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Focus on Medi-Cal Funding

Shannon McConville July 17, 2015

The legislature is currently in a special session to address Medi-Cal financing issues. The governor called the session to deal with his proposal to restructure the tax on managed care organizations—which currently generates about $1 billion in federal funding for Medi-Cal—so that it meets federal guidelines. In addition to complying with federal requirements, the governor’s proposed changes to the managed care tax will also provide revenue to increase payment rates for providers of services to the developmentally disabled and undo cuts to the In-Home Supportive Services (IHSS) program. In the absence of these changes, the state could face a $1.3 billion shortfall in Medi-Cal financing.

Regardless of the outcome of this special session, the state faces the challenge of establishing a stable and sustainable state funding base for Medi-Cal, which now covers nearly one-third of the state population. Since Medi-Cal expanded under the Affordable Care Act (ACA) less than two years ago, enrollment has increased by nearly 40 percent, and about 12 million Californians are now covered. Nearly all new enrollees are in Medi-Cal managed care, which has also grown considerably over the past few years. The federal government is providing most of the financing for Medi-Cal expansion, but there is uncertainty about state costs in future years.

Enrollment growth has increased the total costs of the program, which are expected to be more than $90 billion in the 2015–16 budget year—an increase of nearly 50 percent from the 2013–14 fiscal year, which included the first six months of the ACA’s Medi-Cal expansion. More than two-thirds of this increase has been funded by the federal government, which pays 100 percent of the costs of those who became newly eligible for Medi-Cal during the first three years of the ACA.

But the state will assume responsibility for 5 percent of costs for the newly eligible in 2017, and this share will gradually increase to 10 percent in 2020 and thereafter. Based on cost estimates for the newly eligible from the current state budget, this amounts to an additional $700M in 2017 and $1.4B in 2020. And this estimate doesn’t account for any increases in health care costs.

While state General Fund spending for Medi-Cal has grown relatively modestly since the ACA expansion, there are additional sources of uncertainty about future state costs for Medi-Cal, including (but probably not limited to):

  • Pressure to increase Medi-Cal provider rates, which are among the lowest in the country.
  • The legal status of President Obama’s executive order allowing many undocumented immigrants to get health coverage and the number of immigrants who could become eligible for full Medi-Cal benefits—which would be financed entirely by the state.
  • The effect of changes to state financing for county indigent care (under AB 85), which is expected to offset some of the state costs of the Medi-Cal expansion.
  • Ongoing negotiations with the federal government over the renewal of California’s 1115 Medicaid waiver. These waivers are designed to give states more flexibility to expand and improve their Medicaid programs. Over the past five years, California’s waiver brought in about $10 billion in federal funding to support Medi-Cal and the state public hospital system.
  • Planned reductions in federal funding from the Disproportionate Share Hospital (DSH) program, which provides additional funds for California hospitals that serve large shares of uninsured and publicly insured Californians. The lion’s share of DSH funds in California go to public hospital systems—an important source of specialty and inpatient care for Medi-Cal beneficiaries.
  • Required expansions to behavioral health benefits, including mental health treatment and substance use disorder services.
  • The high cost of new drugs—most notably for the treatment of Hepatitis C. Nationally, prevalence rates of Hepatitis C are higher among low-income men, who are among those most affected by ACA changes in Medi-Cal eligibility.

Long a complex issue, Medi-Cal financing has been complicated even more in recent years by the ACA, which affects all aspects of California’s evolving health care delivery system. But it will be important for the state to meet the challenge of developing a sustainable funding plan for this program, which provides for comprehensive health services for nearly a third of state’s population.

Sources: Medi-Cal enrollment totals are from the Department of Health Care Services, Research and Analytic Studies Division, Medical Certified Eligibles, Summary Pivot Table, Most Recent 24 months, May 2015. Medi-Cal funding sources are from the Medi-Cal Local Assistance Estimates, May 2014 and May 2015.

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