Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

California Children's Services

Missed Opportunities for General Fund Savings in the CCS Program

The California Children's Services (CCS) program provides medical treatment and therapy services to eligible children and young adults under 21 years of age with certain debilitating medical conditions or major traumatic injuries. Our analysis indicates that the CCS program is missing opportunities to control increasing costs and preserve General Fund resources that could help address the state's fiscal problems. Specifically, we found that CCS is not taking full advantage of available federal funds, that some CCS costs could appropriately be funded under Proposition 98, that some state reimbursement practices have created incentives for expensive inpatient care, and that the state lacks data that could be used to help prevent program overspending.

Background

Services Provided

Two Major Components. The California Children's Services (CCS) program provides diagnostic and treatment services, medical case management, and medical and occupational therapy services to eligible children and young adults under 21 years of age. The CCS program, which is administered by the state Department of Health Services (DHS), has two major components. The first provides medical case management and payment of treatment and diagnostic services (which we refer to later as the CCS treatment program), while the second provides school-based physical and occupational therapy services through what is called the Medical Therapy Program (MTP).

Eligibility Rules

The administration estimates that by June 2004 the total CCS caseload will be about 178,380 children. To be eligible for CCS, a child must meet both income and medical eligibility requirements and also be a permanent resident of the county in which an application for the child is filed.

Income Eligibility. The initial diagnostic and evaluation services to determine the presence of a CCS-eligible condition are available to families free of charge regardless of family income, as are MTP services. However, to be eligible for CCS medical treatment services, the child's family generally must have an adjusted gross income of no more than $40,000. Children in families with a higher income may also be eligible if expenses for treating the CCS-related medical condition exceed 20 percent of family income.

Children enrolled in the Medi-Cal and Healthy Families Programs are deemed to automatically meet income eligibility requirements for CCS. About 75 percent of the children receiving treatment services, or about 134,080 CCS clients, are estimated to be enrolled in both CCS and Medi-Cal and an estimated 13 percent are enrolled in both CCS and the Healthy Families Program.

Medical Eligibility. In order to receive CCS services, a child must also have a qualifying medical condition. These conditions include serious birth defects, disabling injuries, certain nervous system diseases, blood diseases, some types of cancer, certain types of heart conditions, and HIV infection. Medical eligibility for CCS treatment services and the MTP differ. A child receiving CCS treatment services may not necessarily be eligible for the MTP. The MTP only serves children with conditions that could benefit from therapy services.

Benefits

The CCS program is not a comprehensive health insurance program, but instead is intended to provide medical, therapy, and case management services related to a child's specific qualifying condition. In addition, the CCS program will only pay for medical services provided by a CCS-approved provider. Program benefits include diagnostic and treatment services, case management, and school based therapy.

Program Funding Structure

The CCS program is funded with state General Fund, federal funds, county funds, and a small amount of enrollment and assessment fees. 

Medi-Cal Enrollees (CCS/Medi-Cal). For these enrollees, the federal government pays about 50 percent of the cost of medical treatment services, with the state General Fund paying the remaining 50 percent. As regards MTP services, federal funds finance half the costs with the state and counties each paying about half of the remaining costs.

Healthy Families Enrollees. For these enrollees, the federal government pays about 65 percent of the costs of treatment services, with the remaining 35 percent split equally between the state and counties. The MTP component of the CCS program does not bill for services provided to children enrolled in the Healthy Families Program.

State-Only Program. The state and counties each pay about 50 percent of the cost of treatment and MTP services for children who are enrolled in the CCS program and who are not identified as being enrolled in Medi-Cal or the Healthy Families Program. This is often referred to as the "state-only" CCS program because no matching federal funds are used to provide services for these children.

The Budget Proposal

State-Only Program Budget. As Figure 1 shows, the Governor's budget proposes to spend about $69 million from the General Fund ($141 million all funds) on the state-only component of CCS in 2003-04, a small decrease from estimated current-year expenditures.

Within the state-only program, medical treatment costs are estimated to decrease 6 percent while MTP costs are estimated to grow by 3 percent. County administrative costs within the state-only component of CCS are anticipated to account for $19.5 million in expenditures, about 14 percent of program costs, about the same amount as in the previous year.

CCS/Medi-Cal Budget. At the time this analysis was prepared, the DHS indicated it was not able to estimate the amount that would be spent from within the Medi-Cal budget for CCS program services in 2003-04. However, based upon historical data, we estimate that Medi-Cal expenditures for CCS services would be about $614 million from the General Fund ($1.2 billion all funds) in the budget year. Of this sum, we estimate that less than 1 percent of total expenditures (about $3.5 million from the General Fund) would be for MTP services.

CCS/Healthy Families Program Budget. The Governor's budget proposes to spend about $9 million from the General Fund ($47 million all funds) for CCS medical treatment services for children enrolled in the Healthy Families Program. This is about a 4 percent increase in estimated spending from the previous year. 

State Has Missed Opportunities to Save General Fund

Caseload and Costs Continue to Rise

Significant growth in overall cost and caseload have occurred in both the Medi-Cal and state-only components of CCS. 

Caseload Trends. Figure 2 shows the CCS caseload trends since 1999-00. During this period of time, the CCS/Medi-Cal caseload has grown at an average annual rate of about 14 percent, while the CCS state-only caseload has decreased at an average annual rate of about 8 percent. This decrease in the state-only program is primarily due to a corresponding increase in the CCS caseload enrolled in Healthy Families.

At the time this analysis was prepared, data on the number of Healthy Families enrollees being served by the CCS program were available for the years 1999-00 through 2001-02, but not for subsequent years. Based upon this information, we estimated the caseload for the current and budget years. The upward trend in the CCS/Healthy Families caseload appears to be consistent with the rapid growth in the Healthy Families Program, which began operation in 1998-99.

Adding the CCS-state only and the Healthy Families caseloads together, the non-Medi-Cal caseload has grown by an average of 6 percent annually in this time period.

Expenditure Trends. Because we do not have updated expenditure estimates for CCS/Medi-Cal from DHS, Figure 3 focuses on expenditure trends for the CCS-state only caseload since 1999-00. Notably, during this five-year period, the growth in expenditures for MTP services has continued to outpace growth in treatment services for CCS-state only enrollees. During this time period, expenditures for MTP services have grown at an average annual rate of 9 percent, while spending for treatment services has grown at an average annual rate of about 2 percent.

Ramifications of These Trends. The growth in CCS caseloads and costs appears to be due to several factors. One key factor is the expansion of the number of children enrolled in recent years in the Healthy Families and Medi-Cal Programs, which has resulted in increased identification of children eligible for CCS services. Expansion of medical therapy services to children in special education programs and medical inflation have also increased costs. Increases in the rates paid to CCS providers which took effect in 1999 and 2000 also played a role by encouraging them to identify additional CCS children who could receive CCS treatment services and to bill CCS for these services.

The growth in CCS caseloads and costs emphasizes the need for the state to evaluate cost control measures, or to at least slow the further increase in these costs in ways that will not undercut the provision of health care for some of the state's most medically fragile children. 

CCS Not Taking Advantage of Available Federal Funds

Our analysis indicates that, in a number of different ways, the state is failing to take advantage of available federal funds, resulting in additional state General Fund costs of more than $6 million. We discuss these findings in more detail below.

Healthy Families Children Not Being Identified. Our analysis indicates that there may be as many as 5,000 additional children in the CCS medical treatment program who are enrolled or eligible for Healthy Families. The state may be spending about $3 million more annually from the General Fund for CCS treatment services than necessary for these children.

In addition, we estimate that the state could save as much as $2 million annually beginning in 2003-04 if it began to identify children in MTP who could be in the Healthy Families Program. Currently, MTP does not identify such children. If the state did so, it could reduce its share of cost of the services provided to these children from the current 50 percent to 17.5 percent.

We would also note that the failure to enroll CCS children in Healthy Families also means that the state is missing another opportunity—the chance to provide them with more comprehensive medical care. The Healthy Families Program provides a comprehensive package of health care services, including dental and vision care, while the CCS program only covers those specific services that address a child's CCS-eligible condition.

Duplicative Services at Regional Centers. Our analysis indicates that some of the community services provided through the Regional Centers (RCs) under the direction of the Department of Developmental Services could be provided through the CCS program. Providing services through CCS could reduce state cost because RC services are funded entirely with General Fund while CCS receives federal and county funds.

Developmentally disabled individuals receive case management from the 21 RCs located throughout the state. The RCs are statutorily required to exhaust all available public resources, such as the CCS program, before purchasing services through its own contractors using state General Fund resources. However, after a child has been determined to be eligible for services, RCs have only 60 days under state law to establish a start date for services. If CCS is unable to complete intake for a child within that 60-day period, an RC may then opt to pay its own vendor for services rather than wait for CCS to complete its intake process. This situation results in RCs paying for services using General Fund resources that could instead be provided through CCS with a county and federal share of cost.

The available data suggest the General Fund impact could be significant. During 2001-02 (the last fiscal year for which data were available), RCs spent $10.7 million for physical and occupational therapy services similar to the services offered by MTPs. As many as 15 percent of the children receiving these services through the RCs may be eligible for services provided through the MTP. The caseload data suggest that providing the services through CCS instead of RCs could save the state about $1.2 million in General Fund annually.

Some MTUs Not Certified as Medi-Cal Providers. The state may be missing an additional opportunity to offset state General Fund support provided to children for medical therapy services. Medical therapy services are provided in school-based medical therapy units (MTUs).

In order to receive federal Title XIX funds under the Medi-Cal Program, an MTU must be certified as an outpatient rehabilitation center. Currently, 18 of the 107 MTUs statewide are not certified, and therefore are unable to bill Medi-Cal for the services they provide to CCS children. As a result, each visit to one of these 18 MTUs is paid for entirely by the counties and the state.

The DHS was unable to provide information regarding how many MTU therapy visits are conducted annually by those MTUs that are not certified as rehabilitation centers. Nor was DHS able to document the cost of a typical MTU visit. As a result, we were not able to estimate the loss of federal funds and the resulting additional cost to the state for medical therapy services provided through uncertified MTUs. Given the caseload and cost of such services, however, we believe the fiscal impact on the counties and the state could be significant.

Missed Opportunities in Use of General Fund Resources

In addition to the lost opportunities to recoup federal funds, our analysis indicates that there may be other alternatives in the way the CCS program is being funded and operated.

CCS Providing Education Services. Our analysis indicates that some medical therapy services provided under the CCS program could appropriately be considered to be educational in nature and thus could be provided within the Proposition 98 funding guarantee.

Under Proposition 98, a portion of state revenues must be dedicated each year for the support of educational programs. Our analysis indicates that it would be possible to shift part or all of the General Fund cost of these CCS services to Proposition 98, thus permitting a net reduction in non-Proposition 98 General Fund expenditures. Because we forecast greater growth in the Proposition 98 minimum guarantee than the administration for 2003-04, the Legislature could use this option to meet the higher Proposition 98 minimum guarantee for education spending without increasing General Fund expenditures. These savings presume that the Legislature (1) does not over-appropriate the minimum guarantee, and (2) does not adjust the minimum guarantee to reflect the transferring of CCS into Proposition 98. The State Constitution is silent on adjusting the minimum guarantee to reflect new responsibilities shifted to school districts.

We have been advised that the school-based medical therapy services could be considered an education program supported by Proposition 98. While therapists and other MTU employees are employed by the county, school districts typically donate the building space and other "overhead" expenses. The budget proposes to spend $37 million in General Fund resources for MTP services in 2003-04. We believe that these services could be funded with Proposition 98 General Fund.

Billing Problems. Our analysis indicates that county billing practices for medical therapy services may be resulting in the state foregoing federal funds and spending additional General Fund resources for these services.

Data we have reviewed indicate that the amount of claims being billed to Medi-Cal for MTP services is significantly lower than expected, given the size of the CCS enrollment and other factors. This discrepancy could be the result of counties' submitting eligible claims to the state under the CCS-state only program rather than as required under CCS program rules to Medi-Cal. The low level of Medi-Cal billings could also partly be the result of counties' use of vendors to provide CCS services. The DHS indicates that services provided by vendors cannot be billed to Medi-Cal.

We were unable to obtain data from DHS that would allow us to determine exactly why the discrepancy in Medi-Cal billings exists or the potential loss to the state due to this situation. Given the size of the Medi-Cal/CCS caseload and costs of the program, we believe that cost to the state General Fund resulting from these problems could be significant.

Billing Process Creates Incentives for Expensive Inpatient Care. Our analysis indicates that the way the state reimburses CCS providers for medical treatment services creates an unintended incentive for them to provide care in expensive inpatient settings instead of less costly outpatient settings.

Advances in medical treatment have enabled physicians to deliver services in outpatient settings where they once could be provided only on an inpatient basis. However, CCS providers have reported that the opposite is sometimes occurring for CCS patients. For example, due to reimbursement policies and procedures, sometimes higher reimbursement rates are paid for treatment of similar conditions when provided in hospitals as compared to treatment provided in an outpatient setting. In addition, providers indicate that they are sometimes able to get more timely approval for inpatient services. Families also report experiencing longer waiting periods for outpatient care for CCS children than if they obtain the same services from hospitals.

As a result, the state is probably spending more than necessary for the provision of some CCS services. While these additional costs are unknown, they are probably significant.

Program Lacks Protections Against Overspending. Our analysis suggests that an inadequate system of data reporting and analysis is creating a risk of overspending within the CCS program.

As the program is currently operated, counties provide minimal information to DHS about CCS clients and the services they utilize. This lack of data makes it difficult for the state to monitor important program trends such as the utilization of CCS services, the cost of those services, enrollee characteristics, the availability of private insurance to offset the cost of CCS services, or provider enrollment patterns. Each of these measures is a standard data component commonly collected for other health programs to protect against program overspending.

There is also a lack of current data regarding CCS/Medi-Cal caseload and costs. While the delivery of CCS/Medi-Cal services to children is "carved-out" from the regular Medi-Cal program, the budget for these services is folded into the DHS Medi-Cal budget. However, DHS does not regularly track overall CCS costs as a distinct part of the Medi-Cal budget. The state therefore lacks basic information on projected costs, service utilization, and other factors necessary for effective program oversight, even though Medi-Cal-eligible children constitute 75 percent of the total CCS caseload.

The lack of information creates a significant fiscal risk to the state. For example, the DHS has advised us that a significant percent of CCS enrollees receive services through relatively expensive Special Care Centers. However, CCS was unable to provide even basic utilization or expenditure data about these centers. As a result, it is not possible now to track changes in the utilization of Special Care Center services to ensure that utilization is appropriate and costs are being controlled.

After encountering significant delays, the DHS is now planning the implementation of a new data system, known as CMS Net, that could eventually address some of these concerns. However, it is not clear that the data that would be collected in the new system will provide all of the tools needed to ensure the appropriate tracking of costs to protect the state against overspending.

Maximizing the State's Opportunity to Improve CCS

We recommend that the Legislature consider taking a number of steps to improve the operation of the California Children's Services program that could free-up as much as $43 million in General Fund resources in the budget year.

We recommend that the Legislature consider a series of actions that could reduce state costs for the CCS program and free-up General Fund resources. Figure 4 outlines the opportunities for cost savings which we have identified in this program. Our analysis suggests that these actions would not harm the state's program to assist some of its most medically fragile children, and could improve the care available to some CCS children. Each of these actions are discussed below.

Require Counties to Screen for Healthy Families Eligibility. We recommend that the Legislature change state law to require counties to enroll those CCS children who are eligible into the Healthy Families Program. Counties could be required to screen for eligibility in much the same way they are already required to do so for children who are eligible for enrollment in Medi-Cal. Implementation of this change could result in net savings to the state General Fund (after the state cost of Healthy Families coverage has been taken into account) of as much as $5 million annually beginning in 2003-04.

Shift Care From RCs to CCS We recommend that DHS and DDS be directed to report to the Legislature by December 2004 regarding: (1) how RC and CCS intake procedures could be streamlined to facilitate the timely provision of CCS services to eligible children who are developmentally disabled, (2) the state fiscal effect of shifting services now paid for by RCs to CCS, (3) an estimate of the number of developmentally disabled children currently eligible for CCS services but who are receiving services through the RCs other providers, and (4) recommendations for improving intake into CCS for RC clients and to reduce state costs for these services. We therefore recommend adoption of the following supplemental report language:

The Department of Health Services (DHS), in consultation with the Department of Developmental Services, shall report to the Chair of the Joint Legislative Budget Committee and the chairs of the fiscal committees of both houses of the Legislature, information regarding the effect of California Children Services (CCS) intake practices on Regional Center (RC) clients. The DHS report shall include, but not be limited to, (a) an evaluation of the time required for CCS to complete its intake assessment of RC referrals and to commence the provision of services once an RC client is deemed eligible; (b) the number of RC clients currently receiving services from other providers who could instead be receiving those same services through CCS; (c) the expenditures by RCs for the purchase of services that could instead be obtained through CCS; (d) its recommendations, if any, regarding how CCS and RC intake practices could be improved to ensure the timely provision of services to RC clients and to reduce state costs for the provision of these services. The department's findings shall be reported to the Joint Legislative Budget Committee and the fiscal and policy committees of both houses of the Legislature by December 1, 2004.

Require All MTUs to Be Certified as Outpatient Rehabilitation Centers. The Legislature may wish to consider changing state law to require that all existing and new MTUs to be certified as outpatient rehabilitation centers, thereby enabling them to bill Medi-Cal for therapy services. The DHS indicates that it does not collect data regarding the number of visits to uncertified MTUs and the cost per visit. As a result, the extent to which this option would result in cost savings is unknown.

Shift Medical Therapy Costs to Proposition 98. The Legislature may wish to consider changing state law to enable the shift of part or all of the state's General Fund cost of the MTP to Proposition 98, thus permitting a net reduction in non-Proposition 98 General Fund expenditures. Adoption of this option would shift funding for these services from the CCS program to the California Department of Education but would not result in any significant operational change in the program. Since we forecast a higher minimum guarantee than the Governor, shifting CCS to Proposition 98 would help the state meet the minimum guarantee without additional spending. Consequently, the state could save $37 million General Fund. These savings only occur if the Legislature (1) does not over-appropriate the minimum guarantee, and (2) does not adjust the minimum guarantee to reflect the program transfer.

Investigate County Billing Practices. The Legislature should request the Bureau of State Audits (BSA) to conduct an audit to examine whether counties are appropriately billing the state under Medi-Cal for medical therapy services provided to CCS children. The BSA should further be requested to specifically report on the fiscal impact of any such billing errors and possible steps to remedy and prevent any further billing errors, if they are occurring. Accordingly, we recommend the Legislature adopt the following supplemental report language:

It is the intent of the Legislature that the Bureau of State Audits (BSA) review county billing practices for the California Children's Services (CCS) program to determine whether medical therapy services are being appropriately billed under the Medi-Cal Program. The BSA may review what it deems to be a representative sample of county billings for CCS medical therapy services in conducting its review. It is the further intent of the Legislature that BSA report to the Legislature by December 1, 2003 the results of its review, along with its recommendations, if any, for improvement of CCS program rules to ensure that county billing practices minimize state costs for the provision of these services. The report shall be provided to the Chair of the Joint Legislative Budget Committee and the chairs of the fiscal committees of both houses of the Legislature.

Create Greater Incentives for Outpatient Care. The Legislature may wish to consider directing DHS to review the way the CCS program reimburses certain medical treatment services that could be accomplished at less cost in an outpatient setting. Specifically, the DHS should be directed to monitor the outcome of a study now being conducted by the Los Angeles Children's Hospital that will compare the medical outcomes and costs of treating CCS children with certain medical conditions in either a hospital or an outpatient setting. If it were to be determined that some medical conditions could be treated as effectively in less costly outpatient settings without harm to patients, the Legislature may wish to consider implementing a pilot project to change the CCS billing system in a way that encourages a less costly medical approach to treatment. The DHS has already initiated discussions with CCS providers regarding this issue.

Accordingly, the Legislature may wish to consider the adoption of the following supplemental report language:

It is the intent of the Legislature that the Department of Health Services (DHS) shall examine whether California Children's Services (CCS) are unnecessarily being provided in expensive inpatient settings if these same medical conditions could be appropriately treated at less cost in outpatient settings. The DHS shall also recommend what steps, if any, are warranted to change state reimbursement to providers to address this problem. The DHS shall report its findings on this matter by December 1, 2004 to the Chair of the Joint Legislative Budget Committee and the chairs of the fiscal committees of both houses of the Legislature.

Require Additional Data Collection. The Legislature may wish to consider changing state law to require DHS, in consultation with county CCS programs and providers, to collect additional CCS program data that could protect the state from potential overspending. One option would be to require county MTPs to submit a quarterly report providing additional information regarding CCS clients and the services provided to them. The DHS could be further directed to use these additional data to better analyze CCS utilization and expenditure trends and provider participation patterns, to develop better cost containment policies, and to provide better service to CCS clients.

There would be some cost to the state from imposing additional reporting requirements on counties because existing reporting forms would have to be modified to collect this information. Given these potential additional costs, the Legislature may want to implement this change once the state's fiscal situation has improved.