Analysis of the 2004-05 Budget Bill Legislative Analyst's Office February 2004

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 (MRMIP) 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 currently 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 and, beginning in the budget year, will provide health coverage for certain uninsured infants born to AIM mothers.

The MRMIB also administers the County Health Initiative Matching Fund (CHIM), a program established last year as a component of Healthy Families. Under CHIM, counties, County Operated Health System managed care health plans, and certain other locally established health programs are authorized to use county funds as a match to draw down federal funding to purchase health coverage for children in families with incomes between 250 percent and 300 percent of the FPL. No state funds are used to support CHIM.

Budget Proposal. The budget proposes $1.2 billion from all fund sources ($314 million General Fund) for support of MRMIB programs in 2004-05, which is an increase of $35 million or about 3.1 percent ($10.3 million General Fund) over estimated current-year expenditures.

The relatively small budget increase for MRMIB is due primarily to the administration's proposal to cap enrollment in the Healthy Families Program effective January 1, 2004, and to keep the enrollment cap in place at least through 2004-05. (At the time this analysis was prepared, this proposal had not been adopted by the Legislature.) Another budget proposal intended to slow Healthy Families spending growth would make the benefits now provided for certain legal immigrants part of a health and social services block grant to counties. Also, the administration has proposed that premiums and benefits provided for Healthy Families children of families with higher incomes be modified to establish a "two-tier" program structure by 2005-06.

The budget reflects the continuation of funding for CHIM at the same level as budgeted for the current fiscal year—about $154 million ($54 million in reimbursements from counties and $100 million in federal funds).

The budget further reflects the implementation of statutory budget language which specifies that infants born to AIM mothers who enroll in the program on or after July 1, 2004, will be enrolled into the Healthy Families Program at birth. Under this new measure, health coverage for the infant's mother would continue to be provided through AIM.

The budget plan proposes only minor changes in the spending levels for the AIM and MRMIP programs. It also does not contain any proposals to initiate administrative activities to implement Chapter 673, Statutes of 2003 (SB 2, Burton). This measure (1) requires certain employers to pay a fee to the state to support a State Health Purchasing Pool to be administered by MRMIB unless the employer directly provided health insurance coverage for employees or, in some cases, for an employee's dependents; and (2) establishes a new state program to assist low-income employees with children enrolled in Healthy Families (as well as family members eligible for Medi-Cal) in paying premiums to obtain employer-based health coverage.

We discuss issues relating to the enrollment cap proposal below and also in the "Crosscutting Issues" section of the Health and Social Services chapter of this Analysis. We also discuss the block grant proposal and the implementation of SB 2 within the "Crosscutting Issues" section.

Healthy Families Program

Background  

Program Draws Down Federal Matching Funds. 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. Under SCHIP, the federal government provides states with flexibility in designing a program

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, vision, and basic mental health care benefits. The Healthy Families Program also covers more intensive mental health services for children with serious emotional disturbances, which are directly provided through county mental health systems and supported primarily with county and federal funding.

State Implements Program Expansions. The program began enrolling children in July 1998. In 1999, the program was expanded to include children with family incomes 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 January 2002, the state was granted a waiver by the federal government to expand the Healthy Families Program to uninsured parents of children eligible for the Healthy Families or Medi-Cal programs in families with incomes up to 200 percent of the FPL. (State law authorizes the expansion of coverage to parents with incomes up to 250 percent of the FPL, but this further change is not being pursued at this time.) The previous administration had proposed to delay implementation of the Healthy Families parent eligibility expansion until July 2006 due to the state's fiscal problems. The new administration has not proposed any change in this timeline.

Recently, the state initiated additional expansion efforts outside of the state's Healthy Families Program to provide health care coverage for uninsured children. The 2003-04 Budget Act implemented the CHIM to allow counties to receive federal SCHIP matching funds to provide health coverage on a county-by-county basis to uninsured children living in families earning incomes between 250 percent and 300 percent of the FPL. The implementation of this program is awaiting federal approval. (We discuss the CHIM program later in this analysis.) 

The Budget Proposal. As shown in Figure 1, the January budget proposes $844 million (all funds) in Healthy Families Program expenditures in the budget year. This is an increase of about 4.4 percent over estimated current-year expenditures. The budget proposes $311 million in General Fund support for the Healthy Families Program, a $14.3 million increase above the current-year level. The budget proposal represents a relatively modest increase in Healthy Families expenditures in comparison with six years of much more rapid growth in the program. The slowdown in the rate of program growth can be largely attributed to the Governor's proposal to cap enrollment in the program beginning in the current year.

Enrollment Cap Proposal Raises Policy Concerns

The Governor's budget proposal to cap Healthy Families Program enrollment, while feasible and effective in addressing the state's fiscal problems, raises a number of issues. We recommend against this approach because other alternatives are available to the Legislature to hold down the cost of the Healthy Families Program.

Budget Reflects Capped Enrollment in the Healthy Families Program  

Waiting Lists for Applicants. The Governor's budget plan proposes to cap enrollment in the Healthy Families Program beginning January 1, 2004, at the estimated caseload level for that date, about 732,000 children. Once the program reaches this limit, children applying for Healthy Families coverage would be placed on a waiting list and enrolled on a "first-come, first-served" basis as attrition occurs in the program. The enrollment cap would not apply to infants transferring to the Healthy Families Program from AIM. Children on the waiting lists and in need of medical care would either access uncompensated medical care through community clinics, emergency rooms, or, in some cases, forgo medical treatment altogether. The proposed enrollment cap would require federal approval as well as state legislative and regulatory changes. Currently, six of the 35 states with separate SCHIP programs (the equivalent of the Healthy Families Program in California) have frozen enrollments because of budgetary problems.

Based on past enrollment trends (including the rate at which children are sometimes disenrolled from coverage for various reasons), the administration projects that the cap would result in a waiting list of approximately 159,000 children by the end of 2004-05. The waiting period for coverage is expected to grow over time, reaching as long as six months by the end of the budget year. Our analysis indicates that the waiting list would grow to approximately 280,000 by the end of 2005-06 and the last child to enroll before June 30, 2006 would not receive coverage until June 2007.

The proposed cap on enrollment would curtail caseload growth in the Healthy Families Program and, subsequently, lower overall state expenditures. The administration estimates that the state would achieve only minor savings from this measure in 2003-04, in part because of one-time administrative costs to carry out the change. But the budget plan assumes it would reduce Healthy Families expenditures by approximately $86 million ($32 million from the General Fund) in the budget year.

Governor's Proposal Has Some Advantages

Savings Would Be Realized. The overall administration proposal to cap health and social services program caseloads is discussed generally in the "Crosscutting Issues" section of this chapter. Policy issues of particular importance to the Healthy Families Program are discussed below.

Our analysis of the Governor's proposal indicates that it is technically feasible and would probably generate program savings of the magnitude estimated by the administration. Assuming the cap were maintained, the amount of savings achieved from a freeze on enrollment would grow significantly over time and contribute to addressing the state's structural imbalance between revenues and expenditures.

The administration's approach would also be less disruptive to the ongoing operation of the program than other possible approaches for achieving savings. No child now receiving coverage through the Healthy Families Program would lose his or her benefits. It is also possible that the prospect of long waiting lists would provide additional incentive for parents of Healthy Families children to become more diligent about submitting annual eligibility documents in a timely fashion, and reduce the high rate of disenrollment of children from the program.

Several Issues Warrant Consideration

The Governor's proposal to cap program enrollment in Healthy Families (as well as comparable caps on other health and social services programs) raises a number of significant policy issues that the Legislature may wish to consider.

Waiting Lists Could Create Inequities. The administration's proposal raises some distinct equity issues. First, children who entered the program before January 1, 2004 would be treated differently than children who applied after that date even though they met the same eligibility criteria. Also, the administration proposal is for a first-come, first-served approach in which the first person on a waiting list would be added to the Healthy Families Program caseload as children were disenrolled and "room" was created for additional children on program rolls. While this approach is equitable—all children on the waiting list would be treated alike—it also raises other questions of fairness, in that children would be added to program enrollment in the future regardless of a child's medical needs or family income level.

Another equity issue pertains to how this cap would be implemented in the context of other publicly supported health programs. For instance, while enrollment would be capped for children in families under 250 percent of FPL in the Healthy Families Program, the Governor's budget plan proposes to continue implementation of the CHIM Fund for counties to use to support their county health initiatives to provide coverage to children in families with incomes between 250 percent and 300 percent of the FPL. Thus, the Governor's budget proposal means that, in some counties, some higher-income children might receive health coverage more quickly through county health initiatives than lower-income children enrolled in Healthy Families who would face a wait of six months or longer for coverage.

Time on Waiting List May Be Underestimated. Another concern is that the waiting time for an applicant to actually receive health coverage could turn out to be longer than the maximum of six months estimated by the administration. That estimate is based on current disenrollment and enrollment trends. To the extent that parents' behavior changed, as discussed above, so that disenrollment rates in the program decreased, the waiting period for coverage could be longer than projected. As noted earlier, the waiting period for enrollees would be likely to exceed one year by June 2006.

Cap Places Program Changes at Risk. Establishment of an enrollment cap places at risk the implementation of the Legislature's previous decisions to (1) authorize the future expansion of the Healthy Families Program to parents, (2) expand health coverage and establish premium assistance through a "pay or play" system of health coverage, and (3) establish a "gateway" from the Child Health and Disability Prevention Program (CHDP) to Healthy Families.

The federal government approved California's waiver request to expand SCHIP-funded coverage for low-income uninsured parents on the condition that the state continue its efforts to enroll low-income uninsured children. The establishment of an enrollment cap and waiting lists may place the previous federal approval of California's parent expansion at risk.

An enrollment cap would also conflict with the provisions of SB 2, which enacted a pay or play system of health coverage commencing in 2006. Among other provisions, SB 2 provides premium assistance and wraparound coverage through the Healthy Families Program for coverage of eligible dependents. Implementation of SB 2 would be complicated by the imposition of enrollment limits that would hinder the expansion of health coverage intended in the measure.

The Legislature provided approximately $9.7 million ($3.8 million state funds) in the 2002-03 Budget Act for information technology and other procedural changes, referred to as a gateway, to expedite the enrollment of children receiving services under the state's CHDP program into Medi-Cal or Healthy Families coverage. However, the proposed Healthy Families enrollment cap and subsequent waiting lists would slow the movement of children through the CHDP gateway to Healthy Families. (The gateway would, however, continue to facilitate the transfer of children into the Medi-Cal Program, except for certain immigrant groups.)

State Would Lose Additional SCHIP Funds. The proposal to cap enrollment in the Healthy Families Program would result in state savings, but also reduce by about $55 million the amount of federal SCHIP funds being drawn down for health coverage of the uninsured. Since the inception of the Healthy Families Program, California has struggled to fully utilize its federal allotment of SCHIP funds. To date, the state has reverted $1.1 billion in unspent funds back to the federal government, which was redistributed to other states that were able to expend their allotment within the specified time period. As of May 2003, California had approximately $1.9 billion in unspent SCHIP funds remaining. We would acknowledge, however, that some other strategies for containing state costs for Healthy Families coverage would also add to the amount of SCHIP funds that would go unspent.

Some Children Would Lose Insurance Coverage. The Healthy Families Program was established to operate in tandem with Medi-Cal to ensure seamless health care coverage for children ages 0 to 19 living in families earning up to 250 percent of the FPL. Due to the income and age-based eligibility structure for both programs, the proposed enrollment cap would place certain children who were enrolled in Medi-Cal at risk of losing insurance coverage. Specifically, upon reaching their first and sixth birthday, children who would traditionally transition to the Healthy Families Program because their families' incomes would no longer qualify them for Medi-Cal would instead be placed on a waiting list for coverage.

Analyst's Recommendation

Other Alternatives Available. . . After weighing the advantages of imposing an enrollment cap on Healthy Families against the issues discussed above, we recommend against the Governor's proposal because, in our view, other alternatives are available to the Legislature to hold down the cost of the Healthy Families Program. As we will discuss later in this analysis, we believe there are other strategies that could be adopted to reduce program spending that would be more equitable to beneficiaries, more consistent with other state efforts to assist the uninsured, and that would make more effective use of the available federal SCHIP funds.

. . . But if Proposal Is Adopted. Should the Legislature decide to adopt the Governor's proposal, there are several steps it could take to address some of the issues we have outlined. In that event, we would recommend that the Legislature consider the following actions:

• Modify the first-come, first-served approach to prioritize for Healthy Families coverage the poorest eligible children, and-or those with the most significant medical needs. These actions would partly reduce the savings but ensure that state funds are used for those who are most needy.
• Modify the CHIM program to allow coverage of individuals otherwise eligible for Healthy Families but placed on a waiting list. This could address the inequity by which CHIM children in families with higher incomes would receive coverage quickly, while those in families with lower incomes would remain on waiting lists.
• Adopt supplemental report language directing MRMIB to provide the Legislature with a quarterly report providing a statistical summary of the number of children placed on waiting lists, the period of time applicants must wait for coverage, and the effect of waiting lists on program enrollment rates. This information would enable the Legislature to assess the impact of the enrollment caps upon their implementation.
• Direct MRMIB to report at budget hearings on how conflicts with the CHDP gateway, parent expansion of Healthy Families, and SB 2 should be addressed.

Choice of Two-Tier Benefit System Worth Considering

Although our preliminary analysis indicates that the proposal to fund activities to establish a two-tier benefit system represents a reasonable alternative for reducing Healthy Families Program costs to help address the state's fiscal problems, we withhold recommendation on the associated funding request for administrative resources until the administration has fully developed the proposal and provided updated cost and savings estimates to the Legislature.

Higher Premium, Greater Benefits. The Governor's proposal requests $750,000 in funding ($263,000 from the General Fund) for administrative activities to implement a two-tier benefit structure for the Healthy Families Program in 2005-06.

Under this proposed approach, children in families with incomes of more than 200 percent of the FPL would henceforth have a choice of two types of health care coverage for their child. (Children in families earning less than 200 percent of the FPL would not be impacted by this proposal.) A family choosing to pay premiums comparable to what they now pay (ordinarily ranging from $4 to $9 per month per child) would receive basic medical coverage for their child, but would no longer receive vision or dental coverage. A child in a family choosing to pay a higher premium of about $15 per month would receive all of the services he or she now receives under the Healthy Families Program, including vision and dental benefits. The proposal would be contingent upon federal approval, require state regulatory changes, and not be implemented until 2005-06.

The administration estimates that its proposal would initially save $12.2 million ($6.6 million from the General Fund) beginning in 2005-06 and $25 million ($11 million from the General Fund) in 2006-07. The administration has indicated that this estimate is based on a number of assumptions that will need to be modified as the proposal is further refined in budget trailer bill language and the Healthy Families caseload estimate is updated for the May Revision.

A Reasonable Concept. Because the proposal has not yet been fully developed, the Legislature is not in a position at this time to fully assess the merit of this approach. In concept, however, the Governor's proposal represents a reasonable alternative for reducing Healthy Families Program costs to help address the state's fiscal problems. A two-tier benefit system could result in savings while also providing families with the flexibility to choose the benefit package they need and desire for their child. The proposal is also equitable, in that a higher-income family (earning more than 200 percent of the FPL) whose child qualified for Healthy Families would contribute more toward health care coverage than a lower-income family.

One potential drawback to the proposal is its effect on the health care of some Healthy Families children. Some children might receive vision and dental care less frequently. Because the families affected by this change are those with higher incomes, however, it is also possible that many children would continue to receive the services with out-of-pocket payments for care by their parents.

Analyst's Recommendation. Although our initial analysis indicates that the two-tier benefit proposal has merit in concept, the administration has indicated that the details of the proposal and the cost and savings estimates are still being refined. As such, we withhold recommendation on this approach pending the further development of this proposal.

Alternatives for Reducing Healthy Families Program Costs

The January budget plan proposes several measures to contain the costs of the Healthy Families Program. We recommend that the Legislature also consider alternative approaches to those of the Governor, including program consolidation with Access for Infants and Mothers, changes in premium levels, trimming benefits, or shifting coverage of children in families with higher incomes to county coverage.

The Governor's budget proposes to reduce costs of the Healthy Families Program through an enrollment cap, a block grant for immigrant services, and development of a two-tier benefit structure. Given the state's fiscal difficulties, we recommend that the Legislature also consider alternatives to the Governor's budget proposal. We discuss some of these options below.

Shifting AIM Mothers Into Healthy Families Could Save State Resources

Our analysis indicates that it would be possible for the state to shift some or all of the caseload of mothers in the AIM program to the Healthy Families Program in a way that would maintain their health care while eventually generating as much as $42 million in state savings. We describe this alternative in further detail in our discussion of the AIM program later in this chapter.

Family Contributions Could Be Increased

Parent Contributions Unchanged Since Program Began. As noted earlier, families which enroll their child in the Healthy Families Program typically pay between $4 to $9 per child each month (with a monthly maximum of $27 per family) for insurance coverage. The amount paid varies according to a family's income, the region of the state where they reside, and the health plan they selected. The premium levels set for Healthy Families have not changed since the program began in 1998.

However, as Figure 2 indicates, the average monthly cost per child receiving coverage has increased from $38 in 1998-1999 to a projected $95 in 2004-05. Within certain limitations in federal law, the state could increase premiums for program enrollees generally to help offset part of the increase in costs. For example, increasing premiums to levels ranging from $6 to $12 (varying depending upon income, region, and health plan selected) would result in savings of as much as $8 million to the state ($22 million all funds). In contrast to the Governor's two-tier proposal, which would increase premiums only for higher-income families, this alternative approach would increase premiums across-the-board for most enrollees. To the extent the higher premiums prompted families to discontinue coverage, the state would achieve additional savings.

Currently, several states set monthly premium rates for SCHIP coverage that are significantly higher than the premium levels set in California. As indicated in Figure 3, Arizona, Illinois, Texas, and New York have monthly premium levels that range between $5 and $11 higher than California's premium rates. Raising California's premiums would bring the state's Healthy Families Program more in line with other states across the country.

Benefits Package Could Be Trimmed

One alternative for reducing state costs for the Healthy Families Program would be to reduce the scope of coverage that all Healthy Families enrollees receive. If this approach were substituted for the Governor's proposed enrollment cap, no eligible child would be denied coverage and placed on a waiting list, but the coverage each child would receive would be reduced in scope. For example, the elimination of vision and dental care across the board for all enrollees would result in state savings of as much as $75 million in 2004-05.

Some Children Could Be Shifted to County Coverage

The Legislature has the option of reducing costs in the Healthy Families Program by partially or completely reversing the expansion of coverage to higher income families that occurred after the program was initially created and shifting coverage of those children to the CHIM program.

If this alternative were substituted for the Governor's proposed two-tier structure for the program, the existing benefit package, including dental and vision care, could be preserved for all enrollees, but the number of children eligible for the program would be scaled back. In contrast to the Governor's first-come, first-served enrollment cap, this alternative approach would prioritize coverage for poorer families.

This alternative could result in significant state savings. For example, reducing coverage for children in families with incomes above 200 percent of the FPL could save the state as much as $65 million in 2004-05. The savings to the state would be significantly lower initially if those already enrolled in coverage were permitted to remain in the program. In order to provide an alternative source of health coverage for these children in higher-income families, the state could adjust the CHIM program (subject to federal approval) to allow counties to provide coverage for children of families in this income group.

Block Grant May Not Be Feasible  

The Governor proposes to consolidate funding for state-only programs, which serve immigrants into a single block grant for counties effective October 1, 2004. The proposal assumes that counties will achieve administrative efficiencies, so proposed block grant funding has been reduced by 5 percent. We recommend that the Legislature reject the proposal because the programs proposed for transfer to the counties are not well-suited for local control.

The Governor's budget plan proposes to create an Immigrant Services block grant for counties with funding that is currently budgeted for the support of various health and human services provided to certain legal immigrants. Among other programs, the block grant would include approximately $16.3 million in funding the state would have otherwise spent for health coverage for certain legal immigrant children enrolled in the Healthy Families Program. We discuss this proposal in the "Crosscutting Issues" section of this chapter.

County Health Initiative Matching Fund

Background

State Established Program for Counties to Access SCHIP Funds. Chapter 648, Statutes of 2001 (AB 495, Diaz), established the CHIM Fund program. Through this program counties would be able to access federal SCHIP matching funds to provide health coverage on a county-by-county basis to uninsured children living in families earning incomes between 250 percent and 300 percent of the FPL. In accordance with Chapter 648, the 2003-04 Budget Act included about $150 million to fund the CHIM. As approved by the Legislature, CHIM relies on no state funding but only on federal and county resources—approximately $54 million in reimbursements from counties and $100 million in federal SCHIP funds. A portion of these funds ($280,000) would be used to reimburse the state for its anticipated administrative expenses. In effect, counties would leverage local funds to draw down some of the unspent portion of California's federal SCHIP allotment according to the same 2-to-1 matching rate used by the state. The implementation of this program, however, is contingent upon federal approval of an amendment to the state's SCHIP plan.

The Governor's budget proposes to maintain the current-year level of funding for the CHIM Fund in 2004-05. Specifically, the budget plan includes $54 million in the CHIM Fund and $100 million in federal funds. (As discussed below, the program has not operated in the current year because federal approval is pending.) 

Federal Approval of CHIM Still Pending

The implementation of the County Health Insurance Matching Fund is contingent upon federal approval. We withhold recommendation at this time on the Governor's budget proposal to continue the program at its current funding level because a decision by federal authorities on the state's request may be known by this May.

The MRMIB submitted a state plan amendment to the federal government in May 2003 which included the state's proposal to establish the CHIM Fund and specific proposals developed by four Bay Area counties. The administration expects a final decision on its request for approval in May 2004. Currently, four pilot counties are implementing county health initiatives to expand health coverage for children independent of the CHIM, and are awaiting federal approval of the new program, which would allow them to leverage their existing resources by drawing down federal SCHIP funding.

Analyst's Recommendation. We concur with the Governor's budget proposal to continue efforts to take advantage of uncommitted federal funds available through SCHIP to support county health coverage initiatives for children. However, we withhold recommendation on the administration's budget request pending further information on the status of federal approval of the state plan amendment.

Access for Infants and Mothers

Background

Pregnancy and Postpartum Health Coverage. The AIM program provides comprehensive health care for low-to-moderate income women throughout their pregnancy, delivery, and 60 days after delivery. The program currently also provides health insurance to infants born to women enrolled in AIM until their second birthday. To be eligible for the program, women must be no more than 30 weeks pregnant, have no health coverage for their pregnancy, and have incomes between 200 percent and 300 percent of the FPL. The Medi-Cal Program provides coverage to pregnant women and their infants in families with incomes up to 200 percent of the FPL.

In accordance with statutory budget language adopted last year, infants born to AIM mothers who enroll in the program after July 1, 2004, will be enrolled in the Healthy Families Program at birth, while the mothers will remain covered through the AIM program. Over time, this shift of new AIM infants into the Healthy Families Program will result in an AIM program consisting only of mothers. 

Currently, program participants pay a fee of 2 percent of their family income toward the costs of services received by the mother and an infant up to one year of age. (For example, coverage for an AIM mother and her infant would cost $449 per pregnancy for a family with an annual income of $22,450.) Infants born to AIM mothers can continue to receive coverage for a second year through the AIM program for an additional $100, or $50 if their recommended one-year vaccinations are up to date. Under the new law, which transfers certain infants to Healthy Families, the family fee for AIM will be reduced to 1.5 percent of family income to reflect the family's new and additional payment of a premium for enrollment of the infant in Healthy Families.

Governor's Proposal

Minor Changes in Spending. As summarized in Figure 4, the Governor's budget proposes about $118 million from all funds (including $6.5 million from the General Fund and $99.5 million in Proposition 99 funds) for the AIM program. This is a small decrease in spending of $600,000 (or less than 1 percent) from 2003-04. As in the past, the AIM program would be financed primarily with various state fund sources. A relatively small amount of federal funds is currently available to help pay for coverage for infants in their first year in the AIM program.

Caseload Shifts. In accordance with the recent changes in statute, the Governor's budget reflects discontinued AIM coverage of infants who will be redirected to coverage under the Healthy Families Program. Figure 5 summarizes the impact this new law is projected to have on AIM caseloads in the budget year.

While caseloads for women are expected to increase by 6.2 percent in 2004-05, the number of infants in their first year of AIM coverage is projected to decline by 14 percent. Two factors explain this decline. First, this group of infants consists of those who, in the past, would have received coverage in AIM, but who now would be admitted instead to the Healthy Families Program. (As we noted earlier, infants of mothers who were enrolled before the change takes effect will remain in AIM as long as they are eligible.) Second, program officials indicate that part of the decline in the number of infants in this group is due to prior budget decisions to eliminate funding for outreach activities.

Nonetheless, a temporary increase in caseload of about 17 percent is projected for the budget year for the group of infants who are in their second year of AIM coverage. Because the shift to Healthy Families affects only new admissions to AIM, the number of infants in this second-year group will not be affected by this change until 2005-06. The number of infants in the second-year group is expected to subsequently decline. All infant caseload in the AIM program will be gone by the end of 2006-07 as the children reach age two and are automatically disenrolled from the AIM program.

AIM Mothers Could Also Be Shifted to Maximize Use of Federal Funds

We recommend that the Legislature take steps to shift all new Access for Infants and Mothers-eligible mothers to the Healthy Families Program possibly as soon as the budget year. The Legislature also has the option of shifting this group of enrollees to Medi-Cal coverage. Our analysis indicates that either approach would maximize the state's use of available federal funds and result in significant state savings.

Federal Law Allows Expansions of Care for Pregnant Women. As noted earlier, California's Healthy Families Program implements a federal law, SCHIP, enacted in 1997. This program generally provides funding to states on a 2-to-1 federal/state matching basis.

In September 2002, the Bush administration issued a regulation that permits states to utilize federal SCHIP funding to provide coverage to unborn children (and their mothers) in families with low incomes up to 200 percent of FPL. (States are authorized to submit waiver requests to exceed this income level.) As of September 2003, six states have received federal approval to expand their state's SCHIP-funded insurance programs to include pregnant women and unborn children. The SCHIP statute currently provides states with broad flexibility in defining the services to include under their state plan. Through the new regulation, states have the flexibility to provide expectant mothers services related to pregnancy or conditions that could complicate a pregnancy.

The Medi-Cal Program (the federal Medicaid program in California) provides health care services to low-income persons who meet the program's specific eligibility criteria including special populations of pregnant women and infants. Under longstanding state law, pregnant women in families earning up to 200 percent FPL are eligible under Medi-Cal for no-cost coverage of pregnancy-related health care. Nothing in federal Medicaid law precludes the state from expanding this coverage to include pregnant women up to 300 percent of FPL.

Our analysis indicates that it would be possible for the state to shift some or all of the caseload of mothers who would otherwise remain in the state-funded AIM program to either Healthy Families or Medi-Cal in a way that would maintain their health care while generating significant state savings by drawing down additional federal funds. However, there are significant policy advantages and disadvantages for each approach that the Legislature should consider in authorizing such a change. We discuss these policy tradeoffs in more detail below.

Benefits From Shift to Healthy Families. Merging the population of AIM mothers with Healthy Families would result in both fiscal and programmatic benefits to the state and the persons now enrolled in AIM.

This alternative would help the state to maximize the use of the two-for-one federal matching funds currently available through SCHIP that have gone unused in recent years. (To date, California has reverted approximately $1.1 billion in SCHIP funds.) Thus, health coverage (at least pregnancy services and possibly more) could be provided for the population of mothers now covered by AIM at a substantially lower cost to the state.

We estimate that the state would eventually draw down as much as $42 million in additional SCHIP dollars annually for health coverage, resulting in an equivalent net savings to the state. The state could initially achieve net state savings in 2004-05 of as much as $20 million. The actual savings achieved by the state would depend upon a number of factors, including future state and federal decisions about which AIM mothers, on the basis of their family income, could be transferred to Healthy Families coverage; the timetable for accomplishing this change; and whether the state chose to use some of the savings from this proposal to keep health coverage for mothers under Healthy Families comparable to what they now receive under AIM. (We discuss these health coverage issues in more detail below.) The costs avoided by the state by accomplishing such a shift would grow over time, given the upward trend in AIM enrollment seen in recent years.

The achievement of savings in costs for AIM would free up Proposition 99 funds that could either be (1) used in conjunction with funding for other health programs to help achieve General Fund savings for the state, or (2) used to help preserve funding for Proposition 99 programs which would otherwise face reduction or elimination because of the continued decline in tobacco tax revenues.

Finally, the recommended consolidation of programs would result in programmatic efficiencies over time by combining the administrative responsibilities from two programs into one.

Shift to Healthy Families Has Some Complications. One potential disadvantage of this alternative is that certain nonpregnancy related health care services (such as vision) covered under AIM are not now included in the Healthy Families Program. Additionally, some postpartum medical care is not now covered under Healthy Families. The state could provide such coverage under Healthy Families, but it would reduce the savings the state could achieve from a shift to Healthy Families by approximately $8 million.

Another concern is that, under federal regulations, the state would ordinarily not be able to draw down SCHIP funding for expectant mothers earning incomes between 250 percent and 300 percent of FPL. The state might either have to keep these mothers in AIM coverage or establish another "state-only" component of the Healthy Families Program (such as now exists for certain legal immigrant children) to provide services for these expectant mothers. The MRMIB, however, has already re quested federal approval to use SCHIP funds to cover infants of AIM mothers up to 300 percent FPL. If federal authorities approved this change in coverage for children, the state would be able to draw down federal funds for coverage of all women now eligible for AIM. Such a federal approval would permit the state to achieve the estimated maximum savings of $42 million annually cited earlier in this analysis.

Benefits and Tradeoffs From Shift to Medi-Cal. Expanding Medi-Cal to include pregnant women up to 300 percent of FPL would likewise maximize the use of available federal funds. This match would result in one federal dollar for each state dollar used to provide coverage for mothers in the income group who would be eligible for AIM. We estimate that the state could eventually draw down additional federal funds of as much as $25 million annually, and achieve a commensurate amount of state savings. Initial savings to the state of up to $12 million could be achieved by such a switch in coverage in 2004-05, again depending on a number of key implementation details. For instance, the level of savings would depend on whether the state provided a benefit package that was similar to or less comprehensive than what the pregnant women receive in AIM. If the state were to provide similar coverage as available through AIM, savings would be reduced by approximately $8 million.

Analyst's Recommendation. After weighing the alternatives, we recommend that the Legislature change state law to permit the gradual shift of some or all mothers in the AIM program to Healthy Families (which could include women up to 300 percent of the FPL depending upon federal approval of the state's plan amendment). Our proposal would not affect anyone now receiving AIM benefits, but would change how coverage for this population is provided in the future.

While a shift of this population to Medi-Cal also has merit, and warrants consideration, the Healthy Families potentially offers greater state savings as well as administrative efficiencies through the consolidation of programs. That is primarily because Healthy Families draws down federal funding at a federal match of two-to-one, whereas coverage under Medi-Cal would result in a one-for-one match of federal dollars to the state's contribution.

The Legislature should also direct MRMIB to report at budget hearings regarding the feasibility, operational ramifications, and potential timetable for implementing this change and the options for covering some or all mothers now eligible for AIM within the Healthy Families Program. The review should include an examination of the options, and cost implications to the state of maintaining postpartum coverage and non-pregnancy services now provided to mothers under the AIM program. In our view, this information would provide the Legislature with the guidance needed to determine whether the state could begin to achieve savings from the implementation of this change in health coverage, as we believe possible, beginning in 2004-05.

Reserve Requirement Unnecessary

We recommend that the Legislature repeal the statutory requirement that the Managed Risk Medical Insurance Board maintain a reserve in the Perinatal Insurance Fund for the Access for Infants and Mothers program, thereby achieving state savings of about $1 million in Proposition 99 funds. (Reduce Item 4280-111-0232 by $998,000.)

State Law Mandates a Reserve. The Perinatal Insurance Fund is used to receive funding appropriated by the Legislature and subscriber contributions to cover the operating expenses incurred by the AIM program. Under current state law, MRMIB is required to maintain a prudent reserve in the Perinatal Insurance Fund, which is funded from Proposition 99 tobacco tax revenues. Although current law does not specify the level of a prudent reserve, MRMIB has historically been budgeted with a reserve equal to 3 percent of projected program expenditures supported by the fund.

The January budget plan includes a reserve for the Perinatal Insurance Fund totaling $1 million, equal to roughly 1 percent of program expenditures supported by the fund. The administration has indicated that the customary reserve level was decreased because of the state's fiscal problems.

However, our analysis indicates that there is no need for a separate and special reserve fund for AIM. In the event that AIM program expenditures exceeded the 2004-05 budgeted amount, an alternative source of funding is available to fund unanticipated expenses. Specifically, a separate reserve is maintained for state programs funded through Proposition 99. The Governor's 2004-05 budget plan sets aside $10.7 million for the Proposition 99 reserve.

Analyst's Recommendation. In light of the state's fiscal difficulties, and the availability of the Proposition 99 reserve for any deficiencies for the support of AIM, we recommend that the Legislature repeal the state law requiring a separate Perinatal Insurance Fund reserve. The Legislature could then use these funds in coordination with other health programs to achieve an equivalent savings for the state General Fund or to backfill part of the proposed reductions in other Proposition 99 programs.