Legislative Analyst's Office Analysis of the 2002-03 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 (AIM) program provides coverage for pregnant women and their infants 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 $777 million from all funds for support of MRMIB programs in 2002-03, which is an increase of $104 million, or about 15 percent, over estimated current-year expenditures. This increase is due primarily to projected caseload increases in AIM and Healthy Families. In addition, the administration proposes shifting all but $1.8 million (General Fund) from MRMIB programs to the Tobacco Settlement Fund (TSF) in the budget year.

The January budget also proposes to delay implementation of the Healthy Families eligibility expansion to include parents until July 2003, for estimated savings of about $54 million in the current year and about $160 million in the budget year. (The Governor has since indicated his interest in proceeding with the parent expansion in the budget year provided that funding is available.) The budget further reflects caseload increases due to the proposed elimination of the Child Health and Disability Prevention (CHDP) program. Finally, the budget proposes suspend ing the Rural Health Demonstration Project (RHDP) in the budget year for an estimated savings of $2 million.

Healthy Families Program

Background

The federal Balanced Budget Act of 1997 (BBA) 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). The BBA 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.

California decided in 1997 to use its approximately $4.5 billion share of SCHIP funding to implement the state's Healthy Families Program. Funding for the program 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, who are not eligible to receive federal funds and therefore do not draw federal matching funds. In December 2000, the state submitted a waiver request to the federal government to expand the Healthy Families Program to uninsured parents of children eligible for the Healthy Families or Medi-Cal programs up to 200 percent of the FPL. In January 2002, MRMIB resubmitted the waiver--with no significant further policy changes--under the new Health Insurance Flexibility and Accountability (HIFA) initiative procedures established by the federal Centers for Medicare and Medicaid Services (CMS). Federal authorities announced shortly thereafter that the waiver to extend Healthy Families eligibility to parents up to 200 percent of the FPL had been approved. As state statute requires, the administration has indicated its intention to submit an amendment to the waiver further expanding eligibility for parents up to 250 percent of the FPL.

The Budget Proposal

As shown in Figure 1, the January budget proposes state expenditures of $657 million ($1.8 million General Fund) in MRMIB's budget for the Healthy Families Program in 2002-03. This is an increase of about 18 percent over estimated current-year expenditures. The budget proposes $5.5 million for Healthy Families state operations and $652 million for local assistance.

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 $795 million ($42 million General Fund), a decrease of about 3 percent from the current year. The decrease is due primarily to proposed reductions in state operations support and outreach in the DHS, and decreases in expenditures in the Department of Mental Health.

In the current year, $62 million from TSF was appropriated for projected enrollment of 150,000 parents up to 250 percent of the FPL by June 2002. It was assumed that parent enrollment would begin on October 1, 2001. As a result of the January budget's proposal to delay the expansion of eligibility to parents until July 2003, the budget reflects a reduction in TSF funding to $8 million in the current year. Only $54 million in state savings was realized in the current year because some expenditures were made in the current year in preparation for the expansion to parents. The January budget proposal reflects a $160 million TSF reduction for the proposed delay of parent enrollment until July 2003.

Caseload Issues

Budget Reflects Growing Children's Caseload

The administration's estimates of Healthy Families caseload and associated expenditures are reasonable. We recommend approval of the request for $58 million (Tobacco Settlement Fund) in the budget year for caseload growth.

Caseload Estimate. The budget proposes total expenditures of about $649 million from all funds (including federal funds) for an estimated 644,000 children enrolled in Healthy Families in 2002-03. This includes about a $58 million increase in TSF in the budget year from the revised current-year spending level for caseload growth. This increase is due to the estimated addition of 85,000 children in the program during 2002-03. As we discuss later in this analysis, part of this increase (20,700) results from the proposed elimination of the Child Health and Disability Prevention (CHDP) program and the resulting transfer of some of these children to the Healthy Families Program. The MRMIB anticipates total enrollment in the budget year of about 610,000 children who qualify for federal matching funds (referred to as "base population") and about 33,600 legal immigrant children who do not qualify for federal funds and thus are funded entirely through state funds. Figure 2 shows MRMIB's Healthy Families caseload projections for the current and budget years.

The MRMIB anticipates that growth rates in the enrollment of its base population will level off for children under 200 percent of the FPL and will slow to about 1 percent average monthly growth for children between 201 percent and 250 percent of the FPL by the end of the budget year. The projected growth in enrollment of immigrant children is expected to hold steady at about 4 percent each month in the budget year. Enrollment of this group is expected to continue to increase until full enrollment is achieved.

The January budget assumes that no parents are enrolled in the Healthy Families Program until 2003-04 due to the proposed delay in this program expansion.

Caseload Tracking Close to Estimate. In preparing this analysis, we compared actual caseload trends for each of the Healthy Families Program enrollment groups to the administration's caseload projections. The data indicate that the estimates for each group are consistent with actual program growth. We would note that the administration intends to update its caseload and cost projections for the Healthy Families Program at the time of the May Revision.

Risks to the Accuracy of the Projections. Any projection is at risk of being in error, and there are several factors that could influence the accuracy of the projections of the Healthy Families Program caseload. One of these factors is the economy. California is experiencing the first recession since the implementation of the Healthy Families Program and it is unclear what affect it may have on the rates at which children enroll and disenroll in the program.

Enrollment could be greater than estimated to the extent that additional individuals lose their jobs and their health insurance. If one parent in a two-parent family loses his/her job or a parent's work hours are reduced, then the family's income could decrease to the point that they become eligible for the Healthy Families Program. At the same time, disenrollment in the Healthy Families Program could increase as parents in low-income families already enrolled in the program lose their jobs or enough income such that the family qualifies for the Medi-Cal Program.

The accuracy of the department's caseload projections and cost estimates are also dependent upon a number of other factors. These include:

• Federal actions on such matters as state plan amendments to California's SCHIP plan or waiver requests, as well as congressional actions relating to the appropriation and carryover of SCHIP grants.
• Further changes in state and local laws and regulations adopted by the Legislature and the Governor or through the initiative process.
• Effects of the Governor's budget proposals. The Governor's proposal to reduce funding for media campaigns and other outreach activities for the Medi-Cal and Healthy Families Programs could slow caseload growth.

Analyst's Recommendation. While the economy and other factors pose a risk to the accuracy of the Healthy Families caseload and cost projections, it is not yet clear whether the economic downturn will significantly impact the Healthy Families caseload. Accordingly, we recommend approval of a $58 million (TSF) increase in the budget year for Healthy Families children's caseload growth. We will continue to monitor caseload trends and recommend appropriate adjustments at the time of the May Revision.

Elimination of CHDP Would Increase Caseload

We withhold recommendation on the $5.9 million allocated for children's caseload growth related to the elimination of the Child Health and Disability Prevention program, pending a more detailed report from the Department of Health Services at budget hearings on several key issues.

The budget proposes eliminating the CHDP program in the budget year for an estimated savings of about $52 million. The administration maintains that most children in the CHDP program are eligible for Medi-Cal or Healthy Families. As a result of the proposed elimination of the CHDP program, the budget estimates that about 20,700 additional children will enroll in the Healthy Families Program in the budget year. However, this estimate may not reflect the true magnitude of the impact on the Medi-Cal and Healthy Families caseloads primarily because it is not clear how many children receive services through CHDP. Accordingly, we withhold recommendation on the proposed increase of $5.9 million pending a more detailed report from DHS at budget hearings on key issues relating to how the plan would actually be implemented. (Please see the "Public Health" section of this analysis for a more detailed discussion of the proposed elimination of the CHDP program.)

Healthy Families Parent Expansion

The January budget proposes delaying the implementation of the Healthy Families parent expansion until July 2003. Should the Legislature wish, however, to proceed with the expansion in the budget year, we offer an alternative for doing so at a reduced state cost.

Background

California, along with a number of other states, has not spent all of the federal funds that are available to it through the state's federal SCHIP (Title XXI of the Social Security Act) allotment. Recognizing that states needed additional flexibility to expand health insurance coverage and spend their allotted federal funds, CMS (formerly the Health Care Financing Administration [HCFA]) issued guidelines in July 2000 for demonstration project waivers. Specifically, CMS indicated that the Secretary for the U.S. Department of Health and Human Services (DHHS) 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.

California's SCHIP Waiver. Chapter 946, Statutes of 2000 (AB 1015, Gallegos), directed MRMIB to seek a federal waiver to expand the Healthy Families Program to uninsured parents of children in families with incomes up to 250 percent of the FPL. In December 2000, the Secretary for the California Health and Human Services Agency submitted a request to federal authorities to expand eligibility to parents with incomes up to 200 percent of the FPL.

After ongoing communications with federal authorities, the state resubmitted its waiver request under the new HIFA waiver process in January 2002. The HIFA initiative, announced by DHHS in August 2001, promises to provide states with expedited review of their waiver proposals if they follow structured guidelines in designing and applying for proposed pilot or demonstration projects.

California's waiver request was approved shortly after resubmittal with no substantial changes from the original request. We are advised that a condition of approval was a federal request that the state conduct a feasibility study of the possibility of expanding eligibility to parents by helping them pay premiums for employer-sponsored health coverage.

Federal approval of the expansion of the Healthy Families Program to include parents was delayed in part due to state and federal negotiations over details of the proposal, including the way that income eligibility for parents would be calculated under the waiver. The state reviewed the issue and decided not to modify the waiver request, thereby establishing income eligibility rules for parents that would be consistent with the existing family income calculations for enrollment of children in the program.

Implementing the Expansion

January Budget Proposes Delay in Parent Expansion. State law requires implementation of the parent expansion to commence no later than four months after the date a waiver is approved. However, the January budget proposed to delay implementation of the parent expansion until July 2003. The Legislature accepted an administration proposal to revert current-year funding for the parent expansion, but did not approve language proposed in SB 6xxx (Peace) to require a delay in the implementation of the Healthy Families Program until July 2003. In effect, legislative action to date would allow the parent expansion to commence on July 1, 2002, unless contrary action is taken during deliberations on the 2002-03 Budget Bill.

Since the release of the January budget, the Governor has indicated that the administration is interested in going forward with the parental expansion provided funding is available. The Governor suggested he would work with the Legislature to identify possible funding sources.

Expansion Could Start at Lower Budget-Year Costs. Chapter 946 requires the state to seek a federal waiver to cover parents up to 250 percent of the FPL. At the time this analysis was prepared, however, MRMIB had not yet submitted a further request to CMS to amend its HIFA waiver to expand parent eligibility further to 250 percent of the FPL. Thus, currently federal approval only allows the state to extend parental expansion to 200 percent of the FPL.

If the parent expansion, as currently approved by the federal government, were implemented on July 1, 2002 it would cost the state an estimated $96 million (TSF) in the budget year and provide health coverage for about 187,000 parents. We recognize that the expansion of Healthy Families to parents has been an important legislative priority. Should the Legislature elect to proceed with the implementation of the expansion in the budget year, it could reduce state costs by $66 million by delaying expansion until January 1, 2003. This option would cost the state an estimated $30 million in the budget year and require a change in state law.

State Faces Potential Loss of SCHIP Funds

The state is at risk of losing $750 million in unspent federal State Children's Health Insurance Program funds over the next two years in the absence of congressional action. We suggest the Legislature work with the congressional delegation regarding the availability of these funds. We also present examples of options to minimize this potential loss of federal funds.

Background

Each federal fiscal year (FFY) since 1998, California has received a share of the nationwide SCHIP appropriation. The first appropriation was to be used within three years, while subsequent allotments were to be used within two years. Like many other states, California was not able to establish new health programs and to expand enrollment in health programs quickly enough to use all of its FFY 98 and FFY 99 allotments within the designated time period. In 2000, however, Congress authorized states to retain part of these allotments until September 30, 2002. Of the amounts not spent, California was allowed to keep about 63 percent of its FFY 98 allocation and about 42 percent of its FFY 99 allotment. The MRMIB advises that all of its FFY 98 funds will be spent prior to September 30, 2002. As a result, any unspent FFY 99 funds are at risk of reverting to the federal government after September 30, 2002. In addition, under current federal law, the state would lose all of its unspent FFY 00 allotment at the end of FFY 02 and all of its unspent FFY 01 allotment at the end of FFY 03.

State Could Lose Hundreds of Millions in Federal Funds. In the absence of further federal action regarding the FFY 00 allocation and beyond, our analysis indicates that California is at risk of losing $750 million in federal funds through reversions to the federal government. The federal administration recently proposed allowing California and other states to retain part of their unspent SCHIP allotment. Any such relief would be subject to congressional action.

If the Healthy Families parent expansion is delayed past the budget year as the January budget proposes, a total of almost $1 billion of the state's unspent SCHIP funds could be lost at the end of FFY 02 and FFY 03. Figure 3 provides estimates of the amount of federal SCHIP funds which the state is at risk of reverting under several possible scenarios.

Options for Preventing Loss of Some Federal Funds. As previously indicated, hundreds of millions of dollars of unspent SCHIP funds are at risk of reverting to the federal government. As a first step, we believe the Legislature should work with the California congressional delegation to extend the deadline on the availability of these funds. If Congress allows the states to retain some of these funds, there are several options, both one-time and ongoing, that may help to minimize the loss of the state's SCHIP allotment.

As an example of one-time options, the state could attempt to draw down federal matching funds for limited duration activities such as abatement of lead in schools and low-income residences, short-term youth violence prevention programs, or the provision of health and dental services for children in geographically isolated areas. This approach would not only allow the state to reduce the amount of unspent SCHIP funds subject to reversion, but preserve SCHIP funds in future years when spending for programs supported by SCHIP funds may outpace the amount of the funds available.

As an example of an ongoing program option, the state could offer premium assistance to low-income or recently unemployed workers. The federal administration is encouraging states to integrate and coordinate any waiver proposals with the private health insurance market (especially the group health plan market) through premium assistance programs. This option, which has been implemented by Massachusetts, Wisconsin, Mississippi, and other states, would use SCHIP funds to pay for part of the premium for health coverage offered by employers. Under Rhode Island's Rite Share Premium Assistance Program, for example, working families who are eligible for Medicaid can enroll instead in employer-sponsored insurance coverage. The state pays the employee's monthly health insurance premium. This approach could expand coverage to lower-income working families at less cost to the state than providing full coverage through a state program.

All of these options would require federal approval, a step that could significantly delay their implementation. Some of these options might also involve a state funding match that may be difficult due to the state's fiscal problems. In addition, implementing ongoing programs could create General Fund pressure beyond the budget year to the extent that spending on programs supported by the state's SCHIP allotment outpaces available federal funds.

Dual Enrollment in Healthy Families and Medi-Cal

An unknown, but probably substantial number of individuals enrolled in the Healthy Families Program are also enrolled in Medi-Cal. We recommend that the Department of Health Services and the Managed Risk Medical Insurance Board report at budget hearings on the steps they are taking to ensure that the state is not paying twice for health coverage for the same individuals.

A recent study conducted by the Department of Mental Health (DMH) suggested that an unknown, but probably substantial, number of individuals enrolled in the Healthy Families Program were also enrolled in Medi-Cal. State regulations do not allow dual enrollment for patients without a share-of-cost in Medi-Cal and Healthy Families, however there is no mechanism currently in place that prevents individuals from being simultaneously enrolled in both programs. Although individuals may be enrolled in both programs, it is uncertain if there are duplicative payments for them. The DMH attributes the dual enrollment problem in part to the lengthy delay in disenrollment that can occur in the Healthy Families Program.

Analyst's Recommendation. We recommend that DHS and MRMIB report at budget hearing on the steps they are taking to ensure that the state is not paying twice for health coverage for the same individuals.