Analysis of the 2006-07 Budget Bill Legislative Analyst's Office February 2006

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 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 (HFP) provides health coverage for uninsured children in families with incomes generally up to 250 percent of the FPL who are not eligible for Medi-Cal and, beginning in July 2004, 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 and certain locally established health plans and 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 $1.2 billion from all fund sources ($380 million from the General Fund) for support of MRMIB programs in 2006-07, which is an increase of $127 million from all fund sources ($47 million from the General Fund) or about 12 percent over estimated current-year expenditures. This increase is due primarily to projected caseload growth in HFP and the administration’s proposals to streamline enrollment for HFP and increase use of the electronic HFP application.

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

• Increased Staff to Address Workload. The administration proposes to add ten positions and $983,000 ($248,000 from the General Fund) to address an anticipated increase in workload. We more fully describe this request and our analysis of the proposal later in this section.

• Streamlining of Enrollment Process and Promoting Use of Health-e-App. The budget proposes $91,000 ($32,000 from the General Fund) to implement changes to HFP eligibility and enrollment processes and to expand use of an electronic benefits application system known as Health-e-App. We discuss these proposals in more detail within the “Crosscutting Issues” section of this chapter.

• Increased Oversight of Mental Health Services for HFP Enrollees. The budget includes $432,000 ($151,000 from the Mental Health Services Fund and $281,000 in federal funds) to increase oversight in the delivery of mental health services for HFP enrollees with serious emotional disturbances.

• Elimination of Duplicate Healthy Families and Medi-Cal Enrollments. The administration proposes to eliminate the potential for duplicate enrollment in HFP and Medi-Cal by denying enrollment to an infant if the infant is currently enrolled in Medi-Cal or employer sponsored health coverage.

• Expedited Enrollment of Eligible Infants Born to Mother in AIM. The administration further proposes to expedite HFP enrollment for infants born to AIM mothers by allowing MRMIB to redirect a portion of the subscriber contributions paid by AIM participants to HFP and to apply this money toward the infant’s HFP premium.

• Elimination of Legislative Oversight of Certain Expenditure Authority. The MRMIB is proposing Budget Bill language to allow the Department of Finance to change HFP General Fund and federal funds expenditure authority or establish permanent staff positions to the extent that foundation and grant funding are available without any advance oversight by the Legislature. We more fully describe this request and our analysis of the proposal later in this section.

Healthy Families Program

Background

Expanded Health Coverage for Low-Income Children. The federal Balanced Budget Act of 1997 (BBA) made available approximately $40 billion in federal funds over ten years to states to expand health care coverage for children under the State Children’s Health Insurance Program (SCHIP). The BBA also provided 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. Under SCHIP, the federal government provides states with flexibility in designing a program.

California decided in 1997 to use its approximately $6.9 billion share of its ten-year SCHIP funding to implement the state’s HFP. Funding for the program generally is on a 2-to-1 federal/state matching basis. 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 (generally between $4 and $15 per child) and can choose from a selection of managed care plans for their children. This program is administered by MRMIB.

The Budget Proposal. As shown in Figure 1, the budget proposes about $1 billion (all funds) in HFP expenditures in the budget year. This is an increase of about 15 percent over estimated current-year expenditures. The budget proposes $380 million in General Fund support for HFP, a $51 million increase above the current-year level. The increase in General Fund expenditures is primarily due to growth in caseload and the administration’s proposals to streamline the enrollment process and increase usage of the electronic application process for the program.

Future Federal Funding Unlikely To Meet Program Requirements

Future uncertainties surrounding the reauthorization of federal funding and the eventual exhaustion of unspent federal funds pose a risk of significant future increases in General Fund expenditures for the Healthy Families Progam (HFP). In light of this potential problem, we present alternatives to hold down increases in overall HFP costs and to obtain additional financial support for the program.

SCHIP Reauthorization

As previously mentioned, the BBA provided California with approximately $6.9 billion over ten years for HFP. The end of this ten-year period is approaching. Funding has been authorized by Congress only through the 2007 federal fiscal year (through September 2007) and the future actions of Congress in regards to SCHIP funding reauthorization are unknown. Furthermore, it is particularly difficult to estimate California’s future allocation of federal SCHIP funding given that there has been significant variation in the allocation amount from year to year. For example, in the 2004 federal fiscal year, California was allocated $534 million, but the state received $667 million in the following year. This uncertainty in federal support is a major policy concern because Congressional actions could have significant impacts on the level of state spending on HFP, as we discuss in more detail later in this analysis.

State Has Expanded Use of Its SCHIP Funds

States must spend their federal SCHIP allocations within a set period of time (generally three years) or risk the reversion of these funds to the federal government. Consequently, California has expanded its use of SCHIP funds for health coverage programs over time, in part to prevent SCHIP funds from being reverted and lost to the state. In this section, we provide a brief description of some of these expansions in the use of SCHIP funding.

(We note that in January 2002, the state was granted a waiver by the federal government to expand HFP to uninsured parents of children eligible for HFP or Medi-Cal in families with incomes up to 200 percent of the FPL. The waiver will expire in January 2007 and at this time the administration does not propose to implement this expansion.)

Children’s Eligibility Expansion. The program began enrolling children in July 1998 in families with incomes up to 200 percent of the FPL. In 1999, the program was expanded to include children with family incomes up to 250 percent of the FPL, as well as recent legal immigrant children who are not eligible for support with SCHIP federal funds. The budget includes about $90 million from the General Fund for these children.

CHIM Fund Program. In 2001, the Legislature expanded the use of SCHIP funds by establishing the CHIM Fund program. Through this program counties are able to access federal SCHIP matching funds to provide health coverage on a county-by-county basis to uninsured children living in families earning incomes between 250 percent and 300 percent of the FPL. As noted earlier, CHIM relies on no state funding but only on federal and county resources. In effect, counties leverage local funds to draw down some of the unspent portion of California’s federal SCHIP allotment according to the same 2-to-1 matching rate used by the state. The Governor’s budget plan includes $1.5 million in the CHIM Fund and $2.7 million in federal funds. 

AIM Infants. As a result of enactment of the 2003-04 Budget Act, infants born to AIM mothers are enrolled in HFP, while the mothers remain covered through the AIM program. Over time, this shift of new AIM infants into the HFP will result in an AIM program consisting only of mothers. The Governor’s budget proposes about $19 million in state funds and about $36 million in federal funds for these AIM-linked HFP infants.

Presumptive Eligibility. The Child Health and Disability Prevention (CHDP) “gateway” program was implemented in 2003. Under the gateway program, when a child visits a CHDP provider for a check-up, the provider determines if the child appears to be eligible for Medi-Cal or HFP. If the child appears eligible for either of these programs, the child is presumed to be eligible for two months of benefits. The child’s family must subsequently apply to Medi-Cal or HFP to be permanently enrolled in health benefits. The Governor’s budget proposes about $41 million in state funds and $77 million in federal funds for HFP presumptive eligibility.

Prenatal Services. The 2005-06 Budget Act expanded the use of federal SCHIP funds for support of prenatal services provided under Medi-Cal and AIM. Previously, state funds (General Fund and Proposition 99 funds) were used to support these services. The combined state savings for 2004-05 and 2005-06 is $304 million. The Governor’s budget proposes about $88 million in state funds and $163 million in SCHIP funds in 2006-07 for this same purpose.

Potential Future Federal Funding Shortfall

As a result of these program expansions and underlying growth in HFP caseload, the current level of SCHIP funds being spent each year now exceeds the SCHIP funds allocated annually to California, with the result that the balance of unspent SCHIP funds has been gradually declining. As shown in Figure 2, the Governor’s budget plan proposes to use about $400 million from the previous years’ unspent balance of SCHIP funding (the difference between the carryover in federal funding for 2006-07 and 2007-08). Assuming the Governor’s proposal were adopted as proposed, we estimate that the state will exhaust its unspent balance of SCHIP funds in 2007-08. We base this estimate on MRMIB’s estimates for federal fiscal year 2007 and use this estimate for 2007-08 and 2008-09.

Consequently, if no changes are made to eligibility, benefits, rates paid to providers, or program funding sources, additional General Fund support would be required as early as 2007-08 in order to maintain the current level of services.

Alternatives for Addressing the Funding Shortfall

Early Action Has Advantages. Under the Governor’s budget proposal, the Legislature is not likely to face a funding shortfall in the budget year for the HFP. However, as shown in Figure 2, the projections do show a funding shortfall of federal SCHIP funds in 2007-08 that would grow considerably in 2008-09. Consequently, we recommend that the Legislature begin to consider now how it might address this situation, particularly given its potential impact on the General Fund. Early consideration of this matter by the Legislature would (1) give it more flexibility and time to weigh its options, (2) potentially extend the availability of federal SCHIP funds, if early steps were taken that could slow the drawdown of the current balance of such funds, and (3) help factor this problem into administration and legislative proposals to further children’s health coverage. (Our analysis of the administration’s budget proposals to increase enrollment in HFP and Medi-Cal can be found in the “Crosscutting Issues” section of this chapter.)

In this section, we present alternatives for the Legislature to consider to address this future situation. While some of these alternatives could work in combination with each other, some represent conflicting approaches. See Figure 3 for a summary of these alternatives.

We note that under current law, the administration is permitted to cap enrollment of children in the HFP in order to live within the available funding for the program. (In 2004-05, however, the Legislature rejected the administration’s proposal to cap enrollment and create waiting lists for HFP.) In this section we highlight additional options the Legislature could consider to address the likely future shortfall in SCHIP funding.

Benefits Package Could Be Trimmed. One alternative for reducing state costs for the HFP and extending the use of available SCHIP funds would be to reduce the scope of coverage that all HFP enrollees receive. Under this approach, no eligible child would be denied coverage, but the coverage each child would receive would be reduced in scope. For example, we estimate that the elimination of vision and dental care for all enrollees would eventually result in full-year state savings of as much as $77 million and allow $142 million in SCHIP funds to be carried forward for support of the program. (We note that it would not be feasible to obtain full-year savings in 2006-07 due to the timing of rate negotiations with the plans.)

Premiums Could Be Increased. Beginning in 2005-06, the premiums for children paid by families with incomes between 201 percent and 250 percent of FPL were generally increased from $9 per child to $15 per child. This premium increase is projected to raise an additional $5.5 million in state revenue for the program in 2006-07. Initial disenrollment data (collected since the implementation of the premium increase) indicates that raising the premiums has not significantly increased the number of children disenrolled from HFP. The Legislature should monitor these disenrollment trends. If it appears likely that program enrollment would not be adversely affected, the Legislature could consider future premium increases as part of a solution to the SCHIP funding shortfall.

Some Children Could Be Shifted to County Coverage. The Legislature has the option of reducing costs in HFP by partially or completely reversing the expansion of coverage to families that occurred after the program was initially created and shifting coverage of those children to the CHIM program, other local health coverage programs, and county indigent care.

This alternative could result in significant state savings. For example, reducing coverage for children in families with incomes above 200 percent of the FPL could save the state as much as $82 million in General Fund in 2006-07 that could be used to maintain eligibility and benefits for the children the state would continue to cover under HFP.

Under an alternative approach, this change could be phased in for new enrollees while those already enrolled in coverage could be permitted to remain in the program. The savings to the state under this option would ramp up slowly but would eventually become significant. In order to provide an alternative source of health coverage for these children in higher-income families, the state could adjust the CHIM program (subject to federal approval) to allow counties to provide coverage for children of families in this income group.

We note that increasingly since 1997, the state has provided coverage to an additional 3.4 million children and adults, many of whom were once only eligible for county programs. This occurred through the creation of the HFP and Medi-Cal 1931(b) eligibility without any reimbursement from the counties. The shift in coverage costs discussed above would in effect return some of these families to county-funded coverage.

Some Children Could Be Shifted to Medi-Cal. Similarly, the Legislature also has the option of shifting some HFP children to the Medi-Cal program. For example, children ages 6 to 19 in families with income under 133 percent of FPL could be shifted from HFP to Medi-Cal. Assuming that HFP has roughly the same proportion of 6- to 19-year-olds as the general population, this could free up about $6 million in federal SCHIP funding that could be used for ongoing support of HFP. Such a change would also allow families with income under 133 percent of FPL and children ages 1 to 5 and 6 to 19 to have children in one program (Medi-Cal), rather than have children in both Medi-Cal and HFP.

The federal match for Medi-Cal is on a 1-to-1 basis, while HFP is on a 2-to-1 federal/state basis. Nevertheless, shifting HFP children to Medi-Cal would save state dollars compared with covering these children only with state funds.

Consider Reductions in Other State Programs or Explore Additional State Revenues. Finally, if the Legislature does not wish to make changes to HFP, it could consider (1) adopting reductions in other state programs, thereby, freeing up resources that could be used for HFP and/or (2) exploring options for obtaining additional state revenues to help take the place of diminishing SCHIP funds.

Analyst’s Recommendations. We recommend that the Legislature begin to consider now how it might address the significant mismatch that likely lays ahead for federal SCHIP funding and the state programs currently supported from that funding source. This is a particularly important issue for the Legislature to consider given its potential impact on the General Fund and given our out-year projections of a major structural gap between state operating revenues and expenditures if the administration’s proposed budget were adopted. Early actions on this matter, we believe, would provide the Legislature more flexibility in its choice of solutions to this problem.

Caseload Projection Too High

For the last two years, the Managed Risk Medical Insurance Board has overestimated Healthy Families Program (HFP) caseload. We find the budget year projection for HFP also to be high. Consequently, we recommend the Legislature make a downward adjustment to the HFP budget. (Reduce Item 4280-001-0001 by $14 million and 4280-001-0890 by $26 million.)

Governor’s Proposal. The Governor’s budget plan assumes that the HFP caseload will increase by about 106,000 children or almost 13 percent during the budget year. The budget assumes that a total of 933,000 children will be enrolled in HFP as of June 2007.

The implementation of various proposals to expand program outreach activities and to change the HFP enrollment process are projected by the administration to account for a major part of this projected enrollment growth. (We evaluate the administration’s proposals to increase enrollment in HFP in the “Crosscutting Issues” section of this chapter.) These proposed new activities are assumed to add 30,000 children to HFP during 2006-07.

Assessing the Governor’s Proposal. Our analysis indicates that, for the last two years, the budget requests submitted to the Legislature by MRMIB have significantly overestimated HFP enrollment. The caseload for 2004-05 was overestimated by MRMIB at the 2004-05 May Revision by more than 30,000 children and thus overbudgeted by about $28 million from the General Fund. Similarly, it now appears that the 2005-06 May Revision caseload for HFP was overstated by 40,000 and about $19 million from the General Fund. The budget proposes to reduce funding in the current year to reflect this lower-than-expected caseload.

According to MRMIB, the 2005-06 caseload projection was overstated for two main reasons. First, the Medi-Cal/Healthy Families Bridge Performance Standards Program, an effort to ensure that children discontinued from Medi-Cal due to increased income have the opportunity to apply for HFP, was not implemented as scheduled, with the result that enrollment of about 9,900 children will not materialize in 2005-06. Second, the actual enrollment trends for HFP (for which MRMIB had data through September 2005) have turned out to be lower than originally projected. This second factor prompted MRMIB to lower its end-of-year caseload projection for the current year by about 27,000.

Our analysis of caseload data indicates that the latest budget plan presented by MRMIB has again overestimated caseload growth, this time for the budget year. As mentioned previously, MRMIB estimates that almost 106,000 more children, an increase in caseload of 13 percent, will occur during the budget year.

Given that approximately 75 percent to 80 percent of the estimated population of children that is eligible for HFP is already enrolled in HFP, we believe that such a high growth rate for this maturing program is unlikely at this time. We estimate that caseload growth in the budget year will probably be about 85,000 children for a caseload increase of about 11 percent, this reflects a slower growth in caseload that continues to decline over time. Furthermore, our analysis indicates that MRMIB’s estimated caseload growth due to the proposed changes to the enrollment process (with 12,400 more children expected to be enrolled between January 2007 and June 2007) is high and does not reflect a reasonable phasing in of the new caseload resulting from the simplification of the enrollment process.

Analyst’s Recommendation. We recommend that the Legislature make an adjustment to the HFP budget for the reasons stated above. Specifically, we recommend a reduction of $40 million from all fund sources (with a General Fund reduction of $14 million). We will continue to monitor caseload trends and will recommend appropriate further adjustments in May when MRMIB’s updated budget request is presented to the Legislature.

Protect Legislative Oversight of Expenditure Authority

We recommend the rejection of the administration’s request to eliminate Budget Control Sections 28 and 28.50 requirements for the Healthy Families Program expenditures.

Control Sections 28 and 28.50. For a number of years, the Budget Act has contained Control Sections 28 and 28.50 which provide the administration with a process by which it can spend federal funds or other non-state funds which are received after enactment of the budget. Generally, these augmentations can only occur no sooner than 30 days after advance notification has been provided in writing to Legislature. This provides the Legislature with the opportunity to review the proposal and raise any concerns it may have with the administration. Additionally, this process provides the Legislature with the opportunity to consider how such augmentations may impact future obligations of state dollars.

The Governor’s Proposal. The Governor’s budget includes Budget Bill language to exempt MRMIB from Control Sections 28 and 28.50 and to allow the Department of Finance to augment reimbursements to the General Fund and federal funds and-or establish permanent positions to the extent that foundation and grant funding are available without advanced notice to the Legislature. The administration proposes this change on the grounds that the current Control Sections 28 and 28.50 processes jeopardize MRMIB’s ability to quickly respond to grant and foundation requirements and delay the receipt of grant and foundation funding. It argues that these control section processes can take anywhere from one to four months depending on coordination within the administration.

Analyst’s Recommendations. We recommend the rejection of the administration’s request to eliminate Budget Control Sections 28 and 28.50 for HFP expenditures. We note that these processes only require 30 days advance notice to the Legislature and even provide for a waiver of the 30-day review period if appropriate. All other delays should be worked out within the administration. The exemption of MRMIB from these control sections would decrease legislative oversight of MRMIB’s expenditures.

MRMIB-State Operations

Request for Additional Staff Positions Unjustified

The Governor’s budget requests ten additional staff positions to address current and anticipated workload within the customer service, policy, legal, research, and special program areas at the Managed Risk Medical Insurance Board. We recommend the approval of two of the positions and denial of the remaining eight positions on a workload basis. (Reduce Item 4280-001-0001 by $248,000, Item 4280-001-0236 by $35,000 and Item 4280-001-0890 by $513,000.)

Governor’s Proposal. The Governor’s budget includes a request for an additional ten staff positions and $983,000 in funding ($248,000 from the General Fund) to enable MRMIB to address current and anticipated workload within the customer service, policy, legal, research, and special program areas. These additional support resources would be used for five distinct types of activities: (1) processing of application and enrollee complaints and appeals, (2) supervision of legislation, external affairs, and major policy matters, (3) support of legal staff, (4) trend analysis of health plan performance, and (5) monitoring and review of the Rural Health Demonstration Projects program.

Assessing the Governor’s Proposal. The 2005-06 Budget Act authorized an additional nine permanent positions for MRMIB and two one-year limited term positions for MRMIB that were intended to restore overall staffing to a level that existed in 2002-03 for its core operations. (This was in response to the elimination of 13.4 positions from MRMIB’s budget over the two-year period beginning in 2002-03.) This year MRMIB is requesting to add positions on the basis that they are needed to keep pace with program growth, emerging policy issues, and health plan research.

However, our analysis indicates that, in many instances, MRMIB has not demonstrated that the workload increases cited as the basis for increased staff will materialize. For example, previous budget actions had at one point eliminated funding for HFP application assistance. Because elimination of these application assistance activities resulted in more problems in the applications which continued to come in for HFP, this change had the effect of temporarily creating additional workload in the form of a backlog of appeals of denied applications. However, this workload is temporary for two reasons. First, MRMIB has been working through this backlog and should have it completed no later than July 2006. Second, with last year’s restoration of application assistance support, the number of appeals should be decreasing in the budget year.

Nevertheless, the Governor’s budget request proposes to add five staff positions at a cost of $273,000 to MRMIB’s complaints and appeals unit. We see no justification at this time for adding staff to address a backlog of work that should be resolved before these new staff could be hired and begin work.

There are other MRMIB position requests for which additional workload does appear likely to occur. But in these cases, before requesting new positions, MRMIB should seek to (1) fill existing vacant positions for which it was previously provided funding or (2) reclassify vacant positions to meet MRMIB’s workload. For example, MRMIB’s Benefits Division has two vacant research analyst II positions and one vacant associate governmental program analyst position. We believe it would be reasonable to expect that the workload that was to have been handled by at least two of the new positions requested in the Governor’s budget could instead be addressed if MRMIB filled these vacant positions. We have similar concerns with MRMIB’s request to add a new executive assistant position at a time when three office technician positions that MRMIB already has funding and position authority for remain vacant.

Analyst’s Recommendations. On a workload basis, we recommend that the Legislature approve two of the ten positions requested by MRMIB (legislation/external affairs and management of health plan analysis) and delete the other eight requested positions. This would result in a savings of $796,000 from all fund sources ($248,000 from the General Fund).