State Spending Plan
October 5, 2016

The 2016-17 Budget

California Spending Plan


Overview of Spending. The spending plan provides $20.1 billion General Fund for health programs. This is an increase of $447 million, or 2.3 percent, compared to the revised 2015–16 spending level, as shown in Figure 20. This year–over–year net increase reflects increases in the Medi–Cal caseload and in the cost of providing health care services to Medi–Cal beneficiaries, as well as some new health care initiatives and program expansions. Figure 21 shows the major policy changes adopted by the Legislature as part of the 2016–17 spending plan. These changes—which include the enactment of a revised managed care organization (MCO) tax resulting in General Fund savings of $1.1 billion in Medi–Cal—are discussed in more detail below.

Figure 20

Major Health Programs and Departments—Spending Trends

General Fund (Dollars in Millions)



Change in



Medi–Cal—local assistance





Department of State Hospitals





Department of Public Health





Other DHCS programs





Office of Statewide Health Planning and Development



Emergency Medical Services Authority




DHCS—state administration










DHCS = Department of Health Care Services.

Figure 21

Major Health Programs and Departments— Key Policy Changes

2016–17 General Fund Effect (In Millions)



Medi–Cal—Department of Health Care Services

Savings resulting from revised MCO tax


Savings from new federal limits on generic drug prices


Rate adjustments for certain long–term care providers


Changes to asset recovery


Restoration of acupuncture benefit


Behavioral Health

Infrastructure funding for public safety diversion programs


Expansion of children’s mental health crisis services


Office of Statewide Health Planning and Development

Expansion of residency programs for primary care physicians


Department of Public Health

Additional funds for sexually transmitted disease prevention


Reestablish Children’s Dental Disease Prevention Program


Drug overdose prevention


Early detection and diagnosis of Alzheimer’s disease


Prevention funds for hepatitis B and C viruses


Enforcement funding for tobacco–related legislation


Department of State Hospitals

Activation of additional beds in Department of State Hospitals


Jail–based competency treatment expansion


MCO = managed care organization.

Department of Health Care Services (DHCS)— Medi–Cal

The spending plan provides $17.8 billion General Fund for Medi–Cal local assistance expenditures administered by DHCS. This is an increase of about $243 million, or 1.4 percent, compared to the revised 2015–16 spending level. Spending in 2015–16 was about $528 million lower than the 2015–16 budget appropriation. The lower spending in 2015–16 compared to the appropriation is the net result of a variety of factors, such as higher–than–expected prescription drug rebates and lower–than–estimated managed care costs.

Differences in Medi–Cal spending between 2015–16 and 2016–17 are in large part the result of underlying cost drivers in the program, such as changes to caseload and the cost of providing health care services. For example, the spending plan assumes that overall caseload will grow by 4.8 percent compared to 2015–16. We discuss some of the major policies that were adopted as part of the 2016–17 Medi–Cal budget below.

Reflects MCO Tax Funding That Resulted From Special Session. Chapter 2 of the 2015–16 Second Extraordinary Session (SB2X 2, Hernandez), imposes a revised MCO tax on most managed care plans. Revenues from the MCO tax are used, in part, to create General Fund savings in Medi–Cal. The spending plan reflects $1.1 billion in General Fund savings resulting from the MCO tax in the Medi–Cal budget for 2016–17.

Reflects Special Session Rate Adjustments for Certain Long–Term Care Facilities. Chapter 3 of the 2015–16 Second Extraordinary Session (AB2X 1, Thurmond), forgave certain payments that distinct part skilled nursing facilities would have otherwise owed retroactively. The legislation also eliminated certain Medi–Cal rate reductions for Intermediate Care Facilities for the Developmentally Disabled and provided a 3.7 percent rate increase for these providers. The cost of these rate adjustments is $135 million General Fund in 2016–17. Ongoing, these adjustments will cost roughly $13 million General Fund. (The cost in 2016–17 is substantially higher, as it accounts for the one–time costs associated with the forgiveness of the payments owed retroactively.)

Reflects Extension of Section 1115 Waiver. In December 2015, the federal government approved a five–year extension of the state’s Section 1115 waiver. The federal government grants states flexibility in administering their Medicaid programs through “waivers,” such as those allowed under Section 1115 of the federal Social Security Act. When a state’s waiver request is approved by the federal government, the state is permitted to waive certain federal requirements on the basis that the waiver serves to further the purpose of the state’s Medicaid program. The extension of the Section 1115 waiver includes roughly $7 billion in federal funding for Medi–Cal over the five years associated with several new programs that the state will implement through the waiver. Examples of such programs include the Global Payment Program that reforms financing provided to certain public hospitals to treat the remaining uninsured and the Whole Person Care Pilot that will provide coordinated care for Medi–Cal beneficiaries who are high utilizers of services.

Funds Closeout Activities Resulting From California Medicaid Management Information System (CA–MMIS) Replacement Project Settlement. The CA–MMIS processes payments to health care providers of the Medi–Cal fee–for–service system. In 2011, DHCS contracted with a vendor to (1) replace the legacy CA–MMIS with a modernized system, known as the CA–MMIS Replacement Project, and (2) take over the maintenance and operation of the legacy CA–MMIS while the replacement project was underway. After four years of development, the vendor notified DHCS that it would not complete the CA–MMIS Replacement Project after experiencing significant schedule delays. This notification initiated a negotiation between DHCS and the vendor regarding the terms of a settlement agreement, which was finalized in April 2016. The settlement agreement stipulates that DHCS and the vendor agreed to discontinue work on the CA–MMIS Replacement Project. However, the vendor will continue to maintain and operate the legacy CA–MMIS through September 2019. The spending plan provides limited–term funding of $3.4 million General Fund for 24 positions to (1) conduct various project closeout activities, (2) begin the procurement for a new vendor to maintain and operate the legacy CA–MMIS, and (3) reevaluate the procurement approach to replace the legacy system.

Extends Hospital Quality Assurance Fee for One Year. The spending plan extends the hospital quality assurance fee to January 1, 2018. (It was previously scheduled to sunset on January 1, 2017.) However, this fee extension does not have an impact on the 2016–17 Medi–Cal budget. Rather, the roughly $850 million in General Fund savings that will result from the fee extension will likely occur in 2017–18, reflecting the timing of the required federal government approval and Medi–Cal’s cash–basis budgeting.

Scores Savings Resulting From Revised Federal Upper Limit for Generic Drug Prices. In April 2016, a revised federal rule went into effect limiting how much the fee–for–service Medi–Cal program can reimburse pharmacies for certain generic drugs dispensed to beneficiaries. The new upper limits are based on pharmacies’ average drug acquisition costs and are on net lower than the amount Medi–Cal was previously reimbursing pharmacies, resulting in estimated General Fund savings of $130 million in 2016–17.

Restores Acupuncture Benefit. The spending plan restores the acupuncture benefit in Medi–Cal at a cost of $3.7 million General Fund ($4.4 million ongoing). Acupuncture is an optional Medi–Cal benefit—meaning the state is not required to provide the benefit under federal Medicaid law—that was eliminated during the recession.

Scales Back Asset Recovery. The spending plan scales back estate recovery as currently implemented in Medi–Cal such that estate recovery is only collected to the extent required by federal law, at an annual cost of $26 million General Fund. Prior state law required recovery for nearly all Medi–Cal payments for individuals aged 55 or older at the time of receiving services (with certain exceptions). In contrast, federal law requires the state to seek recovery from a deceased individual’s estate for payments for only a select group of services provided by Medi–Cal, including nursing facility services, home– and community–based services, and related hospital and prescription drug services.

Behavioral Health

Expands Public Safety Diversion Programs. The spending plan provides $67.5 million from the General Fund on a one–time basis to establish a community infrastructure grant program administered by the California Health Facilities Financing Authority. The competitive grant program will distribute funds to cities and counties to increase capacity within local mental health, substance use disorder, and trauma–centered service facilities, with the intent that these expanded facilities will serve as an alternative to incarceration for individuals with behavioral health disorders. The grants will finance the acquisition or renovation of new or expanded facilities and equipment, as well as support diversion program startup or expansion costs. In addition to funding diversion services, the grant funding is intended to expand services to sex trafficking victims, domestic violence victims, and victims of other violent crimes.

Funding to Build a Continuum of Children’s Mental Health Crisis Services. The spending plan includes $30 million on a one–time basis to build a continuum of children’s mental health crisis services. The funding consists of $16 million from the General Fund—including a $6 million reappropriation—and $14 million in Mental Health Services Act (MHSA) state administration funding. The funds will establish a grant program administered by the Mental Health Services Oversight and Accountability Commission and the California Health Facilities Financing Authority, to which counties will apply. The grant program will support county efforts to build a full range of children’s crisis services, including residential crisis beds that serve as an alternative to hospitalization, community–based intervention services, expanded respite care, and crisis training for families.

State Resources to Maintain Suicide Hotline Funding at Current Level. The spending plan includes $4 million in one–time MHSA state administrative funds to allow the state’s 11 crisis call centers that answer calls through the National Suicide Prevention Lifeline to maintain recently introduced services that were previously funded with discretionary county MHSA funds. The one–time funding is intended to temporarily address an ongoing suicide hotline funding shortfall until a permanent funding plan can be identified and selected.

Use of County MHSA Funds to Support Statewide Homelessness Initiative. The spending plan reflects the No Place Like Home initiative, which was introduced by the Legislature and incorporated into the Governor’s budget to establish a $2 billion grant program primarily to support the construction and reconstruction of permanent housing for the state’s homeless population with mental health needs. Revenue bonds whose debt service will be paid over time with county MHSA funds will fund the initiative. (Budget–related legislation permits other funding sources to be used to finance the initiative as well.) The No Place Like Home initiative is discussed in greater detail in the “Other Major Provisions” section of this report.

Office of Statewide Health Planning and Development

Expands Primary Care Physician Residency Programs. The spending plan provides $33 million from the General Fund for each of the next three years to expand residency programs for primary care physicians. The majority of the funding—$82.5 million over three years—is dedicated to support new residency slots in medically underserved areas under the Song Brown Program, while the remainder—$17.5 million over three years—is intended to expand residency training in community–based Teaching Health Center programs.

Department of Public Health (DPH)

The spending plan provides over $3 billion from all fund sources for DPH programs. This is an increase of $56 million, or about 2 percent, compared to the revised prior–year spending level. Of this total, the spending plan provides $151 million General Fund for DPH, an increase of $21 million, or 16 percent. This year–over–year increase in General Fund largely reflects a number of relatively small program augmentations initiated by the Legislature, as discussed below. (The spending plan also reflects various funding and policy changes for DPH to implement the Medical Marijuana Regulation Safety Act, which we describe in the “Other Major Provisions” section of this report.)

Childhood Lead Prevention Program. The spending plan includes an increase of $8.4 million from the Childhood Lead Prevention Fund to support expanded childhood lead prevention activities, including funding for: (1) expanded services to children who have been exposed to lead and (2) Geographic Information System mapping of the locations of children with elevated blood lead levels to help identify locations of lead exposure.

Office of AIDS. The spending plan reflects various policy changes and an increase of $9.6 million ongoing in federal and drug rebate funds to: (1) expand the Health Insurance Premium Payment program to clients with employer–based or family or dependent health insurance, (2) increase access to Pre–Exposure Prophylaxis (PrEP) to prevent human immunodeficiency virus (HIV) transmission in select demonstration counties, (3) develop a PrEP Affordability Program, and (4) eliminate cost sharing for individuals enrolled in the AIDS Drug Assistance Program who have annual incomes between 400 percent and 500 percent of the federal poverty level.

Legislative General Fund Augmentations for Expanded and New Program Activities. The spending plan includes a total of $13 million—primarily one–time funding—in legislative General Fund augmentations that were approved by the Governor as follows:

  • $5 million on a one–time basis for sexually transmitted disease prevention.
  • $3.2 million ongoing to reestablish the California Children’s Dental Disease Prevention Program.
  • $3 million on a one–time basis for drug overdose prevention.
  • $2.5 million on a one–time basis for early detection and diagnosis of Alzheimer’s disease.
  • $1.4 million on a one–time basis for prevention and treatment of the hepatitis B and C viruses.
  • $1 million (increased to $2 million in future years) for enforcement–related activities in implementation of recently enacted tobacco legislation,
  • $600,000 on a one–time basis for the Biomonitoring California program. (This program works to study environmental chemicals in Californians to help assess effectiveness of public health and regulator efforts to reduce chemical exposures.)

Department of State Hospitals (DSH)

Under the budget plan, General Fund spending for DSH will be about $1.7 billion in 2016–17, an increase of $77 million, or 5 percent, from the revised 2015–16 level. The year–over–year increase is largely due to various plans to increase capacity in the state hospitals and jail–based competency treatment (JBCT) programs.

Activation of Additional State Hospital Beds. The budget plan includes an $18 million General Fund increase for the activation of an additional 85 patient beds. This total includes (1) $13 million for 60 beds primarily to treat incompetent to stand trial (IST) patients at DSH–Napa and (2) $5 million for 25 beds at DSH–Metropolitan to treat patients committed under the provisions of the Lanterman–Petris–Short (LPS) Act and currently housed at DSH–Patton. This will allow DSH–Patton to accommodate additional IST patients. In addition, the budget package includes $2 million in reimbursement authority for the activation of 11 beds at DSH–Metropolitan for LPS patients. Counties will contract with the state for these beds for LPS patients.

JBCT Program Expansion. The budget provides an additional $4 million from the General Fund to expand JBCT programs by up to 35 beds in two counties. These programs provide services to IST patients in county jails. The counties had not been identified at the time the budget was enacted.