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Other Budget Issues

Last Updated: 1/23/2011
Budget Issue: Implement utilization limits, impose copayments and benefit reductions to achieve Medi-Cal savings
Program: Department of Health Care Services
Finding or Recommendation: Recommend the Legislature adopt some proposals to implement utilization limits, reject the proposal to limit prescription drug utilization, and consider alternatives to some utilization limits. Recommend the Legislature consider alternatives to the administration's copayment proposals. Recommend the Legislature adopt the proposal to eliminate over-the-counter cold and cough medicine, and consider an alternative to the administration's proposal to limit enteral nutrition to tube feeding.
Further Detail

Governor’s Proposals

The Governor’s budget plan proposes to achieve approximately $791 million in General Fund savings in Medi–Cal through the imposition of the following three broad cost containment strategies: 1) utilization limits, 2) mandatory copayments, and 3) benefit reductions.  Figure 1 provides a summary of the Governor’s proposals in these three areas.We note that in addition to the proposals described above, the Governor proposes to achieve significant savings through provider payment reductions. We discuss the provider payment proposals in a separate analysis.

Figure 1
Medi-Cal Program
Selected Budget Solutions
General Fund Benefit, In Millions
Utilization Limits
Impose cap on medical supplies at 90th percentile (adults)  
Impose cap on durable medical equipment at 90th percentile (adults)  
Impose cap on drugs at six prescriptions (adults)  
Impose cap on hearing aids at 90th percentile (adults)  
Impose a cap on physician and clinic visits at ten per year (adults)  
Impose a $5 copayment for visits to physicians and certain clinics
Impose $3 and $5 pharmacy copayments
Impose $5 copayment for dental office visits (adults)
Impose a $50 copayment for emergency ER visits
Impose a $50 copayment for nonemergency ER visits
Impose a $100 copayment per hospital inpatient day
Benefit Reductions
Eliminate selected over-the-counter drugs
Limit nutritional supplements
Total Solutions

Analyst’s Comments and Concerns

Here we provide our comments on the Governor’s proposals and raise concerns that the Legislature may wish to consider during its deliberations.

Governor’s Proposals Need Federal Approval. All of the Governor’s copayment, utilization limit, and benefit reduction proposals are contingent upon federal approval of a waiver or a state plan amendment (SPA). The state plan is the officially recognized statement describing the nature and scope of California’s Medi-Cal Program. Essentially the state plan is an agreement that California conforms its program to federal requirements set forth in law and regulations. Waivers allow states to waive certain federal requirements, generally in order to provide them with more programmatic flexibility while furthering the purposes of the program. Our analysis indicates that there is some risk the SPAs and waiver(s) would not be approved and as a result the savings would not be realized.

In particular, it may be difficult to obtain federal approval for the copayment proposal. Federal law restricts 1) copayment amounts, 2) the beneficiary groups that are subject to copayments, and 3) the benefits on which a state may impose copayments. Under the Governor’s proposal, the state would ask the federal government to waive all of these requirements.

Some Savings Estimates May be Overstated. We believe the level of savings estimated by the administration may be somewhat overstated because the savings estimates do not fully account for potential cost shifts to other state programs and Medi-Cal services. For example, the state may generate some savings through the implementation of a $50 copayment for emergency room (ER) visits. This level of copayment for ER visits would likely deter the inappropriate utilization of ERs which occurs when patients go to ERs when they could be more appropriately be treated at a clinic or a doctor’s office. However, increased copayments could also deter the appropriate utilization of medical services by patients who have limited means. Delay or avoidance of appropriate utilization can result in a medical condition worsening or becoming critical, thereby necessitating more intensive and potentially more expensive medical treatments at a later time. To the extent that this occurs, and the state pays for the medical treatment, the savings from the administration’s proposals would be less than proposed.  The administration’s savings estimates do not account for many of these potential cost shifts.

Proposals May Disproportionately Affect Medically Fragile Beneficiaries. We believe these proposals could adversely impact those with the greatest need for health care services. In particular, the utilization limits may disproportionately affect individuals who most frequently access medical services, such as seniors and persons with disabilities.  

Proposed Copayments Decrease Provider Rates. The Governor’s budget assumes that providers will be able to deny services to Medi-Cal beneficiaries who do not make a copayment.  In effect, the state will achieve savings through provider rate reductions. The providers would have to recoup the difference by collecting copayments.  Providers may not be able to collect these copayments in some cases. For example, federal law requires that patients who come to the emergency room be stabilized if they have an emergency medical condition.  In this example, even if a beneficiary cannot pay, the hospital would still have to provide services without receiving a copayment.

Legislature May Wish to Consider Alternatives

Many of the governor’s proposals mirror proposals from the prior administration that were rejected by the Legislature. Due to the state’s fiscal condition, we recommend the Legislature reconsider these proposals. However, given the Legislature’s prior rejection of these proposals, we also provide alternatives for the Legislature to consider. Our alternatives generally would have less impact on Medi-Cal beneficiaries and achieve less in savings than the Governor’s proposals.  Some of our alternatives may be more burdensome for the department to administer than the Governor’s proposals. Furthermore, our alternatives would require federal approval of SPAs and/or waiver amendments.

Cost Sharing as an Alternative To Utilization Limits. Instead of limiting services over a certain threshold for durable medical equipment and certain medical supplies, the Legislature may wish to consider establishing cost sharing for all expenses over a certain threshold. For example, a beneficiary could be required to pay 10 percent of all costs for durable medical equipment when their costs exceed the 90th percentile.

Allow for Exceptions To Utilization Limits. An exception process could be put in place for the utilization limit proposals. This would allow the department to make exceptions to the limits in cases where it could be shown that this would be cost effective. For example, the department could make an exception to the limit on durable medical equipment and provide a wheel chair to a disabled individual. This would be cost effective in a situation where the lack of a wheel chair could result in a disabled individual needing a costly nursing home placement.

Consider Lower Copayment Levels. We agree with the concept of copayments to help contain costs, however, some of the proposed copay amounts may present a hardship for low-income populations. The Legislature may wish to consider implementing lower copayments than those proposed by the administration.

Implement a Cap on Beneficiary Copayments. As proposed by the administration, the aggregate amount of copayments could impose a significant financial burden on the Medi-Cal population particularly on seniors and persons with disabilities. The Legislature may wish to mitigate this result by placing a cap on the total copayments a beneficiary must pay.

Analyst’s Recommendations

Figure 2 summarizes our recommendations for each of the administration’s proposals. We also provide some additional alternatives for the Legislature to consider. 

Figure 2    
DHCS Medi-Cal Cost Containment Proposals  
LAO Recommendations and Alternatives  
Proposal Recommendation Alternative
Utilization Limits    
Durable medical equipment at 90th percentile (adults) Adopt Proposal Allow for exception process and/or cost sharing over 90th percentile.
Medical supplies at 90th percentile (adults) Adopt Proposal Allow for exception process and/or cost sharing over 90th percentile.
Hearing aids at 90th percentile (adults) Consider Alternative Limit coverage to once every three or four years.
Physician and clinic visits at 10 per year (adults) Consider Alternative Allow exceptions for certain services or conditions.
Hard cap of six prescriptions (adults) Reject Proposal  
$5 copayment for physician and clinic office visits Consider Alternative Establish a copayment cap for beneficiaries.
$3 and $5 pharmacy copayments Consider Alternative Establish a copayment cap for beneficiaries.
$5 copayment for dental visits (adults) Consider Alternative Establish a copayment cap for beneficiaries.
$50 copayment for nonemergency ER visits Consider Alternative Adopt a lower copayment amount, such as $25. See LAO’s 2002-03 Analysis of the Budget Bill.
$50 copayment for emergency ER visits Consider Alternative Adopt a copay that aligns with outpatient physician services ($5).
$100 copayment per hospital inpatient day (maximum $200 per admission) Consider Alternative Adopt a lower copayment amount, such as $50 to $100 per admission.
Benefit Reductions    
Elimination of over-the-counter cold and cough medicine Adopt Proposal  
Enteral nutrition—limit to tube feeding Consider Alternative Tighten the criteria for approval of enteral nutrition products. For example, documentation of clinical malabsorption could be required.

 In addition to the recommendations above, we recommend the Legislature require the department to report at budget hearings on the following issues:

  • Federal Approval Requirements. We recommend the Legislature require the administration to report in budget hearings on the likelihood of obtaining federal approval for the SPAs and waivers necessary to implement their proposals.
  • Potential Cost Shifts. We recommend the Legislature require the department to report at budget hearings on the extent to which the proposed savings levels could be reduced by cost shifts.