Upcoming Changes in Medi-Cal Create Fiscal and Policy Uncertainty

The state’s Medi-Cal program is a complex and dynamic program that at any given time is subject to potential changes resulting from economic or policy shifts. (For general background on Medi-Cal, see the “Medi-Cal” section in our February report, The 2015‑16 Budget: Analysis of the Health Budget). These changes can range from economically driven caseload changes to policy and programmatic changes such as coverage expansions, the addition of new health care benefits, and delivery system reforms. These types of changes have fiscal impacts on the state’s budget and implications for how the state administers the program and how Medi-Cal enrollees access and receive care. Below, we briefly highlight four upcoming major changes in Medi-Cal that have uncertain but potentially significant fiscal and policy implications, including (1) the renewal of the state’s Section 1115 waiver, (2) proposed modifications to the federal government’s regulations for Medicaid managed care plans, (3) the phase-in of state’s share of cost for the Patient Protection and Affordable Care Act’s (ACA’s) optional expansion population, and (4) the need to restructure the managed care organization (MCO) tax to meet federal requirements. In the coming weeks and months, we will provide more detail and updates on these changes and their potential implications for the Medi-Cal program and the state’s budget in future policy posts similar to this one and in budget analyses.

Section 1115 Waiver Renewal

The state’s current Medicaid Section 1115 waiver is set to expire on October 31, 2015. (The federal government generally grants states flexibility in administering their Medicaid programs through “waivers,” such as those allowed under Section 1115 of the federal Social Security Act. These permit a state to waive certain requirements in order to further the purposes of the program.) The Department of Health Care Services (DHCS) has submitted a proposal for a renewal of the Section 1115 waiver and is currently in discussions with the federal government regarding the structure of the waiver. Under the current waiver, the state received a total of $10 billion in federal funding over five years to implement a number of programs in Medi-Cal, such as the Low-Income Health Program that expanded Medi-Cal coverage to low-income adults who were not previously eligible for Medi-Cal in advance of ACA’s coverage expansion. In the proposal for the waiver renewal, the state is asking for about $17 billion in federal funding over the next five years to fund new delivery system transformation efforts in Medi-Cal, such as funding to incentivize public hospital systems to better integrate primary and specialty care (for more information, see the state's waiver proposal). However, according to DHCS, ongoing negotiations with the federal government regarding the waiver renewal indicate the federal funding received under the renewed waiver may be less than originally proposed. We will provide more detailed information on the Section 1115 waiver in an upcoming post.

Proposed Medicaid Managed Care Regulations

The federal Centers for Medicare and Medicaid Services (CMS) recently proposed broad and sweeping changes to the federal regulations that govern the Medicaid managed care program. These regulations were submitted for public comment in June and are expected to be finalized in 2016. If the regulations were adopted by CMS in their current form, there would be a number of fiscal and policy implications for the Medi-Cal program, which is predominantly delivered through managed care. For example, the state’s ability to draw down federal funds through certain fee-based mechanisms, such as the hospital quality assurance fee, may be limited. We will provide more detailed information on the potential implications of the proposed Medicaid managed care regulations in an upcoming post.

ACA Optional Expansion State Cost

Currently, the federal government pays 100 percent of the costs for those Medi-Cal enrollees who became eligible through the ACA’s optional expansion (largely low-income, childless adults). Beginning in 2017, the state will pay 5 percent of these costs, phasing up to 10 percent in 2020 and thereafter. The administration has estimated that this could result in additional state General Fund costs of roughly $1 billion annually by 2020. The actual cost faced by the state will depend on key factors that are uncertain—including the number of individuals enrolled in Medi-Cal under the optional expansion and the cost per enrollee. The majority of these beneficiaries will be enrolled in Medi-Cal managed care plans that receive a “capitated” rate per enrollee per month regardless of the number of services an enrollee receives. The rates paid to managed care plans for optional expansion enrollees have decreased relative to the rates plans were paid at the beginning of the Medi-Cal expansion because this population was less costly than originally estimated. It remains to be seen if this decreasing trend will continue into the future. If it does, the state’s cost for the optional expansion may be less than estimated by the administration. On the other hand, costs could be higher than estimated if, for example, enrollment is higher than projected.

MCO Tax

The MCO tax is currently an important source of funding for the Medi-Cal program. The administration estimates that revenues from this tax will offset General Fund spending for Medi-Cal local assistance by $1.1 billion in 2015-16. The federal government has indicated that the state’s existing tax structure—which sunsets in June 2016—is inconsistent with federal Medicaid law and regulations and has advised California to bring its MCO tax structure into compliance by August 30, 2016. If the state were to extend the tax beyond this deadline without addressing CMS’s concerns, it could risk losing over $1 billion in federal Medicaid funds annually. During the 2015‑16 budget process and the ongoing special session, the administration, the Legislature, and stakeholders have been working to develop a modified MCO tax that meets federal requirements. While various alternative structures have been considered, to date no agreed-upon alternative has been enacted. For more information on the MCO tax, see the “MCO Tax Modification” write-up in our February report, The 2015‑16 Budget: Analysis of the Health Budget, and our prior post, "The MCO Tax: A Flat Versus Tiered Structure."