From Reduction in County Administration Funding May Erode. The Governor’s budget includes reductions of $70 million for the county administration function. The counties are responsible for processing new Medi–Cal applications and for the redetermination of eligibility status for existing Medi–Cal beneficiaries, currently performed on a biannual basis for adults and on an annual basis for children. The Governor proposes to reinstate quarterly status reports, which will increase the counties’ workload as they will have to perform redeterminations on a more frequent basis. The Governor’s proposal does not include funding to perform the extra redeterminations because the assumed decrease in overall caseload resulting from the additional reporting requirements would act as an offset.

If the total reduction in funding to the counties impedes their ability to handle the workload, counties may prioritize the processing of new Medi–Cal applications and delay completion of redeterminations. This may cause some Medi–Cal beneficiaries to receive benefits for a longer period than assumed in the Governor’s budget and erode the level of savings estimated from tightening eligibility requirements.

Implementation of Self–Certification Inconsistent With Other Proposals. The proposal to implement Chapter 328, which would increase the Medi–Cal caseload, is inconsistent with the BBRs intended to reduce the Medi–Cal caseload. Given the projected operating budgetary shortfall, delaying implementation of this pilot program would allow the Legislature to redirect these resources (totaling $13 million) to other areas.

The Economy Represents a Major Uncertainty. Continuing softness in the economy could potentially have a significant effect on Medi–Cal caseload trends. It is possible that a number of 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. However, if the economic sluggishness continues, causing more people to become unemployed, Medi–Cal caseloads could rise above the forecasted levels.

Federal Changes in Eligibility Requirements. The federal Deficit Reduction Act of 2005 (DRA) mandated evidence of citizenship and identity as a condition of Medicaid eligibility. The number of undocumented persons receiving full–scope Medi–Cal benefits is unknown, though DHCS has indicated that it is not a large number. Although the effects of DRA on the Medi–Cal caseload are unknown, other states have indicated that they have experienced a decline in caseload, which they attribute to the citizenship and identity requirements.

Analyst’s Recommendations

Our analysis indicates that the Governor’s caseload estimate is reasonable overall, but we believe that both upside and downside risks to the estimate exist. This is due to a number of factors, including the BBRs and the effect of the economic downturn. Given the fiscal situation and because the Governor’s proposal to implement Chapter 328 is inconsistent with other proposals to reduce the Medi–Cal caseload, we recommend the Legislature delay implementation to achieve savings of $13 million General Fund.

In addition, the data available at the time of the May Revision will provide updated information for the Legislature to assess the proposed Medi–Cal caseload prior to making any adjustments. We will continue to monitor Medi–Cal caseload trends and will recommend any appropriate adjustments to the budget estimate at the May Revision.

Some Proposed Reductions to Provider Reimbursement Could Further Limit Access to Care

The Governor’s budget proposes to reduce provider reimbursements by $668 million General Fund for 2008–09. We review the potential effects of this proposal and generally find that the proposed reductions might reduce patient access to care or cause patients to obtain care through other, more costly access points such as emergency rooms. We recommend that the Legislature reject the proposed reductions for all providers except hospitals. We also recommend additional actions to generate savings in certain areas.


Medi–Cal. The Medi–Cal Program provides services through two basic arrangements, managed care and “fee–for–service” (FFS). In the traditional FFS portion of the program, providers are paid for each examination, procedure, or other service that they furnish. The Medi–Cal Program is estimated to spend $19.3 billion ($8.4 billion in state funds) in 2007–08 for FFS care, including $1.2 billion ($600 million General Fund) for physician services and $7.7 billion ($3 billion in state funds) for hospital inpatient services. Medi–Cal also pays for the services provided by various other types of providers, including nursing facilities and pharmacy under FFS.

Under Medi–Cal managed care, DHCS contracts with health care plans to provide health care coverage for Medi–Cal beneficiaries residing in certain counties. The plans are reimbursed on a “capitated” basis with a predetermined amount per person per month regardless of the number of services an individual receives. Most of the estimated $5.8 billion ($2.9 billion General Fund) in premiums that Medi–Cal pays health plans for beneficiaries enrolled in managed care indirectly pays for services that physicians that contract with the health plans provide to patients. About one–half of Medi–Cal’s beneficiaries are enrolled in managed care health plans while the remainder receive services under the FFS portion of the program.

Other Health Programs. The DHCS operates several other health care programs besides Medi–Cal. Two of these programs, California Children Services (CCS) and the Genetically Handicapped Persons Program (GHPP), provide health care services to low–income persons with qualifying medical conditions. Additional programs, including the Expanded Access to Primary Care (EAPC) Program, provide funds to support clinics that serve certain populations. Expenditures for these programs in 2007–08 are budgeted at $347 million ($163 million General Fund). Counties are also expected to contribute an additional $106 million for CCS in 2007–08 that is not included in the state budget.

Savings From Rate Reduction Overstated

Governor’s Proposal. The 2008–09 budget proposes to reduce almost all Medi–Cal provider rates. Rates for physicians and many other providers would be reduced by 10 percent. The overall reductions for hospital inpatient care would total about 2 percent of total Medi–Cal spending for inpatient services. This would be achieved through a 10 percent reduction to certain types of hospital payments. A portion of the hospital payment reduction consists of federal funds that would be redirected to backfill General Fund spending for CCS and GHPP. Figure 4 lists the affected providers and the amount of the proposed decrease by provider type. The only providers not affected would be SNFs and ICF–DD. These facilities are excluded from the rate reductions because they are subject to quality assurance fees that generate state revenue. Collectively, the proposed reductions are expected to save the state $668 million General Fund. The dollar amount of the savings generated by the rate reductions shown in Figure 4 do not match the numbers provided in the Governor’s budget because of technical adjustments provided to us by the administration after the budget was issued on January 10, 2008.

Savings Estimate Double Counts Dental Reduction. The DHCS’ estimate of savings from a 10 percent reduction in the rates of dental providers does not take into account another Governor’s proposal which would eliminate optional dental services provided to adults who are not living in long–term care facilities. Therefore, the department overstates the total savings that would be available if dental rates were reduced. We estimate that the savings shown in Figure 4 from the proposal to reduce rates to providers of dental services by 10 percent is overstated by $10.6 million General Fund in 2008–09.


Figure 4

Governor’s Budget Proposes to
Reduce Provider Reimbursement

(2008-09 General Fund Effect, Dollars in Millions)



Rate Reductions


Medi-Cal Service Category


Managed care plans




Long-term care facilities






Other medical




Other services


Outpatient services


Other programsb


Home health


Medical transportation


California Children’s Services


Genetically Handicapped Persons Program




Shift of federal hospital paymentsc


Reductions to funding for clinics





a  Dental reductions do not incorporate the estimated impact of a reduction in provided benefits and therefore are overstated.

b  Other programs include Early Periodic Screening, Diagnosis, and Treatment; Family PACT; and Breast and Cervical Cancer Treatment Program.

c  Shift will backfill General Fund.

Note: Total may not match text or sum due to rounding.


Rate Reductions Could Reduce Access to Care

Rate reductions have the potential to negatively impact the operation of the Medi–Cal Program and the services provided to beneficiaries by limiting access to providers and services. The Legislature may wish to take into account the following factors when making a decision regarding the proposed rate reductions.

Physicians Have Not Received Rate Increases in Recent Years. In general, FFS physician rates have not changed since the Legislature granted rate increases in the 2000–01 budget year, though medical costs continue to rise. A recent study that compared the rates Medi–Cal pays to its FFS providers to rates paid by Medicare found that, on average, Medi–Cal rates are about 61 percent of what Medicare pays to its service providers. A 10 percent rate reduction will reduce the rates to approximately 57 percent of what Medicare would pay.

Hospitals and Some Other Providers Have Received Recent Rate Increases. In contrast to physicians, Medi–Cal adjusts on an annual basis the reimbursement rates for certain other types of providers. For example, the rates for some long–term care providers, including nursing homes, are recalculated on a yearly basis to account for changes in costs.

Funding for hospitals has also increased recently. Between 2000 (the last year that physicians received a Medi–Cal rate increase) and 2006, rates increased by an average of 4.7 percent annually for hospitals that contract to provide Medi–Cal services. In 2005–06, the state also negotiated an agreement (known as a Medi–Cal “waiver”) with the federal government that is estimated to provide increased payments of hundreds of millions of dollars annually to the largest public hospitals in the state. Also in 2005–06, the state stopped collecting an “administration fee” from public hospitals related to the DSH Program. This fee, which offset General Fund costs, had been set at over $200 million annually in some previous years.

Studies Link Rates and Access to Timely Health Care. Though the effect of reimbursement rates on access to care and quality of care is complicated and influenced by a number of factors, some evidence exists that the rates paid to providers can positively affect access to care. A recent national survey has suggested that Medicaid rates not only seem to have an effect on access, but also on the perception of the quality of care that beneficiaries receive. Beneficiaries in this study uniformly had higher levels of satisfaction with their care when Medicaid reimbursements were higher. Other studies have shown that physician fee levels affect both access and outcomes for Medicaid patients.

Medi–Cal reimbursements may particularly impact the participation of specialist providers in the program. A recent study of otolaryngologists (ear, nose, and throat specialists) in Southern California found that fewer than 50 percent of the practicing physicians would accept appointments with children enrolled in FFS Medi–Cal. Of the physicians who would not accept new appointments, 90 percent cited low reimbursement rates as a reason. If the cost of practicing medicine in California continues to grow while Medi–Cal rates remain stagnant, the relatively low Medi–Cal reimbursement rate for many primary care doctors and specialists may limit the number of physicians willing to see new Medi–Cal patients or continue treatment of existing patients.

Lack of Primary Care Access May Cause a Shift to More Expensive Forms of Care. Research indicates that access to effective primary care services can reduce the inappropriate use of the emergency room. Generally, the cost of services is more expensive if provided in an emergency room than in a primary care doctor’s office. Many Medi–Cal managed care plans, as well as commercial health care plans, reward physicians for providing after–hours service and being available on weekends in order to increase their availability to beneficiaries, reducing the unnecessary use of the emergency room and thereby helping to control costs.

A recent nationwide report indicates that the number of doctors accepting new Medicaid patients has declined and that the percentage of doctors with no Medicaid patients has increased. In addition, the report found that a relatively small percentage of physicians provide most of the care to the Medicaid population. The most recent estimate available specifically for Medi–Cal physician services, provided by a 2001 survey by the California Health Care Foundation, concluded that only 55 percent of primary care physicians and less than 50 percent of specialists were willing to accept Medi–Cal patients following the rate increase that year. If the proposed physician rate reductions were to result in a decrease in the number of physicians willing to serve the Medi–Cal population, it would be more difficult for beneficiaries to find physicians or schedule appointments. If physicians are unavailable, these beneficiaries may seek care in expensive emergency room settings.

Other Options to Achieve Savings Are Available

Rate Reductions Could Be Implemented in Alternate Ways. If the Legislature decides to reduce the rates paid to Medi–Cal providers, it may wish to consider alternatives to the administration’s approach. Rather than reducing rates by 10 percent across the board for almost all providers, the Legislature may wish to consider ways to implement rate reductions that would least disrupt the provision of services. We provide some options for ways in which the Legislature might modify application of a rate reduction:

Analyst’s Recommendations

Reject Reductions for Most Provider Types. We recommend the Legislature reject the Governor’s proposal to reduce payments for all providers except hospitals. The rate reductions proposed by the Governor, in our view, could further limit access to primary care in Medi–Cal and the other DHCS programs. Furthermore, these rate reductions may cause a shift to the utilization of costlier sources of care, diminishing the net savings to the state.

Approve and Increase Reductions for Hospitals. Our review indicates that hospitals have received significant rate increases relative to other provider types in recent years, and hospitals are generally among the most expensive settings to provide care. As such, we recommend that the Legislature take the following actions:

Consider Alternate Approaches. However, if the Legislature were to enact rate reductions for nonhospital providers, we recommend the prioritization of the reductions, as described above, to minimize the impact upon these programs. Any of these approaches would eliminate or, at least, diminish somewhat the level of savings proposed by the administration from rate reductions. Recognizing the magnitude of the state’s fiscal problem, our office has identified a number of options and recommendations for reducing state costs or increasing state revenues in “Part V” of our companion publication, The 2008–09 Budget: Perspectives and Issues.

Pay–for–Performance Could Reduce Medi–Cal Costs and Improve Patient Care

As health care costs continue to face upward cost pressures, many federal, state and private health care programs have turned to pay–for–performance programs as a way of both ensuring the practice of effective and efficient medicine and of controlling costs. Our analysis indicates that the implementation of a pay–for–performance program in Medi–Cal could eventually reduce General Fund costs by as much as tens of millions of dollars annually and significantly improve care for patients.

What Is Pay–for–Performance?

Pay–for–Performance (P4P) is a program that links fiscal incentives for medical service providers to measures of access, quality, and efficiency, thereby giving providers an incentive to provide efficient, effective, and appropriate medical care. The fiscal incentives generally take the form of increased reimbursements to providers.

Goals of P4P Programs

Through the use of appropriate incentives, P4P programs target the following broad goals: (1) improving patient outcomes, (2) improving access to care and quality of care, and (3) lowering costs. The success that providers have meeting these goals is evaluated using a number of different performance measures. Based on our review of available studies and discussions with managers of P4P programs, performance measurements vary among P4P programs depending on each P4P program’s goals. Typically they focus on the evaluation of three areas: a doctor’s clinical practice, the patient experience, and an office’s use of information technology (IT).

Clinical Practice. The most common goal of P4P programs is to improve a doctor’s practice of medicine. To this end, many programs will structure their incentives around measures that reward physicians for ensuring that their practice meets certain standards for care. For example, many programs reward physicians for ensuring that parents bring their newborns in for well–baby visits and for ensuring that these babies receive their immunizations.

Patient Experience. The P4P programs are also structured to reward physicians for providing their patients with a satisfactory experience when they visit. Accordingly, many P4P programs structure incentives around measures of patient satisfaction and access to care.

Health IT and Data Submission. Health IT can improve patient outcomes by reducing medical errors, such as mistakes in the administration of prescriptions. However, health IT often requires a significant up front investment for providers. Therefore, many P4P programs provide fiscal incentives to providers to encourage them to adopt health IT, such as electronic prescriptions.

Components of Successful P4P Programs

Based on our review of the available literature and the experiences of managed care plans that have implemented P4P programs within their own provider networks, we have learned that successful programs generally combine the following key components: (1) well–designed performance measures, (2) fiscal incentives that are carefully aligned with performance measures, and (3) reliable and robust data sources. A more detailed explanation of these key components is provided below.

Well–Designed Performance Measures. Performance measures should be designed to affect a targeted group of patients and achieve a specific outcome. For example, a performance measure could measure the reduction in the number of emergency room visits for nonemergency illnesses achieved by improving access to primary care providers and preventative care.

Fiscal Incentives and Performance Measures Should Be Aligned. The available data show that the P4P programs that carefully align their incentives with their goals achieve better results than programs that do not. When incentive payments can significantly affect a physician’s profitability, the physician is much more likely to try to earn the incentives.

Reliable Data Sources. The collection of reliable, accurate data is integral to an incentive program’s success. Data must be robust enough that they paint an accurate picture of an individual physician’s or physician group’s practice as well as showing actionable areas for improvement. The data must also be complete enough to allow for uniform evaluation of a physician’s performance based on several different measures and across multiple health plans.

Current Status of P4P

As health care costs continue to rise, health care insurers have started to turn towards P4P programs as a means of providing better health care while controlling the growth in costs. Although commercial providers were generally the first adopters of P4P programs, many state Medicaid programs, as well as the federal Medicare program have started to implement P4P programs.

Federal Medicare Program Is Experimenting With P4P Programs

The federal Center for Medicare and Medicaid Services (CMS) has started to explore the concept of incorporating performance into the rates paid to physician groups. In an initial demonstration project, ten physician groups participated in a P4P program that allowed the participating groups to share in any savings resulting from the practice of high quality, efficient medicine. All groups showed improvement in patient outcomes, though only two of the groups qualified to share in the savings. The CMS estimates that, during the initial year, the program saved an estimated $10 million. At the time this analysis was prepared, CMS had not yet calculated overall savings for the program. However, the physician groups participating in the program estimate that the first two years have likely saved Medicare about $21 million.

Some State Medicaid Programs Now Operate P4P Programs

The implementation of P4P programs has become a national trend in state Medicaid programs. Currently over one–half of state Medicaid programs operate at least one P4P program, with nearly 85 percent expected to begin a program within the next five years. Many states have operated their programs for over five years. Some states, such as New York, have focused their programs on encouraging participation in health IT. New York issues grants to physician groups that perform well based on New York’s P4P criteria thereby funding the up–front costs of purchasing health technology systems. Other states have focused on other goals.

Alabama’s FFS Medicaid Program has operated a P4P program for the past decade called Patient 1st that tracks doctors’ generic drug prescription rates, number of office visits, and emergency room visits. Doctors can also receive per member per month bonuses by meeting certain accessibility standards. State officials estimate the program saves the state roughly $12 million annually, with doctors and the state sharing the savings.

Many P4P Programs Already Operate Within California

Many Medi–Cal Managed Care Plans Have Implemented Incentive Programs Internally. Some, but not all, of the state’s Medi–Cal managed care plans currently have implemented some type of internal P4P program. By operating their own internal P4P programs, plans are trying to control costs and improve outcomes for their members. The nearby box identifies the three types of Medi–Cal managed care systems that operate in California.

In an effort that has been under way for several years, Medi–Cal managed care plans are attempting to create a statewide P4P program that will include a core set of performance measures agreed upon by all the plans. The uniformity of performance measures adopted by health care plans for physicians is a key component of any statewide P4P program. If each health plan adopts a different set of performance measures, physicians who contract with multiple health plans may be faced with multiple reporting requirements and competing objectives. Most plans choose to measure performance using the nationally accepted Health Effectiveness Data and Information Set (HEDIS) measures. These measures represent a set of generally accepted benchmarks that provide an indicator of the quality of care patients receive. The plans hope that by creating a statewide program, they will lessen the administrative burden on participating physicians and reduce confusion when a physician contracts with more than one Medi–Cal managed care

Three Major Types of Managed Care Plans

  • County Organized Health System (COHS). Under this model, there is one health plan run by a public agency and governed by an independent board that includes local representatives. The COHS are different from the other managed care systems because nearly all Medi–Cal enrollees residing in the county are required to receive care from this system.
  • Geographic Managed Care (GMC). The GMC system allows Medi–Cal beneficiaries to choose to enroll in one of many commercial health maintenance organizations (HMOs) operating in a county.
  • Two–Plan Model. The Two–Plan Model consists of counties where the department contracts with only two managed care plans. One plan generally must be locally developed and operated. The second plan is a commercial HMO, selected through a competitive bidding process.

plan (as in a two–plan or geographic managed care [GMC] county).

A statewide program would also have several advantages for most managed care plans. Especially in the GMC and two–plan counties, the opportunity for data aggregation would make all data on physicians more robust, presenting a better overall picture of a physician’s practice.

The DHCS Operates a Program Similar to P4P in Two–Plan and GMC Counties. The DHCS has already started to implement some P4P principles in select Medi–Cal managed care counties. In two–plan and GMC counties, DHCS measures the performance of these plans using various predetermined quality measures. The DHCS then assigns higher–performing plans a larger percentage of new Medi–Cal beneficiaries that do not select a plan in which to be enrolled.

Benefits of a Statewide P4P Program in California

As described below, a statewide P4P program in California would promote desirable changes in how physicians practice medicine and reward physicians and health care plans that achieve measurable performance outcomes.

P4P Programs Promote Change

Many insurers use their internal P4P plans to encourage desired change among their providers. Santa Barbara Regional Health Authority, a Medi–Cal County Organized Health System, has used its incentives program to encourage the submission of data from its providers. The providers that submit data electronically receive a higher payment rate than those who submit paper claims. Recently, the plan has also created incentives to encourage providers to remain available during weekend and evening hours as a way of decreasing emergency room and urgent care usage.

A recent study of five Medi–Cal managed care health plans and their efforts in implementing a P4P program documented that most of the studied plans experienced some success in raising HEDIS scores. Of the different measures, improvement across all the plans was seen in at least one measure, the well–baby visit. Other plans saw varying levels of improvement in other measures. The study suggests that P4P plans in Medi–Cal have the potential to create improvement, but will require careful design and implementation.

A Way to Selectively Reward the Best Doctors and Plans

The DHCS has recently implemented a new actuarially based methodology for calculating rates for Medi–Cal managed care health plans, resulting in rate increases for many of the plans. Broader implementation of a P4P program would give DHCS a way to selectively reward the plans providing the highest quality of care and practicing the most efficient medicine without raising rates to all plans.

Moving California Towards P4P

We recommend the enactment of legislation to guide the implementation and evaluation of a pay–for–performance (P4P) program for Medi–Cal managed care plans. We also recommend the adoption of supplemental report language directing the Department of Health Care Services to examine the feasibility of implementing P4P in the Medi–Cal fee–for–service program. We estimate that the implementation of statewide P4P program would eventually result in net savings to the General Fund of up to tens of millions of dollars annually.

The DHCS currently does not operate a statewide P4P program in its Medi–Cal managed care or FFS program. Below we discuss how P4P could be implemented statewide in both managed care and FFS.

P4P Program Structure Must Take Into Account How Providers Are Reimbursed. Medi–Cal provides health care coverage through two basic types of arrangements—FFS and managed care. Under an FFS health care delivery system, a health care provider receives an individual payment from DHCS for each medical service delivered to a Medi–Cal beneficiary. Beneficiaries generally may obtain services from any provider who has agreed to accept Medi–Cal payments.

Because FFS providers are spread throughout the state, implementation of a P4P program presents several logistical challenges not present when creating a P4P program for managed care plans that typically operate in densely populated regions. However, as previously described, other states and the federal Medicare Program have managed to create successful P4P programs in an FFS system.

In contrast to FFS, under Medi–Cal managed care, DHCS contracts with health care plans, also known as HMOs, to provide health care coverage for Medi–Cal beneficiaries residing in certain counties. The health plans are reimbursed on a capitated basis with a predetermined amount per person, per month regardless of the number of services an individual receives. As we discuss above, managed care plans have taken steps independent of the state to implement internal P4P programs.

Program Can Be Structured in Many Ways. A statewide program in California could be structured in a variety of ways and with varying means of computing financial incentives. A financial incentive model links monetary rewards with the achievement of certain outcomes, adherence to certain processes or protocols, demonstration of improved performance or for participation in a desired activity. Though financial incentive models are often created with a separate pool of funds that is paid to providers in addition to regular compensation, not all financial incentive models require additional funds. For example, Michigan’s Medicaid managed care program withholds a small amount of each approved capitation payment from each of their contractors until a predetermined amount for the pool is met. Awards are then made to contractors from this pool based on established performance criteria.

Program Could Be Implemented at Little Cost. Using a similar structure to that used by Michigan, a P4P program could be implemented in California in a way that would result in little additional state costs. This would be accomplished by withholding a small amount of each plan’s capitation payment to create the initial incentive pool.

General Fund Savings Potential. While the majority of P4P programs focus on improving the quality of care delivered to patients, the potential exists for such a plan to generate cost savings. However, it is difficult to provide a precise estimate of potential savings that would result from the implementation of a P4P program because the level of savings would depend upon the performance measures the program would target and the population these measures affect.

Our FFS savings estimate assumes that a P4P program would result in better preventive care for all Medi–Cal beneficiaries, leading to a decrease in the overall rate of hospital admissions. The total cost of hospital admissions in Medi–Cal during calendar year 2006 was almost $3.5 billion, with the average cost per beneficiary over $6,000 for all claims paid. Our savings estimate assumes that some portion of these hospital days could be avoided through the practice of timely and appropriate outpatient medical care that would be incentivized through P4P.

Figure 5 shows for illustrative purposes the potential General Fund savings the state could achieve from full–scale implementation of an FFS P4P program. We estimate the state could save in the range of $18 million to $88 million General Fund annually, the equivalent of between 1 percent to 5 percent of the total yearly Medi–Cal cost for inpatient hospitalizations. However, we note that some of these savings would likely be offset by increased costs from higher utilization of primary care.


Figure 5

Potential General Fund Savings From Implementation of Pay-for-Performance in Fee-for-Service
Medi-Cal Alternative Scenarios

(Dollars in Millions)





Percent net savingsa




Total fundsb




General Fundb





a  Represents a percent reduction in the total number of claimed inpatient hospital days.

b  These amounts would be offset to an unknown extent by increases in primary care utilization.


These estimates are in line with national and statewide studies that show that up to 10 percent of hospital admissions are potentially avoidable. The actual level of savings that Medi–Cal could possibly achieve would vary significantly depending upon program implementation and the target population.  

Implementation of P4P could also reduce costs in Medi–Cal managed care. For example, managed care plans would likely have lower overall costs as a result of providing more preventive care in order to earn P4P incentives. In turn, the cost–based rates that the state calculates for managed care plans would reflect these lower overall costs.

Savings Unlikely in Budget Year. One important consideration for the Legislature is that any potential savings will likely not occur until after the budget year has passed. The implementation of a P4P program will require some up front personnel resources to develop the performance measures and some funding for the incentives. However, the implementation of a program may reap significant savings in the long term by reducing avoidable hospitalizations and other expensive medical services. Given the projected growth in Medi–Cal costs, such an investment makes sense.

Analyst’s Recommendations. As noted above, our analysis indicates that the implementation of a P4P program, if carefully designed and structured, could eventually result in significant net General Fund savings to the state. However, a full–scale implementation of a P4P program for the FFS providers may not be feasible at this time because DHCS has not yet examined how best to implement an incentive program for Medi–Cal’s FFS physicians. Also, the state’s current budget shortfall may make it difficult to provide the funding necessary to create an incentive pool large enough to significantly motivate FFS physicians. Given these circumstances, we believe that DHCS should take some modest first steps to support current efforts under way to implement a statewide P4P program for managed care, while assessing the potential of expanding P4P programs to FFS in the future.

We therefore recommend the Legislature enact legislation directing DHCS to create a statewide P4P program for Medi–Cal managed care plans. This plan–based program would act to support the current project under way in the state to create a uniform performance incentive program applicable to all Medi–Cal managed care plans. We recommend that the legislation include the following provisions.

The incentive pool could initially be implemented with funds withheld from each plan’s capitation payment. Withholding a small percentage of payments (up to 3 percent) to fund an incentive pool would help to ensure budget neutrality. We recommend DHCS report at budget hearings on the necessary staff needed to implement such a program.

We further recommend the Legislature adopt supplemental report language directing DHCS to report on the feasibility of implementing a P4P program in FFS Medi–Cal. The following language is consistent with this recommendation:

It is the intent of the Legislature that the Department of Health Care Services (DHCS) shall submit a report to the Legislature evaluating the feasibility of implementing a pay–for–performance P4P program for fee–for–service (FFS) Medi–Cal. The report shall at a minimum address the following: (1) ways in which a P4P program may be implemented for FFS Medi–Cal; (2)

appropriate performance measures and their targeted outcomes; and (3) estimated costs and savings to the state of implementation of P4P. This report is due to the legislative fiscal committees and the Joint Legislative Budget Committee by January 1, 2010.

Our recommendations would provide the Legislature with a relatively low–cost approach to evaluate the benefits of P4P for the Medi–Cal Program.

Providing HIV/AIDS Medications Should Be a Priority

The 2008–09 budget proposes nearly $3 million General Fund for the continuation of an HIV/AIDS Pharmacy Pilot Program that helps to ensure that patients comply with their medication regimen. While coordinating care is important, we believe that the continued provision of direct services is a higher priority than continuing to fund a pilot program beyond the time period set by the Legislature. We recommend allowing the HIV/AIDS Pharmacy Pilot Program to sunset and redirecting these funds to the AIDS Drug Assistance Program. (Decrease Item 4260–001–0001 by $2,655,000 and Increase Item 4264–111–0001 by $2,655,000).

Governor’s Proposal. The Governor proposes about $2.7 million General Fund to fund continuation of an HIV/AIDS Pharmacy Pilot Program, which was created by Chapter 850, Statutes of 2004 (AB 1367, Steinberg). This program was scheduled to sunset January 1, 2008, but was extended until June 30, 2008 by the 2007–08 Budget Act. The Governor’s budget proposes to extend this program an additional year, until June 30, 2009. The pilot was designed to test the effectiveness on patient outcomes of having pharmacists coordinate and monitor HIV/AIDS patients’ therapeutic drug regimens.

The Governor’s budget also proposes to reduce approximately $7 million General Fund to the AIDS Drug Assistance Program (ADAP). The ADAP provides drugs to low–income HIV and AIDS patients, who would be otherwise unable to afford treatment. This reduction would reduce the formulary by excluding some of the drugs used to treat side effects and related conditions of HIV/AIDS. Patients who receive drugs through ADAP are generally not eligible to receive drugs from other state programs. A Department of Public Health study found that patients in ADAP had a lower rate of death than similar Medi–Cal beneficiaries and patients in commercial insurance plans.

Analyst’s Recommendation. Consistent with legislative intent, we recommend the Legislature allow the HIV/AIDS Pharmacy Pilot Program to sunset June 30, 2008. We further recommend the funding from this program be redirected to the ADAP program in 2008–09 to continue

funding for HIV/AIDS patients’ medications that treat side effects and related conditions. While we recognize the merits of having pharmacists coordinate HIV/AIDS patients’ therapeutic drug regimens, we believe that the provision of direct services is a higher priority than continuing to fund a pilot program beyond the time period set by the Legislature.

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