DMH—Budgeting Improvements Could Help Ensure Efficient Use of State Resources

Due to concerns about DMH’s increasing state hospital costs and budgeting accuracy, the Legislature enacted budget bill language that required an audit of DMH’s budget estimation methodologies. In this analysis, we (1) provide background on the significant growth in the state hospitals budget, (2) review the findings from the audit required by the 2008–09 Budget Act, (3) discuss how DMH’s methodologies do not follow an agreement made with the Legislature in 2002, and (4) recommend actions for the Legislature to take to improve DMH’s budgeting processes.

Background

General Fund Growth Expected to Continue. The General Fund expenditures for the state hospitals have grown at an average annual rate of about 20 percent over the last three years and now exceed $1.1 billion annually. Many factors are driving these significant increases in state hospital spending, including medical inflation, new laws, litigation affecting staff salaries, and caseload increases. However, one major additional factor contributing to this rise in costs are state efforts at compliance with the CRIPA.

The CRIPA is a federal civil rights law designed to protect individuals in public institutions such as mental hospitals. Starting in June 2002, the U.S. DOJ conducted on–site reviews of the state hospitals and found significant deficiencies with California’s compliance with CRIPA. In May 2006, a formal consent decree was reached between the U.S. DOJ and DMH to address identified deficiencies. State hospital cost increases are partly due to ongoing efforts towards achieving CRIPA compliance through enhanced staff–to–patient ratios and the rollout of a new “recovery model” of care to improve patient treatment. The requirement that the state comply with CRIPA and implement the terms of the consent decree negotiated with U.S. DOJ limits the state’s options with respect to controlling costs in state hospitals.

Audit Raises Concern Regarding State Hospital Operations

The 2008–09 Budget Act directed the state Office of State Audits and Evaluations (OSAE) within DOF to conduct an audit of DMH’s budget estimation process. The OSAE audit makes several findings regarding state hospitals. It concludes that:

• The current staffing model may not adequately reflect hospital workload.
• Funding is insufficient for annual operating expenditures.
• State hospitals may not be efficiently using their staff.

The OSAE’s findings indicate a misalignment of the way funding is budgeted for state hospitals for personal services and operating expenditures and equipment (OE&E). For example, the audit identified that cost savings from personal services, known as salary savings, are being used to offset OE&E costs. As a result, the OSAE found that the state hospitals are at risk for operational shortfalls in the future. That is because salary savings will eventually decrease when vacant positions are filled and thus will no longer be available to be redirected to pay OE&E costs.

Audit Indicates Staff Possibly Being Used Inefficiently. Personal services expenditures make up the majority, or about 80 percent, of total hospital costs and have grown about 35 percent over the last three fiscal years. These cost increases are due in large part to level–of–care (LOC) staff activities related to CRIPA compliance as well as changing patient demographics, such as the increasing medical needs of an aging state hospital population. Our discussions with OSAE indicate, however, that another cost factor may be the inefficient use of hospital staff. Specifically, the audit found that some LOC staff, who are assigned to provide direct patient care, are regularly performing administrative duties not directly related to patient care. We are advised that some LOC staff are taking double shifts in order to complete paperwork and data entry tasks. The OSAE reports that some of this workload could possibly be shifted to non–level–of–care (NLOC) staff, who are generally less costly than LOC staff.

Staffing Ratios and Standards May Require Adjustment. The workload issues described above suggest that the current staffing ratios and standards may need to be adjusted. Staffing ratios and standards are generally guidelines for the number of LOC and NLOC staff needed per patient, per facility, or both. The DMH generally adjusts the state hospital budget for changes in population using LOC staffing ratios that are based on patient acuity levels as well as CRIPA and licensing requirements.

In addition, DMH has staffing standards for NLOC positions that generally appear to be based on guidelines dating back to the mid–1990s and early 2000s. The DMH reports that in recent years, budget requests for additional non–LOC staff have usually been based on specific, identified workload rather than these general guidelines.

Based on our discussions with OSAE, these potential workload issues, which in some cases have resulted in LOC staff performing administrative NLOC functions, appear to be driving some of the significant growth in overtime. Thus, the current LOC staffing ratios may not reflect the actual workload for these positions. This also raises question as to whether the NLOC staffing standards are up to date.

Agreed–Upon Budgeting Methodology Not Being Followed

We find that the department has deviated from an agreed–upon budgeting methodology for population requests established in 2002 among the Legislature, DOF, and DMH. As we describe below, the department’s current methodology differs from the 2002 agreement in two key ways: (1) when and how budget adjustments for the current year are triggered and (2) how funding adjustments for changes in the hospital caseload are calculated.

How the 2002 Agreement Worked. In 2002, the Legislature and the administration were in disagreement over the way that the state hospital budget should be adjusted when the population of various groups of patients turned out to be larger or smaller than originally budgeted. A compromise reached that year established a methodology for making such adjustments. It requires current–year adjustments if the actual patient census in any of five forensic commitment categories varies by 2.5 percent from the numbers assumed in the budget act for that year. This variance analysis was to be made, and result in appropriate budget adjustments, both at the time the Governor’s January budget was submitted to the Legislature as well as at the time of the May Revision. The budget–year caseload estimate was to be based on a projection reflecting the trend of actual hospital caseload data over the prior two years. These basic methodologies were used to adjust funding for state hospital caseload for the current year and the budget year based on an estimate of the annual cost of operating a state hospital bed.

Department Has Departed From the 2002 Methodology. Our analysis indicates that DMH has modified the way it adjusts its budget for unanticipated changes in its state hospital caseload so that it is no longer fully complies with the 2002 agreement. Specifically, as the annual January budget plan is prepared, DMH is now adjusting its budget only when the combined total change among these five categories of patients is higher or lower by 2.5 percent than assumed previously in the current year. At the May Revision, DMH uses yet a different method to develop its caseload estimate for the state hospitals in the current year. It creates a new projection of the state hospital population based on recent caseload trends. It then proposes budget adjustments if the total population projection varies from the budgeted amount by 2.5 percent, but does not propose changes when the projected number of patients in a particular forensic group is 2.5 percent larger or smaller than assumed in the original budget plan.

In addition, DMH no longer uses an average cost per bed to adjust its caseload budget requests. It instead computes such adjustments based on staffing ratios and the associated wage and salary costs for LOC staff.

Significant Changes Since 2002. We recognize that state hospitals have chanced significantly since 2002, particularly due to CRIPA related requirements, and that these changes have dramatically impacted staffing ratios and patient treatment models. Due to these changes, we believe that revisiting the agreed–upon methodology for making caseload adjustments may be warranted.

State Hospital Budgeting Procedures Should Be Reviewed

Our analysis of DMH’s budget estimation methodology, and the findings from the OSAE audit, demonstrate that improvements are possible to ensure more accurate budgeting of personal services and OE&E and the most efficient use of state resources. We also find that, due to significant changes to the state hospital system in recent years, the agreed–upon budgeting methodology between the administration and the Legislature from 2002 warrants review. Based on these findings, we recommend the following actions:

Contract Through OSAE for Independent Consultant. We recommend that the Legislature adopt budget bill language requiring OSAE to contract with an independent consultant to identify what, if any, improvements are necessary to the current staffing model for the hospitals. The consultant should provide an evaluation of workload distribution issues, all staffing ratios, and overtime. In addition, we recommend this consultant review whether the staffing levels established to meet CRIPA requirements are appropriate. The DMH would pay for the costs of the consultant out of its existing resources, given the high vacancy rates (about 19 percent across the state hospital system) for hospital staffing.

Report on Operating Expenditures. We recommend that the Legislature direct the department to report at budget hearings on the extent to which (1) personal services funds are being used to support operating expenditures in state hospitals and (2) this practice may result in budget shortfalls in the future.

Revisit Agreed–Upon Budgeting Methodology. We recommend the Legislature direct the administration to work with the Legislature to establish a new caseload adjustment methodology agreement that considers the significant changes in the operation of the state hospitals since 2002. Please see the “Balancing the 2009–10 Budget” section of this report for a discussion of our recommendations for adjusting the Governor’s budget request for state hospital caseload, which are based on the agreed–upon methodology from 2002.