LAO 2006-07 Budget Analysis: Health and Social Services

Analysis of the 2006-07 Budget Bill

Legislative Analyst's Office
February 2006

Public Health

The Department of Health Services (DHS) delivers a broad range of public health programs. Some of these programs complement and support the activities of local health agencies in controlling environmental hazards, preventing and controlling disease, and providing health services to populations who have special needs. Others are solely state-operated programs, such as those that license health facilities.

The Governor’s budget proposes about $2 billion in local assistance from all funds for public health programs in the budget year, about the same level of funding provided in the current year. Total proposed expenditures in the budget year include $392 million from the General Fund, a 3 percent ($11 million) increase from the revised current-year level of spending. This increase is largely due to the administration’s proposals for emergency preparedness, pandemic influenza, and other disease outbreaks.

Budget Proposals

The Governor’s proposed budget for public health programs includes the following significant changes:

Public Health Program Expenditures

Public Health Expenditure Information Unavailable

We recommend the adoption of trailer bill language (1) requesting the Bureau of State Audits to conduct an audit of the funding provided for various Department of Health Services (DHS) public health programs and (2) requiring the administration to include public health program expenditure information in the budget display because DHS is unable to provide the Legislature with detailed information about these expenditures on a timely and regular basis.

Governor’s Proposal. The Governor’s budget proposes aggregate expenditure information on certain major categories of public health local assistance funds administered by DHS. For example, the Governor’s plan indicates that about $822 million would be spent in the category of public health spending for public health services. However, DHS often operates dozens of specific subprograms within a single category of spending. For example, the Primary Care and Family Health Division’s Maternal, Child, and Adolescent Health Branch operates such subprograms as the Childhood Injury Prevention Program and the Oral Health Program.

Certain Budget Information Not Available. Detailed information on the actual past year, estimated current year, and proposed budget year level of spending for these subprograms is not now available to the Legislature in the Governor’s budget documents. We note that this information was previously available in these budget documents. We are concerned that, for at least the last several years, DHS has been unable to produce an accurate and comprehensive list of the funding allocated for these public health programs for the Legislature despite past and recent requests that they do so. While the department has, on occasion, been able to respond to legislative inquiries for this type of information with regard to a specific particular subprogram, it has been unable to provide a comprehensive lists of subprograms, and their associated expenditures, for entire categories of public health spending. The DHS has indicated that it cannot do so due to limited staff resources and competing workload.

This situation raises two significant concerns. First, this lack of timely and regular information about DHS subprograms undermines the ability of the Legislature to provide policy and fiscal guidance and oversight of these funds, which amount to hundreds of millions of dollars annually. Second, and of equal concern, DHS’ fiscal managers are not routinely collecting and using such information themselves on an ongoing basis to provide appropriate fiscal management of the department’s array of public health subprograms. If DHS administrators do not routinely track how much is being spent by various other branches of the department for these various subprograms, it raises a question as to whether they can exercise appropriate fiscal controls over these activities, let alone determine the appropriate amount of funding to request in the DHS budget for the broader categories of expenditures.

Analyst’s Recommendations. Given the potential concerns over executive branch and legislative oversight of DHS’ array of public health subprograms, we recommend that the Legislature request the Bureau of State Audits to conduct an audit to identify the actual past year, estimated current year, and proposed budget year expenditures for DHS’ various public health subprograms. The audit should also evaluate whether these expenditures are now subject to appropriate fiscal controls by DHS.

We also recommend that the administration annually provide actual past year, estimated current year, and proposed budget year expenditures for DHS’ various public health subprograms to the Legislature in the annual budget documents.

Women, Infants, and Children Program Could Face Major Penalties

The state faces a risk of as much as tens of millions of dollars in penalties for paying vendors more than permitted under federal limits in the Women, Infants, and Children (WIC) nutrition program. We recommend that the Department of Health Services report at budget hearings on the status of federal enforcement actions related to this issue and the implications of this situation for the state budget and the WIC program.

Background. The Women, Infants, and Children (WIC) program is a nutrition program that helps pregnant women, new mothers, and young children eat well and stay healthy. Program recipients receive food checks that are valid for items such as milk, eggs, and baby formula. These food checks are redeemed at retail vendors. The vendors are reimbursed by the state for the costs of the foods. About $1.2 billion ($936 million in federal funds and $297 million in special funds) is proposed for support of the program in 2006-07.

More than 3,600 vendors participate in California’s WIC program. These vendors include almost 700 vendors that receive more than one-half of their annual food sales revenues from sales to WIC customers. (These are referred to as “above 50 percent vendors” and often include vendors that sell WIC-only food and vendors that are located near WIC offices.) Another 2,900 “regular vendors” receive a lesser amount of their revenue from sales to WIC customers.

A new federal law requires states to ensure that reimbursement levels for above 50 percent vendors do not result in higher food costs than if WIC participants shopped at regular vendors. States are required to compare the average cost of payments for each type of food provided under WIC for the above 50 percent vendors and the regular vendors.

States are required to make these comparisons of costs on an ongoing basis and to make any adjustments to reimbursement levels that are needed to comply with the federal payment limits. States are subject to federal claims for recovery of any excessive payments made to vendors. At the time this analysis was prepared, legal challenges filed by above 50 percent vendors intended to block the enforcement of these new federal provisions were pending.

California at Risk of Being Penalized. California authorities have compared payments to regular vendors and the above 50 percent vendors and determined that the WIC program has been spending about $4 million more per month than permitted under federal limits that became effective December 31, 2005. Thus, if the overpayments continued the state faces the risk of federal penalties that could amount to tens of millions of dollars. At this point, it appears that the General Fund or potentially the WIC Food Manufacturer Rebate Fund could be used to pay such a penalty. (The federal government has not yet issued written clarification regarding what sources of funding states would be permitted to use to pay such penalties.) If the rebate fund were used to fully pay such penalties, it would reduce the amount of funding available for nutritional assistance.

We note that since 2000 DHS has been working on developing new state regulations for authorizing and reimbursing vendors in recognition of the differences in business practices and costs among regular vendors and above 50 percent vendors. However, the above 50 percent vendors have strongly objected to the draft regulations. The DHS is now working to address the concerns with the draft regulations.

Analyst’s Recommendations. Given the risk to the state of these federal penalties, we recommend that DHS report at budget hearings on the status of any pending litigation and federal enforcement actions related to this issue and the implications of this situation for the state budget and the operation of the WIC program.

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