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Analysis of the 2004-05 Budget BillLegislative Analyst's Office
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A developmental disability is defined as a severe and chronic disability, attributable to a mental or physical impairment that originates before a person's eighteenth birthday, and is expected to continue indefinitely. Developmental disabilities include, but are not limited to, mental retardation, cerebral palsy, epilepsy, autism, and disabling conditions closely related to mental retardation. The Lanterman Developmental Disabilities Services Act of 1969 forms the basis of the state's commitment to provide developmentally disabled individuals with a variety of services, which are overseen by the state Department of Developmental Services (DDS). Unlike most other public social services or medical services programs, services are generally provided to the developmentally disabled at state expense without any requirements that recipients demonstrate that they do not have the financial means to pay.
The Lanterman Act establishes the state's responsibility for ensuring that persons with developmental disabilities, regardless of age or degree of disability, have access to services that sufficiently meet their needs and goals in the least restrictive setting. Individuals with developmental disabilities have a number of residential options. Slightly more than 98 percent receive community-based services and live with their parents or other relatives, in their own houses or apartments, or in group homes that are designed to meet their medical and behavioral needs. The remaining 2 percent live in state-operated, 24-hour facilities.
Community Services Program. This program provides community-based services to clients through 21 nonprofit, corporations known as regional centers (RCs) that are located throughout the state. The RCs are responsible for eligibility determinations and client assessment, the development of an individual program plan, and case management. The RCs are supposed to be the "payer of last resort." They generally pay for services only if an individual does not have private insurance or they cannot refer an individual to so-called "generic" services that are provided at the local level by counties, cities, school districts, and other agencies. The RCs also purchase services, such as transportation, health care, respite, day programs, and residential care provided by community care facilities. The department contracts with the RCs to provide services to more than 190,000 clients each year.
Developmental Centers (DC) Program. The department operates five DCs, and two smaller facilities, which provide 24-hour care and supervision to approximately 3,500 individuals. All the facilities provide residential and day programs as well as health care and assistance with daily activities, training, education, and employment. More than 7,800 permanent and temporary staff serve the current population at all seven facilities.
Budget Proposal. The budget proposes $3.4 billion (all funds) for support of DDS programs in 2004-05, which is a 4 percent increase over estimated current-year expenditures. General Fund expenditures for 2004-05 are proposed at $2.2 billion, an increase of $114 million, or 5.6 percent, above the revised estimate of current-year expenditures.
The budget proposes $2.7 billion from all funds ($1.8 billion from the General Fund) for support of the Community Services Program in 2004-05. This represents a $108 million General Fund net increase, or 6.5 percent, over the revised estimate of current-year spending primarily as a result of caseload growth, higher utilization rates for services, and other program changes. The increases would be partly offset by proposed reductions in the budget, including policy initiatives to impose cost-containment measures on RC purchase of services and RC operations. (We discuss these policy proposals in more detail later in this analysis.) The 2004-05 Community Services Program includes a net increase of $104 million in General Fund support due to the scheduled transfer of the Habilitation Services Program from the Department of Rehabilitation to DDS on July1, 2004.
The budget proposes $690 million from all funds ($370 million from the General Fund) for support of the DCs in 2004-05. This represents a net increase of $5 million General Fund, or 1.4 percent, over the revised estimate of current-year expenditures. The increase in General Fund resources is mainly due to increases for employer retirement contributions and additional funding for employee compensation. However, these increases are largely offset by reductions in DC staffing due to population decline; implementation of Section 4.10, a provision in the 2003-04 Bud get Act that mandated reductions in state operations; and the elimination of funding for one-time costs associated with the Bay Area Project, an effort to help move clients at the Agnews DC, which is closing, to relocate to the community.
The budget proposes $31 million from all funds ($20 million from General Fund) for support of headquarters. About 60 percent of headquarters funding is for support of the community services program with the remainder for support of the DC program.
The cost to the state of operating regional centers (RCs) for persons with developmental disabilities has continued to escalate at a rapid pace, with General Fund spending more than doubling in the past five fiscal years despite efforts to obtain more federal funds to offset state support. In this analysis, we analyze recent caseload and program spending trends to determine what is driving this growth, review the major initiatives to date to address the situation, consider the Governor's proposal to address these issues, and offer additional approaches for containing RC program costs.
Two Types of Expenditures. The RC system provides community-based services to clients through the 21 RCs located throughout the state. The RC budget is mainly comprised of two major types of expenditures. The first major category of RC expenditures consists of purchase of services, such as transportation, day programs, and residential care. The Governor's budget proposes $2.3 billion for RC purchase of services in 2004-05.
The other major category of RC expenditures consists of RC operations, which includes eligibility determinations and client assessment, the development of individual program plans for clients, service coordination (also known as case management), as well as associated administrative and personnel costs. The Governor's budget proposes $420 million for RC operations, although $23.8 million of these funds represent "pass-throughs" for various contracts, programs, and projects not directly controlled by RCs. Over the past five years, RC operations have comprised about 18 percent to 21 percent of the total RC budget, with RC purchase of services making up most of the remainder.
Fund Sources. The RC budget is supported primarily by the state General Fund as well as by reimbursements that are drawn down under a federal Medicaid waiver program, which is discussed in more detail below. After adjusting for a recent program shift to DDS, General Fund has typically accounted for about 65 percent of the RC budget in recent years, while Medicaid waiver reimbursements are the source of about 21 percent of RC support. Other major sources of funding include: (1) federal Title XX Social Services Block Grant funds; (2) federal Targeted Case Management funds; and (3) other federal funds, mainly related to Early Start services for infants, and various other minor sources of funding.
Home and Community-Based Services (HCBS) Waiver. The HCBS waiver is a federal funding mechanism that allows developmentally disabled persons to live at home or in the community rather than having to live in an institutional setting. Costs for these community-based services are jointly funded by the federal government's Medicaid program (known as Medi-Cal in California) and the state.
Under the HCBS waiver, certain federal Medicaid rules are "waived" to allow states to provide services to persons with developmental disabilities that are not otherwise available to a typical Medicaid recipient. Many services received by RC clients who are enrolled under the waiver are partially paid for in this way by the federal Medicaid program. Unlike some other states, California provides the full scope of RC services to its clients, whether or not they are enrolled under the waiver.
By agreement with federal authorities, enrollment under the waiver is capped. Currently there are about 57,000 RC clients enrolled under the waiver, which is capped at 60,000 RC clients until October 2004. The waiver cap will grow to 65,000 clients in October 2005 and to 70,000 clients in October 2006.
In order to be eligible for the waiver, the client or the client's family must either be Medi-Cal-eligible or be "deemed" eligible for Medi-Cal under special rules that allow an individual to qualify regardless of his or her parent's or spouse's personal income. The client must have a formal diagnosis of a developmental disability and be a RC consumer. Also, the client must undergo an evaluation that determines that, were they not maintained in the community, they could otherwise be placed in a licensed health care facility for persons with mental retardation.
Growth Trend Still Strong. Between 1999-00 and 2004-05, the RC caseload is projected to grow from about 155,000to more than 199,000 clients, at an average annual growth rate of about 5.2 percent. For purposes of comparison, however, California's population increased by an average of about 1.7 percent annually during that same period. The caseload trend can be seen in Figure 1.
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Regional Center
(RC) |
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Fiscal Year |
RC
Caseload |
Year-to-Year
Difference |
Percent
Increase |
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1999-00 |
154,962 |
N/A |
N/A |
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2000-01 |
163,613 |
8,651 |
5.6% |
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2001-02 |
172,505 |
8,892 |
5.4 |
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2002-03 |
182,175 |
9,670 |
5.6 |
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2003-04a |
190,030 |
7,855 |
4.3 |
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2004-05a |
199,295 |
9,265 |
4.9 |
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a
Reflects the Governor's mid-year proposal for 2003-04 and budget
proposal for 2004-05. |
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Why Caseload Is Growing. Several key factors appear to be driving these growth trends. Improved medical care and technology has increased life expectancies for the developmentally disabled. It is also possible that medical professionals are identifying more developmentally disabled individuals at an earlier age, and referring more persons to DDS programs. The RC caseload growth also reflects a significant increase in the diagnosed cases of autism, the causes of which are not yet fully understood.
Autism is a neurological disorder characterized by impairments in social relating, language, and by the presence of repetitive and stereotyped behaviors. The caseload for persons professionally diagnosed with full syndrome autism, and excluding children less than three years of age and persons with less common forms of autism, increased between 1998-99 and 2002-03 from about 10,300 to about 20,300 or by almost 97 percent. (During that same period, the caseload of persons with mental retardation increased by 20.4 percent, those with epilepsy increased 16.4 percent, and those with cerebral palsy increased by 15.9 percent.) Other states have reported growth trends in their autistic caseloads similar to those seen in California.
Overall Spending and Cost Per Client Growing. Despite recent legislative initiatives to control costs, which we discuss in more detail below, General Fund spending (again, after adjusting for a program shift to DDS) has increased by $332 million or by 25 percent since 2001-02. As shown in Figure 2, while the overall level of RC spending has increased, the proportion of RC support coming from the General Fund has remained fairly stable in recent years. The proportion of RC funding coming from the federal Medicaid waiver has also remained steady over time.
The average cost per client (including support from all fund sources) has increased steadily between 1998-99 and 2003-04, from about $9,500 to $13,400. The Governor's proposed budget, would bring the estimated cost per client in 2004-05 to about $13,600.
Why Spending Is Escalating. As can be seen in Figure 3, total spending for RC services is growing more quickly than RC caseloads. Several factors help to explain why this may be occurring.
One factor is an aging RC client population which requires more intensive and more costly services and supports. Another probable factor pushing costs upwards is the increase in diagnosed autism caseloads discussed earlier, and the comparatively higher costs of treating autistic individuals. Also, as new medical technology, treatments, and equipment become available, the scope of services and supports that DDS is able to provide to developmentally disabled individuals is broadening. In addition, increased spending is, to some extent, a result of rate increases provided for community care facilities that were intended to provide the facilities with sufficient resources to meet federal requirements for quality of care and staffing.
The Legislature has adopted a series of significant budget actions in recent budget deliberations in an attempt to slow the upward trend in General Fund expenditures for the support of RC programs. These measures include steps to: (1) enhance federal funding for the support of the RC system, (2) impose unallocated reductions and rate freezes; (3) suspend the startup of new community programs; (4) extend intake and assessment periods; (5) take steps toward expanding parental copayments, and (6) changing program eligibility rules. Several of these actions (although not all) have helped in preventing the significant increases in RC spending from being even greater.
The growth in caseload and costs for RC services has occurred at a time when the state has been experiencing fiscal difficulties. As a result, the Legislature has concurred with a series of changes proposed by the prior administration, and taken other actions on its own, in an attempt to hold down further growth in spending for RC services. Some, although not all, of these actions are proving to be effective in preventing the significant increases in RC spending from being even greater. We discuss these actions in more detail below.
Enhancing Federal Financial Participation. The 2002-03 budget plan adopted proposals to increase the amount of federal financial participation received by the state by enrolling additional RC clients under the HCBS waiver. The DDS was subsequently successful in adding approximately 12,000 additional consumers to the waiver who previously were receiving RC services mainly at General Fund expense. Additional federal funds have also resulted from the reinstatement of some RCs for federal reimbursements. Since 2001-02, the annual amount of federal funding from the HCBS waiver used for support of the RC system has grown by more than $100 million. The increased level of federal funding is assumed to continue in 2004-05 and subsequent fiscal years.
The 2003-04 budget plan assumed the implementation of several additional proposals to increase federal financial participation for the support of RC services. These steps included: (1) enrollment of additional RC clients under the waiver; (2) increasing the number of contracted services eligible for reimbursement; (3) implementing a system to capture funding for RC waiver administration costs; (4) revising the state's targeted case management rate methodology, and (5) redefining selected services so that they can be added to the waiver.
The DDS originally estimated that this initiative would generate additional federal reimbursements of about $100 million in 2003-04. However, the department has since revised its estimate downward to about $87 million due to (1) delays in adding certain services to the waiver, and (2) the determination that some of the additional federal funding sought was already being collected for targeted case management services.
The administration's 2004-05 proposed budget does not contain any new initiatives to increase federal funds under the waiver. The administration has indicated that recent reductions in headquarters staffing has limited the ability of DDS to undertake additional efforts at this time to increase reimbursements from federal funds.
Unallocated Reductions and Rate Freezes. For 2002-03 the administration proposed to achieve $52 million in General Fund savings by implementing statewide purchase of services standards. (We discuss this approach in more detail later in this analysis.) The Legislature rejected the proposal and instead approved an unallocated reduction of $52 million. Each RC was assigned a portion of the unallocated reduction and required to submit a plan detailing how it would achieve the savings.
The effectiveness of the 2002-03 unallocated reduction appears to have been limited. Instead of a reduction in overall RC expenditures, the RC system experienced about a $79 million deficiency in purchase of services in 2002-03. Part of the deficiency—exactly how much is unclear—appears to have been due to the failure by RCs to achieve the savings target.
The administration again proposed the implementation of statewide purchase of service standards for 2003-04, this time with a goal of achieving $100 million in General Fund savings (it later revised its estimate downward to $50 million). The Legislature again rejected this proposal and adopted various substitute cost-containment actions. These included setting limits for certain provider rates (for estimated General Fund savings of $25.9 million), adjustments to service coordinator ratios ($13.9 million General Fund), elimination of the pass-through of an SSI/SSP rate increase to community care facility providers ($1.5 million), and an unallocated reduction of $10 million General Fund for purchase of services.
The Governor's January budget plan generally assumes that these measures will be effective and does not contemplate a deficiency request for additional funding for RC services for the current fiscal year.
Suspension of Startup Programs. The 2002-03 budget as enacted suspended the expenditure of purchase of services funds for the startup of any new RC programs, with the exception of community placement plan programs, unless the expenditure was deemed necessary to protect the consumers' health or safety and had prior authorization from the department. This change was expected to result in savings of $6 million General Fund. The suspension of the new program startups was continued as part of the 2003-04 budget plan, and a continued suspension is proposed as part of the 2004-05 budget plan.
Intake and Assessment. The 2002-03 budget plan extended from 60 to 120 days the amount of time permitted under state law for RCs to complete the assessment of clients after their initial intake. This was to have resulted in savings of $4.6 million General Fund. The extension of the assessment period was continued in 2003-04 and is proposed to be maintained in the 2004-05 spending plan.
Parental Copayments. Currently, less than 1 percent of RC clients or their families pay any share of the cost of the services they receive. The Governor's 2003-04 budget plan initially proposed that DDS develop and implement an expanded copayment program to assess and collect reimbursements from the families of developmentally disabled children who live at home and receive certain services purchased by the RCs. The Legislature did not approve the implementation of broader parental copayments in 2003-04, but did adopt budget trailer bill language that directs DDS to submit a plan for implementing parental copayments meeting specific criteria by April 1, 2004. The statutory language specifies that the copayment program cannot be implemented without subsequent statutory authorization by the Legislature. The administration has indicated it is proceeding to develop the proposal for submittal to the Legislature, and is considering additional copayment options. We discuss the Governor's recent copayment proposals later in this analysis.
Change in Eligibility. The 2003-04 budget as enacted contains a proposal to achieve savings of $2.1 million General Fund by more closely conforming the state's definition of what constitutes a substantial disability to a comparable standard established under federal law. The state's prior definition granted more latitude in determining whether a person was developmentally disabled.
The DDS has estimated that about 400 persons per year would not be eligible for services under the new definition. These would generally be higher functioning individuals with mild mental retardation, or another disability and without severe medical or behavioral needs. While the immediate fiscal impact of the change in definition is relatively small, the cumulative effect may be substantial over the next ten years. The Governor's 2004-05 budget plan assumes continued savings from this action.
The Governor's 2004-05 budget plan for RC community services has several components, including (1) an RC caseload estimate, (2) a proposal to again use federal social services block grant funds to offset state costs for community services, and (3) both budget year and longer term proposals to contain program costs. We explain and evaluate each of these proposals below.
We withhold recommendation on the administration's caseload estimate for regional centers, which assumes a significant slowdown in the rate of growth in the current fiscal year. While recent caseload trends indicate that the Governor's proposal is reasonable, it is not yet clear whether this moderation in caseload growth is an ongoing trend or only temporary. If it turns out to be only temporary, then General Fund support for RC caseload could be underbudgeted by as much as $20 million in both the current and the budget year.
Caseload Counts Below Budget Target. The DDS budget estimate for 2004-05 is partly based on an assumption that RC caseload in the current year will be 190,030, or 3,070 below the caseload of 193,100 assumed when the 2003-04 budget was approved. This would represent year-over-year growth of 4.3 percent. The Governor's budget plan further assumes that the RC caseload will increase in 2004-05 by 9,265 clients, or 4.9 percent, to a total of 199,295.
If the estimate is accurate, it would reflect a slowdown in caseload growth, although the growth rate would remain significant. The previous caseload projection, presented at the time of the 2003-04 May Revision, assumed a significantly higher year-to-year growth rate of about 6 percent.
The projection of a somewhat moderating rate of caseload growth is reasonable, given the trend seen in caseload and the adoption of cost-control measures adopted by the Legislature in recent years. However, there is not sufficient data available at this time to determine whether the moderation in caseload growth is a temporary change or an ongoing trend. If the previous trend of higher growth were to resume, the Governor's budget plan could be underbudgeted by as much as $20 million General Fund in both the current and budget year.
Analyst's Recommendation. We withhold recommendation on the Governor's budget proposal at this time. Because of the relatively high degree of uncertainty over the caseload projection, it is possible that the budget proposal may understate the amount of state funding required for the program in both 2003-04 and 2004-05. The administration will update its projections this spring. We will continue to monitor caseload growth trends and recommend adjustments, if necessary, following our review of the May Revision.
The Governor's budget plan proposes to use $48 million in federal Title XX Social Services Block Grant funds in place of General Fund for specified regional center expenditures. Although a similar fund switch had been halted in the past because of technical issues, it should be possible to accomplish these General Fund savings in 2004-05.
Title XX Funds Contingent on Copayment Data. The 2002-03 budget plan included provisions intended to achieve General Fund savings by (1) transferring Temporary Assistance for Needy Families funds into the state's federal Title XX Social Services Block Grant, and then (2) substituting block grant funds for General Fund support in the DDS budget for RC programs. The administration subsequently withdrew the proposal and the Legislature agreed to reverse the funding shift to DDS. At the time, the administration cited a lack of data on the income levels of families receiving RC services as a technical flaw inconsistent with federal rules that precluded the shift of these federal funds to DDS.
However, the Governor's 2004-05 budget plan again proposes to accomplish a similar fund switch, this time to generate General Fund savings of $48 million. The administration believes that income data on the families of RC clients that will be obtained as part of the proposed expansion of parental copayments would resolve this technical flaw, thereby permitting the state to use the Title XX funds to support the RC budget.
Analyst's Recommendation. We concur in the Governor's proposal to accomplish this funding shift in order to achieve General Fund savings. We would note, however, that the success of this proposal is conditioned on a successful effort by DDS to collect and tabulate data that would provide the needed information about client family incomes. We intend to monitor the situation to ensure that the proposed funding shift remains a technically effective solution.
The Governor's budget proposes several cost containment measures that would reduce budget year growth in RC purchase of services by $100 million in state funds. The Governor's budget also proposes longer-term reforms to contain program costs. We support the Governor's proposals in concept, but withhold recommendation on the reform plan until more details are available. The Legislature should request that these details be provided at budget hearings, rather than at the May Revision, so it can consider their policy implications and determine whether the savings that are proposed will actually be achieved.
2004-05 Budget Proposal. The Governor's budget proposes to reduce growth in 2004-05 RC purchase of services by $100 million in 2004-05. The administration has identified several general cost-containment strategies that include:
Longer-Term Reform. The Governor's budget also proposes to reduce the rate of growth of spending for RC purchase of services in 2005-06 and thereafter by an unspecified amount through three specific cost-containment measures that include:
Below, we provide some general information regarding several of the Governor's cost containment proposals as well as some background information to assist the Legislature in assessing the Governor's plan once more details are forthcoming.
Standards Warranted to Prevent or Reduce Overspending. As we described above, statewide purchase of services standards were proposed in the Governor's January budget proposals in both 2002-03 and 2003-04 but rejected by the Legislature in favor of other approaches. At this point it is not clear how or if the 2004-05 proposal will differ from those proposed by the previous administration. But there is evidence which indicates that such standards are warranted in general to prevent or reduce program overspending.
A recent study commissioned by the state found that five cost-related factors explain why the cost of services for some clients differ from the costs of caring for others. They are the client's (1) age; (2) residence type, such as a community care facility or their home; (3) characteristics, such as whether an individual is autistic; (4) level of mental retardation, if any; and (5) their adaptive behavior, such as their independent living skills and social competence. The study also determined that gender had no relation to purchase of service costs, but that client ethnicity had a small influence on such costs. (At the time this analysis was prepared, a follow-up study was nearing public release that will examine whether other factors account for variations in spending patterns.)
Some Variations Justified. The study compared RC spending patterns and found clear variations in purchase of services expenditures that could not be explained by these five factors. For the five-year period covered by the study, 1995-96 through 1999-00, clients in the three highest spending RCs received more than $8,700 per capita annually in services, while consumers in the lowest spending regional centers received slightly below $6,000 in services. The biggest variations were found in out-of-home services, day programs and transportation. These data suggest that there are differences in spending patterns among RCs that could be addressed by statewide purchase of service standards to ensure that RC clients in one region of the state receive services and supports that are comparable to those received by RC clients in other regions.
Some regional variation in the cost of services in RC programs is inevitable and appropriate, given that the RC system was designed and intended to permit community preferences to be taken into account in the delivery of services. Regional factors such as the rural nature of an area or the availability to clients of generic services can also affect costs, such as transportation. We believe these concerns could and should be addressed in the development of statewide standards through the involvement of RC, client advocates, service providers, and other interested parties.
Last Year's Copayments to Be Implemented, and More Proposed. In our Analysis of the 2003-04 Budget Bill, we supported copayments in concept because of the potential fiscal benefit to the state and because we believe it is a reasonable and appropriate policy that those who can afford to do so contribute to the cost of the care provided to members of their family. We did recommend that the Legislature clarify and improve some specific aspects of the plan as it moved forward. We also recommended, among other actions, that the Legislature consider broadening the proposal to include families of children from birth to age 3 as already occurs in some other states.
As discussed above, the Legislature last year directed DDS to submit a plan, by April 1, 2004, for implementing parental copayments that meets specific criteria. The Governor's 2004-05 budget proposal moves forward with the initial expansion authorized by the Legislature, as well as extends copayments to the families of infants.
Fiscal Implications. The DDS's preliminary estimate is that this first copayment expansion (ages 3 through 17) would result in $29.5 million in additional state revenues during the first full year of implementation. The revenue estimate will be revised after DDS obtains income data on the families of the clients that would be assessed the copayment. In addition to the revenues that would directly result from copayments, however, their implementation would probably decrease the demand for certain RC services. Some families would probably elect to receive fewer services once they were required to help pay for them in order to lower their copayment. As long as they are reasonable in their amount and based on a family's ability to pay them, copayments could help deter excessive use of the available services. Our analysis also indicates that unknown but potentially substantial additional General Fund savings could result from the imposition of copayments on families with infants and the resulting changes in utilization patterns.
Rate-Setting Process Varies. The Governor's budget proposes to implement a standard statewide rate system for major categories of services purchased by regional centers beginning in 2005-06. The rates for residential services purchased by RCs are set at the state level. However, RCs have considerable discretion in determining how much they will pay a vendor for some nonresidential services. The rate-setting methods employed by RCs for nonresidential services vary significantly, according to the type of service. There is also significant variation in the way rates are set for the same types of services, such as for transportation.
Some RC service rates are set competitively while others are not. Some rates are based on historical cost data while others are tied to what other similar vendors are paid, or the rates paid under the state's Medi-Cal health program for the poor, or what the public would pay for the same services. In general, we found the rate-setting approach is often complex, inconsistent, potentially costly to the state, and, in some cases, inequitable to some providers. For example, a provider who has recently contracted with an RC to provide day program services may receive a significantly higher reimbursement rate than another vendor who is providing the identical service, but who signed a contract at an earlier date.
Given the varying methods currently used to determine rates for services purchased by the RCs from their vendors, we believe that the standardization of RC rates contemplated by the administration is feasible in concept and warranted. We would note that while the intent is to constrain costs, changes to rate-setting mechanisms could in theory result either in state savings or costs depending on the details of the specific proposal. Any proposed change to the rate-setting mechanism should be carefully reviewed by the Legislature to ensure that it will in fact result in net savings to the state.
More Client Control and Lower Costs. Subject to federal approval, the administration has proposed to implement a waiver that will allow a self-directed services model of funding and service delivery, more commonly known as self-determination, that caps individual budgets in exchange for increased consumer control over services.
In our review of the DDS budget in the Analysis of the 2003-04 Budget Bill, we concluded that expansion of self-determination under the proposed waiver represented a potential "win-win" situation for clients and the state. Clients could gain greater control over their services and their life while the state could potentially hold down growth in program costs. During last year's budget deliberations, the Legislature adopted language that allowed for continuation of the existing self-determination pilot projects in five RCs as well as for expansion to other RCs when consistent with federal approval of the waiver.
Expansion of self-determination is also contingent on the successful implementation of the California Developmental Disabilities Information System (CADDIS), which is necessary to meet federal billing requirements. The CADDIS system, which allows for tracking of individual client budgets, is expected to be fully implemented in all 21 RCs by the end of the current fiscal year.
Regional Center Operations Unallocated Reduction. The Governor's budget proposes an unallocated reduction to RC operations of $6.5 million to control administration costs. The administration believes that opportunities exist to increase operational efficiencies within the RCs which would allow savings to be achieved without adversely affecting program administration. Accordingly, under the Governor's plan, DDS will work to develop a long-term strategy to minimize waste and excessive administrative costs.
However, the details of how these efficiencies will be accomplished are not available. Therefore, we are unable to determine at this time how RC administrative functions would be affected and what direct impact, if any, the unallocated reduction would have on the RC's ability to meet their obligation to provide services to their clients.
We would note that several of the administration's cost-containment proposals for 2004-05 and 2005-06 could potentially increase workload for the RCs. Although there are few details available at this point, it is likely that implementation of statewide purchase of service standards, implementation of parental copayments, and an expansion of self-determination projects would create additional administrative workload for the RCs. In addition, in 2004-05 the Habilitation Services Program will be transferred to DDS from the Department of Rehabilitation, a shift which will also generate additional workload, but occur without an increase in RC operations funding.
Actual Savings From Governor's Proposals Indeterminable. In concept, the Governor's proposals appear to have merit, given our own past recommendations to the Legislature for reform (see our analyses of the DDS budget in 2002-03 and 2003-04) and the continuation of rapid RC caseload and expenditure growth trends. However, neither the savings estimates for each of the Governor's separate cost-containment proposals for 2004-05, nor detailed information regarding how they would be implemented, was available at the time this analysis was prepared. According to the administration, this additional information will be provided in the 2004-05 May Revision. Details are also lacking regarding the proposals for longer-term reform.
Consequently, we cannot say at this time whether the 2004-05 package will achieve the contemplated savings or provide a full assessment of any of the proposals. Lacking these details, the Legislature is also not in a position to fully assess all of the policy and operational implications of these changes.
Given the complexity of these issues, however, the Legislature should request that the administration present its completed proposals to implement cost-containment measures at budget hearings, and not wait until the May Revision to present these details. An earlier timetable would provide the Legislature with the additional time needed to review, analyze, and, in some cases, compare alternative approaches to the plans put forward by the administration.
The Governor's budget proposal for a continuing effort to change the way regional center services are delivered in order to improve program accountability and cost-effectiveness represents a reasonable starting point for consideration. There are additional options the Legislature may also wish to consider to broaden the discussion of possibilities for cost containment and program reform, including the improvement of audit functions, clarification of some provisions of the Lanterman Act, modification of the nursing home rate structure, and reductions in certain contracted activities.
In our view, the administration's proposals to study additional cost-saving changes in RC programs and operations constitutes a reasonable initial approach. We believe this discussion should be broadened, however, to include additional opportunities for reform besides those mentioned in the Governor's budget plan. We discuss some of those possibilities below.
Limited State Audit Role. The RC fiscal oversight functions include desk audits in which vendor billings are reviewed for accuracy and completeness or, in some cases, field audits that include a detailed review of some or all of a vendor's records or financial accounts to check their accuracy. In some instances, an RC may request that DDS participate in an audit of a vendor. However, DDS headquarters is neither staffed to perform vendor audits, nor is this one of its regular functions. As a result, there is little chance that a RC vendor will ever face an audit performed by state auditors. One significant exception is vendors who are also Medi-Cal providers, and therefore subject to state reviews related to the state's Medi-Cal antifraud efforts.
Many RC vendors do not participate in the Medi-Cal Program. Although they provide services that are similar or identical in nature to those of Medi-Cal providers, they are not subject to the same statewide, centrally coordinated effort aimed at deterring fraud and abuse to which Medi-Cal providers are subject. We believe this arrangement does not provide an adequate safeguard for the expenditure of very significant amounts of state funds that flow each year through non-Medi-Cal vendor contracts. Our analysis indicates that shifting the responsibility for vendor field audits from the RCs to the state would relieve the RCs of part of their workload and allow them to focus more on providing high-quality services to RC clients. At the same time it would allow the state to achieve stronger fiscal oversight of the RC vendors and to coordinate these efforts on a statewide basis. Under our suggested approach, the RCs would retain their present oversight responsibilities for conducting desk audits.
Because the existing DDS audit unit is not staffed to perform field audits of vendors, as much as $2.9 million of the $4.4 million in funding now provided for RC audit functions could eventually be transferred from the RC operations budget to the DDS headquarters budget for this purpose. Because this change would require modifications of existing RC contracts, it may be necessary to phase in such a funding shift as the contracts are renewed.
Analyst's Recommendation. Accordingly, we recommend that DDS report at budget hearings on the feasibility of shifting the responsibility and funding for field audits of RC vendors from the RCs to DDS. The DDS should also report at that time on whether it would be more cost-effective to contract out the audits, increase headquarters staff to perform the audits, or some combination of these two options. The DDS should also report on the timeline necessary for completing such a shift, and recommend the amount of resources that should be transferred to its headquarters operations for this purpose in 2004-05 to begin phasing in this change.
Lanterman Act Unclear in Some Respects. The Lanterman Act states the intent of the Legislature to ensure the provision of services to clients and their families be effective in meeting the goals stated in the individual program plan, reflect the preferences and choices of the client, and reflect the cost-effective use of public resources. Services and supports may include, but are not limited to, more than 20 specific services that are listed in the Lanterman Act. The law is specific that the services available must include diagnosis, evaluation, treatment, personal care, day care, speech therapy, education, recreation, camping, and specialized medical and dental care, among others. However, the Lanterman Act is not as specific regarding which services, if any, the state is not responsible for providing to clients. At one time, however, state law was clear that RCs were not obligated to pay for services for a client that parents would typically be responsible for purchasing for any children. This statutory language sunsetted in 2002.
Under the RC system, administrative law judges (ALJs) are empowered to hear appeals of cases in which RCs have denied the provision of services. In ruling on such appeals, ALJs have recently ordered RCs to fund services and supports for services that are typically paid for by parents of children without developmental disabilities. For example, one RC was required to purchase private swimming lessons even though the RC had determined that group swimming lessons with peers with whom the client could socialize would likely be more beneficial to the client. In another case, an ALJ ordered an RC to pay a portion of the cost for an addition of a bedroom and bathroom to a house. The RC had denied the request because it believed this expense was one which would normally be assumed by the parents of a nonhandicapped child.
Our analysis indicates that the restoration of the language that sunset in 2002 could eventually, although not immediately, result in significant savings to the state. The initial fiscal impact of adopting this language would be relatively modest in terms of reduced RC purchase of services costs—probably less than $1 million annually. However, the cumulative effect of this change would probably be greater over time, and could potentially reach several million dollars annually. The savings would occur because RCs would have greater authority to control program costs.
Reinstatement of the prior state law could also reduce RC expenditures and workload related to the hearing process to the extent that clarification of the Lanterman Act resulted in fewer appeals of RC decisions to deny payment for services that are appropriately the financial responsibility of their families.
Analyst's Recommendation. For these reasons, we recommend that the Legislature reinstate statutory language that clarifies that parents of children with developmental disabilities, and not state taxpayers, should be financially responsible for the purchase of goods and services that would normally be purchased by the parents of a child without developmental disabilities. Because the impact of this change would be gradual, we recommend no specific budgetary adjustment to the RCs at this time relating to this action.
Leveraging Federal Dollars Could Reduce General Fund Costs. Our analysis indicates that the state has the option of drawing down additional federal funds to offset the state costs of services provided to resi dents of Intermediate Care Facilities for the Developmentally Disabled (ICF/DDs). This could be achieved by modifying the ICF/DD rate and implementing other related changes. We estimate that this approach could generate as much as $50 million annually in additional federal funds that would allow a commensurate reduction in state General Fund support for these nursing homes.
Federal regulations allow for a broad definition of the services that can be provided in ICF/DDs with reimbursement under the Medi-Cal Program. Other states have been successful in defining their ICF/DD programs more broadly to cover the supports and services for clients with developmental disabilities, thereby increasing their federal reimbursement under Medicaid. However, California continues to maintain a more narrow definition of ICF/DD services than the one permitted under federal law. We believe the state could take the same approach taken by other states to increase its federal reimbursement under Medi-Cal.
Specifically, in order to capture these additional federal funds, the state would have to redefine the ICF/DD program as an "all-inclusive service." Currently, the ICF/DDs are paid a rate based only on the specific nursing care services they provide. Additional services that a client may receive such as transportation or a day program are generally paid for separately by the RC or provided through a generic service provider. Under this option, ICF/DDs would be redefined to be an all-inclusive service and the responsibility for paying for transportation and day programs and other assistance (in cases where generic services were unavailable) would shift from the RC to the ICF/DDs and would be reflected in the rates paid to the ICF/DDs.
The DDS would have to address several significant programmatic and administrative issues to implement this proposal. Implementation would also likely require regulatory changes and would be contingent on federal approval of an amendment to the State Medicaid Plan. However, no change in statute is believed necessary to move forward with this approach.
Analyst's Recommendation. Our analysis suggests that recent staffing reductions mean that it would be difficult for DDS headquarters to accomplish the change in ICF-DD rates that we propose without additional positions and resources. Accordingly, we recommend that DDS report at budget hearings on the feasibility, timetable, and staff resources that would be required to proceed with this effort to further maximize the federal funding available to the state for the support of the RC system. The DDS should also specifically report on the state savings, if any, that could be achieved in this manner in the 2004-05 and 2005-06 fiscal years.
Missed Opportunity for RC Operational Savings. The Governor's 2004-05 spending plan includes significant proposals for reductions in RC operations. This follows the approval by the Legislature in the 2003-04 budget of a $13.9 million reduction in RC operations funding through the modification of staffing ratios for case management, supervisory, and clerical personnel.
However, no comparable reductions have been made to various spending items that "pass through" the RC operations budget and do not directly support RC management activities. We believe it would be reasonable to consider reductions to these items given the state's current fiscal condition.
The proposed 2004-05 budget would provide $22.1 million General Fund for 13 such separate contracts, programs, and projects. A 10 percent reduction in General Fund expenditures would result in General Fund savings of $2.2 million. We would note that, in most cases, reduction or elimination of these contracts, programs, and projects would require a change in statute, federal approval, or both.
Analyst's Recommendation. We recommend that the Legislature direct DDS to report at budget hearings on the feasibility of achieving a 10 percent reduction in state expenditures for contracts, programs, and projects included in the RC operations budget as "pass-through" items. The DDS would identify the savings that could be obtained within particular pass-through items, the steps necessary to reduce costs, and the effect, if any, on the quality of services provided directly to RC clients.
Even with the recent slowdown that appears to be occurring in caseload growth, it appears likely that RC costs will continue to grow at a significant pace. We believe the Governor's budget proposals offer a reasonable starting point for discussions with the Legislature and other interested parties about how changes could be made in the RC system that would ensure the most cost-effective use of state funding while maintaining high-quality services for RC clients. However, we recommend that discussion be broadened to include some of the additional strategies we have outlined in this analysis.
Although the caseload estimate for the Governor's budget plan for developmental centers (DCs) is reasonable, we have identified three factors that make it possible that up to about $80 million in additional funding will be required for their support. These additional costs could result from (1) the Agnews DC closure plan, (2) the possible federal decertification of Lanterman DC, and (3) the possibility that savings from a proposal to contract out food preparation at the DCs may not be realized.
Caseload Estimate Reasonable. The Governor's budget plan assumes that the DC population will average 3,490 clients in 2003-04, and will continue on the present long-term trend and decrease through the remainder of the current fiscal year and the budget year. Specifically, the DC estimate projects that the average population actually present at any given time in the DCs, including the state's two leased facilities, will be 3,367 for the budget year.
While the proposed budget for 2004-05 reflects savings from the ongoing decline in DC population, these savings are more than offset by increases in retirement costs and other factors, resulting in a net growth in DC expenditures of 1.4 percent in the budget year. Based upon our review of the available caseload data, we believe the Governor's budget estimate for the DCs is reasonable. In any event, the caseload estimate for DCs will be updated at the time of the May Revision.
Our analysis of the budget estimate indicates, however, that three factors could ultimately result in greater expenditures for the DCs in 2004-05 than have been proposed at this time. These factors, which we discuss in more detail below, relate to (1) the Agnews DC closure plan, (2) the possible decertification of Lanterman DC, and (3) the possibility that savings from a proposal to contract out food preparation at the DCs may not be realized.
Funding Request Anticipated for Agnews DC Closure. The 2003-04 budget plan included authorization for DDS to redirect existing resources to form a project team that would begin planning efforts to close Agnews DC by July 2005. The project team is currently developing a master plan for Agnew's closure, and DDS is required to submit a completed closure plan to the Legislature by April 1, 2004.
The administration is expected to submit a 2004-05 funding request during the spring for costs to carry out this closure plan. During the budget year, all remaining Agnews residents would be transferred to other DCs or placed in the community so that the facility would be shut down by July 2005. During this period, negotiations would also begin for the transfer of Agnews to the Department of General Services as potential surplus property.
In our discussion of the DC closure issue in the Analysis of the 2003-04 Budget Bill, we estimated that the state would incur initial costs of $10 million to $15 million in the short term related to the closure of Agnews DC. We assume that the administration will probably present a funding request in that range in the spring. The actual costs of closure activity could vary based upon the extent to which Agnews DC clients could be placed in community settings instead of being transferred to the remaining DCs. Our estimate of the additional net funding takes into account: (1) new costs to assess and place DC residents in community programs, (2) costs for relocation of staff, and (3) the savings to DDS operating costs that would result from movement of individuals from DCs to the community or less expensive DCs.
The state would subsequently realize substantial savings from the closure of Agnews—potentially $30 million to $40 million annually—that would more than offset these one-time closure costs. In addition to these ongoing savings on state operations, the closure of Agnews would allow the state to avoid an additional $100 million to $200 million in costs for capital improvements that would otherwise probably be necessary to continue to operate the facility. Finally, the land value of Agnews offers potential one-time income to the state General Fund of an estimated $80 million to $90 million that could be used to offset closure costs.
We would note that our Analysis of the 2003-04 Budget Bill recommended that the Legislature initiate the process to also close Lanterman DC in addition to Agnews DC given the projected decline of the DC population. The Governor's budget plan indicates that the administration intends to revisit the issue of whether additional DCs should be closed.
Lanterman Federal Funding at Risk. The federal government periodically conducts surveys of state institutions, including DCs, to ensure that they are being operated in compliance with federal rules and constitutional requirements. A survey conducted at the Lanterman DC in August 2003 concluded that the facility was out of compliance for five of the eight conditions established for the receipt of federal funding for the part of the DC that is licensed as an ICF/DD. About 75 percent of Lanterman clients are cared for in the ICF/DD part of the facility.
If the problems identified in the survey are not remedied before a follow-up survey anticipated to occur by March 2004, the federal Centers for Medicare and Medicaid Services (CMS) may "decertify" the ICF program retroactively to September of 2003. Decertification would result in a loss of federal funds to the state of approximately $3.2 million per month—potentially as much as $32 million in the current fiscal year and $38.4 million in the budget year. In the past, the state has replaced lost federal funds in the DC program with General Fund support in order to safeguard the health, safety, and welfare of the populations cared for in these 24-hour care facilities.
Contract Savings Depend on Constitutional Amendment. The Governor's spending plan assumes that the state will achieve General Fund savings of $910,000 in the budget year by contracting out DC food services beginning January 1, 2005. However, our analysis indicates that, while the proposal has merit, some hurdles make it uncertain whether these savings can be achieved.
The five DCs all have large, institutional kitchens where food for the DC residents is now prepared by state personnel. Because of the fragile medical condition of many of the DC residents, and the resulting dietary restrictions, food preparation at the DCs is more complex than is typically the case for other institutions. Many DC residents have special meal plans prepared for them by dieticians and medical staff.
The administration has indicated that it believes contracting-out food preparation will result in more cost-effective and higher-quality service for DC residents. The state currently contracts out for janitorial services at the DCs and has contracted out for food preparation at other state facilities, such as veterans' homes.
However, provisions of the California Constitution and case law limit the practice of contracting-out, especially in regard to programs which already have state staffing in place performing a state governmental function. For this reason, the administration has proposed to place an amendment to the State Constitution on the November 2004 ballot so that this proposal, and other contracting-out efforts affecting other departments, could be implemented within the budget year. The Governor's budget plan assumes both that the Legislature will place such a measure on the November ballot and that it will receive approval by the voters. If either of these actions fails to occur, an additional $910,000 from the General Fund, beyond the funding now proposed in the budget plan, would be needed for the support of the DCs.
Analyst's Recommendation. We will review the Governor's plan for the closure of the Agnews DC and the anticipated funding request to allow closure of the facility to proceed as the information about these matters becomes available to the Legislature. We will also monitor the Lanterman decertification situation. We recommend no specific actions to the Legislature in regard to these matters at this time, except that we continue to recommend that the Legislature consider initiating the closure of Lanterman.
We support in concept the Governor's proposal to contract out food preparation in the DCs because of the potential savings from this approach. However, we withhold recommendation pending the outcome of the Legislature's deliberations on the constitutional amendment.