Putting Medicaid in the Larger Budget Context: An In-Depth Look at Three States in FY 2015 and 2016


Economic and Budget Outlook


California, like many other states, has seen continually improving economic conditions since the Great Recession, during which California experienced record unemployment (peaking at 12.2 percent), major budget shortfalls, and declines across all major industries. California’s economy began its recovery from the last recession in June 2009, paralleling the economic recovery for the U.S. After six years of slow growth, the state’s economy is now on more solid ground.1 The state has recovered all of the jobs lost during the recession,2  and in recent months, job growth in California has outpaced the national average, with notable growth in professional and business services and construction sectors.3 The state’s annual GDP has been growing faster than the national rate for the last few years. As of August 2015, California’s unemployment rate had fallen to 6.1 percent, remaining above the national average (5.1 percent) as nearly 1.2 million California residents remain unemployed.4

State Budget

California’s budget situation has improved in recent years.  The state had faced several years of challenging budget conditions that were made more difficult by the Great Recession. At the height of the downturn, the state faced several years of multi-billion dollar budget shortfalls5 that required a number of policy actions to curb spending and increase revenue, including a temporary increase in personal income tax rates for higher income earners (over $250,000) along with other tax increases approved by California voters through Proposition 30 in November 2012. In 2014, for the first time since 2007, California ended its fiscal year with a positive General Fund balance totaling $1.9 billion, due to much larger than anticipated growth in revenues from personal income taxes and corporate taxes.6 In 2014 the state also implemented the Medicaid expansion, opened its state-based health insurance Marketplace, and invested in outreach and enrollment efforts.7

California’s budget processes for FY 2015 and FY 2016 started off with budget surpluses, allowing the state to continue to pay down debt, restore some previous cuts, and make additional investments. The FY 2016 budget, signed by Governor Brown on June 25, 2015, totaled $168 billion. It holds total general fund spending relatively flat (increasing just 0.8 percent over last year) while increasing spending on education, health care, in-home supportive services (IHSS), workforce development, drought assistance, and the judiciary.8 In addition, the state is expanding full-scope coverage through existing Medi-Cal managed care for undocumented children; this coverage is financed with state-only dollars. The state is also focused on building reserves; the state estimates there will be $4.6 billion in state reserve accounts at fiscal year-end.9

Affordable Care Act Coverage Expansion

The 2010 Affordable Care Act (ACA) was designed to expand coverage to a majority of the non-elderly uninsured across the country through the Medicaid expansion and the creation of health insurance Marketplaces in states. These ACA coverage provisions took effect on January 1, 2014. California was one of a several states that opted to expand coverage to low-income adults before 2014.

Early Implementation Efforts: Low-Income Health Program (LIHP)

Since 2010, the state uninsured rate has dropped dramatically.  In 2010, out of a total population of 37 million, there were 6.8 million nonelderly uninsured in California.10 In 2010, well before the major gains in coverage under the ACA, California expanded coverage to uninsured, low-income adults through the creation of the Low-Income Health Program (LIHP) under their “Bridge to Reform” Section 1115 Medicaid Demonstration Waiver.

California has a history of county-delivered health care services, as counties have traditionally had broad authority over the provision of health-related services. Building on an existing coverage initiative, LIHP was county-based coverage that was financed with county funds and federal funds at the state’s regular matching rate (no dollars from the state General Fund were used).11 County participation was voluntary. LIHP benefits were more limited than those available to state Medicaid beneficiaries. Counties could use an open fee-for-service (FFS) system or a closed managed care system, or a combination of the two systems. Between July 2011 and December 2013, LIHP coverage was provided through 19 LIHP programs across 53 of the state’s 58 counties.12 By the end of 2013, over 650,000 people were enrolled in the program.13

Medicaid Expansion and Marketplace Coverage

In January 2014, California expanded its Medicaid program, known as Medi-Cal, statewide to cover low-income adults at or below 138 percent FPL. Individuals at or below 138 percent FPL who gained coverage under the early LIHP expansion were automatically enrolled in Medi-Cal coverage. As a result, approximately 630,000 LIHP beneficiaries were auto-enrolled in Medi-Cal.14 Subsidized private coverage became available to adults with moderate incomes (between 139 – 400 percent FPL) through California’s state-based health insurance Marketplace, known as “Covered California.” An estimated 25,000 LIHP beneficiaries transitioned to Covered California.15

In addition to automatically transitioning LIHP beneficiaries to ACA coverage options in 2014, California took several other steps to simplify and streamline enrollment under the ACA including creating a single online portal for Covered California and Medi-Cal applications and adopting the Express Lane Enrollment Project to target and enroll state Supplemental Nutrition Assistance Program (SNAP) beneficiaries in Medi-Cal coverage. The state also invested heavily in outreach and enrollment efforts for both Medi-Cal and Covered California. Covered California established an Assisters Program and worked with community organizations to provide direct assistance to consumers to help them enroll in coverage.

Medi-Cal coverage grew by 30 percent (or 2.8 million people) between the fall of 2013 and the end of 2014.16 Approximately 1.7 million people applied for and were determined eligible for Covered California health plans between October 2013 and October 2014.17 From 2013 to 2014, California’s uninsured rate declined from 19.1 percent to 13.4 percent.18

Despite much success in enrollment, California—like most other states—experienced enrollment and outreach challenges in 2014 including a shortage of in-person assisters, problems with cultural and linguistic resources, and technology/systems issues with the Covered California website.  These system issues led to a significant Medi-Cal application backlog.  In late 2014 and 2015, the state successfully addressed many of these challenges, largely resolving the backlog issue.19

Delivery System And Payment Reform

In addition to coverage expansions, DHCS has increasingly focused on delivery system and payment reform – to expand access for Medi-Cal beneficiaries, to improve care quality and health outcomes, and to reduce costs to create a more sustainable program.

Delivery System Reform Incentive Payment (DSRIP) Initiative

In 2010, California was the first state to secure a DSRIP waiver, effectively establishing the basic framework for future DSRIP waivers – the distribution of funds to safety net providers that agree to meet defined metrics and goals. California pursued a DSRIP initiative to provide financial support and stability to its 21 public hospital systems (referred to as “designated public hospitals”) and to “jump start” public hospital system preparation for broader health reform implementation. California’s $6.67 billion dollar DSRIP initiative was financed entirely by the state’s 21 public hospital systems and the federal government.20

Participating public hospitals were required to implement projects in the following areas: infrastructure development (e.g., disease management registries, enhancing performance improvement and reporting capacity); innovation and redesign (e.g., medical homes); population-focused improvement (e.g., diabetes care management and outcomes); and urgent improvement in care (e.g., central line-associated infection prevention). In 2012, the state added the HIV Transition Incentive Program to DSRIP, a new optional project, to strengthen public hospital capacity to serve individuals diagnosed with HIV, particularly LIHP enrollees previously served under programs funded by the Ryan White HIV/AIDS Treatment Extension Act of 2009.21 The state’s waiver gave individual hospital systems broad flexibility to determine the specific projects they would pursue and the benchmarks they would attempt to meet – acknowledging hospital systems were at different starting points along the spectrum of delivery system reform. To receive DSRIP funds, participating public hospitals were required to achieve project-specific milestones.

Since each public hospital system developed an individualized implementation plan, it is hard to tell a statewide story involving how much DSRIP has accomplished to date. It is also challenging for the state to assess the impact of DSRIP projects in advancing the state’s broader vision for delivery system reform.22 To address these issues, California proposed a more standardized DSRIP approach in its waiver renewal application (described in more detail below) that includes the use of required core project components and standardized outcome and quality metrics.

In March 2015, California submitted a renewal application for its Bridge to Reform waiver, which was renamed “Medi-Cal 2020.” The renewal requests authority for a series of delivery system transformation and alignment programs, including the continuation of DSRIP funding for public hospital systems. The proposed waiver expands the scope of DSRIP-eligible institutions to 42 safety net institutions run by health care districts (referred to as “non-designated public hospitals”). These institutions are predominantly located in rural areas and are often the only hospitals serving their communities. The application requests a funded planning period of up to one year for these safety-net hospitals to build the infrastructure necessary to participate in the program. Proposed DSRIP project domains noted in the Medi-Cal 2020 renewal include:

  • system redesign (e.g., improving care transitions, physical and behavioral health integration);
  • care coordination for high-risk, high-utilization populations (e.g., health homes, complex care management);
  • resource utilization efficiency (e.g., appropriate use of antibiotics, high cost imaging and pharmaceuticals);
  • prevention (e.g., obesity, cancer); and
  • patient safety in ambulatory care (e.g., medication reconciliation).
Managed Care

California’s Department of Health Care Services (DHCS) has a long history with managed care plans.23 Over time, DHCS has expanded Medicaid managed care to all 58 counties, with each county choosing its own managed care model. As a result, several different managed care models operate across the state. All models include commercial plans and/or county-run plans. In most counties Medi-Cal beneficiaries choose between at least two managed care plans. However, in some less-populated counties beneficiaries have access to only one county-run plan.24

At the start of the 2010 Bridge to Reform waiver, 55 percent of Medi-Cal beneficiaries were enrolled in managed care. Today, nearly 80 percent of Medi-Cal beneficiaries, or more than 9 million beneficiaries, are enrolled in managed care.25

In addition to the expansion of managed care statewide, in recent years the state has expanded managed care to new Medi-Cal populations, including seniors and persons with disabilities (SPDs). Managed care expansions involving SPDs are described in the next two sections followed by a discussion of managed care systems transformation and improvement strategies outlined in the Medi-Cal 2020 proposal.

Mandatory Managed Care for Seniors and Persons with Disabilities (SPDs)

The Bridge to Reform waiver authorized the expansion of mandatory Medicaid managed care for seniors and persons with disabilities (SPDs) enrolled in fee-for-service (FFS) Medi-Cal.26 By enrolling SPDs in managed care the state aimed to increase access, improve care coordination, and achieve cost efficiencies.27 Because of the complex care needs of SPDs, managed care plans had to meet extensive readiness requirements. The state was required to conduct outreach and engagement activities to encourage active plan selection among beneficiaries and to educate beneficiaries about the new delivery system.28 The state took a phased approach to enrolling Medi-Cal SPDs into managed care over a 12 month period beginning June 2011. During this period, nearly 240,000 FFS SPDs were transitioned to Medicaid managed care plans across 16 counties.29 Although the state engaged in significant planning efforts to try to ensure the smooth transition of SPDs to managed care, a multitude of challenges arose. Some challenges included beneficiary data sharing delays that hindered health plan and provider readiness; plan difficulty recruiting providers with expertise in complex care; lack of provider training in care coordination; and inadequate/confusing beneficiary outreach materials.30,31 The state is using experience gained from this SPD transition to inform similar transitions in an additional 19 (rural) counties32 and the transition of dually eligible beneficiaries into managed care; both of these latter transitions began in 2014.

Coordinated Care Initiative

California’s 2012-2013 state budget established the Coordinated Care Initiative. This initiative was authorized by CMS through an amendment to the Bridge to Reform waiver. Through this initiative, the state aims to transform the Medi-Cal delivery system to better serve seniors and persons with disabilities. The initiative involves two major components: Cal MediConnect and Managed Medi-Cal Long-Term Services and Supports (MLTSS).

Cal MediConnect is a three year demonstration program for Medicare and Medi-Cal dual eligible beneficiaries. Typically, across states, very little coordination has occurred between Medicare and Medicaid programs. Cal MediConnect seeks to integrate care and improve health outcomes for dual eligible beneficiaries through the alignment of Medicare and Medicaid financing. Under Cal MediConnect, a single health plan is responsible for coordinating medical, behavioral health, long-term institutional, and home- and community-based services for beneficiaries. Enrollment in Cal MediConnect began in April 2014. The demonstration is operating in 7 counties. The state is using a passive enrollment system, where eligible beneficiaries are enrolled into a MediConnect health plan unless they actively “opt-out.” Beneficiaries may opt-out or change plans at any time.  As of June 2015, enrollment in the demonstration had reached nearly 130,000 beneficiaries.33 As of July 2015, the opt-out rate, excluding Los Angeles County, was 33 percent. Los Angeles County experienced a higher opt-out rate of 51 percent.34

Under the Managed Medi-Cal MLTSS initiative, all Medi-Cal beneficiaries (in demonstration counties), including dual eligible beneficiaries, are required to join a Medi-Cal managed care plan to receive LTSS and other Medicaid-covered benefits. Most people with Medi-Cal only are already enrolled in a Medi-Cal managed care plan, however, now they will also obtain LTSS through their health plan.35

Managed Care Systems Transformation & Improvement Programs

The Medi-Cal 2020 proposal outlines payment reform strategies the state believes will promote collaboration and shared accountability across managed care plans and providers. The state believes these strategies will lead to improved care quality and beneficiary health outcomes and reduced costs. Core strategies described in the Medi-Cal 2020 proposal include:

  • Shared Savings Incentives with Managed Care Plans – A shared savings incentive for managed care plans based on total cost of care and performance on quality metrics. Managed care plans would be required to form partnerships with providers and behavioral health systems, what the state is referring to as “accountable care groups.”
  • Standardization of Pay-for-Performance programs – The standardization of core elements of managed care plan pay-for-performance (P4P) programs to ease administrative burden on providers and drive quality improvement.
  • Physical and Behavioral Health Integration – Incentives to improve coordination between managed care plans and county mental health plans and provider incentives to promote the integration of mental and physical health care services, through coordination or co-location approaches.
Fee-for-Service Transformation

Most services are provided under Medi-Cal managed care plans, although some services are still provided through Medi-Cal’s fee-for-service program, namely dental services and maternity care. The state has proposed, in the Medi-Cal 2020 renewal application, to introduce provider incentives to expand access to oral health services and to increase preventive service utilization. The state also proposed a Hospital Incentive Program to promote evidence-based obstetrical care to improve quality and reduce costs.

Increased Access to Housing and Supportive Services Programs

As part of the Medi-Cal 2020 renewal proposal, the state aims to improve care coordination for vulnerable populations including those experiencing homelessness. The state is proposing to include enhanced tenancy support and intensive medical case management services for individuals who are homeless and meet other high-risk criteria. The state also envisions the formation of regional housing partnerships that would be eligible to receive incentive funding to establish and support integrated care partnerships focused on housing. The state would require partnerships to include managed care plans, county health agencies, cities, hospitals, and housing and social service providers.

Additional Areas of Policy Change in FY 2016

Significant adjustments made to the 2015-2016 DHCS budget include: increased Medi-Cal spending due to expected caseload growth (including the expansion of state-funded coverage for children regardless of immigration status); restoration of the 10 percent dental provider rate reduction; increased managed care rates; funding for behavioral health treatment services for individuals with Autism; funding for ACA Section 2703 Health Homes; and funding to restore in-home supportive services (IHSS) hour cuts.

While signing the Budget Act, Governor Brown called for a special legislative session to address Medi-Cal financing issues related to the state’s managed care organization (MCO) tax and continued funding for the IHSS restoration. The special session, which began June 19, 2015, is considering the Governor’s proposal to restructure the managed care organization tax which is set to expire at the end of this fiscal year. A letter from CMS raised concerns about the current tax structure – noting the tax does not meet the federal requirement to be broad-based.36 The current tax is estimated to generate $1.1 billion in FY 2016 that can then be used finance care and to draw down federal matching dollars. This special session will also consider how to fund the IHSS restoration in future years.

California Medicaid Policy Changes in FY 2015 and 2016
Eligibility, Application and Renewal Policies
  • Expansion to full-scope Medi-Cal coverage for pregnant women between 60-133% FPL in FY 2015.
  • MAGI based income standards for family planning (Family PACT) eligibility in FY 2015.
Provider Rates and Provider Fees/Taxes
  • Increased MCO and Nursing Facility rates in FY 2015. All other rates were held flat.
  • Plan to increase MCO, Nursing Facility, and Dentists’ rates in FY 2016.  Plan to hold all other rates flat.
  • Medicaid MCO tax expires in FY 2016. Legislative plan to make this tax broad-based will be discussed in a special legislative session.
Benefits and Pharmacy
  • New behavioral health treatment benefit for children with Autism in FY 2015.
  • Restoration of previous cuts in In-Home Support Services (IHSS) in FY 2016.
  • New clinical guidelines for treatment of Hepatitis C will be released in FY 2016.
Managed Care
  • HCBS and institutional LTSS added to managed care under the Coordinated Care Initiative in FY 2015.
  • Substance abuse services moving to an Organized Delivery System operated by counties in FY 2016.37
  • Health plans participating in the Medicare-Medicaid Financial Alignment Demonstration have a quality withhold of 1% in FY 2015 and 2% in FY 2016.
  • In FY 2016, DHCS will introduce an updated health plan Quality Award.
Delivery System and Payment Reform
  • Plan to submit 2703 Health Homes SPA in FY 2016. Health Homes will focus on high utilizers including individuals experiencing homelessness.
  • Plan to introduce “ACO-like” initiatives (as part of 1115 waiver renewal) in FY 2016.
  • Plan to continue DSRIP initiative (part of 1115 waiver renewal) in FY 2016.
  • All-payer claims database initiative led by HHS (not DHCS) in FY 2016.
Long-term Services and Supports Rebalancing
  • Plan to expand the number of persons served in HCBS waivers in FY 2016.
  • Plan to expand the number of persons served under the HCBS State Plan Option 1915(i) in FY 2016.
  • Plan to build rebalancing incentives into managed care contracts covering LTSS in FY 2016.
  • Plan to add a new PACE site or increase the number of persons served at PACE sites in FY 2016.
  • Plan to close/down-size a state institution and transition residents into community settings in FY 2016.
Alaska Tennessee

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