Legislative Analyst's Office

Analysis of the 2000-01 Budget Bill
Aging with Dignity Initiative

Governor's Initiative Includes A Wide Range of Proposals

In his Aging with Dignity Initiative, the Governor makes numerous proposals to improve nursing home care and develop community-based alternatives to nursing homes. In the following pages, we summarize the initiative and provide our assessment of it.

The Governor's Aging with Dignity Initiative consists of numerous components administered by several departments, at a General Fund cost of $140.4 million (and 221.5 positions) in 2000-01. The purpose of the initiative is "to help elderly people remain at home, or with their families, rather than in nursing homes; dramatically increase the availability of innovative community-based alternatives to nursing home care; and enhance the quality of care in California's nursing homes." Figure 1 (see next page), and the discussion that follows, describe the proposed components of the initiative that have fiscal effects.

Community Programs

The budget includes the following proposals intended to help seniors remain in their homes or in the community in a noninstitutional setting.

Long-Term Care Tax Credit. The budget proposes a $500 tax credit for persons (specifically taxpayers) who provide or pay for care at home for seniors or disabled individuals of any age. This credit would result in an estimated General Fund revenue loss of $47 million in 2000-01. In order for the taxpayer to qualify for the credit, the senior or disabled person would have to meet certain criteria for needing care.
Figure 1
Aging with Dignity Initiative

(In Millions)

General Fund Other Funds Totals
Community Programs
Caregiver tax credit $47.0 -- $47.0
In-Home Supportive Services wage increases 20.0 $35.7 55.7
Long-term care innovation grants 20.2 -- 20.2
Expand no-cost Medi-Cal for aged, blind, and disabled 2.4 2.4 4.8
Senior housing information and support center 1.0 -- 1.0
Senior wellness education campaign 1.0 -- 1.0
Improving Quality of Care and Enforcement
Caregiver recruitment and training -- $50.0 $50.0
Five percent pay increase for nursing home workers $32.5 33.3 65.8
Nursing home quality awards 8.0 2.0 10.0
Increased nursing home inspections 3.0 4.5 7.5
Focused nursing home quality reviews 2.5 1.5 4.0
Rapid response to nursing home complaints 2.2 1.7 3.9
Nursing home fiscal review advisory board 0.5 -- 0.5
Totals $140.3 $131.1 $271.4

In-Home Supportive Services (IHSS) Wage Increase. The IHSS program provides services to aged, blind, and disabled persons who are unable to remain safely in their homes without such assistance. Under the program, counties are authorized to establish Public Authorities to negotiate wages for the providers of services. The budget proposes that the state pay 65 percent of the nonfederal costs of wage increases negotiated by IHSS Public Authorities, up to 85 cents above the minimum wage. Under current law, the state pays for 80 percent of the nonfederal costs, up to 50 cents above the minimum wage, for 1999-00 only. The budget proposal would result in a General Fund cost of $48.5 million compared to current law, or $20 million above the cost of extending the 1999-00 provision into 2000-01. The budget assumes that the following counties will have Public Authorities in 2000-01: Alameda, Contra Costa, Los Angeles, Monterey, Sacramento, San Francisco, San Mateo, and Santa Clara.

Long-Term Care Innovation Grants. The budget proposes a one-time General Fund expenditure of $20.2 million (including three positions) in the Department of Aging to establish a "Golden Challenge" long-term care innovation grants program. The grants would be used to expand adult care alternatives to nursing homes by funding innovative community-based programs that could be replicated in other communities.

Expand Medi-Cal for the Aged, Blind, and Disabled. The budget proposes to provide (beginning January 2001) no-cost Medi-Cal coverage to aged, blind, and disabled persons up to 100 percent of the federal poverty level, at a General Fund cost of $2.4 million in 2000-01 and $6 million annually thereafter. Currently, persons in this category who have incomes above about 90 percent of the poverty level must pay a share of cost for Medi-Cal benefits.

Senior Housing Information and Support Center. The budget proposes $1 million from the General Fund, including eight positions, to establish a Senior Housing Information and Support Center in the Department of Aging. The center would serve as a clearinghouse and educational resource for seniors and their families for information on housing and home modification. The center would also promote education and training for professionals, such as physical and occupational therapists, who can assist seniors in maintaining independence.

Senior Wellness Campaign. The budget proposes $1 million from the General Fund, including two positions, in the Department of Aging to develop and administer a statewide media campaign on community-based and in-home care alternatives to institutional care.

Improving Quality of Care and Enforcement

The Aging with Dignity Initiative includes the following proposals that address issues of quality of care provided to seniors in their homes and in long-term care facilities and the enforcement of requirements for nursing homes.

Caregiver Training, Retention, and Recruitment. The budget includes $50 million ($35 million General Fund and $15 million federal Workforce Investment Act funds) to train, recruit, or retain workers in the caregiver industries, including nursing homes and the IHSS program.

Pay Increase for Nursing Home Workers. The budget request for the Medi-Cal Program in the Department of Health Services (DHS) includes $65.8 million ($32.5 million General Fund) to increase rates paid to nursing homes and other long-term care facilities in order to fund a 5 percent increase in wages and benefits for direct-care staff, effective August 1, 2000. This increase would be in addition to a similar 5 percent increase funded in the current year. These increases are in addition to annual cost-based rate increases for nursing homes and other long-term care facilities. The budget also indicates that DHS will review staffing ratios in nursing facilities and make recommendations by December 31, 2000. The current-year budget included funds to increase the number of caregiver hours per resident from an average of 2.9 to 3.2. The budget also requests $465,000 ($232,000 General Fund) for 6 additional DHS auditor positions (limited to 2000-01) in order to ensure that nursing homes actually pass the increases through to their employees as higher wages and benefits.

Nursing Home Quality Awards. The DHS budget includes $10 million ($8 million General Fund) for a new program of awards to nursing homes that provide exceptional care. These funds potentially could be used for staff bonuses or to fund innovative programs at nursing homes. The awards would focus on facilities that have a high proportion of Medi-Cal residents and would range from $20,000 to $50,000 each, for a total of 200 to 500 awards (equivalent to 14 percent to 36 percent of the 1,400 nursing homes in California).

Increased Unannounced Inspections and Federal Workload. The budget requests a total of $7.4 million ($3 million General Fund) to increase DHS staffing by 70 positions and fund an additional 30 Los Angeles County contract positions for these workload components. A total of 57 positions (including 17 contract positions) would be used to increase the frequency and reduce the predictability of required nursing home inspections. The department indicates that the average inspection frequency has increased from the goal of 12 months to almost 14 months. In some cases, inspections have not met the federal minimum-frequency requirement of 15 months, and that this "pushing up" against the federal requirement makes it relatively easy for facilities that have not been inspected for more than a year to anticipate the timing of their next inspection. This request also includes 43 positions (including 13 contract positions) to meet new federal requirements for increased nursing home facility monitoring and enforcement in the Medicaid and Medicare programs.

Focused Nursing Home Quality Reviews. The budget requests a total of $4.1 million ($2.5 million General Fund) for 43 new DHS positions (plus an unidentified number of Los Angeles County contract positions) to (1) expand the number of nursing homes (from 34 to 100) that would be subject to focused enforcement reviews, (2) perform more in-depth reviews of license applications, and (3) monitor and improve the quality of nursing-home enforcement activities.

Ensure A Rapid Response to Complaints. The budget requests a total of $3.9 million ($2.2 million General Fund) for 33 additional DHS positions and 13.5 Los Angeles County contract positions in order to respond in a more timely manner to complaints about nursing home conditions and care. Existing law requires DHS to investigate complaints within ten days of their receipt; and, for complaints alleging immediate jeopardy to residents' health or safety, the department's policy is to investigate within two days of receiving a complaint. The department indicates that it was unable to meet these goals for a third of the complaints received in 1998-99.

Fiscal Advisory Board. The budget requests $500,000 from the General Fund for one position and $400,000 in consultant services to staff and provide expert assistance to a new Fiscal Solvency Review Advisory Board. The nursing home industry recently has experienced a number of bankruptcies. The department is responsible for ensuring continuity of care for nursing home residents in the event of an imminent closure--either by ensuring transfers to other appropriate facilities or by continuing operation through a receivership. The new advisory board would help DHS develop better fiscal solvency standards to protect nursing home residents.

LAO Findings and Recommendations

Long-Term Care Tax Credit Unlikely To Be An Efficient or Effective Incentive

We find that the proposed $500 long-term care tax credit (1) is unlikely to be a means of effectively targeting a significant subsidy to many taxpayers who currently provide in-home long-term care or to provide a significant incentive for many families or individuals to provide this type of care; (2) has an inherent potential for higher-than-intended costs because its eligibility qualifications will be difficult to enforce; and (3) will have its impact diluted by increasing federal tax liabilities. We recommend that the Legislature consider alternative means of helping seniors and disabled persons to remain in their homes or the community, such as further expansion of Medi-Cal coverage for seniors and the disabled.

The Governor's proposal includes a personal income tax credit of $500 for taxpayers providing or paying for the long-term care of elderly or disabled individuals in the taxpayer's home. The $500 credit would typically be available to taxpayers for each individual residing with them who is certified by a physician as requiring long-term care--defined as a continuous period of at least 6 months. Individuals with long-term care needs must meet the following criteria for a taxpayer to qualify for the credit: (1) those 6 years and older must be unable to perform without assistance at least three basic activities of daily living; (2) those between the ages of 2 and 6 years must be unable to independently perform two activities such as eating or bathing; and (3) those younger than 2 years must require specific medical equipment or the care of a skilled health-care practitioner.

The proposal is modeled after a similar proposal at the federal level for a $3,000 credit. For calendar year 2000, the Franchise Tax Board assumes that approximately 120,000 taxpayers would take advantage of the new state credit. The estimated revenue reduction from the credit is $47 million in 2000-01, reaching $52 million by 2004-05.

Legislative Considerations. Whether tax credits are an effective and efficient means of accomplishing their objectives depends on their specific provisions and purpose. They can, for example, be a good method of providing tax relief to certain categories of taxpayers or outright subsidies to them, if they are well targeted. However, if their objective is to encourage certain types of behavioral changes, tax credits generally do not score particularly well as an effective and efficient tool. This is largely because it is hard to ensure that credits go only to those persons whose behavior changes; thus, many taxpayers receiving credits are simply rewarded for doing things they would have done anyway. Thus, in the case of the proposed credit, a key question is whether it is primarily intended to subsidize the care costs of taxpayers who already provide long-term care in their homes, or, alternatively, to provide an incentive for expansion of home-based long-term care. In either case, the proposal raises a number of concerns:

Given these concerns, we do not believe that the proposed credit would be an effective or efficient means of providing either (1) significant assistance to those taxpayers who bear the greatest burden for the care of seniors or disabled persons or (2) an effective incentive for an expansion of home-based care for seniors and the disabled. Consequently, we recommend that the Legislature explore alternative approaches to accomplishing the objectives of the proposed tax credit that would provide both more financial relief to many families and individuals and would help more seniors and disabled persons avoid institutionalization. In the issue that follows, we discuss expanding Medi-Cal coverage for seniors and the disabled, which is one alternative approach that in our view, has a number of advantages over the proposed tax credit.

Expanding Medi-Cal Coverage for Seniors and the Disabled

We recommend that the Legislature consider expanding Medi-Cal coverage for seniors and the disabled as an alternative to the long-term care tax credit proposed in the budget, because expanding Medi-Cal coverage has the potential for more effectively targeting state assistance to those with the greatest needs and would enable the state to leverage federal funds.

As an alternative to the proposed long-term care tax credit, the Legislature may wish to consider expanding Medi-Cal coverage for seniors and the disabled beyond the modest expansion proposed in the budget (discussed above). Expanding Medi-Cal coverage has several advantages that can make this approach a more efficient and effective means of helping those who have the greatest needs:

Existing Medi-Cal Coverage for Seniors and the Disabled. Currently, there are two main avenues through which the low-income elderly or disabled may get Medi-Cal coverage:

Benefits from the Budget's Proposed Coverage Expansion Are Limited. In addition to the proposed long-term care tax credit, the Governor's budget proposes to expand Medi-Cal coverage for the elderly or disabled in a manner that would eliminate a share-of-cost for individuals who have incomes above the MN income limit, but under the poverty level. The expansion would not affect couples initially because the MN limit for couples currently exceeds the FPL. The budget estimates that about 13,000 individuals initially would be affected by this expansion. All of these persons currently are enrolled in the Medi-Cal MN program with a share-of-cost of less than about $100 per month.

The Governor's proposal would assist some poor elderly or disabled persons at a very modest state cost. However, it would provide only limited benefits to a relatively small group of individuals. For example, the Governor's proposal provides no benefit to couples or those individuals whose Medi-Cal share of cost exceeds about $100. (About 47,000 aged or disabled Medi-Cal beneficiaries have a share of cost between $100 and $500, for example.)

Options for Expanding Coverage. The Legislature has a number of options for expanding Medi-Cal coverage for seniors and the disabled beyond the modest expansion proposed in the budget. These options include the following:

We recognize that health care costs for the elderly and disabled can be large and difficult to control. Accordingly, approaches would need to be carefully crafted to provide specific benefits while remaining within ongoing budget constraints. Nevertheless, the Legislature has a variety of options and considerable flexibility in structuring an expansion of coverage in order to remain within those constraints. Accordingly, we recommend that the Legislature consider expanding Medi-Cal coverage for the elderly and disabled as an alternative to the Governor's tax credit proposal because expanding Medi-Cal would be a more effective use of state funds to benefit needy seniors and disabled persons and their families.

More Information Needed On Department of Aging Proposals

We withhold recommend on $22 million proposed from the General Fund for the Innovation Grants, Senior Housing Support Center, and Senior Wellness Campaign programs, pending receipt of additional information from the Department of Aging.

With respect to the Innovations Grants proposal, the department indicates that program elements such as the size and number of grants, the criteria for awarding the grants, and how the grants will be evaluated, will be developed prior to the May revision of the budget, in conjunction with the state's Long Term Care Council. Without such information, the Legislature will be unable to evaluate the proposal to establish the grants program.

We have also asked the department to explore whether federal matching funds for the three proposed programs could be obtained by coordinating with other departments that administer related programs. For example, the Departments of Rehabilitation and Health Services administer programs related to housing or health promotion, which qualify for federal funding.

Accordingly, we withhold recommendation on these program components, pending receipt of this information.

More Information Needed on Caregiver Training, Retention, and Recruitment Proposal

We withhold recommendation on the proposal to establish a caregiver training, recruitment, and retention program, pending receipt of additional justification.

At the time this analysis was prepared, the Department of Social Services could not provide any details on the type of training, retention, or recruiting activities contemplated in the Governor's initiative; the number of individuals that would receive the training/recruitment services; or the cost of providing these services. Consequently, we withhold recommendation on the $50 million proposed for these activities, pending receipt of additional information concerning program costs and the estimated caseload. We note that $35 million of the proposed funding is part of the $60 million state match for the federal Welfare-to-Work program (U.S. Department of Labor). These funds must be expended if the state is to receive the federal funds under this program.

Rate Increase for "Distinct Part" Nursing Facilities Not Justified

We recommend a General Fund reduction of $2.6 million in the budget request for a 5 percent pay increase pass-through for nursing home staff in order to delete funding for "distinct part" nursing facilities, because these facilities currently receive much higher rates than other nursing homes for similar care. (Reduce Item 4260-101-0001 by $2,558,000.)

The Medi-Cal Program, administered by DHS, pays for the care of roughly two-thirds of all nursing home residents in California. In addition to stand-alone nursing homes, facilities operated as a "distinct part" of a hospital also provide long-term care to Medi-Cal patients. These hospital-based distinct part nursing facilities (DP-NFs) receive daily Medi-Cal rates that generally are more than twice the rate paid to stand-alone facilities for similar levels of care. The basis of the higher rate for DP-NFs is the higher cost structure that they have (including labor costs) due to their association with a hospital. The higher DP-NF rates provide substantially more funding for staff pay and other costs than do the rates for most nursing homes, which are stand-alone facilities. Accordingly, we do not believe that a need for higher DP-NF rates to adjust staff pay has been justified, and we recommend deletion of $2.6 million (General Fund) requested for wage pass-throughs for DP-NFs.

More Developed Proposal for Quality Awards Needed

We withhold recommendation on $10 million ($8 million General Fund) requested for nursing home quality awards, pending a specific proposal that describes the program in sufficient detail, including the criteria for (1) awarding grants and determining their amount, and (2) the use of the funds by awardees.

The budget proposal for quality awards currently is at a conceptual stage, and DHS anticipates that it will present a more specific and detailed proposal during the budget process. Accordingly, we withhold recommendation on the request pending receipt of a developed proposal.

Nursing Home Enforcement Staff Requests Overbudgeted

We recommend a General Fund reduction of $584,000 (and $584,000 in federal funds) and 16 positions because the proposal to increase unannounced inspections is overbudgeted. We withhold recommendation on a total of $11.2 million ($6 million General Fund) and 106 positions requested for improving nursing home regulation and enforcement pending receipt of specific workload information, including how much of that workload could be addressed by filling currently authorized, but vacant, positions. (Reduce Item 4260-001-0001 by $584,000.)

The DHS licenses nursing homes and administers and enforces the state and federal requirements for these facilities through its Division of Licensing and Certification. As part of the Aging with Dignity Initiative, the budget requests $16 million ($8.2 million General Fund) and 147 new state positions for nursing home inspection and enforcement activities.

Unannounced Inspections. The DHS staffing request includes the equivalent of 57 additional positions to increase unannounced nursing home inspections, based on increasing the number of current annual inspections by 20 percent. However, only a 14 percent increase is needed in order to achieve the stated goal of a 12-month average inspection interval. Moreover, the current regular inspection workload should decrease due to the planned increase in the number of nursing homes placed on focused quality review status. Accordingly, to meet the administration's stated goal, we recommend a reduction of 16 positions for a General Fund savings of $584,000 and an equal amount of matching federal funds.

Other Inspection and Enforcement Proposals. While additional staffing for nursing home inspections and enforcement activities may be needed, the budget proposals do not provide adequate information to justify the specific resources requested. In particular, the following information is necessary to evaluate these proposals:

Pending receipt of this information, we withhold recommendation on $11.2 million ($6 million General Fund) and 106 DHS positions requested for nursing home enforcement and regulation.

Increase In Bed Licensing Fee Would Reduce General Fund Costs

We recommend an increase in the per-bed nursing-home licensing fee for 2000-01 in order to adjust fee revenues to the amount needed to fully fund additional enforcement and regulatory staff and quality awards approved in the budget for a potential General Fund savings of up to $10.5 million.

License fee revenues from health facilities are deposited in the General Fund and offset, in effect, the General Fund costs of inspecting and regulating these facilities (federal funds and penalties also finance the program). Proposed budget bill language (in Item 4260-001-0001) establishes the annual per-bed licensing fee for nursing homes at $189.48 for 2000-01. Pursuant to current law, this rate was calculated by DHS based on the amount of license fee revenues needed to fund current-year spending for the regulatory and enforcement program. This one-year lag in the existing fee-setting mechanism facilitates the fee calculation because it does not require the department to estimate future costs or to adjust fees for budget actions. Since the size of the Licensing and Certification Program has tended to be relatively stable, fee revenues have approximately offset the total General Fund cost of the program, even with the one-year lag in the fee calculation.

The budget, however, requests an increase in General Fund spending for this program of almost $16 million, or 51 percent, in 2000-01, and DHS indicates that the license fee revenues proposed in the budget will not be sufficient to offset this increased General Fund cost. Almost all of the increased spending is a result of the Aging with Dignity proposals discussed above.

Increasing nursing home fees by an amount sufficient to fully offset the higher General Fund spending proposed for 2000-01 would eliminate the direct General Fund impact of the increased spending. However, some of these savings would be offset by costs to support an additional increase in Medi-Cal nursing home rates. This is because the licensing fees are an allowable cost that is included in the Medi-Cal nursing home rates. Since Medi-Cal pays for about 65 percent of nursing home residents, Medi-Cal payments would cover most of the nursing homes' costs for the increased license fees. Federal matching funds provide slightly more than half of Medi-Cal funding, with the remainder paid by the General Fund. As a result, the net cost to the General Fund (via Medi-Cal nursing home rates) of increasing nursing home bed fees is about one-third of the increased fee revenue, and the net General Fund savings is about two-thirds of the additional revenue.

For example, raising nursing home licensing fees by $16 million (which is the amount of the increase in General Fund spending requested in 2000-01, including the quality awards), would reduce General Fund costs by about $10.5 million on a net basis after allowing for the cost of Medi-Cal nursing home rate increases. Similarly, the net cost to nursing homes for the $16 million of additional fee revenue would be about $5.3 million.

In order to minimize the net General Fund costs of increased regulatory and enforcement efforts for nursing homes, we recommend adjusting the fee established in the budget bill to the amount necessary to fully offset direct General Fund costs approved in the budget. This would be consistent with the underlying concept of using fee revenues to offset these costs, with the intent of making fees assessed in the budget year correspond to the program's costs in the budget year.

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