Legislative Analyst's Office
February 22, 1995

California Medical Assistance (Medi-Cal) Program (4260)

The California Medical Assistance Program (Medi-Cal) is a joint federal-state program to provide health care services to public assistance recipients and to other individuals who cannot afford to pay for these services themselves.

The budget proposes Medi-Cal expenditures of $17 billion ($5.7 billion General Fund) in 1995-96. This represents a General Fund decrease of $350 million, or 5.8 percent, below estimated current-year expenditures.

At the state level, the Department of Health Services (DHS) administers the Medi- Cal Program. Other state agencies, including the California Medical Assistance Commission (CMAC) and the Departments of Social Services, Developmental Services, Alcohol and Drug Programs, and Mental Health perform Medi-Cal-related functions under agreements with the DHS. At the local level, county welfare departments determine the eligibility of applicants for Medi-Cal and are reimbursed for those activities. The federal Health Care Financing Administration oversees the program to ensure compliance with federal law.

Generally, program expenditures are supported on a 50 percent General Fund, 50 percent federal funds basis.

Caseloads and Expenditures

Who Is Eligible for Medi-Cal?

Persons eligible for Medi-Cal fall into four major categories:

Figure 13 (see next page) summarizes the various eligibility categories for the Medi-Cal Program for the current year. The first three categories are required by federal law--that is, the Medi-Cal Program must provide services to individuals meeting these criteria in order for the program to receive federal funds. The remaining eligibility categories are optional--the state has discretion over whether to provide services to individuals in these categories, though it receives federal funds to the extent it chooses to do so.

What Benefits Does Medi-Cal Provide?

Federal law requires the Medi-Cal Program to provide a core of basic services, including hospital inpatient and outpatient care, skilled nursing care, doctor visits, laboratory tests and X-rays, family planning, regular examinations for children under the age of 21, and services in rural health clinics. Many Medi-Cal services require prior state authorization and may not be reimbursed unless the service is determined by the department's field offices to be medically necessary.

In addition, the federal government provides matching funds for optional services. California currently provides 28 of 31 optional services, but the budget proposes to eliminate nine of them. We discuss this proposal in more detail below.

Proposed Changes for 1995-96

The major General Fund changes proposed for the Medi-Cal Program in 1995-96 include: (1) $322.7 million for caseload, utilization, and cost increases; and (2) a net decrease of $665 million in various program changes.

The proposed program changes include the following:

Medi-Cal Program Growth

Growth in California's Medi-Cal Program over the last few years has been dramatic. As background for the recommendations that follow, we review some of the principal reasons for growth in the program and the department's efforts to control Medi-Cal expenditures.

As Figure 14 indicates, Medi-Cal General Fund expenditures have increased from $3.5 billion in 1989-90 to an estimated $6 billion in 1994-95, reflecting an increase of about $2.5 billion over the five-year period, or about 11 percent annually. Federal funding for the program has increased at a significantly higher rate largely due to the "SB 855" Program, which provides payments to disproportionate-share hospitals, begun in 1991-92. The purpose of these payments is to recognize the financial burden of uncompensated care on those hospitals that serve a high number of indigent persons. These payments, and the required county match, comprise about $2 billion of the total expenditure figures from 1991-92 through 1994-95.

In addition, federal funding is budgeted in the current year and for 1995-96 for the "SB 910 Program," which reimburses counties for case management and administrative activities. These funds, and the required county match, comprise about $1.5 billion of total expenditures for 1994-95 and the budget year.

Reasons for Increased Medi-Cal Expenditures

The dramatic increase in Medi-Cal expenditures over the last five years has resulted largely from caseload increases (which in turn reflect economic and societal changes), medical care inflation, and court decisions. We discuss these factors below.

Caseload Increases. The largest single factor driving program expenditures is the significant increase in the number of persons eligible for Medi- Cal. In 1985-86, 2.9 million persons (one out of ten persons in the state) were eligible for the program, while in the current year the number of eligibles is estimated to reach 5.5 million persons (more than one out of every six residents). As a point of comparison, the number of persons who receive health care coverage through Medi- Cal is now greater than the number of children enrolled in California's public school system, and the Medi-Cal Program is the single largest health-insurer in the state.

In general, three factors account for the increase in the number of eligible participants. The "traditional" recipients of Medi-Cal services--primarily AFDC and SSI/SSP recipients--have been increasing significantly during the last few years, largely as the result of economic and demographic changes. In addition, the Medi-Cal Program caseload has increased as a result of state and federal changes that have expanded eligibility to "newer eligibility groups" of recipients. Specifically, the federal government has mandated that the state provide medical services to undocumented persons and expand eligibility for pregnant women and children. Similarly, the state has elected to extend coverage to pregnant women and their infants beyond the federal requirements. Expenditures due to these state and federal policy changes account for about one-third of total expenditure growth since 1989-90.

Medical Care Inflation. Medical care costs increase at rates that generally exceed other types of inflation--though there is evidence that they have moderated in recent years. Medi-Cal payment levels for some services (such as for physician services) are discretionary, while others are automatically adjusted pursuant to statute (such as for generic drugs and nursing facilities). Hospital inpatient rates generally are negotiated, but the state has little practical alternative to recognizing at least a portion of the cost increases that hospitals experience. Accordingly, because expenditures for hospital inpatient services, long-term care, and drugs account for the vast majority of Medi-Cal expenditures, medical care inflation has played a significant role in the program's expenditure growth over the last several years.

Court Decisions Concerning Provider Rates. Under federal law, the state must offer access to services comparable to those which are available in the community. The courts have interpreted this provision to require rate increases for certain services. For example, the state recently was ordered to increase rates substantially for dental services, because the courts found that low Medi-Cal rates had the effect of denying access to those services. The administration estimates that this court decision will result in additional General Fund expenditures of about $200 million in the current year. (Similar court cases are pending that could affect rates for all outpatient services.)

Societal Changes. Various demographic and societal changes over the last several years have contributed to Medi-Cal expenditure growth. One societal change that has affected the Medi-Cal Program is the emergence of the AIDS epidemic. Medi-Cal expenditures for AIDS-related illnesses were estimated to be $140 million during 1992-93. In addition, the growth in the number of unmarried teenage women having children, citizen children born to undocumented women, and children born to substance-abusing mothers also has increased Medi-Cal eligibility and expenditures.

Optional Benefits

Elimination of Optional Services

With respect to the department's proposal to eliminate certain optional services, we find that: (1) the proposal could place an additional burden on county indigent health programs; and (2) although the department's estimate does attempt to account for potential cost shifts resulting from the proposal, its savings estimate probably is still somewhat optimistic, due to the federal requirement that Medi-Cal provide necessary transportation.

We recommend that if the Legislature chooses to ration services, as the administration effectively proposes, the Legislature consider basing its approach on identifying specific medical diagnoses or treatments that will no longer be covered, rather than eliminating entire categories of benefits.

The budget assumes that the Legislature will enact legislation that will result in savings of $311.2 million ($155.6 million General Fund) in the budget year by eliminating the following optional service categories from coverage through Medi-Cal for most beneficiaries:

The budget proposal would continue to provide these services for developmentally disabled regional center clients, children to age 21, and persons in long-term care. The department indicates that it is proposing elimination of these services solely to reduce Medi-Cal costs. (An identical proposal was included in last year's budget, and was rejected by the Legislature.)

Figure 15 (see next page) lists the department's estimate of the Medi-Cal savings from eliminating each of these services and an estimate of the average number of Medi-Cal beneficiaries who currently use these services each month. These savings are partially offset by a General Fund cost of $13.1 million in the budget of the Department of Developmental Services to continue the benefits for regional center clients.

"Necessary Transportation" Is Required. Even if optional benefits are eliminated, federal law requires Medi-Cal to provide "necessary transportation" to Medi-Cal beneficiaries. Accordingly, we do not believe the budgeted savings attributable to the elimination of medical transportation provided in vans can be achieved. Absent legislative action to augment the budget, we estimate that this will result in a General Fund deficiency of at least $14 million for 1995-96.

Costs May Shift to Other Services. Actual savings from elimination of the proposal's remaining eight optional benefits would depend on behavioral changes on the part of Medi-Cal beneficiaries. In some cases, elimination of optional services clearly will result in savings. In other cases, the savings may be offset because beneficiaries may substitute other Medi-Cal services for the service being eliminated or they may delay receiving treatment and ultimately require more acute care. The budget assumes cost shifts such as these ranging from 0 to 90 percent, depending on the service. The extent to which cost shifts will actually occur, however, is unknown.

Cost Shifts to Counties May Result. We note that counties are the provider of last resort for health services. Accordingly, they may experience increased demand for services they provide, to the extent that beneficiaries are unable to receive care under the Medi-Cal Program. This is most likely to occur with respect to adult dental services.

Rationing Services. Finally, we note that by proposing to eliminate optional benefits, the administration is effectively proposing to limit services for Medi-Cal beneficiaries. If the Legislature chooses to limit services in order to achieve a given level of General Fund savings, we recommend that it instead consider adopting an approach based on identifying specific medical diagnoses or treatments that will no longer be covered, rather than eliminating entire categories of benefits. Such an approach has been implemented in Oregon.

We believe that such an approach has important advantages over that proposed by the administration. First, we note that the administration's approach indiscriminantly affects beneficiaries with greatly different levels of illness. For example, the proposal to eliminate medical supplies applies equally to both diabetics who require syringes to inject insulin, and a beneficiary who needs to purchase bandages. In contrast, a proposal to limit services based on diagnoses could cover medically necessary care for the treatment of diabetes, but exclude coverage for minor injuries.

In addition, the administration's approach will result in some unknown amount of cost-shifting, as discussed above. By eliminating coverage for certain diagnoses, the Legislature could more effectively achieve a given level of General Fund savings because the potential for cost-shifting would be significantly reduced.

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