LAO 2004-05 Budget Analysis: General Government

Analysis of the 2004-05 Budget Bill

Legislative Analyst's Office
February 2004

Department of Mental Health (4440)

The Department of Mental Health (DMH) directs and coordinates statewide efforts for the treatment of mental disabilities. The department's primary responsibilities are to (1) provide for the delivery of mental health services through a state-county partnership and for involuntary treatment of the mentally disabled; (2) operate four state hospitals; (3) manage state prison treatment services at the California Medical Facility at Vacaville and at Salinas Valley State Prison; and 4) administer various community programs directed at specific populations.

The state hospitals provide inpatient treatment services for mentally disabled county clients, judicially committed clients, clients civilly committed as Sexually Violent Predators (SVPs), and mentally disordered offenders and mentally disabled clients transferred from the California Department of Corrections (CDC).

Budget Proposal Increases DMH Budget Overall. The budget proposes $2.5 billion from all funds for support of DMH programs in 2004-05, which is an increase of more than $165 million, or 7 percent, above estimated current-year expenditures. The budget proposes $911 million from the General Fund, which is an increase of about $32 million, or 4 percent, above the Governor's revised budget plan for the current year. Reimbursements that would be received by DMH—largely Medi-Cal funding passed through to community mental health programs—would increase $134 million, or 9 percent.

The overall proposed increase in DMH expenditures is primarily due to the expansion of the Early and Periodic Screening, Diagnosis and Treat ment Program (EPSDT) for children with emotional problems. The Governor's budget plan reflects a proposed $245 million increase in EPSDT reimbursements in the budget year compared to the revised current-year level of spending ($112 million from the General Fund). We discuss the reasons for the augmentation request (including some significant technical adjustments that make program growth appear larger than is actually the case), describe measures that are being proposed by the administration to partly offset the growth in program costs, and provide our response to these proposals later in this analysis.

The Governor's budget proposes about a $28 million increase from the General Fund to continue with preparations to open a new state hospital in Coalinga, which is now under construction. This amount includes funding for additional staff, equipment and expenses for the next phases of staffing, and the full-year cost of staff added for activation of the facility in the current year. The administration proposes to open the facility in August 2005.

Budget Proposal Includes Some Reductions. Although the budget plan provides for an overall net increase in General Fund spending, it does reflect some significant reductions in mental health program spending, including proposals to:

We discuss some of these specific proposals in more detail later in this section of the Analysis.

State Hospital Issues

Activation of Coalinga Hospital Could Be Delayed

The Governor's budget requests $27.7 million to continue the activation of the Coalinga State Hospital. However, our analysis indicates that the state hospital system currently has sufficient capacity to allow the activation of additional beds at Coalinga to be postponed to reduce costs in the budget year. Accordingly, we recommend that the Legislature delay the activation until March 2006 in order to achieve one-time state General Fund savings of up to $20.1 million. (Reduce Item 4440-011-0001 by $20,143,000.)


SVP Commitments. In accordance with Chapter 763, Statutes of 1995 (AB 888, Rogan), and Chapter 762 (SB 1143, Mountjoy), California established a new civil commitment category for SVPs. This law requires that certain criminal offenders who have been committed by the courts as SVPs be placed in state hospitals for inpatient treatment, and then eventually released into the community for further supervision and treatment. The law's intent was to ensure that SVPs be confined and treated until they no longer presented a threat to society. 

Currently, 535 persons who have either an SVP commitment by a court, or who have been temporarily placed in a state hospital pending the outcome of their commitment hearing, have been placed in the state hospitals. The number of SVP commitments has been growing each year, and only a few persons sent to state hospitals as SVPs have thus far been released to the community.

New State Hospital for SVPs. Beginning in 2000, the state initiated steps to construct a new 1,500-bed secure mental health treatment facility, to be known as Coalinga State Hospital (CSH), to provide DMH with additional capacity to treat patients involuntarily committed under the SVP law. The DMH began construction in 2001, and construction is scheduled to be completed by May 2005. The construction project will be funded by lease-revenue bonds, which are scheduled to be sold in the spring or fall of 2004. To date, the state has committed more than $380 million for the construction and preliminary staffing of CSH.

In addition to this construction project, the state has taken several steps in recent years to ensure that there is sufficient space in the state hospital system for the treatment of offenders who require high security, such as SVPs. Among other actions, the Legislature provided $6.9 million in 2001-02 to purchase modular buildings for placement at Patton State Hospital (PSH) and Atascadero State Hospital (ASH) and to convert program areas into temporary patient living space to accommodate up to 500 additional patients. Additional funding for the state hospital system to staff the 500 additional beds has not been provided to date because the overall hospital population has grown significantly less than DMH had previously projected.

Evaluating the Governor's Budget Proposal

CSH Activation Would Continue. The Governor's 2004-05 budget proposal includes $27.7 million from the General Fund for the continued activation of CSH. This funding consists of (1) $8.7 million for what are called phases IV and V of staffing; (2) $12.2 million for operational expenses and equipment; (3) $3.2 million for recruitment and retention pay differentials and salaries that would exceed standard levels for certain positions at CHS; and (4) a net increase of $3.6 million to pay the full-year cost in 2004-05 of CSH staff added in 2003-04 to help prepare the facility for its opening. The proposal would add almost 165 new positions for CSH in the budget year. The budget plan also requests an augmentation of about $770,000 for about 20 additional positions to activate for the first time 147 of the 500 temporary beds at ASH and PSH. 

Additional Capacity Not Needed at This Time. Our analysis of the Governor's budget request indicates that the state could delay the activation of CSH and still have more than sufficient capacity to meet the projected need for secure treatment beds in the budget year, and beyond.

According to DMH's own population projections, the number of patients requiring secured housing will not grow, but will instead decline by 47 patients during the budget year as a result of proposals to (1) cap the populations of two groups of forensic patients and (2) divert from the state hospital system persons who have been referred for SVP commitment but have not yet been determined by the court to be SVPs. (We discuss these proposals later in this analysis.)

In light of these projected population estimates, our analysis indicates that DMH will have a surplus of approximately 600 beds in the budget year. The DMH has estimated it will need to house a total of 3,776 secure patients in the state hospitals by June 2005. However, the state hospitals have the capacity to hold up to 4,376 patients in secured treatment settings (including the 500 temporary beds at ASH and PSH) in 2004-05. The anticipated decline in the state hospital populations and the resulting surplus of beds suggest that a delay in the activation of CSH would be possible.

Administration Objections. In our discussions about the possibility of delaying the activation of the facility in order to achieve General Fund savings, the administration has raised several objections.

First, the administration has indicated that delaying the activation of CSH could complicate the sale of the lease-revenue bonds if no date for activation of the facility is specified. Bond underwriters, we are advised, may request that such a date be finalized before bonds could be sold.

Also, the administration has asserted that allowing the facility to sit idle could generate significant new costs by allowing the condition of unused equipment to deteriorate. It has also voiced concern that students who are expected to complete educational programs at a nearby community college in preparation for work at CSH could leave the Coalinga area and obtain employment elsewhere.

Finally, the administration has raised concerns that the use of the temporary beds at ASH and PSH beyond August 2005 may not be permitted by DHS and the State Fire Marshall. The DMH asserts that the continued use of the beds beyond that date could result in licensing violations or require funding to bring the space used for patient care into compliance with licensing, earthquake, and fire safety codes and regulations. 

Analyst's Recommendations

Precedents Exists for Facility Delay. In light of the state's budget difficulties, we recommend that the Legislature delay the activation of CSH from August 2005 until March 2006 for a state General Fund savings of up to $20.1 million. In the past, the Legislature has delayed the activation of state prison facilities, including a new high-security facility in Delano (Kern County), to help address budgetary shortfalls. We believe a similar approach is warranted for CSH, given the considerable resources being requested to bring the facility on line, the severity of the state's current fiscal problems, and our findings that the state hospital system has more than enough secure beds to meet patient needs. We also believe it is possible to address most of the concerns voiced by the administration about a potential delay.

Our approach would fund operating expenses and equipment and staff recruitment costs necessary for a March 2006 opening of the hospital to move ahead in the budget year. Our proposal would also provide the additional funding needed to support the Phase III expansion of staff already authorized for the current fiscal year to proceed without any disruption. Given that these activities would continue in the budget year at CSH, we see little risk that a seven-month delay in the arrival of patients would result in major costs from the deterioration of any equipment purchased for the facility.

The Legislature could take steps to ensure that the sale of the bonds would proceed. The state recently encountered and resolved a similar issue when it delayed the activation of the Delano II state prison. To ensure that the state's intention to occupy the facility is clear to prospective bondholders, we propose that the Legislature adopt the following budget bill language:

Provision X. In order to address the state's fiscal problems, it is the intent of the Legislature to achieve savings in the 2004-05 fiscal year by delaying some staffing and funding for activation of Coalinga State Hospital until 2005-06. It is further the intent of the Legislature that patients occupy beds at CSH no later than March 2006.

We would acknowledge that a delay in staffing and opening CSH might cause some community college graduates who would otherwise take jobs at the new state hospital to go elsewhere after graduation. However, these nursing and psychiatric technician graduates could be recruited to help address state staffing shortages in these professions, which exist at other state facilities.

We believe it is unlikely that the use of ASH and PSH beds for an additional seven months will pose a serious problem. In 2002-03, DMH itself had proposed to activate these beds for almost as long a period of time (15 months) as we are proposing (20 months). In our view, the department's contention that these beds cannot be used to meet the state's interim needs for secure beds is inconsistent with its prior funding requests for the $6.9 million; the money that was spent to make these 500 beds available for just this purpose.

If Activation Proceeds, Request Should Be Reduced. Should the Legislature adopt the Governor's proposal and decide not to delay the activation of CSH, we recommend that it reduce the funding request to address several concerns. Specifically, we recommend that the Legislature take the following actions:

Capping Enrollment and Shifting Some SVPs To Counties Could Make Better Use of Beds

We recommend that the Legislature approve as an interim measure the Governor's proposal to limit the population of two groups of forensic patients in state hospitals. While we find that the proposal has merit, we recommend that legislative policy committees consider as a permanent solution the enactment of statutory changes that would provide the Department of Mental Health (DMH) more authority to prioritize the use of expensive hospital beds for patients who are willing and ready to receive treatment. We also concur with the administration's proposal to shift some individuals who have been referred for commitment as sexually violent predators out of the state hospitals to prioritize the use of beds for patients amenable to treatment.


Judicially Mandated Groups in State Hospitals. Currently, state law provides authority for courts to place certain mentally ill persons in state hospitals. The courts may determine that a defendant who has been accused of a crime is "not guilty by reason of insanity" (NGI) in cases when it finds that the defendant was insane at the time the offense was committed. The courts may also find an individual "incompetent to stand trial" (IST) when the defendant is unable to understand the nature of the criminal proceedings or assist in their own defense.

In the case of either ruling, the court must direct the defendant to be confined in a state hospital or a public or private treatment facility. In some instances, placement in an outpatient treatment program is also an option. Approximately 1,170 NGI patients and 900 IST patients are currently in the state hospital system—roughly half the entire statewide hospital population. In general, the state and counties share the responsibility for these two populations of defendants in that state law specifies that offenders who have been determined by the courts to be an IST or an NGI can be placed either in the state hospital system or in a local facility (sometimes a jail).

Individuals Referred to SVP Commitments in Hospital Beds. A court determination is required before an individual may be committed to the state hospital system as an SVP. Currently, about 160 of the individuals who are awaiting court proceedings for an SVP commitment are being held in the state hospital system while their cases proceed. Some additional individuals are still being held in state prison as these proceedings occur, while still others who have been released from prison are held in county jails.

A number of components of the SVP law have been determined to constitute a state-mandated program for county governments. Among other costs, counties are reimbursed for the cost of holding any person being considered for an SVP commitment in county jails.

Governor's Budget Reduction Proposals

The Governor's budget proposes various measures that would result in General Fund savings totaling approximately $360,000 in the current year and $10.4 million in the budget year. Specifically, the proposals would (1) place enrollment limits on certain forensic populations to achieve savings of $360,000 in the current year and $2.8 million in the budget year and (2) modify the way the state manages its SVP population to obtain $7.6 million in state savings in 2004-05.

Governor's Proposal to Limit Certain Forensic Populations. As part of a mid-year budget reduction package to limit the caseloads of various health and social services programs, the administration has proposed to limit the number of NGI and IST patients at the state hospitals. Specifically, the state would cap the NGI population at approximately 1,200 patients and the IST population at 850 patients effective January 1, 2004. (At the time this analysis was prepared, the Legislature had not approved this proposal.) The caps would continue at least through the 2004-05 fiscal year.

The administration has indicated that the proposed caps would apply only to new patients, and that existing NGI and IST patients would not be transferred out of the hospital system to conform to the limits. In the event that the hospital population exceeded the cap, admissions of these groups of patients to the hospital system would halt until the census fell to the capped level. In instances where hospital population limits were reached, NGI and IST patients would typically be housed at a county jail at local expense. As a result, adoption of the Governor's proposal for ISTs and NGIs is likely to increase county costs.

Governor's Proposal for Managing the SVP Population. The Governor's budget plan also proposes to shift some individuals who are being considered for commitment to state hospitals (precommitment SVPs) to the local jails while they await their commitment proceedings. The budget plan also proposes to conduct these commitment proceedings at an earlier date before such individuals are due to be released from state prisons in order to reduce the state hospital population. The Governor's proposal relating to SVPs would not increase county government costs, in that, unlike ISTs and NGIs, the entire cost of the SVP population is the responsibility of the state. Counties could obtain reimbursement from the state to offset any additional costs they would incur for holding precommitment SVPs who had been diverted from the state hospital system to county jails.

Measures Would Be Effective in Reducing State Costs. Absent the Governor's proposed cap on NGI patients, this population would potentially grow by 14 patients in the current year and an additional 42 patients in the budget year. Our analysis of caseload trends indicates that the administration's estimates of the caseload reductions and savings due to the NGI cap appear reasonable.

Due to its assumption of a decline in the IST population, the administration budget plan recognized no additional savings as a result of the enactment of a cap on the IST population. However, our review of recent IST caseload trends indicates that the adoption of the cap probably would result in state savings of as much as $6 million in the budget year. At the time this analysis was prepared, the current IST population exceeded the proposed IST cap by about 39 patients, and further growth in the number of IST patients appeared likely.

Our analysis also indicates that the proposal to shift precommitment SVPs from the state hospitals could have a larger impact on caseloads and achieve greater state savings than estimated by the administration. The Governor's budget plan assumes that the changes that it proposes would reduce the hospital population by 100 in 2004-05. However, 160 precommitment SVPs are presently in the state hospital system. Thus it is possible that the savings from the Governor's proposed changes to the SVP statute could be greater than estimated in the budget plan.

Using State Beds More Cost-Effectively. The administration has indicated that part of its rationale for capping certain populations and for redirecting precommitment SVPs from the state hospitals is an effort to ensure that the state prioritizes the use of costly inpatient hospital resources for patients who are willing and ready to accept treatment for their mental illness.

The administration has indicated that some NGI and IST patients transferred to the state hospitals by the courts have been unwilling to accept treatment, including medications that could improve their mental condition. Past court rulings have limited the state's authority to provide such medications to individuals against their will. Under these circumstances, placing such individuals in intensively staffed treatment facilities—at a cost of more than $107,000 per year for each offender—does not appear to be the best use of limited state resources. 

To the extent that the imposition of a cap on IST and NGI populations prompted some judges to more carefully consider which offenders it transferred to state hospitals, it is possible that this change could result in the more cost-effective use of state resources. However, our analysis suggests that the establishment of such caps would not fully address this concern. This is because it would not remove from the existing state hospital population individuals who currently are not amenable to treatment, while potentially keeping out of the hospital system individuals who are ready and willing to accept treatment.

The administration's proposal to shift a portion of the precommitment SVPs would have the effect of prioritizing the use of state hospital beds for persons willing to accept treatment. The DMH has indicated that individuals who are awaiting legal proceedings that could result in their commitment as SVPs are generally unwilling to engage in treatment activities. This is because standard therapy for sex offenders often involves efforts to get individuals to discuss and admit their history of sex crimes. As a result, many individuals who are being held in the state hospitals while they await their SVP commitment hearings are not actively engaged in treatment, in effect wasting the expensive treatment resources available to them.

Analyst's Recommendation

Given the state's serious fiscal difficulties, and the merit of limiting the number of NGI and IST patients held at state expense in the hospital system, we recommend that the Legislature concur with the administration's proposal to establish caps on the NGI and IST populations.

However, we recommend that this limit be approved only as an interim action. In our view, such a cap should be imposed only as a temporary step until legislative policy committees can consider the enactment of permanent changes in state law that would ensure that expensive state hospital resources are prioritized for mentally ill patients who are amenable to treatment. For example, the Legislature may wish to consider providing DMH the legal authority to return to the courts, and to transfer out of the state hospital systems back to county custody, NGI or IST patients who have proven over time to be unamenable to treatment. Under such legislation, the courts could then place these individuals in the most suitable and cost-effective setting.

Accordingly, we propose that the statutory provisions of the administration's proposal be adopted with amendments that sunset the enrollment caps as of January 2006. We believe this would provide the administration with sufficient time to pursue a legislative solution to the inefficient use of state hospital resources.

We also concur with the administration's recommendation to shift a portion of the precommitment SVPs to the local jails while they await the verdict on their commitment hearing, and to expedite the commitment proceedings of others before their release from state prison. While the budget plan reflects $7.6 million in savings to the General Fund from the shift of 100 SVPs to the local level, we estimate that the state could eventually achieve as much as $5 million in additional savings from the shift of all precommitment SVPs (currently estimated at 160) to the local level.

Finally, we note that there could be some offsets to these SVP-related savings, because more persons would be held in county jails while they were awaiting their commitment hearings in the courts. However, the cost to the state of reimbursing counties for the use of their jail beds would be much lower than the cost of using an equivalent number of state hospitals beds—perhaps as much as 20 percent lower. For this reason, we believe this is a sound fiscal approach.

Additional Funding for SVP Evaluations Not Justified

We believe that the administration's proposal to eliminate the present requirement that Sexually Violent Predator (SVP) commitments be renewed every two years is a policy matter for the Legislature to consider. However, a request for a $1.1 million augmentation for a projected increase in SVP evaluations should be rejected because it is not supported by recent caseload trends. (Reduce Item 4440-001-0001 by $1 million.)


Evaluations Legally Required. State law provides a process by which offenders can be determined by the courts to be SVPs and committed to the state hospital system for treatment. Part of that commitment process involves evaluations by psychiatrists or psychologists to ascertain the mental condition of the criminal offenders. These evaluations are conducted upon the referral of cases to DMH by the state Board of Prison Terms (BPT).

Once an individual has been committed to the state hospital system by the courts, DMH is required to periodically reevaluate whether the individual still constitutes an SVP who warrants confinement in the state hospital system. Under current law, SVPs are committed for a two-year period and cannot be held beyond that time period unless another petition for commitment and relevant evaluations are filed. The 2003-04 Budget Act provides about $5.9 million annually for SVP evaluations and related activities.

The state also incurs additional costs to reimburse local governments for the legal proceedings for the SVP commitments, and for subsequent legal proceedings to determine whether these individuals should remain in a state hospital or be released to the community.

Governor's Budget Proposal

Indeterminate SVP Commitments. The Governor's 2004-05 budget proposes to modify state law to eliminate the present requirement that SVP commitments be renewed every two years. Rather, commitments could be made by the courts for an indeterminate period of time. Persons who had been committed as an SVP would be released upon a determination by a court that their mental condition had so improved that it would be appropriate for them to be placed in the community. (The administration proposes , as under current law, that a person confined as an SVP would continue to have the right to petition the courts once each year for his/her release from a state hospital.)

The administration estimates that this change in law would significantly reduce the number of recommitment evaluations that would have to be conducted by DMH-paid evaluators. Also, eliminating the two-year recommitment process would reduce the cost to the state for testimony in local legal proceedings, and reduce future claims by local governments for reimbursement of their costs for their role in the process. We are advised by DMH that, of the 13 states with SVP statutes, California is the only state with a determinate commitment period. The department has indicated that all other states provide for indefinite initial commitments of SVPs.

Although the budget of DMH was reduced by $2 million to reflect the effect of these changes in the budget year, the department subsequently has documented a slightly smaller reduction in costs of about $1.9 million.

Funding Request for Workload Increase. Partly offsetting this proposed reduction in DMH funding is a budget proposal to increase by about $1.1 million the General Fund resources available for SVP evaluations. The administration cites as justification, among other factors, historical data it has compiled indicating an increasing trend in the number of BPT referrals of SVP cases to DMH, as well as an increasing trend in the number of cases subsequently screened by DMH and assigned to its evaluators.

However, more recent caseload data we have reviewed does not justify the administration request. Data available through the end of calendar year 2003 indicates that the number of BPT referrals, as well as the number of SVP cases being referred to evaluators, is declining, not increasing. If current trends continue, the number of SVP evaluations could stay level or even decrease in the budget year. This data is summarized in Figure 1.

Figure 1

SVP Referrals and Assignments of
Evaluations Are Declining





Percentage Change

Referrals of SVP cases from BPT




Cases referred for evaluation




Analyst's Recommendation

Because the most recent caseload data available to us at the time this analysis was prepared does not support the budget projection of increasing workload for SVP evaluations, we recommend that the Legislature reject the $1.1 million augmentation proposed by the administration for these activities. We will monitor the trend and, if necessary, recommend any necessary further actions in regard to the budget for SVP evaluations at the time of the May Revision.

We view the Governor's proposal to modify state law to remove the present legal requirement that recommitment evaluations automatically occur every two years for SVP cases as an important policy matter for the Legislature to decide. We would note that, under the administration's approach, a person confined as an SVP would continue to have the right to petition each year for his/her release.

If the Legislature does choose to approve the Governor's proposal to eliminate every two-year redetermination of SVP commitments, we would recommend a minor modification. Since DMH has documented savings of about $1.9 million related to this proposal, we recommend that this slightly smaller reduction amount be adopted by the Legislature. Together with our recommendation on the evaluation caseload request, such an action would result in a net reduction of $1 million in General Fund expenditures for 2004-05 relative to the amount of funding provided in the Governor's budget plan.

Budget Includes Beds Missing From CDC Budget

The Governor's budget plan includes a $2 million increase in reimbursements to the Department of Mental Health (DMH) from the California Department of Corrections (CDC) to purchase additional state hospital beds at Atascadero. However, the General Fund resources needed for CDC to purchase these beds have not been included in CDC's 2004-05 budget request. Without prejudice to the possible merit of this proposal, we recommend that this expenditure authority be deleted from the DMH budget until such time as these resources are added to the spending plan for CDC.

Governor's Proposal. The DMH budget plan requests $2 million in reimbursement expenditure authority to reflect a proposal by CDC to contract for an additional 25 acute psychiatric beds at the Atascadero State Hospital. However, the 2004-05 CDC budget request does not include funding for these additional beds. The administration has indicated that this funding for CDC may be requested at the time of the May Revision.

Analyst's Recommendation. Without prejudice to the possible merit of allowing CDC to obtain additional beds in the DMH hospital system, we recommend that the DMH expenditure authority be deleted because it will not be needed if these resources are not included in the CDC budget for 2004-05. If such a request for General Fund spending is presented by the administration at the time of the May Revision, and if the Legislature determines that the request is justified, reimbursement authority for this purpose could be restored to the DMH budget at that time.

Community Program Issues

EPSDT Costs Still Soaring, but Some Progress in Sight  

The Governor's budget plan proposes a significant increase in funding for the Early and Periodic Screening, Diagnosis and Treatment (EPSDT) specialty mental health services for children and young adults as well as multiple measures to contain the growth in expenditures of the program. Our analysis indicates that, while the program is still growing significantly, recent efforts to slow the growth in EPSDT expenditures appear to be having some effect. We recommend approval of further efforts to contain program costs by (1) adjusting provider rate limits to better reflect the actual cost of delivering EPSDT services, (2) increasing accountability and oversight through additional auditing of program expenditures, and (3) developing a request for a federal waiver to tighten the definition of what services must be provided by the state.


State Provides Broad Range of EPSDT Services. The EPSDT, a federally mandated program, requires states to provide a broad range of screening, diagnosis, and medically necessary treatment services to Medi-Cal beneficiaries under age 21, even if the treatment is an optional service under a state's Medicaid plan. The requirements apply to mental health as well as physical health.

Historically, the state's expenditures for EPSDT mental health services have grown dramatically—as much as 30 percent annually. In an attempt to slow this growth, state program rules were changed to require counties to be financially responsible for a 10 percent share of the nonfederal cost of program growth. Previously, they were obligated to provide a base level of funding, but bore no share of the cost of the growth of the program. In addition, the Legislature adopted statutory language in 2002-03 directing DMH to assist counties in implementing managed care principles that would help slow the growth in the program.

Governor's Proposed Budget for EPSDT

Increased Funding, but Additional Measures to Reduce Costs. The EPSDT specialty mental health services are budgeted within the DHS budget, and are budgeted as reimbursements in the DMH budget. These services are supported with General Fund and federal funds. As has been the case since the inception of the program, the Governor's spending plan again proposes significant increases in state spending for EPSDT specialty mental health services.

Due mainly to technical adjustments we will discuss in more detail later, the actual amount of state spending for EPSDT specialty mental health services in the current year will be significantly less than the amount appropriated in the 2003-04 Budget Act. The initial budgeted level was about $370 million from the General Fund, but this would be adjusted to $254 million under the Governor's budget plan, primarily to reflect a technical shift made in 2003-04 from accrual to cash accounting.

State support for EPSDT specialty mental health services would grow to $365 million in 2004-05 under the Governor's budget proposal, an increase of almost $112 million or 44 percent. This spending level takes into account some significant technical adjustments, but also results from continued increases in caseload and costs in the program. The proposed budget for 2004-05 also reflects anticipated savings from two proposals that are intended to slow the growth of EPSDT expenditures.

Various Adjustments Distort Actual EPSDT Program Growth. A straight comparison of the projected current year and budget year expenditures suggests that program expenditures would grow by 44 percent in one year. However, various technical adjustments to the budget totals create a somewhat misleading picture of how EPSDT expenditures are changing.

The 2003-04 Budget Act and related legislation shifted the Medi-Cal Program from accrual to cash basis of accounting. The Governor's budget plan would adjust the 2003-04 spending level for EPSDT to put the program on the same accounting basis as the rest of the Medi-Cal Program. This technical change has the effect, on a one-time basis, of reducing the budget for the program in the current year, and making the amount of funding provided for EPSDT services in the budget year look dramatically larger.

Additionally, the 2004-05 budget reflects a change in the share of costs of the Medi-Cal Program that is supported by the federal government. In 2003-04, a congressional fiscal relief package for the states bumped up the share of costs borne by the federal government for Medicaid. This had the effect of reducing the state cost of EPSDT services in the current year. However, the federal relief package is scheduled to expire at the end of 2003-04. The Governor's budget plan takes into account that the state share of EPSDT program costs will increase in 2004-05 from the current 50 percent to 53.3 percent. This also has the effect of inflating the 2004-05 spending level for EPSDT services.

Absent these changes, the actual program growth would still be significant, about 22 percent, but not nearly as large as the nominal change in the budgeted amounts of 44 percent. Figure 2 shows how state expenditures for EPSDT services would grow if the spending figures were adjusted to exclude the effects of the accounting shifts and the change in the federal share of costs for the program. 

Figure 2

Adjusted EPSDT Funding Growth
Less Dramatic Than Budget Figures

(In Millions)


General Fund Budget

Percentage Change



Budget Act amounts




Actual program spending after adjustmentsa





a  Figures adjusted to (1) compare fiscal years on an accrual basis and (2) to hold federal share of program costs constant.

Governor's Proposals for Reducing EPSDT Costs

The Governor's budget plan includes three proposals to reduce costs in the EPSDT program by (1) adjusting ("re-basing") provider rate limits to better reflect the actual cost of delivering EPSDT services, (2) increasing accountability and oversight through additional auditing of program expenditures, and (3) tightening the definition of what services must be provided by the state

Re-Basing Provider Rate Limits. The budget plan includes a reduction of $40 million in General Fund support (a $60 million reduction in all fund sources) from updating provider rates for EPSDT and other mental health services to correspond with current information about the actual cost of providing these services (a process referred to as re-basing). Based on its initial review of more current cost reports, the administration expects that re-basing would reduce the rate limits for all services.

If the Legislature considers approving the administration's estimated $40 million in General Fund savings from re-basing statewide maximum provider rates, it should recognize that there are some risks associated with this estimate. Currently, the maximum rates established for EPSDT and other mental health services provided by the counties are based on cost information dating back to 1989-90, which has been adjusted for inflation. The state was to have updated these rates at least every three years by using more current cost information, but has not done so.

The administration is proposing that the statewide rates be re-based for the first time since 1993. Its estimate of $40 million in state savings is based on a preliminary analysis of 2001-02 cost reports. The actual magnitude of the savings, however, is uncertain and will not be known until a consultant to be retained by DMH has completed extensive re-basing calculations.

Additional Auditing. Additionally, the administration's budget plan assumes that the state will achieve savings of $6.4 million for the General Fund ($13 million all funds) from conducting additional audits of counties and their contractors who provide mental health services. The budget plan requests an augmentation of $844,000 in state funds ($1.7 million all funds) for this monitoring and oversight activity.

Waiver Proposal. The budget plan also proposes to undertake efforts that are intended to result in additional state savings on EPSDT services beginning in 2005-06. About $236,000 in state funds ($472,000 all funds) is requested for additional DMH staff and contract services to develop an application to the federal government for a waiver of federal requirements for EPSDT services. The waiver would not seek to end the provision of such services overall, but would instead allow the state to establish a more formal definition of which EPSDT services were "medically necessary" and therefore necessary to provide to eligible Medi-Cal beneficiaries. Absent such a definition, the administration has indicated, the state is subject to a more vague standard of having to provide any services that "ameliorate" the medical condition of someone with a mental health condition.

Thus far, the administration has not indicated specifically how it would use this more narrow definition of medical necessity to modify the existing EPSDT services to achieve state savings. The administration has proposed that the effort to reform EPSDT be part of a larger federal waiver request to achieve savings in the Medi-Cal Program.

Additional EPSDT Cost-Reduction Efforts Warrant Consideration

Slowing of Expenditures Suggests Progress, but More Effort Needed. Our analysis indicates that the existing cost containment measures have curbed some of the EPSDT expenditure growth. As can be seen in Figure 3, the rate of growth of state expenditures for EPSDT peaked several years ago and has since begun to decline. This decline suggests that the state is making some progress at containing EPSDT expenditures. However, the total cost of the program continues to grow, as can be seen in Figure 4. Under the Governor's 2004-05 budget proposal, total spending for EPSDT services would surpass $1 billion once all funding sources for the program have been taken into account. 


Analyst's Recommendation

We concur with the administration's current estimates of EPSDT expenditures, and recognize that they will be updated by the administration at the time of the May Revision. Given the continuing growth in the cost of EPSDT services, we concur with the administration's request for additional staff and contract funding to initiate steps to rebase provider rates in line with current actual costs, to audit county and contract providers, and pursue a federal waiver to tighten the definition of what services must be provided.

These measures, in our view, would (1) ensure that provider rate limits better reflect actual costs, (2) provide stronger accountability and oversight of EPSDT expenditures at the local level, and (3) promote a more cost-efficient use of state resources only for medically necessary treatment and services.

Additional Federal Funds and State Savings Possible Through Provider Fee Mechanism

The Governor's budget plan proposes a "quality improvement assessment fee" on Medi-Cal managed care health plans to enable the state to draw down additional federal funds for support of the program. We recommend the Legislature explore the feasibility of establishing such fees for mental health managed care plans to draw down additional federal funds, result in a net financial gain of up to $70 million annually for the state, and provide as much as $23 million in additional funding for mental health care programs.

We discuss our proposal to assess a "quality improvement fee" for mental health managed care plans in the "Crosscutting Issues" section of this chapter.

Return to Health and Social Services Table of Contents, 2004-05 Budget Analysis