LAO 2005-06 Budget Analysis: General Government

Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005

Public Health

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

The Governor's budget proposes $3 billion (all funds) for public health programs in the budget year, a 1 percent ($39 million) increase from the previous year. The budget proposes $544 million from the General Fund in the budget year, a 7 percent ($36 million) increase from the current year. This increase is largely due to caseload adjustments in the department's health insurance programs for special needs populations and the administration's proposals for an obesity prevention initiative and a pharmacy assistance program.

Budget Proposals

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

Proposition 99 Fund Shifts

We recommend that the Legislature approve the Governor's budget for Proposition 99 funded programs, which we believe presents a reasonable approach to maximize resources for health programs and achieve General Fund savings. We further recommend, however, that the Legislature begin this year to address the long-term issues posed by the present structure of Proposition 99 and seek the approval of the voters to reform the measure in a way that would enable the state to focus its funding more effectively as the funding derived from tobacco revenues continues to diminish.


In November 1988, the voters approved Proposition 99, the Tobacco Tax and Health Protection Act, which established a surtax of 25 cents per pack on cigarette products. Generally, the revenues generated by the measure support various tobacco education and prevention efforts, tobacco-related disease research, environmental protection and recreational resource programs, and health care services for low-income uninsured Californians.

The proposition requires that the revenues from the surtax be distributed to six accounts within the Cigarette and Tobacco Products Surtax Fund, a special fund created by the measure, according to specified percentages, and further provides that expenditures from each account can be used for specific kinds of activities. Figure 1 identifies (1) the six accounts, (2) their specified purposes, and (3) the percentage of the tax revenues allocated under this measure.

Figure 1

Distribution of Proposition 99 Funds

Account Name

Purpose of Funding

Percentage of Funding


For programs that prevent and reduce tobacco use, primarily among children, through school and community health education programs.


Hospital Services

For payments to licensed public and private hospitals for
uncompensated hospital care.


Physician Services

For payments to physicians for uncompensated medical care.



For tobacco-related disease research.



For programs to protect, restore, enhance or maintain fish, waterfowl, and wildlife habitat (50 percent) and for programs to enhance state and local park and recreation resources (50 percent).



For any of the dedicated uses specified for the other accounts.


Under state law, amendments to the measure are permitted with the approval of four-fifths of the Legislature; however, those amendments must be consistent with the purposes of the measure described in Figure 1.

Governor's Proposal

The Governor's proposed budget projects that Proposition 99 revenues will decrease by $9 million in the budget year. The budget proposes to achieve General Fund and Proposition 99 savings through a series of funding shifts, to augment funding for certain activities, and to maintain Proposition 99 funding for various programs. The major changes in programs funded from Proposition 99 during the budget year are described below and summarized in Figure 2. (We note that the administration has proposed similar fund shifts for the current year and intends to sponsor urgency legislation that would enact the necessary changes in appropriation levels.)

Figure 2

2005-06 Governor's Budget
Proposition 99 Funding Shifts

(In Millions)



General Fund

Federal Funds

Access for Infants and Mothers




Administration of tobacco control activities


Breast Cancer Early Detection Program


State mental hospitals


Expanded Access to Primary Care



Medi-Cal coverage for recent immigrants



Redirected to other Proposition 99 programs


  Total Impacta




a  Detail may not total due to rounding.

Fund Shift Frees Up Proposition 99 Funds. The administration proposes to "free up" $78.4 million in Proposition 99 funds currently used to support prenatal services to low-income women in the Access for Infants and Mothers (AIM) program. It does this by replacing the Proposition 99 funds with $27.5 million from the General Fund, which draws down $51 million in federal State Children's Health Insurance Program (SCHIP) funds.

The administration has proposed to substitute General Fund resources for Proposition 99 in AIM because Proposition 99 ordinarily cannot be used, under the terms of the initiative, to draw down federal funds. Through this fund shift, approximately $78.4 million in Proposition 99 funding would be freed up in the budget year that could be used for other purposes. (We provide more information regarding this proposal in the Crosscutting Issues section of this chapter.)

Program Augmentations. The administration proposes that a portion of the Proposition 99 funds freed up by the fund shift be used to augment funding for three programs currently supported by Proposition 99.

First, the Governor proposes that $1.1 million be used to restore funding for the administration of tobacco control activities that had been inadvertently reduced by budget actions taken in 2003-04.

The administration also proposes a $12.8 million augmentation for the Breast Cancer Early Detection Program (BCEDP), also referred to as the "Every Woman Counts" program. This program provides breast cancer screening to low-income women ages 40 and older who are uninsured or underinsured. The demand for services through this program has steadily increased over the years, with the number of women served increasing by 50 percent between 1999-00 and 2003-04.

Lastly, the administration proposes to augment funding for the Department of Mental Health by $13.6 million to provide care for additional patients in state mental hospitals.

Additional Fund Shifts. The administration further proposes to replace General Fund support for certain health programs with a portion of the freed up Proposition 99 funds. Specifically, the budget plan proposes that $10 million in Proposition 99 funds be used in lieu of General Fund resources to support the Expanded Access to Primary Care (EAPC) program, which reimburses certain primary care clinics for uncompensated medical care. The overall level of state funding for EAPC would be maintained at the current-year level, but a larger portion of the program's funding would come from Proposition 99.

Finally, the Governor's budget plan proposes to substitute $33 million in Proposition 99 funds for General Fund resources to offset the cost of nonemergency services provided under the Medi-Cal Program to recent legal immigrants. Under federal rules, the state can receive federal Medicaid funds to pay for the medical costs of emergency services for legal immigrants who have been in the country for less than five years. However, the federal government will not pay the costs of nonemergency services provided to these individuals. Since, under state law, these individuals are eligible for the same services as citizens, the state bears the full cost of the additional services provided to this group of immigrants under Medi-Cal. Part (but not all) of these costs would now be paid for using Proposition 99 funds.

Funding Held Steady for Remaining Programs and Reserve. The Governor's budget would use the remaining Proposition 99 resources ($8.2 million) freed up from the AIM fund shift to maintain various programs and services now supported by Proposition 99 at their current year funding level. The Proposition 99 reserve in the budget year would also remain generally at the same level as the current year.

Assessing the Governor's Proposal

Budget Proposal Is Reasonable. In light of the statutory restrictions that exist on the use of Proposition 99 funds, we believe that the Governor's budget proposal provides a reasonable approach for the use of these revenues in a way that both maximizes the total resources available for health programs and achieves some General Fund savings in the budget year.

The administration proposal, it should be noted, "works" in totality only if the Legislature concurs with the significant shift in the source of support for prenatal services that frees up a considerable amount of Proposition 99 resources for other programs. In our view, this administration proposal has merit in that it would maximize the amount of federal support available for the AIM (and Medi-Cal) programs that could be leveraged with state funds with no programmatic effect on program beneficiaries. We note, however, that part of the program shifts could be accomplished on a onetime basis using excess Major Risk Medical Insurance Program (MRMIP) reserve funds, a potential option we discuss below.

Although the Governor's proposal presents a reasonable approach to utilize the Proposition 99 funds in the short-term, the Legislature should also begin to consider how it can and will use these funds in the future. We discuss several aspects of this issue below.

Proposition 99 After 16 Years: Steadily Declining Revenues, Too Many Programs

Proposition 99 Funds Have Declined Steadily. The tobacco-tax revenues generated under Proposition 99 have steadily declined since the measure's inception. As seen in Figure 3, the success of efforts to reduce smoking, and the imposition of further tax increases on cigarette products, have resulted in a 46 percent decline in Proposition 99 revenues—from the $573 million received in 1989-90 to an estimated $309 million in 2005-06. The impact of this decline is even more apparent when the value of the initial revenue generated by this measure is adjusted for the effects of inflation. As seen in Figure 3, Proposition 99 revenues, as adjusted for inflation, have dropped by 66 percent since 1989-90.

Events Have Contributed to Decline in Proposition 99 Resources. Since the approval of Proposition 99, two additional measures have been enacted that increased the tax on tobacco products. These were Proposition 10, enacted by the voters in 1998,and the Breast Cancer Act of 1993 (Chapter 60, Statutes of 1993 [AB 478, Friedman]), enacted by the Legislature. In addition, in 1998, the tobacco industry reached a master settlement agreement with a number of states, including California, that committed them to making ongoing cash payments to state and local governments.

All of these events have indirectly contributed to a further decline in Proposition 99 revenues. For example, the tobacco industry increased prices on tobacco products in response to the legal settlements, which had the effect of further reducing the consumption of tobacco products and Proposition 99 revenues. Proposition 10, which increased the tobacco tax by 50 cents per pack of cigarettes to generate revenue for various early child hood development programs, and the Breast Cancer Act which increased the same taxes by 2 cents for cancer research and breast cancer detection, had the same effect.

Proposition 10 did provide that some of its revenues would be used to "backfill" a portion of the revenues lost to Proposition 99 and breast cancer research and detection activities. (About $16 million in backfill funding is provided in Proposition 99 for this purpose in the Governor's budget plan.) However, the Proposition 10 backfill only goes to replace revenues lost to the health education and research accounts—and not the other four Proposition 99 accounts. No backfill at all was provided for in the other legislation.

Too Many Programs Supported by Too Few Dollars. Pursuant to the terms of the initiative, the revenues generated by Proposition 99 are dedicated to a wide array of purposes—tobacco education and prevention, research, resources programs, and health care services for low-income uninsured Californians. Currently, these funds are used to support dozens of separate state programs and services administered by 12 separate state departments.

While the specific programs and activities supported with these revenues have fluctuated from year to year, the breadth of programs and services supported from the Proposition 99 special fund has not changed over time. Coupled with the steady decline in revenues, allocations of Proposition 99 funding are getting smaller each year, in general, program by program. Given estimates that Proposition 99 revenues will continue to drop, in both real and inflation-adjusted terms, the Legislature will inevitably face the question of whether the use of these monies is so fragmented that they are not being used as effectively as possible.

Diminishing Fund Source Ill-Suited for Growing Programs. The continual decline of Proposition 99 revenues means that this fund source cannot keep pace with programs that regularly experience growth in their budgets due to increases in caseloads or costs. Nevertheless, Proposition 99 revenues are now being used to support several programs with growing caseloads, such as AIM, the state mental hospitals, and BCEDP.

The Governor's budget proposal would shift one of these caseload-driven programs (AIM) to the General Fund. But the administration proposal effectively replaces AIM in the Proposition 99 "line-up" with Medi-Cal services for recent immigrants—another activity likely to experience significant growth in caseloads and costs.

Inevitably, this approach of using this declining revenue source to support growing programs will force difficult choices upon the Legislature. If it wishes to maintain support for these programs using Proposition 99 revenues, it will have to come at the expense of the other programs funded from Proposition 99 or through the use of alternative funding sources.

Restrictions Limit Budgeting Flexibility. Proposition 99 contains a number of restrictions that give the Legislature little flexibility in the expenditure of these tobacco tax revenues. The requirement for six separate accounts, each with its own distinct funding purposes, and predetermined percentages of funding for each purpose, may or may not align with current legislative priorities. For instance, if the Legislature wished to shift the health services funds to health education programs, or vice versa, these changes would not be permitted under the measure.

Furthermore, under the terms of the initiative, the state is generally prevented from using Proposition 99 funding to leverage federal resources for health care services funded under the Hospitals Services or Physician Services accounts. We are advised that this provision was drafted mainly to prevent Proposition 99 funds from being diverted to support caseload-driven health care programs supported by federal funds (for example, Medi-Cal). The drafters intended that the resources be used instead to expand the identified programs and services.

However, there is a significant downside to this constraint, in that this language potentially limits the state's opportunities to leverage state funds to draw down additional federal resources. For example, the state would generally be prohibited from using Proposition 99 resources to expand the Healthy Families Program (HFP) to poor adults (as the Legislature had previously declared its intent in Chapter 946, Statutes of 2000 [AB 1015, Gallegos]), even though the state would be able to draw down a two-to-one federal-state match for an expansion of health coverage that is a high legislative priority.

Separate Reserves Tie Up Proposition 99 Funding. Prior to this year, the state had maintained separate reserves of Proposition 99 revenue for AIM and MRMIP to address unanticipated increases in expenditures in those programs. (The MRMIP provides health coverage to individuals who are unable to obtain coverage on their own due to pre-existing medical conditions.) In 2004-05, the Legislature eliminated the separate AIM reserve. However, the Governor's proposed budget would keep in place a separate reserve for MRMIP of $20.2 million in Proposition 99 revenues.

One effect of holding these funds in a reserve is to diminish the amount of Proposition 99 resources that could otherwise be used to support other Proposition 99-funded programs. (We provide more information regarding the Governor's proposed budget for MRMIP and the reserve issue later in this chapter of the Analysis.)

Changes in Funding Allocations or Uses Requires Voter Approval. As noted earlier, the measure contains a provision that authorizes amendments to Proposition 99 that are both consistent with the purposes specified in the measure and have the support of four-fifths of the Legislature. However, a 1994 court case concluded that this provision does not give the Legislature the authority to reallocate funding in keeping with state budget priorities.

Specifically, the state attempted to amend Proposition 99 in 1994 to permit a shift of funds from antismoking programs to other types of health programs. A Superior Court judge subsequently struck down this legislative change and ruled that it was inconsistent with the intent of the voters in the enactment of the initiative. This ruling suggests that future attempts to change the existing allocations of funding in Proposition 99 would require voter approval.

Analyst's Recommendations

We recommend that the Legislature approve the Governor's budget for Proposition 99-funded programs, which we believe presents a reasonable interim approach to maximize resources for health programs and achieve General Fund savings. We believe this approach is interim because it involves the use of declining resources to support caseload-driven programs. A long-term solution is needed to appropriately match state programs with Proposition 99 resources.

Accordingly, we further recommend that the Legislature begin this year to address the long-term issues posed by the present structure of Proposition 99. We propose that the Legislature seek the approval of the voters to reform Proposition 99 in a way that would enable the state to focus its funding more effectively as the funding derived from tobacco revenues continues to diminish. Our proposed approach would seek the consent of voters to allow the Legislature more flexibility to change the way Proposition 99 funds are used to meet the state's ever-changing priorities and needs.

Such a measure could have these specific provisions:

We note that there may be other issues the Legislature may also want to consider for restructuring Proposition 99. The Legislature may wish to examine the allocations required under Propositions 10 and the Breast Cancer Act to consider whether the voters should also be asked to backfill or consolidate any share of these resources into the new structure of Proposition 99 accounts that we identify. Alternatively, all restrictions on these funds could be removed—thus, helping to unlock the budget—so that they were available to meet the state's highest priorities on an annual basis.

Lastly, as we discuss in our analysis of the MRMIP budget, we recommend that the Legislature eliminate the separate reserve maintained in the Governor's budget for the MRMIP program thereby freeing up as much as $20.2 million in Proposition 99 on a onetime basis for other purposes.

Governor's Anti-Obesity Initiative

While additional state public health efforts to combat the spread of obesity are warranted, the Governor's proposal launches new anti-obesity projects before an assessment of existing Department of Health Services (DHS) efforts in this area is complete and does not sufficiently take advantage of alternative funding sources available to DHS. (Reduce Item 4260-001-0001 by $2,803,623 and Item 4260-111-0001 by $3,050,000).


The prevalence of overweight Californians has increased from 38 percent in 1984 to 57 percent in 2003. This excess weight is a major contributor to disease, disability, premature death, and to the burden of increasing health care costs. In response to concerns about this growing public health problem, the Governor's budget includes approximately $6 million in General Fund resources to implement a variety of proposals to promote healthy nutrition, increased physical activity, and obesity prevention. The Governor's initiative has several major components, which are summarized in Figure 4.

Figure 4

Proposed Components of
Anti-Obesity Initiative

(Dollars in Thousands)




DHS coordinating office



Community action grants



Training and technical assistance


Enhanced health services for Medi-Cal children


Surveillance, evaluation, and research


Public relations


Miscellaneous OE&E expenses





New DHS Office. The administration has requested approximately $371,000 and one new staff position to establish a new and separate office within DHS to coordinate the department's existing programs that promote nutrition and physical activity. According to DHS, the office is to (1) serve as the single point of contact for information regarding the development of public policies and scientific information related to obesity; (2) foster partnerships among programs within the department that have functions related to combating obesity; (3) coordinate the department's public health surveillance, training, and evaluation of obesity prevention efforts; and (4) carry out various other coordinating activities.

This new office would be directed by a new medical officer who would report directly to the State Public Health Officer. Part of the funding would also be used to implement a "worksite wellness" initiative by which DHS employees would themselves be encouraged through various strategies to lose or maintain a healthy weight.

Grants to Community Organizations. The Governor's proposal includes approximately $3 million for grants to community organizations to implement projects involving schools and other local agencies and organizations to address various aspects of obesity prevention. For example, a grant might be used to support a project to encourage the layout of new housing developments in designs that encouraged new residents to walk to stores and schools instead of driving to them. The department estimates that 15 such projects would be funded through a competitive process with the funding that the administration is requesting. The administration is additionally requesting $500,000 for technical assistance and training for these regional and local obesity prevention efforts.

Enhanced Health Services for Medi-Cal Children. About $1.4 million would be provided to develop an initial demonstration project targeted at improving the quality of health care provided to Medi-Cal children to prevent or address obesity problems. This project would consist of three main activities: (1) the promotion of breastfeeding and the exclusion of other methods for feeding infants, (2) increased screening and counseling of children for obesity problems by primary care providers, and (3) improved referral and treatment services for children who are overweight or at risk of becoming overweight. This project would be implemented in up to six collaboratives made up of hospitals, clinics, and other medical service providers that serve significant numbers of Medi-Cal beneficiaries.

Other Components. The initiative includes $500,000 for public health surveillance activities, program evaluation, and research into the design and development of effective public health initiatives to stem the rise in obesity. Lastly, the initiative includes approximately $150,000 for public relations materials and events intended to encourage the public to live healthier lifestyles and not be overweight.

Assessing the Governor's Proposal

Given the mounting medical evidence of the costly health problems that can result from obesity, the administration's increased focus on improving the state's efforts to help curb the rise of this serious public health problem is warranted. However, our analysis indicates that there are several problems with the administration's approach, as discussed below.

New Programs First, Assessment Later. Currently, DHS spends about $1.2 billion annually from federal and private sources for a variety of programs that are intended to promote good nutrition and increased physical activity as a means to improve public health. (Of this amount, approximately 75 percent of the funding is for nutritious food provided to low-income families through the Women, Infants, and Children (WIC) pro-gram.) This figure does not include the expenditures in other state departments for anti-obesity activities.

Among other activities, the department's obesity prevention programs provide nutrition education to low-income women and young children, promote physical activity and healthy eating behaviors through public media campaigns, help develop school nutrition policy, and provide technical assistance and training to other entities engaged in obesity prevention efforts. The DHS has indicated that one of the functions of the proposed new state office is to assess how these existing programs could be better managed and focused on reducing obesity.

Nevertheless, the administration proposal immediately seeks additional General Fund resources for new obesity prevention efforts before such an assessment has been completed. This assessment is critical to avoid any duplication of effort and to understand (and eventually maximize) the full potential of our existing programs.

Some overlap with existing activities appears evident. For example, the Epidemiology and Health Promotion section of the Chronic Disease Control Branch of DHS already operates a "California Obesity Prevention Initiative." This initiative, with an annual budget of $275,000 in federal funds, embarks upon many activities, which appear to be similar to those described in the Governor's new budget request. For instance, the initiative is involved in strategic planning, the identification and improvement of data collection and public health surveillance activities, the development of a pilot program to increase student physical fitness activity before and after school, and the provision of training and technical assistance to others both inside and outside the department. The new DHS office proposed to centralize anti-obesity efforts appears to duplicate many functions already being performed within the department.

Alternative Funding Sources Available for Some Components. In its funding request, DHS has asserted that almost all of its existing programs to encourage good nutrition and greater physical activity target high-risk, low-income communities, largely because that focus is required as a condition of receiving federal funds to support them. According to DHS, General Fund support for new anti-obesity activities is necessary because no other funding source is available for its proposed projects, which are intended to improve the public health of a broader segment of the California population.

However, our analysis indicates that alternative funding sources are available in lieu of the General Fund for certain components of this proposal. For example, federal authorities have indicated that states can seek federal approval to establish a so-called "public health initiative" to address targeted health needs of children or carry out supplemental health care-related services not otherwise available through certain other federally supported programs. Every state dollar allocated for such a demonstration project could be used to draw down $2 in federal funds under the SCHIP for certain anti-obesity activities. For example, subject to federal approval, we believe it is likely that SCHIP funds could be available for the component of the administration's proposal to improve screening for obesity problems and other medical services for Medi-Cal children.

Another potential alternative funding source is the Health Information Data Statistics Fund, which consists of revenues derived from fees charged for document (such as marriage and birth certificate) searches and services provided to certain state and federal programs. State law allows this fund to be used to support the conduct of special health studies and to prepare statistical reports concerning the health status of Californians. Our analysis suggests that some of these same activities in the new state anti-obesity office could be supported from this special fund in lieu of the General Fund spending proposed by the administration. We also believe grant funding available from the National Institutes of Health and the Centers for Disease Control—resources not currently accessed by DHS—could also be explored.

Analyst's Recommendations

Slimmer Budget Warranted. In light of the concerns we have identified with the administration's anti-obesity initiative, we recommend that the Legislature reduce the funding request by $5.9 million. We recommend that the Legislature approve only the request for $180,000 from the General Fund for the medical officer position (and related operational costs) to direct the department's coordinating activities. Additionally, the Legislature should redirect existing DHS funding and staff resources from the existing obesity prevention initiative in the Chronic Disease Control Branch to create the new centralized anti-obesity program.

This new DHS office should be directed to complete its assessment of the department's existing programs and to exhaust all available opportunities for obtaining alternative sources of funding in lieu of General Fund support for any new activities that do not duplicate existing DHS programs and functions. Once that has occurred, the administration could return to the Legislature next year with a revised budget request for any additional General Fund resources that are needed to advance efforts against obesity.

We also note that we view the worksite wellness initiative as a lower priority compared to direct services provided by this or other departments and recommend that this component of the proposal be rejected or implemented through a redirection of existing administrative resources.

Should the Legislature determine that it wished to move forward now with certain components of this initiative and not wait for an assessment of existing resources, we recommend it restructure the proposal to maximize the alternative fund sources that we have identified above.

Other Public Health Program Issues

GHPP Accounting Adjustment Would Provide Savings and Consistency

We recommend that the department report at budget hearings on its estimate of the fiscal effect of shifting the Genetically Handicapped Persons Program from an accrual to cash basis of accounting. This change would bring the program in line with other Department of Health Services programs operating under a similar basis of accounting and could achieve net onetime program savings of several millions of dollars in the General Fund.

Background. In recent years, the Legislature has approved various program accounting changes in order to achieve onetime state savings. The 2003-04 Budget Act and related legislation shifted the Medi-Cal Program from an accrual to a cash basis of accounting. The 2004-05 Budget Act adjusted the spending level for the mental health services component of the Early and Periodic Screening, Diagnosis and Treatment Program to reflect the use of the same accounting basis as the rest of Medi-Cal. These technical changes had the effect, on a onetime basis, of shifting a portion of the programs' budget for a particular year to the next fiscal year.

The Governor's budget proposes a similar accounting change for the CHDP program, a change that is estimated to achieve onetime General Fund savings of approximately $500,000 in 2005-06. The department indicates that such a change is warranted because of CHDP's financial support for the gateway, a program that screens for and connects children who are otherwise eligible for or currently enrolled in HFP or Medi-Cal to those programs. Most gateway funding comes from Medi-Cal, which, as noted earlier, is on a cash basis. It is also our understanding that the CCS program (a program that provides health care services to severely ill and medically fragile children) is already budgeted on a cash basis in part because of that program's close financial relationship with Medi-Cal. Notably, the Genetically Handicapped Persons Program (GHPP) (a program that provides comprehensive health care services to severely ill adults) is now budgeted on an accrual basis, which potentially complicates coordination of its "state only" component with Medi-Cal. The department has indicated that it might be possible to move this program to a cash accounting basis.

Analyst's Recommendation. We recommend that DHS report at budget hearings on its estimate of the fiscal effect of a shift of GHPP to a cash basis of accounting in order to make the program consistent with other DHS programs. We estimate that such a shift would result in potentially several millions of dollars in General Fund savings on a onetime basis.

Information Pending on ADAP Federal Allocation and Drug Rebates

We withhold recommendation on the AIDS Drug Assistance Program (ADAP) budget for local assistance funding given the uncertainty about how much money this program will receive from its federal funding allocation and supplemental rebates from drug manufacturers. In order to reduce the future reliance of ADAP on the state General Fund, we recommend that the Legislature approve two additional staff positions requested for the negotiation of better price discounts with drug manufacturers.

Program Description and Budget Proposal. The ADAP is a prescription drug assistance program for persons with HIV with incomes up to $50,000 annually who have no health insurance coverage for prescription drugs and are not eligible for Medi-Cal. The budget proposes $264 million from all fund sources for ADAP in 2005-06, an increase of $18.8 million over the revised current-year budget for the program. Of the amount requested, approximately 35 percent would originate from the General Fund, 38 percent from federal funds, and 27 percent from rebates paid to the state from drug manufacturers (which are deposited into the ADAP Rebate Fund). The Governor's budget also proposes to appropriate $230,000 from the ADAP Rebate Fund for two new staff positions and their associated operational costs to negotiate drug rebates with manufacturers.

Federal Funding Allocation and Supplemental Rebate Negotiations are Pending. The ADAP receives its federal funding under Title II of the Ryan White Comprehensive AIDS Resources Emergency (CARE) Act, which is administered by the Health Resources and Services Administration in the U.S. Department of Health and Human Services. Final confirmation of California's share of the next annual grant is expected to be received in April 2005.

Currently, the department receives supplemental rebates from manufacturers for certain HIV and HIV-related drugs. The supplemental rebates are in addition to those rebates required under federal law. Most of these rebates are scheduled to expire on March 31, 2005. At present, the department is participating in negotiations conducted by a nationwide task force of AIDS programs to obtain new supplemental rebate agreements. The outcome of these negotiations could significantly affect the level of rebates received by California, as well as the other participating states, in the budget year.

No Staff Resources Dedicated to Rebate Negotiations. Currently, ADAP does not have any staff dedicated solely to negotiating ADAP supplemental rebates. Currently, this responsibility is shared between a DHS program chief and a program specialist. According to the department, the two additional positions it is requesting in ADAP would increase its capabilities for negotiating bigger rebates on the state's drug costs and help to ensure that the state receives the maximum allowable rebates from drug manufacturers.

In addition, DHS indicates that without these positions it would have limited staff time to participate and intervene in California's behalf to secure continued federal funding for California's program. The Ryan White CARE Act is scheduled to expire in September 2005 and must be reauthorized by Congress if federal funds are to continue for ADAP and comparable programs in other states. The federal reauthorization process provides not only an opportunity for Congress to evaluate the impact of the Ryan White CARE Act funds, but also to implement changes to current funding allocation methodologies and priorities that may affect California.

Our analysis indicates that the savings or cost avoidances to the General Fund that could result from adding these two staff members are likely to outweigh the personnel and operating costs of two positions.

Analyst's Recommendation. We withhold recommendation on the Governor's proposed local assistance budget for the ADAP program pending the receipt of additional information regarding the state's federal ADAP allocation and the outcome of the supplemental negotiations for discounts with drug manufacturers. Also, we recommend that the Legislature approve the two staff positions requested for ADAP in order to bolster the pharmaceutical expertise in the program for the purpose of obtaining additional drug discounts from manufacturers.

Evaluating the Governor's California Rx Proposal

The Governor's 2005-06 budget plan includes a funding request and related legislation for a new state program to help low- and moderate-income Californians purchase prescription drugs at discounted prices. Our analysis indicates that the Governor's California Rx plan provides a reasonable starting point for the development of such a program, but we recommend modifications to the proposal that we believe will result in a more effective program that will protect the interests of California taxpayers and consumers. We propose, among other changes, that in the event that drug makers fail to make good on their promises for significant price concessions, an automatic trigger would phase out the proposed voluntary approach to obtaining rebates from drug manufacturers, and be replaced by an alternative strategy likely to result in greater discounts on more drugs for consumers.

We discuss the Governor's California Rx pharmacy proposal, including our recommendations for reducing the number of staff positions and funding requested for this policy initiative in the 2005-06 budget, in "Part V" of The 2005-06 Budget: Perspectives and Issues.

State Lacks a Unified Approach on Homeland Security

California has received almost $900 million in federal homeland security funds, including bioterrorism preparedness grant activities coordinated by the state Department of Health Services, which has helped the state start addressing homeland security needs. The state, however, lacks a unified strategic approach to homeland security. In addition, only 31 percent of the state's homeland security funds have been spent to date. We make a number of recommendations on how to address these problems in the state's homeland security approach.

We discuss our recommendations on the state's use of homeland security funds, including DHS bioterrorism preparedness grant activities in the "Crosscutting Issues" section of the General Government Chapter.

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