LAO Analysis of the 1996-97 Budget Bill
Health and Social Services, Crosscutting Issues

California's Health Care Safety Net

Counties are reporting increasing difficulty in carrying out their responsibility to maintain health care services for indigents. We review the "health care safety net" provided by counties and the factors underlying recent trends.

What is the Safety Net and Who Uses It?

The Safety Net Defined

California's health care safety net provides health-related services to persons who lack health insurance or other coverage, such as Medi-Cal, and cannot pay for such services. These services are provided by the counties, which are ultimately responsible for serving those with no other means of public or private support, as required by Section 17000 of the Welfare and Institutions Code. The safety net provides inpatient hospital and outpatient services.

The Uninsured and the Safety Net

The University of California Los Angeles Center for Health Policy Research has examined recent trends in health insurance in California and found that the percentage of persons without insurance (those most likely to use the safety net) varies significantly across the state, as shown in Figure 8 (see next page). The report found that Los Angeles County's uninsured rate of nearly 31 percent is both the highest in the state and the 30 largest metropolitan areas nationwide. Four other regions in the state--Orange, Sonoma, San Diego, and Fresno-Kern Counties--have uninsured rates in excess of 20 percent.

Figure 8
Percentage of Persons Uninsured, by Major Region
Other a
Los Angeles County 30.9% 45.3% 13.8% 10.0%
Orange County 24.3 59.4 6.6 9.7
Sonoma County 24.0 52.6 9.4 14.0
San Diego County 21.9 48.9 14.5 14.7
Fresno-Kern Counties 21.0 45.2 22.2 11.6
Riverside-San Bernardino Counties 19.6 58.7 13.0 8.7
Santa Barbara-Ventura Counties 17.0 60.3 13.1 9.6
Sacramento areab 15.6 59.7 12.3 12.4
San Francisco areac 15.2 62.7 7.6 14.5
Santa Clara County 14.6 68.7 5.8 10.9
a Other insurance, including Medicare.
b Includes Sacramento, Yolo, El Dorado, Placer, San Joaquin, and Stanislaus Counties.
c Includes San Francisco, San Mateo, Marin, Alameda, and Contra Costa Counties.
Source: UCLA Center for Health Policy Research analysis of 1992 and 1993 Current Population Survey.

The report further indicates that the majority of uninsured individuals are employed, typically in small firms. Individuals employed full-time in small firms (less than 25 workers) are less likely to receive health insurance compared to employees in small firms in the rest of the nation--36 percent in California versus 42 percent nationally. Many of the smaller firms are involved in the agricultural, retail, and service sectors of the economy.

Demographics of the Safety Net Users

According to the Department of Health Services (DHS), the counties served roughly 1.7 million medically indigent persons in 1992-93 (the latest year for which data are available). The data show that a majority of those served: (1) received outpatient services (84 percent), (2) received services in Los Angeles County (60 percent), and (3) were identified as Hispanic (60 percent). Those receiving care are about equally divided among three age groups: 31 percent are below the age of 21, 34 percent are between the ages of 21 and 34, and 35 percent are age 35 or older.

How Much Does the Safety Net Cost?

Currently, the data on county indigent health expenditures are not complete. Thus, it is not possible to provide a precise estimate of these expenditures. Based on the data that are available, however, we estimate that the costs are in the range of $2 billion to $2.5 billion annually. This consists of funds from a variety of sources, including: (1) state funds provided through the 1991-92 realignment legislation, Proposition 99, and the General Fund; (2) federal funds provided to "disproportionate share" hospitals; and (3) county general funds. We discuss these funding sources below.

How Has the Safety Net Been Funded?

Funding for the safety net has been provided through several different sources over the years. Below, we describe the major funding sources:

Major Shifts in Safety Net Funding

Several shifts in funding have occurred within the state's health care safety net over the past five years. As discussed below, the difficulty that many counties are experiencing in providing indigent health care is generally the result of a combination of factors, including the shortfall in realignment revenues provided to counties, a declining share of federal DSH funds allocated to public hospitals, and a reduction in Proposition 99 revenues appropriated for indigent health care.

Realignment Revenues Lower Than Projected. The 1991 realignment legislation fundamentally changed the state and county fiscal relationship. Although intended to be revenue neutral, economic factors caused realignment revenues to be lower than expected for county indigent health programs. As Figure 9 (see next page) shows, the level of realignment revenues initially anticipated for 1991-1992 was not achieved until 1994-95.

SB 855 Funding for Public Hospitals Declining. Figure 10 (see next page) shows this program's net benefit (supplemental payments less intergovernmental transfers) to public and private hospitals for 1992-1993 through 1994-95. The figure shows that the net benefit received by public hospitals decreased from $692 million (77 percent of the total) to $483.1 million (57 percent) between 1992-93 and 1994-95. This was a decline of $208.9 million during this period.

Figure 9
Realignment Funding for Indigent Health Services
1991-92 Through 1995-96
(In Millions)
Service 1991-92 1992-93 1993-94 1994-95 1995-96
Indigent health funding a
$652.1 -- -- -- --
577.4 $614.0 $614.3 $653.4 $732.2
a Indigent health portion estimated as 59.3 percent of total realignment health portion, plus entire realignment portion of County Medical Services Program counties.

Figure 10

Fiscal Impact of SB 855 Program
Net Benefit to Public and Private Hospitals a
1992-93 Through 1994-95

(In Millions)
1992-93 1993-94 1994-95
Public hospitals $692.0 $624.0 $483.1
Private hospitals 201.6 293.3 362.0
$893.5 $917.5 $845.1
a Net benefit is the combination of federal funds and intergovernmental transfers less (1) those transfers and (2) state "administrative fees."
Source: Department of Health Services.

SB 1255 Funding for Public Hospitals Increasing. While SB 855 funds have been declining, SB 1255 funds have been increasing, as shown in Figure 11. The figure shows that the net benefit to county hospitals increased by about $130 million between 1992-93 and 1994-95, primarily for L.A. County hospitals.

Figure 11
Fiscal Impact of SB 1255 Program
Net Benefit to Public and Private Hospitals
1992-93 Through 1994-95
(In Millions)
1992-93 1993-94 1994-95
L.A. County hospitals $115.0 $115.0 $209.0
Other county hospitals 33.0 32.4 71.4
County subtotals
($148.0) ($147.4) ($280.4)
L.A. community hospitals $7.7 $9.6 $12.0
Children's hospitals 8.8 10.7 21.5
Other community hospitals 2.9 3.5 9.4
Community subtotals
($19.4) ($23.8) ($42.9)
District hospitals $0.5 -- $0.8
University of California hospitals 9.0 $9.5 20.3
$176.9 $180.6 $344.3
Source: California Medical Assistance Commission.

Federal Cap Placed on DSH Funds.The federal Omnibus Budget Reconciliation Act of 1993 placed a cap on how much each hospital can be reimbursed under the DSH Program. Basically, hospitals cannot receive more than 100 percent of their uncompensated care costs through DSH supplemental payments, beginning in 1995-96. Federal regulations to implement these provisions have not yet been issued. We note that the DHS has submitted a state plan amendment to the federal government proposing a method for calculating uncompensated care costs for hospitals in California, but no decision has been made on this proposal. Because the regulations have not been adopted and hospital-specific data are not yet available, an estimate of the impact of the hospital caps on California is not available at this time; but the department anticipates that the caps will result in a reduction in federal funds.

Proposition 99 Revenues Declining. The decline in tobacco consumption has led to lower tobacco tax revenues for Proposition 99 programs, including county health services, as shown in Figure 12 (see next page). Between 1991-92 and 1995-96, the amount of tobacco tax revenues counties received is expected to fall from $241.6 million to $177.8 million--a 26 percent decline.

Figure 12
Proposition 99 Funding
For County Indigent Health Services
1991-92 Through 1995-96
(In Millions)
Program 1991-92 1992-93 1993-94 1994-95 1995-96
California Healthcare for Indigents Program $227.7 $196.0 $192.5 $162.9 $163.0
Rural Health Services 4.5 3.5 3.4 2.8 2.8
County Medical Services Program 9.4 9.6 12.0 12.0 12.0
$241.6 $209.1 $207.9 $177.7 $177.8

Federal Funds for Los Angeles County. As a result of its fiscal problems, Los Angeles County negotiated agreements with the federal government and the state to receive $514 million in federal funds for 1995-96. Most of these funds will flow through the SB 1255 Program:

We note that pending federal Medicaid reform legislation puts at risk the county's receipt of the $364 million associated with the waiver.

Recent State and County Actions to Reduce Indigent Health Care Costs

The state and counties have taken several actions to reduce indigent health care costs. These include the establishment of new health insurance programs and county efforts to contract with other entities to provide services.

Lowering Health Insurance Costs for Small Businesses.The state Managed Risk Medical Insurance Board (MRMIB) administers the Health Insurance Plan of California (HIPC), which serves as a purchasing pool to leverage lower health insurance rates for small businesses with 3 to 50 employees. By covering the costs of health insurance to small business, it is hoped that those businesses that do not provide insurance will be able to do so and those businesses that currently provide insurance will continue to do so.

By negotiating with health insurance companies, the HIPC helped reduce premium rates by an average of 6.3 percent in 1994-95, and expects to lower them by an additional 5.1 percent in 1995-96. Since its inception in 1993, the HIPC has enrolled over 5,000 small businesses and 97,000 people through 25 different private health plans. Approximately 20 percent of those small businesses enrolled in HIPC did not previously offer health insurance to their employees.

Subsidizing Health Insurance Premiums for Individuals.The MRMIB also secures health insurance for individuals through the California Major Risk Medical Insurance Program (MRMIP) and the Access for Infants and Mothers (AIM) Program. The MRMIP has helped secure health insurance for over 19,000 California residents ineligible for Medicare and unable to obtain coverage in the open market because of pre-existing medical conditions. The program supplements the premiums paid by subscribers (to seven participating health plans) for comprehensive inpatient and outpatient health care services. The AIM Program contracts with private health insurance plans to provide coverage for low-income women seeking pregnancy-related and neonatal medical care. The program has enrolled over 4,500 women and 11,000 infants through eight private health plans. Both the MRMIP and AIM Program are funded with tobacco tax (Proposition 99) revenues.

Contracting Services. Some counties, such as San Diego and Orange, do not operate their own hospitals or primary care clinics, but contract with the University of California and with nonprofit, community-based groups to provide their health services. San Diego County has contracts with 21 nonprofit community-based groups to operate primary care clinics. The clinics reportedly keep their costs down by private fund raising, using volunteers, and paying lower salaries on average.

Issues for the Legislature's Consideration

In our analyses of the Public Health programs and the Managed Risk Medical Insurance Board, we make separate findings and recommendations related to some of the issues discussed above.

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