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Budget and Policy Post
December 7, 2023

The 2024-25 Budget

Medi-Cal Fiscal Outlook


Summary

This post describes our fiscal outlook for General Fund spending in Medi-Cal. Specifically, this post concerns projections of Medi-Cal local assistance spending within the Department of Health Care Services (DHCS).

Estimate Downward Revision for the Current Year. We estimate that Medi-Cal General Fund spending will be $37 billion in 2023-24, a decrease of about $500 million (1.3 percent) compared to the 2023-24 Budget Act. This adjustment largely is driven by a lower level of estimated caseload than was projected at the time the budget was enacted.

Project Slight Net Reductions for the Budget Year. From our estimated level in 2023-24, we project General Fund spending to decline in 2024-25 by $400 million (1.1 percent) to $36.6 billion. Downward adjustments related to limited-term initiatives and caseload drive the reduction in spending. Several upward adjustments nearly offset these reductions, such as increases in per-enrollee costs, the ramp up of comprehensive coverage for undocumented individuals, and adjustments related to the recently enacted managed care organization (MCO) tax package.

Project Longer-Term Growth. We project Medi-Cal General Fund spending to increase in the remaining years of the outlook period, rising to more than $43 billion in 2027-28. This longer-term growth primarily is driven by changes in caseload, continued growth in underlying per-enrollee costs, and the ramp down of the MCO tax package.

Background

Medi-Cal Provides Health Coverage for Low-Income Californians. Medi-Cal, the state’s Medicaid program, provides health care coverage for low-income Californians. Health care services covered by Medi-Cal include visits to the doctor’s office, stays at the hospital, prescription drugs, behavioral health services, long-term care, and dental services, among many other areas. The enacted 2023-24 budget assumes Medi-Cal enrolls 14.2 million people, about one-third of Californians.

Medi-Cal Is a Sizable Portion of California’s Budget. More than half of Medi-Cal’s budget is supported by federal funds, with the remainder supported by state General Fund as well as other state and local government sources. The General Fund portion of Medi-Cal comprises a sizable share of overall state General Fund spending, ranging between 13 percent and 17 percent in most of the last ten years. As a share of General Fund spending, Medi-Cal is the state budget’s second largest program (after Proposition 98, the California Constitution’s minimum spending requirement for K-14 education).

Medi-Cal Spending Grew Notably in Recently Enacted Budget. Under the 2023-24 Budget Act, Medi-Cal is receiving $152 billion, of which $37.5 billion (25 percent) comes from the state General Fund. Compared to the revised 2022-23 level, General Fund spending in Medi-Cal is $6.6 billion (21 percent) higher in 2023-24. The growth in spending primarily is the net effect of technical adjustments, such as changes in caseload, increases in rates, backfill of declining enhanced federal funds, and the implementation of ongoing policy changes and limited-term initiatives enacted in previous budgets. By comparison, the budget includes only a handful of new augmentations in Medi-Cal. In addition, the 2023-24 budget package includes a number of reductions, delays, and other solutions intended to help balance General Fund revenues and expenditures. A few of these solutions are in Medi-Cal, including a renewed tax on health insurance plans (described below).

Budget Also Renewed the MCO Tax. The 2023-24 budget package renews a state tax on enrollment in health insurance plans known as the MCO tax, with the tax extending through the end of December 2026. The tax is designed to draw down additional federal Medicaid funding while imposing a relatively small cost to the health insurance industry. This arrangement requires approval from the federal government. If approved by the federal government, the tax is expected to generate revenues of $8.2 billion in 2023-24 ($32.1 billion through 2026-27). After factoring the portion of revenues used to help cover the cost of the tax on health insurance plans, the budget package assumes that a portion of funds will be used to offset General Fund spending in Medi-Cal (therefore serving as a budget solution) and the remainder will be used to increase support for Medi-Cal and other health programs.

Outlook

Current Year (2023-24)

Estimates Lower Level of Spending in Current Year. We estimate that Medi-Cal General Fund spending will be $37 billion in 2023-24, a decrease of about $500 million (1.3 percent) compared to the enacted level. This adjustment largely is driven by lower levels of caseload than was projected in the budget act. Specifically, we estimate that monthly caseloads will average about 14 million in 2023-24, about 210,000 (1.5 percent) lower than assumed in the 2023-24 budget package.

Budget Year (2024-25)

Anticipates Slight Reduction in Spending in Budget Year. From our estimated level in 2023-24, we project General Fund spending to decline in 2024-25 by $400 million (1.1 percent) to $36.6 billion. As Figure 1 shows, this decline is the net effect of several downward and upward adjustments. We summarize each adjustment below.

Figure 1

Several Factors Impact
Medi-Cal Spending in 2024-25

General Fund Changes Over 2023-24 (in Billions)

Adjustment

Amount

2023-24 Estimate

$37.0

Per-enrollee cost growth

$1.8

Undocumented coverage expansion

1.7

Reduced offset from MCO tax

1.6

End of enhanced federal funding

0.9

Other net spending increases

0.5

Reduction in caseload

-3.0

Ramp down in one-time spending

-3.9

 Total Changes

-$0.4

2024-25 Projection

$36.6

Projects Reduction Due to Ramp Down of One-Time Spending… The largest downward adjustment in our outlook—$3.9 billion—is due to reductions in one-time spending. The decrease primarily is driven by the ramp down of a handful of behavioral health initiatives, such as the Children and Youth Behavioral Health Initiative and Behavioral Health Bridge Housing. In addition, the 2023-24 budget included a notable one-time retroactive payment to the federal government related to erroneous state claiming of federal Medicaid funds. The end of this retroactive payment in 2024-25 also drives down General Fund spending.

…As Well as Notable Decline in Caseload. The other major downward adjustment in General Fund spending—$3 billion—relates to caseload. As the nearby box discusses, federal actions beginning in late 2022 are requiring DHCS to redetermine eligibility for all Medi-Cal enrollees for the first time since the start of the COVID-19 pandemic. These redeterminations are expected to drive a substantial decline in caseload. We estimate that monthly caseloads will average 12.1 million in 2024-25, a decrease of 1.9 million from the 2023-24 level.

Federal Public Health Emergency (PHE) Notably Impacted General Fund Spending. The national PHE for COVID-19 was in effect from early 2020 through May 11, 2023. Generally during this time, a number of temporary policy and financing rule changes were put in place that significantly impacted General Fund spending on Medi-Cal. For example, Congress approved a 6.2 percentage point increase in the federal government’s share of cost for most Medicaid services for the duration of the PHE. This enhanced federal funding reduced the state’s share of cost, resulting in less General Fund spending. The same federal legislation also prohibited the state (as a condition of receiving the enhanced federal funding) from terminating the eligibility of current Medi-Cal enrollees until after the PHE ended, except in limited circumstances. This prohibition, known as the “continuous coverage requirement,” notably increased Medi-Cal caseload from what it otherwise would have been, with corresponding increases to General Fund spending.

Federal COVID-19-Related Policies Are Now Unwinding, With Corresponding Fiscal Impacts. In late December 2022, Congress enacted legislation that began unwinding the temporary COVID-19-related polices. This unwinding creates both upward and downward cost pressures on state General Fund spending. For example, the enhanced federal funding is ramping down over the course of calendar year 2023 until being fully eliminated in January 2024. This ramp down increases General Fund spending to backfill the lost federal funds. On the other hand, the continuous coverage requirement expired at the end of March 2023. This change restarted monthly county eligibility redeterminations beginning April 1, 2023, with the first enrollment terminations beginning July 1, 2023. These redeterminations are expected to decrease Medi-Cal caseload and General Fund spending during 2023-24.

Nearly Offsets Reductions With A Few Key Spending Increases. Under our outlook, a number of upward adjustments nearly offset the reductions from one-time spending and caseload declines. We summarize each major adjustment below.

  • Per-Enrollee Cost Growth. Underlying per-enrollee cost growth in Medi-Cal is driven by changes in health care utilization and service costs. Under our outlook, we assume per-enrollee costs increase by $1.8 billion (around 5 percent). This projection assumes Medi-Cal utilization and costs, as well as their underlying drivers (such as inflation), generally continue to follow past trends.

  • Undocumented Coverage Expansion. The 2022-23 budget package expanded eligibility for comprehensive Medi-Cal coverage to undocumented residents aged 26 through 49. This expansion is scheduled to begin no later than January 1, 2024, half way through the 2023-24 fiscal year. We estimate costs related to the expansion to be $2.9 billion General Fund in 2024-25, an increase of $1.7 billion over the 2023-24 partial-year level.

  • Reduced Offset From MCO Tax. When the MCO tax package was approved in June 2023, it was assumed that the amount of funds used to offset General Fund spending in Medi-Cal will decrease from $3.5 billion in 2023-24 to $1.9 billion in 2024-25. The smaller offset in the budget year primarily is because the package assumes more MCO tax funds will be needed to support programmatic increases. The smaller offset also necessitates an increase in General Fund spending of $1.6 billion in the budget year.

  • End of Enhanced Federal Funding. As the earlier box describes, COVID-19-related enhanced federal funding has been ramping down across calendar year 2023. This results in a $865 million increase in General Fund spending in 2024-25 to backfill the lost federal funding.

Outyears (Through 2027-28)

Anticipates Spending to Grow Each Year. We project Medi-Cal General Fund spending to increase in the remaining years of the outlook period, rising to more than $43 billion in 2027-28 (17 percent of total state General Fund spending). We describe the major drivers of this increase in spending below.

Projects Slight Annual Increases in Caseload, With Faster Growth Among Seniors. Beginning in 2025-26, we project caseload growth of less than 1 percent per year. The slow growth in caseloads primarily is due to our office’s assumptions concerning unemployment and population. Average annual growth is fastest in the senior population (2.5 percent), with much slower rates of growth for most other groups. We project the number of persons with disabilities in Medi-Cal to decline over the outlook period, consistent with historical trends.

Assumes Continued Growth in Per-Enrollee Costs. We assume that underlying per-enrollee utilization and service costs continue to rise over the outlook period, with the increase each year ranging from about 4 percent to 5 percent. In addition, our outlook anticipates overall per-enrollee costs to increase as seniors—among the costliest population to serve—become a larger share of Medi-Cal caseload.

Assumes End of General Fund Savings From MCO Tax. The recently enacted MCO tax is scheduled to expire at the end of the 2026 calendar year. As a result, the amount of tax revenue available for offsetting General Fund spending ramps down in 2025-26 and fully ends in 2026-27, necessitating corresponding increases in General Fund spending.

Key Uncertainties

Recently Enacted Minimum Wage Legislation Will Impact Medi-Cal Spending. In October 2023, the state enacted Chapter 890 of 2023 (SB 525, Durazo), which increases the minimum wage for many health care workers. The measure likely will increase Medi-Cal spending, though the exact timing and magnitude of the impact is uncertain. Recently, the Department of Finance publicly stated that the cost could reach around $2 billion General Fund in 2024-25, largely from increased Medi-Cal managed care rates. At the time of this analysis, the administration had not released more detailed information on its estimates. Given this uncertainty, our outlook does not incorporate the measure’s impacts on General Fund spending in Medi-Cal.

Key Decisions Around MCO Tax Package Are Pending. Our outlook makes the same assumptions as the enacted 2023-24 budget package around how much MCO tax revenue is used to offset General Fund spending in Medi-Cal through 2026-27. However, some factors could result in different impacts than in our outlook. For example, at the time of this publication, federal approval of the MCO tax was pending. Were the federal government to reject the proposed tax, DHCS would need to adjust the tax’s structure and resubmit it for federal approval. Such action could delay the timing of tax proceeds and reduce the overall amount of revenue generated from the tax. Also, as we note in our publication The 2024-25 Budget: California’s Fiscal Outlook, the Legislature could explore using more the of the MCO tax revenue than previously assumed to help address the state’s budget problem. Moreover, it is uncertain whether the state will renew tax in 2027, and if so, how much revenue from the tax would be available to offset future General Fund spending in Medi-Cal.