Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Managed Risk Medical Insurance Board (4280)

The Managed Risk Medical Insurance Board (MRMIB) administers several programs designed to provide health care coverage to adults and children. The Major Risk Medical Insurance Program provides health insurance to California residents unable to obtain it for themselves or their families because of preexisting medical conditions. The Access for Infants and Mothers program provides coverage for women seeking pregnancy-related and neonatal medical care and whose family incomes are between 200 percent and 300 percent of the federal poverty level (FPL). The Healthy Families Program provides health coverage for uninsured children in families with incomes up to 250 percent of the FPL who are not eligible for Medi-Cal.

The budget proposes $846 million from all funds for support of MRMIB programs in 2001-02, which is an increase of about $336 million, or 66 percent, over estimated current-year expenditures. This increase is due primarily to the proposed expansion of the Healthy Families Program to include parents, as well as projected caseload increases. The budget proposes General Fund expenditures for MRMIB programs of about $129 million, a decrease of 13 percent from estimated current-year expenditures. The decrease in the General Fund share is primarily the result of shifting some MRMIB program costs to the newly established Tobacco Settlement Fund.

Healthy Families Program

The Healthy Families Program implements the federal government's State Children's Health Insurance Program enacted in 1997. Funding for California generally is on a 2-to-1 federal/state matching basis. Families pay a relatively low monthly premium and can choose from a selection of managed care plans for their children. Coverage is similar to that offered to state employees and includes dental and vision benefits. The program began enrolling children in July 1998. In 1999, it was expanded to include children with family income up to 250 percent of the FPL as well as legal immigrant children.

The Governor proposes $739 million ($125 million General Fund) in MRMIB's budget for the Healthy Families Program in 2001-02, which is an increase of about 83 percent over estimated current-year expenditures. After accounting for program expenditures (outreach and related Medi-Cal benefits) in the Department of Health Services (DHS) and related expenditures in other departments, the total budget for the Healthy Families Program is proposed at $833 million ($163 million General Fund), which is an increase of 75 percent over the current year. The proposed increase is due primarily to the proposed expansion of the Healthy Families Program to include parents, as well as projected caseload growth. We note that the budget does not include funding for provider rate increases in 2001-02. The rate increases will be negotiated in February and will be included in the May Revision of the budget. The budget projects that enrollment will increase to about 511,000 by the end of the current year and to about 735,000 by the end of the budget year.

Expansion of the Healthy Families Program to Parents

Background

The federal Balanced Budget Act of 1997 (Act) made available approximately $40 billion in federal funds over ten years to states to expand health care coverage for children under the State Children's Health Insurance Program (SCHIP). California's share is approximately $4.5 billion. The Act also provided states with an enhanced federal match as a financial incentive to cover children in families with incomes above the previous limits of their Medicaid programs. For California, the enhanced match is about two federal dollars for each state dollar, as compared to approximately a one-to-one match in the Medi-Cal Program.

California, along with many other states, has not spent all of the funds that are available. Despite the state's recent expansion of Healthy Families to children with family income up to 250 percent of the FPL, a sizeable portion of California's federal allotment would remain unspent over the next five years. Based upon our projections of available federal SCHIP funding and spending trends in the Healthy Families Program through 2004-05, we estimate that the cumulative SCHIP allotments over this period would exceed the cumulative spending of the existing Healthy Families Program by approximately $1.5 billion.

Recognizing that states needed additional flexibility to expand health insurance coverage and spend their allotted federal funds, the federal Health Care Financing Administration (HCFA) last July issued guidelines for demonstration project waivers. Specifically, HCFA indicated that the Secretary for the U.S. Department of Health and Human Services would consider five-year waivers that would allow states to use a portion of their SCHIP allotments for (1) coverage of parents of SCHIP enrollees and (2) public health initiatives designed to address or supplement targeted health needs of children. In addition, subsequent federal legislation allows states to retain a portion of their unspent 1998 and 1999 SCHIP funds for two additional years. Prior to this legislation, any given year's allotment had to be spent by states within three years.

Chapter 946, Statutes of 2000 (AB 1015, Gallegos) subsequently directed MRMIB to seek a federal waiver to expand the Healthy Families Program to uninsured parents of children eligible for the program.

California's Proposed SCHIP Waiver

Budget Proposal. In December, in accordance with Chapter 946, the Secretary for the California Health and Human Services Agency submitted a waiver request to federal authorities to expand Healthy Families coverage to parents. At the time this analysis was prepared, California's waiver request remained pending with federal authorities.

Based on the assumption that the waiver will be approved, the 2001-02 Governor's Budget includes about $202 million in new funding to support California's proposed SCHIP demonstration project expanding Healthy Families to parents. Of that sum, $76 million would be allocated from tobacco settlement funds, $116 million from federal funds, $9 million from reimbursements, and about $700,000 from the General Fund. The MRMIB estimates that the demonstration project will expand coverage to 290,000 parents. The budget further assumes that 174,000 adults, or 60 percent of the eligible parents, will enroll during the budget year.

Eligibility. Under the proposed waiver, the following parents would be eligible for medical, dental, and vision benefits under the Healthy Families Program:

• Parents of Healthy Families eligible children with family income between 100 percent and 200 percent of the FPL.
• Parents of Medi-Cal eligible children who themselves are ineligible or enrolled in "share of cost" Medi-Cal with incomes between 100 percent and 200 percent of the FPL.
• Parents with income below 100 percent of the FPL who do not qualify for Medi-Cal because of assets. Although the state eliminated the Medi-Cal asset test for children to bring the program into conformance with Healthy Families, the asset test is still in place for adults.

Under the proposal, a mother who is enrolled in Healthy Families and becomes pregnant will be covered for labor and delivery. However, since the woman and her infant could qualify for Medi-Cal, the family will have a choice of enrolling them in that program instead of continuing in Healthy Families.

Premiums and Copayments. Monthly premiums would vary according to family income. Families with an income between 100 percent and 150 percent of the FPL would pay $20 per parent in addition to the premiums for their children, while those with a family income between 151 percent and 200 percent of the FPL would pay $25 per parent. However, consistent with the current program, a family could receive a $3 discount per parent by choosing the low-cost Community Provider Plan (CPP). The CPP is comprised of a combination of participating health, dental, and vision plans offering the lowest price in each county. Currently, parents pay between $4 and $9 per month for each child (up to two children for families with income up to 150 percent of the FPL, and up to three children for families with income above 150 percent of the FPL) depending on family income and the plan selected. Figure 1 shows the proposed premium structure for a family of four.

The MRMIB has indicated that the copayment maximum for adults would be higher than the copayment limit for children, but at the time of this analysis, the specifics of the proposal were not available. Under the existing program, a family cannot be required to pay annual health plan copayments of more than $250 for coverage of their children.

The proposed waiver would extend to eligible parents many of the same provisions that exist for children. Figure 2 lists the key features of the proposed waiver.

The waiver seeks to demonstrate that by extending health coverage to parents, the number of low-income children that enroll in the program will increase. In addition, it seeks to demonstrate that covering parents will result in children maintaining health insurance coverage for a longer period of time.

Proposal Misses Opportunities to Improve Health Coverage

The proposed expansion of the Healthy Families Program appears to meet federal criteria for approval, but there are some missed opportunities to further reduce the number of uninsured and further conform and simplify the Healthy Families and Medi-Cal Programs.

California Appears to Meet Federal Criteria for Waiver. Based upon our review of the proposed waiver and federal requirements, California appears to meet the federal criteria for a demonstration waiver. The HCFA guidelines require states to adopt at least three of five policy options to promote the enrollment and retention of eligible children. California has already adopted three of the five listed. These include elimination of the assets test for children, the simplified mail-in application, and elimination of the Medi-Cal quarterly reports (or 12-month continuous eligibility).

The HCFA also requires that any state applying for a waiver demonstrate that sufficient federal funds are available to provide coverage to targeted, low-income children before parents can be covered. Based upon our analysis of projected enrollment and spending in Healthy Families, California will have sufficient federal funds to cover children who are currently eligible for the program as well as the population of adults under the proposed waiver.

Finally, HCFA requires that proposed waivers are "budget neutral." This means that the federal cost of the program operated with a waiver would not exceed the amount of SCHIP funding allotted to the state. As we stated previously, our analysis indicates that there are sufficient federal funds to cover the expansion to parents.

State Would Still Lose Federal Funds. Providing health coverage for parents under the Governor's proposal would allow California to spend an additional $1.6 billion of the state's federal SCHIP allotment over the five-year waiver period (state fiscal years 2001-02 through 2005-06). However, even with this proposed expansion, it is unlikely that the state will be able to spend all of the projected federal SCHIP allocations. The MRMIB estimates that during the waiver period, the state will return about $1.3 billion to the federal government. Although federal law would allow California to retain a portion of its federal fiscal year 1998 and 1999 allocations for two additional years, the effect of this law is to delay the actual reversion of California's federal SCHIP funds to a later date.

Some Low-Income Parents Still Excluded. The waiver request to expand coverage to parents is predicated on the idea that parental coverage will increase enrollment of Healthy Families eligible children, as well as improve continuity of coverage and the overall health of eligible children. The Healthy Families Program currently covers children up to 250 percent of the FPL. However, the administration is proposing to cover only parents in families with an income up to 200 percent of the FPL. Thus, this proposal would only benefit a portion of the children eligible to enroll in the Healthy Families Program.

The administration has indicated that the primary reason for not covering parents earning between 201 percent and 250 percent of the FPL is concern about "crowd-out" or displacement of employer-based coverage. Our analysis indicates that crowd-out can become more of an issue as income levels increase. We would note that, under the waiver proposal, parents who have had employer-based health coverage within 90 days of applying would be ineligible to enroll in Healthy Families. In addition to this 90-day rule, the Healthy Families Program has premiums which may also serve as a barrier to crowd-out. One option available to the Legislature, which we discuss below, is to broaden the premium structure by adding a third premium level. This would allow the Legislature to set the premium for families with incomes between 201 percent and 250 percent of the FPL at a level that would help to minimize crowd-out.

Proposal Fails to Move Toward Conformity. There are several reasons for conforming health programs. Most importantly, it makes it easier for families to move between them as their circumstances change, and easier to determine eligibility in such instances. Program conformity increases the likelihood that individuals will maintain health coverage. It also ensures that similarly situated individuals are treated equitably across programs.

The expansion of Healthy Families to adults creates new opportunities for conforming the Medi-Cal and Healthy Families Programs. However, the administration's proposal does not take advantage of this chance to further conform the two programs.

Consider, for example, the treatment of assets in determining eligibility. The asset test is a part of the eligibility determination process in which applicants provide information on their personal assets, such as bank and trust accounts, residential property, and automobiles to screen out individuals who have low monthly earnings but significant assets. Under the proposed expansion, parents seeking to enroll in the Healthy Families Program will not be required to meet an asset test. This is consistent with the eligibility determination process for children in Healthy Families as well as children in Medi-Cal. However, adults in the Medi-Cal Program continue to be required to meet an asset test.

The budget therefore perpetuates inconsistencies between the two programs. There is also an issue of equity to the extent that Medi-Cal participants with lower incomes and, therefore, more likely to have fewer assets, must face asset limits that do not apply to a group with higher incomes and more assets. Finally, we note that it costs the Medi-Cal Program more to administer the asset test than it would cost to provide Medi-Cal coverage to the relatively few individuals who are currently determined ineligible for the program because of it.

Families Required to Use Two Programs. Because Medi-Cal eligibility rules vary according to the age of a child, a family may have children in both the Medi-Cal and Healthy Families Programs. For example, a family with an income of 125 percent of the FPL and two children ages 4 and 6 would enroll the younger child in Medi-Cal and the older child and themselves in Healthy Families. This has many consequences for that family. The younger child's application would be processed by the local county welfare office, while the application for the older child would be processed by a state contractor in Sacramento. The two children might have to be enrolled in different health plans or see different doctors even if they were in the same health plan. These problems could be addressed, but the Governor's proposal fails to do so.

Options for Improving the SCHIP Expansion

In order to address some of the missed opportunities we have identified, we offer some options for legislative consideration, including (1) further expansion of parental coverage and (2) elimination of the Medi-Cal asset test.

Further Expansion of Parental Coverage. Following the release of the administration's plan to expand Healthy Families, there has been some legislative interest in further reducing the number of uninsured adults by expanding the Healthy Families Program to cover parents with income up to 250 percent of the FPL. In response, MRMIB has estimated that a modification of its proposal to expand coverage to parents with incomes up to 250 percent of the FPL would result in covering an additional 87,000 parents at an increased state cost of $66 million annually upon full implementation. Our analysis indicates that the state will receive sufficient federal funds to cover the federal share of cost of such an expansion through the five-year waiver period.

In addition to further reducing the number of uninsured, expanding coverage to all parents of Healthy Families eligible children would simplify the eligibility determination process for those children who are already enrolled, as well as simplify promotion of the program. In marketing the parent expansion, for example, MRMIB could state that "all parents with children enrolled in Healthy Families qualify," instead of saying that "if your child is enrolled in Healthy Families, you may qualify for the program." This would significantly reduce confusion or misunderstanding among parents about whether they qualify.

This option would also allow California to maximize a greater share of the federal funds allotted to the state. The MRMIB estimates that by covering parents up to 250 percent of the FPL, California would spend approximately $400 million more in available federal funds during the five-year waiver period.

Should the Legislature decide to expand Healthy Families coverage to parents in families earning up to 250 percent of the FPL, it may wish to consider creating a broader premium structure—perhaps with three premium levels instead of two. A broader premium structure would enhance the state's ability to set premiums according to participants' ability to pay, thereby improving MRMIB's ability to maximize enrollment in the program. It would also allow the Legislature to set the premiums for families with incomes between 201 percent and 250 percent of the FPL at a level that would minimize crowd-out.

While it seems likely the federal government will continue to offer enhanced federal matching funds for coverage of children, there is no assurance that federal funding for this program will be available after 2007. We note, however, that should the federal government decide not to reauthorize funding for SCHIP, the state could continue coverage of Healthy Families enrollees under the Medi-Cal Program.

In this event, income eligibility levels in the Medi-Cal Program would be increased and unique features of the Healthy Families Program, such as premiums and copayments, would need to be eliminated. The alternative would be to seek a waiver under Title XIX of the Social Security Act to allow the state to continue coverage with the existing insurance program features. Under either approach, the state would likely receive the dollar-for-dollar federal matching rate provided under the Medi-Cal Program.

Eliminating the Medi-Cal Asset Test Would Further Conformity. During each of the past two years, the Legislature passed budget bills that included a proposal to eliminate the Medi-Cal asset test for adults. However, the Governor has twice vetoed the proposal. The Legislature and Governor may wish to reconsider that decision in light of the new proposal to expand health care coverage. Eliminating the Medi-Cal asset test would conform the eligibility criteria for adults in Medi-Cal and Healthy Families, as well as simplify eligibility determination in the Medi-Cal Program. In an effort to conform Medi-Cal to the Healthy Families Program, the state has eliminated the asset test for children enrolled in Medi-Cal.

Under current law, a child might be enrolled in Medi-Cal, but the parent of that child might not qualify for Medi-Cal due to assets. Under the administration's proposal, the parent would be eligible to enroll in Healthy Families but not Medi-Cal. In such a case, the child and the parent(s) would have to be enrolled in different programs. Eliminating the Medi-Cal asset test for adults would solve this problem. Elimination of the asset test would also result in a net state savings of approximately $4 million in the Medi-Cal Program.

Healthy Families Caseload Overestimated in the Budget Year

We recommend reducing the budget's estimated level of spending for the Healthy Families Program in the budget year by about $75 million ($39 million federal funds, $33 million Tobacco Settlement Funds, and $3 million General Fund) because the budget appears to overestimate projected caseload. (Reduce Item 4280-101-0890 by $39 million, reduce Item 4280-101-3020 by $33 million, and reduce Item 4280-101-0001 by $3 million.)

Our analysis indicates that the administration has overestimated Healthy Families caseload by 11 percent and has therefore overbudgeted the program by about $75 million ($39 million federal funds, $33 million Tobacco Settlement Funds, and $3 million General Fund). Our analysis further indicates that the budget plan overestimates the enrollment of parents under the proposed waiver, as well as children with family income between 201 percent and 250 percent of the FPL, and legal immigrant children. Figure 3 compares our enrollment projection to the proposed budget. We discuss our findings in greater detail below.

Parent Enrollment Overestimated. The MRMIB estimates that approximately 174,000 parents, about 60 percent of the estimated number of parents eligible for coverage, would be enrolled under the proposed expansion by the end of the budget year. Our estimate assumes that only about 147,000, or about 51 percent of the total eligible population, will enroll by then. Our lower estimate is driven by three factors: the level of the premiums, the demographics of the parent population, and the number of parents with employer-sponsored health coverage. Each factor is discussed in more detail below.

• Level of Premiums May Deter Enrollment. The MRMIB has indicated that no survey was done to determine the willingness or ability of families to pay this amount for coverage. Our analysis indicates that, while the premiums proposed for family coverage in the Healthy Families Program are relatively low compared to the cost of family coverage available to many low-income working adults, they still may not be attractive for some groups. We believe this could be the case for families on the low end of the qualifying income range (those with income between 100 percent and 133 percent of the FPL), and individuals who would rate themselves as having excellent to good health and thus, perhaps, be less willing to pay for health coverage.
• Also, some of the adults who would become eligible for Healthy Families under the proposal are enrolled in Medi-Cal with a share of cost. Under Medi-Cal rules, these adults have the obligation of making a share of cost payment only when they visit the doctor rather than having to pay monthly premiums if they enroll in Healthy Families. Some will likely choose to remain on Medi-Cal with a share of cost, particularly if they consider themselves to be in good health.
• Demographics of Parent Population. The MRMIB has limited data on the parents of children enrolled in Healthy Families, but demographic data on the uninsured as a whole indicate that adults ages 18 to 34 represent a significant portion of the low-income adults who lack health insurance. The rate of uninsurance among this group is significantly higher than the uninsurance rate for other age groups of adults. This is the very age group that is targeted for enrollment under the Governor's proposal.
• Research suggests, however, that the reason for the high level of uninsurance for this group is a prevailing perception among them that they are in excellent health. We also note that uninsured low-income young females with excellent-to-good health are more likely to seek health coverage only during pregnancy, at which time they would qualify for no-cost Medi-Cal.
• Parents With Employer-Based Coverage. In estimating the total number of eligible parents, MRMIB has assumed that 38 percent of adults with incomes between 100 percent and 200 percent of the FPL have employer-sponsored health coverage. This assumption is based on 1997 survey data. However, the 1999 Current Population Survey indicates that 45 percent of parents in this income range have employer-sponsored health coverage. The MRMIB's assumption that relatively fewer adults targeted for enrollment in Healthy Families have employer-based coverage would tend to overstate the total number of eligible participants. Given the uncertainty of future employer coverage in this time of rising health care costs, we do not, at this time, recommend an adjustment on this basis to MRMIB's estimated number of total eligible parents. We would note, however, that a higher-than-anticipated level of employer-based coverage could result in lower-than-projected enrollment by adults in the Healthy Families Program during the budget year.

In summary, we believe a number of factors will result in the enrollment of 147,000 adults in Healthy Families—26,000 fewer than assumed in the Governor's budget proposal.

Children's Enrollment Overestimated. Our analysis indicates that the budget plan overestimates the enrollment of children with family income between 201 percent and 250 percent of the FPL. The MRMIB estimates that 175,000 children within this income group, or 100 percent of the eligible children with family incomes in this range, will enroll in the budget year. The budget further assumes that the average monthly enrollment of this group in Healthy Families will increase by 13 percent in the budget year to 6,640 per month. The MRMIB indicates that the accelerated enrollment rate of children will result from the expansion of the program to parents.

There are two reasons why we believe MRMIB has overestimated the enrollment of this group of children. First, we believe that some children in this income range would not be enrolled by their parents because they would prefer not to participate in government programs. In the Medi-Cal Program, for example, many people do not participate in the program even though it is free for them. Second, while we agree that opening enrollment to parents will result in the enrollment of additional children, we believe this impact is overstated in the budget estimate. This is because the proposed expansion would only cover the parents of children with family income between 100 percent and 200 percent of the FPL, and not parents in families with income between 201 percent and 250 percent of the FPL.

Our lower estimate assumes an average monthly enrollment of 5,200, based upon actual recent enrollment data that has been adjusted for the impact of the expansion. At this rate, we project that approximately 138,000 children, or 79 percent of the total eligible population, will enroll by the end of the budget year.

Legal Immigrant Children Enrollment Overestimated. The budget assumes an average monthly enrollment for this group of 1,470 during the budget year. At this rate, approximately 33,000, or 82.6 percent of eligible legal immigrant children would enroll in the budget year. Given recent evidence indicating that immigrant families still have concerns regarding citizenship, our budget-year estimate assumes a lower average monthly enrollment of 560 per month. This is based on actual enrollment for this group in the current year adjusted upward to account for ongoing outreach and education related growth. Thus, we estimate that approximately 18,000 immigrant children, or 45 percent of eligibles will enroll during the budget year.

Analyst's Recommendation. Based upon these findings, we recommend reducing the amount budgeted for Healthy Families by about $75 million ($39 million in federal funds, $33 million in Tobacco Settlement Funds, and $3 million General Fund).