DHCS—Federal Economic Stimulus Package: Implications for Medi–Cal

The federal government is currently developing legislative proposals to help state governments balance their budgets. The U.S. Senate and the House of Representatives have each proposed fiscal assistance packages that would channel substantial federal funds to states through a variety of existing and newly authorized federal programs. The House passed its proposal on January 28, 2009. The Senate had not yet passed its version of the stimulus package at the time this report was prepared.

California stands to gain substantially under either proposal, with significant federal assistance available through the Medicaid program (known as Medi–Cal in California) and other health–related programs. The largest portion of additional funding by far would come in the form of an increased federal share of costs for Medi–Cal. Other significant components would provide new options to states to provide Medicaid coverage for the unemployed, expand transitional coverage, and finance an investment in state health information technology systems.

At the time this analysis was prepared, we were continuing to examine additional provisions of the evolving federal economic stimulus package that could have important ramifications for California. Below, we summarize the key Medicaid components of the proposed congressional packages that we have identified so far and discuss their implications for California.

Increased Federal Share of Support for Medi–Cal

Federal Funds Currently Share a Portion of Medicaid Costs. The federal government provides a share of the cost of each state’s Medicaid program. The percentage of program costs funded with federal funds is known as the federal medical assistance percentage (FMAP), and is determined annually by a federal statutory formula that compares the state’s average income to the national average income. The Medi–Cal Program currently receives the 50 percent minimum FMAP for most services, meaning that the program generally receives one dollar of federal funds for each state dollar it spends on those services.

No state receives less than a 50 percent FMAP, which is only available for services and enrollee groups that are required or optional under federal law. States also may expand their Medicaid programs beyond these federally approved levels, but FMAP is not available for costs related to those services. The federal government also offers an “enhanced FMAP” for certain program costs, such as groups with particular medical conditions or the implementation of information technology systems. For example, a program to provide certain breast and cervical cancer treatment for eligible low–income women receives roughly two federal dollars in support for each dollar of state funds. In addition, the state has delegated administrative responsibility for some portions of the Medi–Cal Program to local governments. In some of these cases, local governments provide a share of the nonfederal portion of the program costs.

Federal FMAP Enhancement Proposals. Both the House and the Senate proposals would provide federal funds to increase FMAP for all states. An increase to FMAP would shift a portion of the costs for states’ existing programs to the federal government. Both of the proposals likely would result in billions of dollars in additional federal funds for California over a little more than two federal fiscal years and then cease. The increase in the federal share of cost for Medi–Cal would be retroactive back to last October, as the bills are now drafted, meaning that the state would benefit from significant federal fiscal relief in both the current state fiscal year and the budget year as well as into part of 2010–11. Local governments that share in a portion of Medi–Cal costs would also benefit.

Key provisions of these proposals (as of the dates indicated below) are summarized in Figure 5.

Implications for California. Under these provisions, according to some estimates, California state and local governments could potentially receive between roughly $9 billion and $11 billion through an increase in its FMAP through December 31, 2010. Based on recent employment data, the state likely would qualify for either the second–highest or highest bonus FMAP increase available under each of the two proposals.

However, based on our review of the proposed eligibility restrictions, the state would currently be ineligible for enhanced FMAP due to an eligibility procedure change the state enacted as part of the 2008–09 Budget Act. This change required families to submit a status report on behalf of their children every six months to confirm their continuing eligibility for Medi–Cal. (The parents are already required to submit this report.) In order to receive the new federal funds, the state would need to reverse this policy prior to July 1, 2009. This reversal would result in additional costs to the state of $92 million General Fund in 2009–10 (as estimated at the current Medi–Cal FMAP rate of 50 percent).

In addition, the Governor’s 2009–10 budget plan incorporates other proposed reductions in Medi–Cal Program eligibility rules that, if adopted, would achieve $324 million in General Fund savings in 2009–10. In particular, the budget proposes to:

• Lower the income eligibility level and restore stricter work limitations for certain parents.
• Reduce the income eligibility level for certain aged or disabled persons.
• Limit the eligibility of undocumented immigrants to the months in which they actually receive services.

The state would have to forego these reductions—at least for about two years—if it wished to qualify for the increased federal Medicaid funding.

New State Medicaid Options

In addition to the FMAP enhancement provisions, the House and Senate federal stimulus proposals would also establish certain new options for state Medicaid programs to expand coverage and benefits, or make other improvements to the health care system. Key provisions included in one or both proposals include:

• A Medicaid coverage option for certain unemployed persons, to be paid for entirely with federal funds. Only the House proposal includes this option.
• An extension of certain “transitional” Medicaid benefits.
• New options to provide funding and other oversight for expanded use of health information technology.

We discuss each of these proposals in more detail below.

New Medicaid Option for the Unemployed

Medicaid Eligibility Currently Limited to Certain Groups. Under current federal Medicaid rules, federal cost sharing is available for states to provide health coverage primarily for low–income families with children and the aged or disabled. Simply having a low income is insufficient for an adult to be eligible for the Medicaid program; a low–income adult must generally also be the caregiver for a child or have a disability to be enrolled. (Also, other elderly and disabled persons receive care under the federal Medicare Program.) States may provide Medicaid coverage to groups without these “linkages,” but the federal government will generally not provide matching funds for those groups. States that wish to expand coverage to such groups must do so now entirely at their own expense.

New Options Proposed for the Unemployed. The House proposal would provide federal funds to pay 100 percent of the costs until December 31, 2010 for states that choose to provide Medicaid coverage to these new groups of adults:

• Adults who are receiving unemployment benefits or who exhausted their unemployment benefits.
• Adults who lose their jobs and have family incomes of no more than 200 percent of the FPL.
• Adults who lose their jobs and whose family participates in the federal food stamp program (see the 2009–10 Budget Analysis Series: Social Services for a description of the food stamp program).

Implications for Medi–Cal. California currently does not offer Medi–Cal coverage to these groups proposed by the House. Persons in these categories now may be uninsured or may have health insurance through a spouse’s employer. Also, counties have financial responsibility for providing care for indigent adults and children who do not qualify for Medi–Cal coverage, and some private medical providers offer charity care to persons who are ill and do not qualify for Medi–Cal assistance or other state health care programs. This proposal breaks new ground, in that it would potentially make a new publicly funded source of coverage available to this population at no cost to the state (or counties) over the short–term. However, under the current House proposal, the federal funding for this expansion of health coverage would terminate as of January 1, 2011.

Transitional Medi–Cal

Current federal law requires states to provide a transitional Medicaid benefit to assist families who increase employment income while receiving Medicaid coverage. Under this benefit, families enrolled in Medicaid for a certain minimum period, and who increase their earnings beyond the income ceiling that would otherwise make them ineligible for coverage, can retain their coverage for an initial six–month period. States must also offer these families a second six–month period of coverage, but may charge premiums or limit the benefits available during the second six months.

Under the House and Senate proposals, effective July 1, 2009, states could elect to (1) extend the initial six–month transition coverage to 12 months, instead of providing extensions of coverage in six–month increments, and (2) waive the minimum enrollment period now needed to qualify for transitional coverage. The transitional benefit would end December 31, 2010.

Implications for California. In Medi–Cal, about 148,000 enrollees currently receive transitional coverage. We estimate that the state would incur General Fund costs in the tens of millions of dollars annually (assuming the standard 50 percent FMAP) to extend the initial six–month coverage period for an additional six months. It is unclear how many additional enrollees would be newly eligible for transitional Medi–Cal if the state were to waive the minimum enrollment period now in place. This further modification of program rules would result in unknown additional state costs for these benefits.

Health Information Technology

Background. Health information technology (HIT) refers to a variety of information–sharing technologies and processes related to the electronic generation, storage, and sharing of health information among health care providers and patients. Please refer to our February 2007 report entitled, A State Policy Approach: Promoting Health Information Technology in California, for a more detailed discussion of HIT and its potential benefits.

The federal government currently provides some policy oversight and funding to promote the adoption of HIT in the U.S. health care system. In California, the California Office of Health Information Integrity, within the state Health and Human Services Agency, has recently expanded its involvement in coordinating HIT privacy policies and convening stakeholder working groups to integrate the use of HIT into the California health care systems. Various private organizations and local governments in California also provide some funding or coordination for various HIT efforts.

Proposed HIT Provisions. Both the House and Senate proposals would establish various policies intended to promote and coordinate the adoption of HIT. These provisions include increased oversight of technology standards and health information privacy, as well as several types of funding assistance. Funding provisions include paying for a portion of the costs for qualifying Medicaid providers, such as physicians and children’s hospitals, to implement and administer HIT. To qualify for the funds, providers would need to serve specified minimum percentages of Medicaid patients and use technologies that meet certain standards. In both the House and Senate proposals, the state would need to administer a HIT oversight program to ensure that providers who receive the federal funds adhere to the proposals’ specified criteria.

The proposals pending in Congress also would establish various HIT programs not directly linked to Medicaid, including grants and other financial and technical assistance to be distributed through states, as well as financial incentives for health care providers in the federal Medicare Program. These programs require varying levels of nonfederal funding to draw down this federal assistance—in some cases as little as $1 of nonfederal funding for every $10 received from the federal government. For example, proposed grants to states to develop loan programs for the adoption of electronic health records would require $1 in nonfederal funding for each $5 in federal funds. These nonfederal shares could be provided by states or potentially by local governments or private entities.

Implications for California. Increasing the adoption of HIT among health care providers in California holds the potential to reduce the costs and increase the quality of health care in the future through such systemic improvements as reducing the number of unnecessary medical tests and procedures, decreasing the number of costly medical errors, and streamlining health care administration. Improvements throughout the health care delivery system are also likely to reduce costs, or at least their growth, in Medi–Cal and other state–administered health care programs such as HFP. It is unclear at this time what portion of funding proposed by the House and the Senate would be allocated to California, or what funds the state or other nonfederal sources might need to provide in order to participate in the proposed programs.

Federal Medicaid Funds Available for Budget Savings

State Budget Situation Remains Fragile. As we described in our recent publication regarding the state budget (see the 2009–10 Budget Analysis Series: Overview of the Governor’s Budget), the state faces severe fiscal problems due to an ongoing gap between state revenues and program expenditures and the severe economic downturn. Additionally, the 2008–09 Medi–Cal budget is itself subject to considerable uncertainty, with potential increases in General Fund costs in the low hundreds of millions of dollars if, for example, the rough economic conditions add to Medi–Cal caseloads.

Federal Medicaid Funds Free Up State General Fund. The additional Medicaid funds proposed by the House and the Senate do not include requirements that states maintain current levels of state funding support for their Medicaid programs. As such, the additional FMAP funds that the state would receive for Medi–Cal could be used to reduce state General Fund support for the program. In effect, this would permit a temporary shift of General Fund resources currently used for Medi–Cal to support other state programs and achieve at least a short–term state budget solution for a couple of years.

Legislature Should Be Cautious About Eligibility Expansions

Eligibility Expansions Could Result in Ongoing Cost Increases. The Medi–Cal options included in the House and Senate bills described above could be of great benefit to individuals and families in California who lack health coverage or are at risk of losing their health benefits due to severe economic problems. However, the options to expand eligibility also pose a significant financial risk to the state at a time when it is likely to continue to have a sizable and ongoing structural budget deficit.

First, some of the options made available to states under the proposals now pending in Congress, such as expanding transitional Medicaid coverage, would require the state to commit additional state matching funds to draw down additional federal assistance at a time when the budget is already facing a severe deficit. Moreover, some aspects of the pending federal legislation, such the 100 percent federal funding to expand eligibility for such new groups as unemployed adults, would expire in about two years, as the bills are now drafted. If the state were to continue coverage for these groups after federal support for these program expansions runs out, the state would need to augment General Fund spending considerably during the second half of the 2010–11 fiscal year and thereafter. Thus, this short–term federal assistance could actually aggravate the state’s fiscal problems in the longer run.

Accordingly, we would caution the Legislature about expanding the Medi–Cal Program in the ways proposed by the federal economic stimulus bills. At the very least, any change in state law to incorporate the federally authorized expansion of services now contemplated by Congress should specify that the expansions of eligibility will cease when the additional federal funding to support them runs out.

HIT Provisions Provide Potential Opportunity. As noted above, both the House and Senate proposals offer opportunities to leverage federal funding for HIT improvements with relatively small contributions of state or other nonfederal sources of funding. The proposals also would allow non–state entities to contribute the requisite matching funds on behalf of the state. Given the potential opportunity to improve services for state health program beneficiaries and to substantially reduce state administrative costs for these programs in the long term, we recommend that the state seek to identify non–state sources of funding from private health care foundations or provider organizations in order to participate in the proposed HIT programs to the extent possible. The Office of Health Information Integrity should be directed to take the lead in these efforts.