LAO 2005-06 Budget Analysis: General Government

Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005

Accessing Federal Funds For Prenatal Services

We recommend that the Legislature approve the administration's proposal to draw down federal funds to offset state costs for prenatal services. We also examine the feasibility of expanding this option to include an offset of state costs for prenatal services provided to incarcerated women. We further recommend the enactment of legislation to phase out the Access for Infants and Mothers program and instead provide health coverage for low-income pregnant women in the Healthy Families Program.

Federal Options Open the Door for State Savings

In our Analysis of the 2004-05 Budget Bill, we discussed how the state could obtain federal funds to partially offset the state's costs for providing prenatal services for poor and pregnant women enrolled in the Access for Infants and Mothers (AIM) and the Medi-Cal programs. In September 2002, the Bush administration issued a regulation that permits states to utilize funding available to the state under the federal State Children's Health Insurance Program (SCHIP) to provide coverage to unborn children (and their mothers) in low-income families. As of January 2005, seven states (specifically, Michigan, Washington, Massachusetts, Rhode Island, Minnesota, Illinois, and Arkansas) had received federal approval under this option to expand their states' SCHIP-funded insurance programs to include pregnant women and unborn children. These states have accessed SCHIP funds to offset the cost of prenatal services provided to undocumented immigrants, incarcerated pregnant women, and other low-income pregnant women who would otherwise be ineligible for participation in federally funded programs.

Prenatal Services Now Largely Supported by General Fund. Currently, the state largely bears the cost of providing prenatal services to pregnant women in two state health programs as well as through state prison institutions. Through AIM, certain low- to moderate-income women receive comprehensive health care throughout their pregnancy, delivery, and 60 days after delivery. The prenatal services available through this program are primarily supported with tobacco tax revenue generated under Proposition 99. Through Medi-Cal, undocumented immigrants receive prenatal, delivery, and post partum services. The prenatal and post partum services provided to these undocumented women are entirely supported with General Fund resources. Lastly, in the state prisons, incarcerated pregnant women receive prenatal and comprehensive health care services either from prison medical employees or from a contracted health care provider entirely supported by the state General Fund.

Governor's Proposal

The Governor's budget plan proposes that the state claim SCHIP funds for certain prenatal services currently provided through AIM and Medi-Cal in order to achieve net state savings of approximately $287 million in the current and budget years combined. The details of the administration's proposal and its impact on the General Fund, Proposition 99, and the state's receipt of federal funds are described below and summarized in Figure 1.

Figure 1

Funding for Prenatal Services

(In Millions)


Current Policy


Governor’s Proposal


Two-Year Impact










Medi-Cal Prenatal Services









General Fund








Federal SCHIP funds






AIM Prenatal Services









Proposition 99






General Fund






Federal SCHIP funds















a    Detail may not total due to rounding.

Proposed Fund Shift for AIM. In the budget year, in lieu of using Proposition 99 funds to support the AIM program, the state would utilize $27 million from the General Fund to draw down $51 million in SCHIP funds for support of the program. This funding switch has been proposed because state law prohibits the use of Proposition 99 funds to leverage federal resources. As seen in Figure 1, by shifting the AIM program to the General Fund, the state would free up approximately $78 million in Proposition 99 funds that could otherwise be used for other purposes. A similar shift is proposed for the current year. (We describe this and other related shifts in funding in the "Proposition 99 Funding Shifts" section of this chapter.

Proposed Fund Shift for Medi-Cal. Also in the budget year, the administration proposes using approximately $51 million in General Fund resources to draw down $96 million in SCHIP funds for prenatal services provided to undocumented immigrants through Medi-Cal. This results in a corresponding General Fund savings of $96 million. (Absent this change, the state would most likely cover the entire cost of these services with General Fund resources.) A similar shift is proposed for the current year. However, the combined effect of the current- and budget-year shifts, which total $191 million in savings to the state, is entirely reflected in the budget year.

Assessing the Governor's Proposal

The federal rules authorizing states to use federal SCHIP funds to provide coverage to unborn children present a substantial opportunity for the state to leverage federal resources for prenatal services that up until now were entirely supported by state resources. However, during our review of this proposal, we have identified additional issues and opportunities for state savings that the Legislature may wish to consider. We discuss these issues below.

Savings Would Be Less in Future Years. The administration is proposing to draw down federal funds to offset General Fund costs in Medi-Cal in the current and budget years. However, the budget plan reflects the entire $191 million in savings from both fiscal years in just the budget year. As a result, we would note that the savings achieved in future fiscal years from this funding shift in Medi-Cal would be roughly one-half of the amount estimated for the budget year. We estimate that the Medi-Cal savings in 2006-07 from this proposal would drop to approximately $96 million.

Total Savings May Be Overstated. Our analysis indicates that the administration has a reasonable basis for assuming the level of savings that would result from the proposed shift to SCHIP. However, the Legislature should be aware that there is some risk that federal authorities would interpret their rules in a way that would result in a lesser, although still significant, level of savings for the state.

Specifically, the Governor's proposal assumes that the state would be able to draw down federal funds for all health care services currently provided to pregnant women in AIM and Medi-Cal, including post partum services provided after delivery. Our review of other state programs and federal guidelines indicates that the federal government has explicitly limited the use of SCHIP funds for pregnancy-related services. Nevertheless, federal authorities in some cases have allowed services to pregnant women to be paid for with SCHIP funds through a "bundled rate" that provides reimbursement for a number of different services, including post partum care. However, at least one state established a state-only component for post partum care because the federal government did not authorize its use of SCHIP funds for this purpose.

These conflicting interpretations of federal rules mean there remains some uncertainty about whether federal authorities will allow use of SCHIP funds for all of the expenses the state would claim under the Governor's proposal. As it develops its budget plan, the Legislature should bear in mind that the savings achieved from this proposal could be lower than expected. In this regard, the Legislature could take additional budgetary actions to offset any possible loss of state savings if federal authorities do not concur in the state's approach. We discuss one such action below.

Additional Opportunity for Savings. Our review of related developments in other states indicates that California may have an additional opportunity to leverage the SCHIP funds to cover prenatal services that are currently supported by the General Fund. Notably, Illinois is currently using its SCHIP funds to provide coverage for, among other groups, pregnant incarcerated women. In Illinois, pregnant incarcerated women can apply for health care coverage through the state's Medicaid program. The Illinois Department of Corrections submits the claims it receives from contract providers for prenatal services provided to these women to its Medicaid program, which are then used to draw down additional federal SCHIP funds.

We believe that the state could pursue a similar approach to offset health care costs provided to pregnant prison inmates residing in its correctional facilities. The California Department of Corrections (CDC) has indicated that it does not currently track the health care expenditures for pregnant inmates when services are provided by state medical staff. However, based on conversations with CDC, we estimate that expenditures for services provided by contract providers would be at least $420,000 in the budget year. If the state were to access SCHIP funds for prenatal services provided to this population, we believe it could achieve at least $270,000 in General Fund savings. The savings would most likely be significantly higher if the state also obtained federal funding for prenatal services provided by prison employees in the institutions.

In addition to achieving additional state savings, this approach could result in additional benefits. It might better ensure that the pregnant inmate has health care coverage in those instances where she is released from prison on parole prior to the delivery of her child. Under this proposal, the expectant mother would already be enrolled in public health care coverage before her release from state custody.

Opportunity for Program Consolidation. In the 2004-05 Analysis discussion of AIM, we proposed that AIM be phased out and consolidated with the Healthy Families Program. The administration's proposal to utilize federal SCHIP funds to cover prenatal services further bolsters the rationale, in our view, for a gradual phaseout of the AIM program and a shift of AIM mothers into the Healthy Families Program. There are several reasons to consider this change.

The AIM program will be serving fewer and fewer individuals in future years, in keeping with prior legislative decisions. By December 2006, AIM will only serve expectant mothers because recent policy changes shifted infants born to AIM mothers into the Healthy Families Program. When this shift is completed, only about 6,000 women (and no infants) will be left in a program that, as recently as June 2004, had a combined caseload of approximately 18,000 mothers and children.

We would note that such a consolidation should not be disruptive for the beneficiaries and the health plans. This is because the health insurance coverage provided to AIM mothers does not differ from the coverage currently provided in Healthy Families. The health plans participating in the Healthy Families Program already cover prenatal and post partum care for individuals enrolled in the program up to age 19. Lastly, the administration's proposal means that the state would be using the same fund source as the Healthy Families Program—SCHIP—to provide prenatal services to this population of expectant mothers. In view of the above, we believe the state could achieve significant administrative savings by folding a program with such a small and declining caseload into one such as Healthy Families that is much larger.

Policy Implications for Women's Access to Services. The administration has indicated that the intent of this proposal is to maximize federal funds, not to change who has access to pregnancy-related services or the scope of such services currently authorized under state law. Should the Legislature wish to formally record the intent of its decision to access federal SCHIP funds for prenatal services, it could consider adopting the following budget bill language for the AIM and Medi-Cal budget items:

Provision X. It is the intent of the Legislature that the state access additional federal State Children's Health Insurance Program funds to offset the state's cost of providing prenatal services provided under the Access for Infants and Mothers (AIM) and Medi-Cal programs. In so doing, it is not the intent of the Legislature to affect access of women to health services.

If the Legislature has any concerns about the policy implications of accessing SCHIP funds for the support of prenatal services, it may also wish to request a legal opinion from the Office of Legislative Counsel on this matter.

Analyst's Recommendation. We recommend that the Legislature approve the administration's proposal to draw down federal funds for prenatal services. We further recommend that the Legislature direct the administration to report at budget hearings regarding the feasibility, operational ramifications, and potential timetable for expanding this proposal to draw down federal funds for prenatal services provided to incarcerated women. In our view, this information would provide the Legislature with the guidance needed to determine whether the state could begin to achieve savings from the implementation of this change, as we believe possible, beginning in 2005-06.

Lastly, we recommend the enactment of legislation to phase out the AIM program and authorize the coverage of low-income pregnant women in the Healthy Families Program. Given (1) the impending decline in AIM caseload, (2) the similarities in services provided in each program, and (3) the administration's proposed use of similar funding sources for both programs, we believe that a shift of AIM mothers into the Healthy Families Program would result in programmatic efficiencies over time by combining the administrative responsibilities of two similar programs into one.

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