Analysis of the 2007-08 Budget Bill: Health and Social Services

Developmental Services (4300)

A developmental disability is defined as a severe and chronic disability, attributable to a mental or physical impairment that originates before a person’s eighteenth birthday, and is expected to continue indefinitely. Developmental disabilities include, but are not limited to, mental retardation, cerebral palsy, epilepsy, autism, and disabling conditions closely related to mental retardation. The Lanterman Developmental Disabilities Services Act of 1969 forms the basis of the state’s commitment to provide developmentally disabled individuals with a variety of services, which are overseen by the state Department of Developmental Services (DDS). Unlike most other public social services or medical services programs, services are generally provided to the developmentally disabled at state expense without any requirements that recipients demonstrate that they do not have the financial means to pay.

The Lanterman Act establishes the state’s responsibility for ensuring that persons with developmental disabilities, regardless of age or degree of disability, have access to services that sufficiently meet their needs and goals in the least restrictive setting. Individuals with developmental disabilities have a number of residential options. Almost 99 percent receive community-based services and live with their parents or other relatives, in their own houses or apartments, or in group homes that are designed to meet their medical and behavioral needs. Slightly more than 1 percent live in state-operated, 24-hour facilities.

Community Services Program. This program provides community-based services to clients through 21 nonprofit corporations known as regional centers (RCs) that are located throughout the state. The RCs are responsible for eligibility determinations and client assessment, the development of an individual program plan, and case management. They generally pay for services only if an individual does not have private insurance or they cannot refer an individual to so-called “generic” services that are provided at the local level by counties, cities, school districts, and other agencies. The RCs also purchase services, such as transportation, health care, respite, day programs, and residential care provided by community care facilities. The department contracts with the RCs to provide services to more than 212,155 clients each year.

Developmental Centers (DC) Program. The department operates five DCs, and two smaller leased facilities, which provide 24-hour care and supervision to approximately 2,800 clients. All the facilities provide residential and day programs as well as health care and assistance with daily activities, training, education, and employment. More than 7,700 permanent and temporary staff serve the current population at all seven facilities.

Current-Year Deficiency. The DDS periodically estimates future caseload and utilization costs for RCs based upon historical data. The DDS has updated its projection of the cost of RC purchase of services during 2006-07 based upon the most recently available actual RC caseload and cost data. The data suggest that funding provided for this program in the 2006-07 Budget Act will be insufficient by about $51 million General Fund. The deficiency results from two adjustments: (1) an increase of $18 million related to the recent state minimum wage increase, and (2) an increase of $33 million related to updated utilization and caseload projections for the RCs. The administration has indicated that funding for this deficiency request will be pursued through a supplemental appropriation bill.

Overall Budget Proposal. The budget proposes $4.3 billion (all funds) for support of DDS programs in 2007-08, which is a 5.7 percent increase over estimated current-year expenditures. General Fund expenditures for 2007-08 are proposed at $2.6 billion, an increase of almost $37 million, or 1.4 percent, above the revised estimate of current-year expenditures.

Community Services Budget Proposal. The budget proposes $3.6 billion from all funds ($2.2 billion General Fund) for the support of the Community Services Program in 2007-08. This represents a $47 million General Fund increase, or 2.2 percent, over the revised estimate of current-year spending. The increase is a result of caseload growth, higher utilization rates for services, the effect of the increase in the minimum wage, and other program changes. Of the total $3.6 billion in funding proposed for RC programs in 2007-08, $501 million is for RC operations and $3.1 billion is for the purchase of services. The community services budget plan includes the following proposals:

• Increased Federal Reimbursements for Intermediate Care Facilities for the Developmentally Disabled (ICF/DD). The budget plan assumes that the federal government will provide matching funds for day programs and nonmedical transportation services for RC clients residing in ICFs/DD. This would require a Medi-Cal state plan amendment which would result in a General Fund savings of approximately $44 million.

• Fund Shift From Public Transportation Account. The budget proposes a one-time allocation of $144 million from the Public Transportation Account in lieu of General Fund to provide certain transportation services to RC clients

• Continued Implementation of Medicare Part D. The budget plan proposes an increase of $708,000 in total funds ($357,000 General Fund) and eight positions to support workload associated with implementation of Part D of the Medicare Prescription Drug Improvement and Modernization Act of 2003.

Developmental Centers Budget Proposal. The budget proposes $712 million from all fund sources ($393 million General Fund) for the support of the DCs in 2007-08. This represents a net decrease of $9.9 million General Fund, slightly more than 2 percent below the revised estimate of current-year expenditures. The DC budget plan includes the following proposals:

• Agnews DC Closure. The budget plan continues to assume the closure of the Agnews DC in June 2008. In 2007-08, DC expenditures decrease by $10.4 million ($5.6 million General Fund) to reflect decreased staffing costs as Agnews’ population is relocated into community placements or to other DCs. The RC budget would provide $50.7 million ($37.9 million General Fund) to reflect the costs of providing community-based services to former Agnews residents.

• Employee Compensation. The budget plan also proposes $33.1 million ($19.2 million General Fund) in 2007-08 for increased employee compensation and benefits.

Headquarters Budget Proposal. The budget proposes $40 million from all funds ($26 million General Fund) for support of headquarters. About 62 percent of headquarters funding is for support of the community services program, with the remainder for support of the DC program.

Regional Center System: Rapid Spending Growth Continues

The cost to the state of operating regional centers for persons with developmental disabilities has continued to escalate at a rapid pace with total spending projected to increase by almost $1.7 billion, or about 89 percent, between 2000-01 and 2007-08. In this analysis we examine recent caseload and program spending trends, assess the Governor’s caseload projections, identify an opportunity to draw down additional federal funds ($11 million in the current year), and recommend the Legislature increase oversight of the department’s rate reform effort.

Background

How Do RCs Provide Services for Their Clients?

The RCs provide services to clients through two mechanisms. First, RCs purchase services directly from vendors. These services are commonly referred to as “purchase of services.” Secondly, RCs assist their clients in obtaining services from public agencies. These services are commonly referred to as “generic services.” We discuss both types of services further below.

Purchase of Services. The budget for purchase of services consists of ten main service categories, plus one additional category referred to as “other adjustments.” (A more detailed description of these categories is provided on page C-162 of our Analysis of the 2005-06 Budget Bill.) Figure 1 shows the Governor’s proposed spending plan for these purchase of services categories in 2006-07 and 2007-08.

Generic Services. Under state law, generic services are defined as those being provided by federal, state, and local agencies which have a legal responsibility to serve all members of the general public and that receive public funds for providing such services. There are more than a dozen different generic services that are regularly accessed by RC clients. For example, medical services for an eligible developmentally disabled person might be provided through the Medi-Cal health care program for the poor. City or county park and recreation programs also provide generic services for developmentally disabled clients. State law requires that RCs access generic services first and make purchase of services only when generic services are unavailable.

Some Purchase of Services Provided Under a Federal Waiver. Under the federal Home and Community-Based Services (HCBS) waiver, federal funds can be drawn down to pay for about one-half the costs of certain community-based services for individuals at risk of institutionalization. The 2007-08 budget plan assumes that RC programs will draw down $818 million in federal funds under the HCBS waiver.

Overall Spending and Cost per Client. Between 2000-01 and 2007-08, total spending is forecast to increase by almost $1.7 billion if the administration’s budget plan were adopted as proposed. During the same period, spending per person, after adjusting for inflation, would go up 11 percent and unadjusted spending per person would go up by 36 percent, as shown in Figure 2.

 

RC Caseload Below Projected Levels

Background

Between 2000-01 and 2007-08, the RC caseload is projected to grow from about 163,613 to almost 221,000, an average annual growth rate of almost 4.4 percent. The caseload trend is shown in Figure 3.

Several key factors appear to be contributing to ongoing growth in the RC caseload. Medical professionals are identifying persons with a developmental disability at an early age and referring more persons to DDS programs. Improved medical care and technology has increased life expectancies for individuals with developmental disabilities. The RC caseload growth also reflects a significant increase in the diagnosed cases of autism, the causes of which are not fully understood.

Governor’s Budget Proposal

In accordance with past practice, the 2007-08 budget plan reflects DDS’ updated projections for the number of RC clients for the current and budget years. The budget plan indicates that the actual caseload in the RC system in 2006-07 is tracking very closely to the original budgeted level. Specifically the average annual caseload for the current year is estimated at 212,155, or just 70 clients less than the estimate of 212,225 that was the basis for the RC system’s appropriations in the 2006-07 Budget Act. The budget plan further estimates that the average annual RC caseload will grow to almost 221,000 in 2007-08, a year-to-year increase of 8,445 clients or 4 percent.

As described above, the administration proposes to increase the level of current-year funding provided for RC purchase of services by about $33 million General Fund. This further adjustment reflects updated expenditure data on utilization and caseloads for RC purchase of services.

For 2007-08, the Govenor’s budget proposes to increase spending for the RC system by about $251 million including an increase of about $46.5 million from the General Fund. This increase mainly reflects estimated growth in caseloads, costs, and the utilization of services by RC clients.

Recent Data Suggest Caseload Overstated. The Governor’s budget request is based on data that was available through July 2006. However more recent data through December 2006 indicate that the average annual caseload is likely to be about 1,460 below the level that DDS has estimated in the current year and about 1,500 below the level that DDS has estimated in the budget year.

Analyst’s Recommendation

Based on the most recent information available, it appears the caseload is potentially overbudgeted by roughly $14 million General Fund in the current year and $15 million General Fund in the budget year. However, the department has indicated that in some cases in the past, lower-than-anticipated caseload costs have been offset by increases in utilization. It is possible that the reduction in caseload will be offset by an increase in utilization cost. We recommend the Legislature require the department to report at budget hearings on the specific causes for increased utilization and costs. In our view, without accurate information about what is causing increased utilization and costs, the Legislature lacks the information it needs to assess the causes of the rapid growth in the RC program and determine which policies would be most effective to contain these costs.

We note that in our Analysis of the 2006-07 Budget Bill, (page C-156) we recommended that the Legislature direct the Department of Finance’s Office of State Audits and Evaluations to conduct an audit to evaluate the accuracy and the consistency of the purchase of services data now being reported by the RCs. Because the accuracy and consistency of these data are now uncertain, the state lacks tools that are needed to exercise strong fiscal oversight over RC spending. An improvement in the way expenditure data are reported has additional potential benefits. It could improve the quality of the data used by DDS for budget forecasts, so that its budget request to the Legislature could more closely match the actual funding required to support community services programs.

The administration has indicated that it will provide updated information on the overall RC caseload trend, change in the mix of RC clients, and trends in the cost and utilization of services at the time of the May Revision. We will continue to monitor caseload trends and will recommend appropriate adjustments, if necessary, in May when DDS’ updated budget request is presented to the Legislature.

ICF/DD Rate Restructure Would Leverage Federal Funds

Background. The ICF/DDs are often located in the community, sometimes in single-family houses, and provide residential services for the developmentally disabled including 24-hour personal care. In our Analysis of the 2004-05 Budget Bill (page C-185), we described how the state could draw down additional federal funds to offset the state costs of day programs and transportation services provided to RC clients residing in ICFs/DD by modifying the ICF/DD rate and implementing other related changes.

Specifically, in order to capture these additional federal funds, the state would have to redefine the ICF/DD program as an “all-inclusive service.” Currently the ICFs/DD are paid a rate based only on the specific nursing care services they provide. Additional services that a client may receive such as transportation or a day program are generally paid for separately by the RC or provided through a generic service provider. Under this option, ICFs/DD would be redefined to be an all-inclusive service and the responsibility for providing day programs, transportation, and other assistance (in cases where generic services were unavailable) would shift from the RC to the ICFs/DD. In turn, these services would be reflected in the rates paid to ICFs/DD.

Budget Plan Assumes Savings in 2007-08. The state plan is an agreement between the federal Center for Medicare and Medicaid Services (CMS) and the state regarding the operation of the state’s Medi-Cal Program. The Department of Health Care Services (DHCS) is pursuing a revision to the Medi-Cal state plan to include coverage and payment for day program and nonmedical transportation services for RC clients residing in ICFs/DD. The budget plan assumes (1) approval of the state plan amendment and an increase of $44 million in federal funds in 2007-08 and (2) a commensurate reduction in state General Fund support for day program and nonmedical transportation services. The budget plan does not assume any savings in 2006-07.

Current Year Savings Opportunity. In some cases, once a state plan amendment is approved by the federal CMS, states may submit claims and draw down federal funds retroactively to the date of submission. For example, if the DHCS submitted the proposed state plan amendment to the federal CMS in April of 2007, and it was approved in July of 2007, the state may be able to submit claims for federal reimbursement going back to the date when the state plan amendment was originally submitted.

Based on discussions with DHCS, the department has been working on developing a state plan amendment for about two years. Given the time DHCS has spent on developing this state plan amendment, we believe that it is reasonable to assume that the department will be able to submit it to the federal CMS by April.

Analyst’s Recommendation. We recommend the Legislature assume that the state plan amendment will be submitted by DHCS to the federal CMS in April of 2007 and that it will be approved. We estimate that this would result in an additional $11 million in federal reimbursements for 2006-07. We recommend that the Legislature recognize a commensurate amount of state General Fund savings in the current year for RC purchase of services.

Rate Reform Progressing Slowly

Background. The Legislature has taken some actions in recent years to slow growth in state costs for the RC system. Beginning in 2003-04 and continuing through 2006-07, it acted to control costs by adopting legislation imposing rate freezes and other cost-control measures on selected community services. The rate freezes and cost-containment measures were intended to be temporary actions to help address the state’s serious fiscal problems while allowing time to consider permanent and ongoing strategies to help contain RC costs such as rate reform.

Rate Reform Efforts. Historically, there has been significant variation in the way that rates are set for the RC vendors who provide services, and the rate-setting approach overall has lacked a rational and consistent approach. The 2004-05 Budget Act provided four permanent staff positions and $500,000 in one-time funding for contract resources to enable DDS to develop standardized rates for certain types of RC vendors. As part of its review process, DDS was to evaluate the existing rate-setting methodology, identify inadequacies or drawbacks in the way rates were set, identify and develop any statutory and regulatory changes found to be necessary, and implement and monitor a revised rate-setting methodology. The rate reform activities approved by the Legislature were intended to be part of a more comprehensive cost-containment program for the RC system.

Progress to Date. The rate reform process has generally focused on those services for which rates are set through negotiations between RCs and service providers. Over a multiyear period, several RCs have been surveyed to obtain specific information about how they determine rates for 16 different services provided to RC clients. The last of three waves of surveys were sent out to the RCs in January 2006.

The DDS has developed a regulations package for rates for supported living services that is currently in the formal regulatory review process. (Supported living services consist of a broad range of services to developmentally disabled adults who choose to live in homes they own or lease in the community.) The DDS planned to circulate an initial regulations package for comment in January 2007 regarding some of the other rates included under the reform effort. At the time this analysis was prepared, these regulations were not yet available for comment.

As noted above, DDS was provided $500,000 in one-time funding for contract resources to enable DDS to develop standardized rates for certain types of RC vendors. In November 2005, DDS awarded a contract to a consultant to provide assistance with analyzing data and evaluating findings and recommendations regarding certain services purchased by RCs. The consultant completed a report and provided it to DDS in the fall of 2006.

State Savings Lost as Rate Reform Plods Along. More than two years have passed since the Legislature provided staff and funding resources to support the administration’s rate reform initiative. The proposed spending plan offers no indication of when DDS will implement any significant rate reform for services other than supported living.

Analyst’s Recommendation. We recommend that the Legislature require DDS to report at budget hearings on the timeline for implementation of revised rate-setting methodologies for RC services to ensure reasonable progress is made towards implementing rate reform. Specifically, the department should report on the services that are under study for rate reform, the timeline for proposing revised regulations packages and other measures, and the estimated savings for implementing rate reform for specified services. This will provide the Legislature with the information it needs as it deliberates on the continuation of temporary cost-containment measures.

Developmental Centers Program

Residential Care Models Allow Shift From Institutions to Community

We recommend the Legislature adopt supplemental report language directing the Department of Health Care Services to submit a report based on a comprehensive evaluation of the Intermediate Care Facility for the Developmentally Disabled-Continuous Nursing pilot program. This will help ensure the Legislature has sufficient information upon which to base decisions about the future of this pilot program.

State Shifting From Institutional Care Model to Community-Based Care

The population of the DCs has declined steadily over the last 20 years. The continuing decline in the population of the DC system is partly the result of the 1994 Coffelt v. Developmental Services lawsuit settlement, which required the state to make more community-based residential services available as alternatives to institutions. The DCs initially downsized in population by about 2,000 in response to the Coffelt settlement. The administration is currently implementing its plan to close Agnews DC, by July 2008.

The downsizing of the DCs is also partly a response to federal policies that promote community-based alternatives and a recent federal court decision. Prompted in part by the June 1999 U.S. Supreme Court decision L.C. & E.W. vs. Olmstead (“Olmstead”), California, and a number of other states are seeking alternatives to institutional care. In the Olmstead case, the U.S. Supreme Court ruled that keeping persons who could transition to a community setting constituted discrimination under the Americans with Disabilities Act, notwithstanding state resources and consumer preference.

Many of the developmentally disabled individuals that reside in Agnews and other DCs are medically fragile and may require regular skilled nursing assessments and interventions due to unstable medical conditions. In response to the needs of these individuals, and a policy of providing services to the developmentally disabled in the least restrictive setting whenever possible, the Legislature in recent years has approved two pilot programs that we describe below.

Intermediate Care Facility for the Developmentally Disabled-Continuous Nursing (ICF/DD-CN). Chapter 845, Statutes of 1999 (AB 359, Aroner), allows for implementation of ICFs/DD-CN under a pilot program. The ICFs/DD-CN provide skilled nursing supervision to clients who have continuous need for skilled nursing care. Residents of ICF/DD-CN require frequent observation and intervention for unstable medical conditions.

The ICF/DD-CN pilot program operates under a waiver approved by the federal CMS that was originally approved in 2001. Six facilities, each with six beds, are currently operating under the waiver and serve, on average, about 35 individuals. The waiver is due to expire on September 30, 2007. The DHCS expects the CMS to grant a waiver extension from October 1, 2007 through September 30, 2009.

Adult Residential Facility for Persons With Special Health-Care Needs (ARFPSHN). Chapter 558, Statutes of 2005 (SB 962, Chesbro), allows for implementation of a new type of licensed residential care facility under a pilot program. Although ARFPSHNs would provide continuous skilled nursing services similar to those provided by ICFs/DD-CN, they would provide fewer hours of continuous skilled nursing services than ICFs/DD-CN. The pilot program would allow for up to five residents to be placed in each facility, with a program total of a 120 beds. Unlike ICFs/DD-CN, which are privately owned and operated facilities, ARFPSHNs would be owned by a nonprofit entity. The state would contract out the provision of care for residents of these facilities. At the time this analysis was prepared, no ARFPSHN had begun operations although a few ARFPSHNs are expected to begin operations by July 2007. The pilot program is due to sunset January 1, 2010, unless extended in statute.

Reporting Requirements. Chapter 558 requires DDS to contract with an independent agency or organization to evaluate the ARFPSHN pilot program and prepare a written report to the Legislature by January 1, 2009. There is currently no requirement for a report to the Legislature evaluating the ICF/DD-CN pilot program. However, we note that DHCS has requested $250,000 total funds ($125,000 General Fund) to contract with an independent agency or organization for a final assessment of the cost-effectiveness and feasibility of making the ICF/DD-CN model a permanent new provider type.

Governor’s Proposal

The 2007-08 Governor’s Budget proposes three positions, on a two-year limited term basis, for DHCS state operations to ensure compliance with waiver requirements and develop the State Plan Amendment to add the ICF/DD-CN as a state benefit.

Analyst’s Assessment. We take no issue with the Governor’s request for positions or for the funding request for a final assessment of the ICF/DD-CN pilot program. We note that state law requires that a report be provided to the Legislature regarding the effectiveness of the ARFPSHN pilot program. However, no such reporting requirement exists for the ICF/DD-CN pilot program although DHCS is requesting funds for a consultant to evaluate the program. Without a report evaluating the effectiveness of the ICF/DD-CN pilot program the Legislature will likely have insufficient information to determine whether this model for residential services should be discontinued, maintained, or expanded.

Analyst’s Recommendation

In order to better evaluate how residential models can best serve the needs of medically fragile DDS clients, the Legislature needs to be fully informed about the cost-effectiveness of the two pilot programs currently underway. Given that DHCS will contract for an evaluation of the ICF/DD-CN, we recommend the evaluation be provided to the Legislature and that the evaluation assess the same issues addressed by the ARFPSHN evaluation.

The following Supplemental Report Language is consistent with this recommendation:

It is the intent of the Legislature that the Department of Health Care Services (DHCS) shall submit a report to the Legislature evaluating the Intermediate Care Facility for the Developmentally Disabled-Continuous Nursing (ICF/DD-CN) pilot program. This evaluation and subsequent report in writing shall at minimum address the following: (1) the number, business status, and location of all the treatment facilities; (2) the number and characteristics of the residents served; (3) the effectiveness of the pilot program in addressing residents’ health care and intensive support needs; (4) the extent of residents’ community integration and satisfaction; (5) the consumers’ access to, and quality of, community-based health care and dental services; (6) the types, amounts, qualifications, and sufficiency of staffing; (7) the costs of all direct, indirect, and ancillary services; and (8) recommendations for improving the ICF/DD-CN model. The DHCS shall report its findings on this matter by January 1, 2009 to the Chair of the Joint Legislative Budget committee and the chairs of the fiscal committees of both houses of the Legislature.

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