LAO 2005-06 Budget Analysis: General Government

Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005

Managed Risk Medical Insurance Board (4280)

The Managed Risk Medical Insurance Board (MRMIB) administers several programs designed to provide health care coverage to adults and children. The Major Risk Medical Insurance Program (MRMIP) provides health insurance to California residents unable to obtain it for themselves or their families because of pre-existing medical conditions. The Access for Infants and Mothers (AIM) program currently provides coverage for pregnant women and their infants whose family incomes are between 200 percent and 300 percent of the federal poverty level (FPL). The Healthy Families Program provides health coverage for uninsured children in families with incomes up to 250 percent of the FPL who are not eligible for Medi-Cal and, beginning this year, provides health coverage for certain uninsured infants born to AIM mothers.

The MRMIB also administers the County Health Initiative Matching Fund (CHIM), a program established as a component of Healthy Families pursuant to Chapter 648, Statutes of 2001 (AB 495, Diaz). Under CHIM, counties, County Organized Health System managed care health plans and certain other locally established health programs are authorized to use county funds as a match to draw down federal funding to purchase health coverage for children in families with incomes between 250 percent and 300 percent of the FPL. No state funds are used to support CHIM.

Budget Proposal. The budget proposes $1 billion from all fund sources ($356 million from the General Fund) for support of MRMIB programs in 2005-06, which is an increase of $66 million from all fund sources ($30 million from the General Fund) or about 7 percent over estimated current-year expenditures. This increase is due primarily to projected caseload growth in the Healthy Families Program, in part resulting from the shift of certain AIM infants to the Healthy Families Program, and the administration's proposals to enhance education and outreach activities in the Healthy Families Program and Medi-Cal.

The Governor's budget plan includes the following significant changes to MRMIB programs:

Healthy Families Program


Expanded Health Coverage for Low-Income Children. The federal government authorizes states to expand health care coverage for children under the State Children's Health Insurance Program (SCHIP) and provides states with an enhanced federal match as a financial incentive to cover children in families with incomes above the previous limits of their Medicaid programs. Funding for SCHIP generally is available to states on a two-to-one federal/state matching basis.

California utilizes its SCHIP funding to support the Healthy Families Program. Through this program, children in families earning up to 250 percent (and in select cases up to 300 percent) of the FPL receive comprehensive health care coverage that includes dental, vision, and basic mental health care benefits. Families pay a relatively low monthly premium and can choose from a selection of managed care plans for their children. This program is administered by MRMIB. (We provide more information regarding this program in our Analysis of the 2004-05 Budget Bill, page C-145.)

The Budget Proposal. As shown in Figure 1, the January budget proposes $903 million (all funds) in Healthy Families Program expenditures in the budget year. This is an increase of about 11 percent over estimated current-year expenditures. The budget proposes $328 million in General Fund support for the Healthy Families Program, a $34 million increase above the current-year level. The increase in General Fund expenditures is primarily due to growth in caseload, staff augmentations, and the administration's proposals to restore outreach and education efforts in the program.

Figure 1

Managed Risk Medical Insurance Board
Healthy Families Program Expenditures

(Dollars in Millions)





Budget Act



From Revised

Local assistance






State operations












General Fund






Proposition 99





Federal funds












a  Detail may not total due to rounding.

Access for Infants and Mothers


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

In accordance with statutory budget language adopted in the 2003-04 Budget Act, infants born to AIM mothers who enroll in the program after July 1, 2004 are now enrolled in the Healthy Families Program at birth, while the mothers will remain covered through the AIM program. Over time, this shift of new AIM infants into the Healthy Families Program will result in an AIM program consisting only of mothers. (We provide more information regarding the program in our 2004-05 Analysis, page C-158)

Governor's Proposal

Significant Fund Shifts and Decrease in Spending. As summarized in Figure 2, the Governor's budget proposes about $101 million from all funds (including approximately $29 million from the General Fund and $19 million in Proposition 99 funds) for the AIM program. This is a significant decrease in total spending of $23.4 million (or 19 percent) from 2004-05 due primarily to the redirection of infants to the Healthy Families Program. Under the Governor's budget proposal, the AIM program would be more heavily financed with state General Fund and federal resources in the current and budget years. (We provide more information regarding these fund shifts in the "Crosscutting Issues" section of this chapter.)

Figure 2

Access for Infants and Mothers
Program Budget Summary

(Dollars in Millions)






Perinatal Insurance Fund (Proposition 99)





General Fund





Federal funds










    Detail may not total due to rounding.

Caseload Shifts. In accordance with the recent changes in statute, the Governor's budget reflects the discontinuation of AIM coverage of infants who are redirected to coverage under the Healthy Families Program. Figure 3 summarizes the impact this new law is projected to have on AIM caseloads in the budget year.

Figure 3

Access for Infants and Mothers
Caseload Summary

Projected Total Enrollment








First-year infants




Second-year infants








While caseloads for women are expected to increase by 10 percent in 2005-06, the number of infants in their first year of AIM coverage is projected to decline by 87 percent. This dramatic decline is due to the shift of newborns from coverage in AIM to the Healthy Families Program. Infants of mothers who were enrolled before the change took effect will remain in AIM as long as they are eligible. However, as Figure 3 also shows, the number of these infants is also declining. The MRMIB indicates that the infant caseload in the AIM program will be gone by the end of December 2006, as the children reach age two and are automatically disenrolled from the AIM program.

MRMIB—State Operations

Mixed Signals From Administration, Staff Requests Must Be Clarified

The administration is sending mixed signals with regard to its requests for administrative support for the Managed Risk Medical Insurance Board that should be clarified before the Legislature considers its request for additional staff. Pending that clarification, we recommend the Legislature reject this proposal. (Reduce Item 4280-0001-0001 by $775,000 and Item 4280-001-0890 by $1,440,000.)

Governor's Proposal. The Governor's budget includes a request for an additional 24.5 positions and $2.2 million in funding ($775,000 from the General Fund) to enable MRMIB to enhance its oversight of the administrative contractor for the Healthy Families Program and AIM, to improve the customer services provided under its health insurance programs and provide general administration support of MRMIB. These additional support resources, we are advised, would be used for four distinct types of activities: (1) contract and fiscal management of program expenditures, (2) application and enrollee complaints and appeals, (3) onsite coordination and monitoring of the administrative vendor contract, and (4) executive management activities. In general, this proposal would restore positions that had been reduced from the MRMIB in recent fiscal years as part of statewide efforts to reduce the cost of state operations, as well as provide additional department staff to enhance its operations.

In addition to this and other program augmentations, the budget plan also proposes an unallocated reduction in MRMIB's state operations budget of $937,000 (all funds).

Assessing the Governor's Proposal. During the current year, the board experienced a number of budget and administrative changes, which have led to increased workload and turnover among staff at the board. For example, the board encountered a number of problems during its transition to its new administrative vendor that handles the eligibility and enrollment functions for the AIM and Healthy Families programs. Previous budget actions had eliminated funding for application assistance. This, in turn, had the effect of increasing the number of denied applications and appeals of such denials that are handled by MRMIB staff. The administration's lifting of a statewide hiring freeze resulted in the departure of a number of MRMIB staff to other state departments.

However, some of this increase in workload appears to be temporary. For example, our analysis indicates that the upswing in appeals is beginning to level off. As seen in Figure 4, the percentage increase in appeal requests spiked during two quarters of the current year, but now appears to be in line with previous trends.

The MRMIB has indicated that the unallocated reduction proposed for 2005-06 represents the equivalent of eliminating 13 staff positions. At the time this analysis was prepared, MRMIB was unable to identify exactly how it would achieve this reduction but indicated that the unallocated reductions would likely come out of its proposed staffing.

Analyst's Recommendations. While we acknowledge that the department has experienced an increase in workload as a result of recent budget and administrative changes, the administration is sending mixed signals with regard to its staffing requirements that should be clarified before the Legislature considers its staffing proposal. The administration has requested legislative approval for 24.5 positions, but at the same time has indicated that if the Governor's budget plan was approved it would reduce this request—in some unknown way—later in the fiscal year.

In our view, it is not appropriate for the administration to request position authority and funding for management positions it indicates that it may not fill. Coupled with the proposal for an unallocated reduction, this proposed approach to budgeting undermines legislative oversight. Once the Legislature granted the MRMIB augmentation, the administration would later determine, at its own discretion, which additional positions and funding would be deleted. For these reasons, we recommend the Legislature reject this request for a staffing augmentation.

Major Risk Medical Insurance Program


The MRMIP provides comprehensive health coverage for Californians who are generally unable to obtain coverage in the individual insurance market or are able to obtain insurance only at a high cost. Typically, these individuals are considered by insurers to be high-risk since they have so-called "pre-existing medical conditions"—that is, conditions that were treated or diagnosed by a doctor prior to the individual's enrollment in health insurance. While other state programs directly purchase health insurance coverage for individuals, MRMIP reimburses insurers when individuals incur high medical costs that exceed the regular health coverage provided to them by that insurer.

Limited Spending Led to Waiting Lists. Historically, the state has provided a set appropriation of $40 million each year from Proposition 99 tobacco tax revenues to fund health care coverage for this particular population. The Proposition 99 funds are transferred to the Major Risk Medical Insurance Fund, the source of support for the state's high-risk insurance program.

Given the state's practice of budgeting a fixed amount of funding each year, the number of individuals enrolled in the program at any given time has been capped in order to remain within the available appropriation. Historically, MRMIP has experienced lengthy waiting lists.

In 2002, the state enacted Chapter 794, Statutes of 2002 (AB 1401, Thomson), which, among other changes, limited the length of time individuals could be enrolled in MRMIP to 36 months. Chapter 794 also required private health plans and insurers to offer guaranteed coverage in the private market to individuals after they reached this time limit. These changes were implemented on a pilot basis and are in effect until September 2007. As a result of these changes, the department now uses its $40 million appropriation both to subsidize health care coverage for individuals enrolled in MRMIP and those enrolled in the guaranteed private coverage. These policy changes enabled everyone on the waiting list to enroll in the program (after fulfilling a standard three-month waiting period).

Governor's Budget Proposal. The Governor's 2005-06 budget plan includes the customary $40 million in Proposition 99 funding through the Major Risk Medical Insurance Fund for MRMIP. The budget plan also sets aside a reserve in the Major Risk Medical Insurance Fund to ensure the program has sufficient revenues to cover any unanticipated operating expenses. Under the 2005-06 budget plan, the reserve would total $20.2 million, an amount roughly equal to 50 percent of the program expenditures annually supported by the fund.

Cost Uncertainties in MRMIP

In light of uncertainties surrounding program expenditures in the Major Risk Medical Insurance Program, we recommend the Legislature direct the Managed Risk Medical Insurance Board (MRMIB) to provide updated caseload and expenditure estimates for the current and budget years in May. Additionally, given the recent significant changes to the program, we recommend MRMIB be directed by statute to submit a detailed estimate of caseload and program spending to the Legislature in January and May of each year.

Caseload Lower Than Anticipated in the Current Year. Based on our review of caseload data through October 2004, we estimate that the average number of individuals enrolled in MRMIP in the current year will total 9,779—about 940 below the department's estimate. Moreover, the number of individuals enrolling in private coverage after they "timed out" of public coverage is also lower than anticipated. Overall, the department is subsidizing fewer persons than expected in the current year. Caseload trends do suggest that the program will reach its enrollment cap early in the budget year, and thus the entire $40 million proposed in the budget plan for continuation of the program will probably be needed.

Data Limitations Prevent Analysis of Actual Program Expenditures. In April 2004, the department encountered data issues, partially caused by significant caseload changes resulting from Chapter 794, which limited its ability to project MRMIP expenditures. The department has indicated that it expects to resolve these issues by this spring.

Analyst's Recommendation. Although current caseload trends indicate that the department is serving fewer high-risk individuals than originally anticipated, data limitations prevent us from definitively calculating the estimated savings at this time. Accordingly, we recommend the Legislature direct the department to provide updated caseload and expenditure estimates for the current and budget years at the time of the May Revision.

Furthermore, the recent significant programmatic changes that are occurring in the program warrant a closer and regular review by the Legislature of fluctuations in caseload and program spending. For this reason, we recommend MRMIB be directed by statute to submit to the Legislature a detailed estimate of caseload and program expenditures each January, as part of the department's budget plan, and again at the time of the May Revision. It is our understanding that this information is already compiled twice per year by the department and easily could be incorporated into the budget information MRMIB currently provides to the Legislature regarding its other programs.

Reserve Requirement Unnecessary

We recommend the Legislature repeal the statutory requirement that the Managed Risk Medical Insurance Board maintain a separate state reserve fund for the state's program to help persons who have trouble obtaining private health insurance coverage. It should also repeal a state law that authorizes unspent funds be carried forward to the succeeding fiscal year. We further recommend the Legislature redirect the $18.2 million in Proposition 99 funding made available through these actions to other Proposition 99 programs in a way that would result in an equivalent amount of savings to the state General Fund and increase the Proposition 99 reserve by $2 million.

State Law Mandates a Reserve and Authorizes Unspent Funds to be Carried Forward. State law requires MRMIB to maintain a reserve in the Major Risk Medical Insurance Fund (which consists of Proposition 99 revenues) that is sufficient to "prudently operate" MRMIP. However, the level of this reserve is not specified by law. Additionally, state law specifies that unspent monies in the fund may be carried into the next fiscal year.

Historically, the Major Risk Medical Insurance Fund has maintained a fund balance ranging between 0.2 percent and 61 percent of program expenditures supported by the fund. Generally, this reserve consists of unspent funds rolled over from prior years. Our analysis indicates that this reserve has not been tapped to help support the program since 2000-01. As seen in Figure 5, the total resources available for the support of MRMIP (the top line in the chart) have exceeded the program's expenditures for the past five years, resulting in a significant ongoing reserve due in part to the policy changes made pursuant to Chapter 794.

The administration has indicated that the reserve is needed because of the uncertainties associated with the recent implementation of Chapter 794 and the possibility of programmatic changes after the pilot expires in 2007. However, our analysis indicates that there is currently no need for a separate and special reserve fund for MRMIP. In the event that MRMIP program expenditures exceeded the 2005-06 budgeted amount, an alternative source of funding is available to fund unanticipated expenses. Specifically, a separate reserve is maintained for state programs funded through Proposition 99. The Governor's 2005-06 budget plan proposes to set aside $16.7 million for the Proposition 99 reserve.

Analyst's Recommendation. In light of the state's fiscal difficulties, and the availability of the Proposition 99 reserve for any deficiencies for the support of MRMIP, we recommend the Legislature repeal the state law requiring a separate Major Risk Medical Insurance Fund reserve, as well as the state law that authorizes unspent funds to carry forward to the succeeding fiscal year. This action would free up as much as $20.2 million in Proposition 99 savings on a one-time basis.

We would also recommend that the Legislature redirect part of the savings from the elimination of the separate MRMIP reserve fund to augment the Proposition 99 reserve to reflect the additional potential risk of a MRMIP deficiency. The department has indicated that it had customarily set aside a prudent reserve of 2 percent of program expenditures. In light of the uncertainties surrounding the recent implementation of Chapter 794, we believe augmenting the Proposition 99 reserve by 5 percent, or $2 million, would provide a prudent reserve for the budget year. This would leave $18 million in Proposition 99 savings that could be used in coordination with other state health programs to achieve General Fund savings. For instance, the Legislature could consider utilizing Proposition 99 funds in lieu of General Fund resources for particular activities that are consistent with the specified uses of Proposition 99.

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