Figure 1--Federal Medicaid Spending by Service, 1993
The number of Medicaid beneficiaries has risen rapidly since the inception of the program. After a period of relative stability during the 1980s, the total number of Medicaid recipients expanded substantially from 21.8 million in 1988 to 33.5 million in 1994 (HCFA Review, 1995; Kaiser Commission, 1995). This recent growth resulted primarily from the expansion of Medicaid coverage to low-income pregnant women and young children who are not enrolled in income support programs, such as Aid to Families with Dependent Children (AFDC). Adults under 65 and children account for approximately 73 percent of the beneficiaries, while the elderly, blind, and disabled account for 27 percent. Despite the disproportionate growth in the numbers of adult and child Medicaid beneficiaries, these two groups, adults and children, contributed less to the growth in overall expenditures than did the aged, blind, and disabled beneficiary groups. Children and non-aged adults account for approximately 27 percent of Medicaid spending compared with nearly 60 percent of expenditures funding services for the aged, blind, and disabled (Figure 1).
Figure 1--Federal Medicaid Spending by Service, 1993
The period from 1988 to 1993 also saw dramatic growth in expenditures for the Medicaid program. Total spending (federal and state contributions) increased from $51 billion in 1988 to $125 billion by 1993, with the Congressional Budget Office projecting expenditures to reach $158 billion for fiscal year 1995. The expansion in eligibility and spending for Medicaid increased state expenditures as well. State contributions almost tripled from $19 billion in 1988 to nearly $56 billion in 1993. Medicaid is seen as a prime example of an "unfunded mandate" in which the states are obligated to share in the cost of the program that the federal government has decided to expand.
Medicaid spending covers a variety of mandated services including inpatient and outpatient acute care services, long-term care for the elderly and mentally ill, Medicare (Part B) premiums for elderly persons in poverty and Disproportionate Share Hospital (DSH) payments. Despite recent increases in acute outpatient spending, long-term care services account for more than one-third of all Medicaid costs (35 percent). Hospital reimbursements account for 34 percent of all costs (including 14 percent spent on DSH); outpatient services account for 26 percent; and payments of Medicare premiums for impoverished elderly account for 5 percent of Medicaid spending.
Some explanation of DSH payments is in order, since these expenditures accounted for much of the increase in overall Medicaid expenditures in the early 1990s. The Omnibus Budget Reconciliation Act (OBRA) of 1987 authorized these payments to supplement the financing of hospitals that cared for a large volume of Medicaid or other low income/uninsured patients. DSH payments are made as a supplemental adjustment to the qualifying hospital's Medicaid rate and are distributed as a function of the number of Medicaid inpatient days. Federal Medicaid reimbursements to states rose sharply in 1989, when DSH payments to states were first implemented. DSH payments accounted for much of the 28 percent increase in Medicaid expenditures between 1990 and 1991.[1] (Winterbottom et al., 1995, p. 127). By 1993, DSH payments amounted to $16.9 billion, or 13.5 percent of total Medicaid expenditures.
The factors contributing to increased Medicaid spending have shifted somewhat in recent years. While DSH payments accounted for much of the increase between 1990 and 1991, their contribution was actually negative from 1991 to 1992 (following federal legislation aimed at limiting states' reliance on DSH funding). Growth in eligibility accounted for two-thirds of the increase in Medicaid expenditures between 1991 and 1992. Additional causes of increased Medicaid spending were an inflation rate in medical costs that exceeded the Consumer Price Index, increases in the number of eligibles resulting from increased immigration, and the continuing loss of job-related health insurance, which was exacerbated by the recession that began in 1990.
The next section describes how these emerging Medicaid trends have affected California. The following sections describe the proposed solutions to California's health care problems--block grants, Medicaid managed care, and changes in the Disproportionate Share program. The final section discusses the likely interactions among these reforms.
Medicaid Enrollees and Enrollment Rates: United States and California, 1992
Figure 2--California Medi-Cal Spending by Service, 1993
California has relatively low per-enrollee costs compared with other states and has experienced lower-than-average increases in expenditures. Reimbursement rates that are well below the national average (Winterbottom et al., 1995, p. 126) allow Medi- Cal to maintain a relatively low average per-enrollee cost, despite the fact that Medi-Cal covers many services in addition to those mandated by federal regulations.[2]
A relatively low Medicaid reimbursement schedule has also allowed California to control the growth of Medi-Cal expenditures. Average annual growth in expenditures from 1990 to 1993 was below the national average--11.8 percent, excluding DSH payments, and 24.9 percent including DSH payments (Winterbottom et al., 1995, p. 127).
The State of California is attempting to streamline Medicaid and control costs by promoting the use of managed care. Historically, California has led other states in the enrollment of Medicaid beneficiaries in managed care. In 1993, 5.3 percent of California's Medicaid payments went to HMOs, compared with 3.1 percent nationally. Current plans call for mandatory enrollment in HMOs for all AFDC-related Medicaid beneficiaries in 19 California counties, beginning in 1996.
The Medicaid reform proposals that call for ending the entitlement aspect of Medicaid and changing the program into one with a fixed budget also will certainly affect California, with its large and growing Medicaid population. The next section discusses the implications for California, and particularly Los Angeles County, of the three proposed policy changes.
The bill explicitly eliminates the entitlement characteristic of the program, thus eliminating current federal regulations regarding categorical eligibility, duration of eligibility, and financial standards. Instead, states could set their own eligibility standards. However, states would be required to devote specified minimum shares of total Medicaid spending for each of three groups: low-income families with a pregnant woman or child (below 185 percent of the federal poverty line), low- income elderly, and low-income disabled. The share for each of these beneficiary groups would have to reach at least 85 percent of the average share of the spending mandated for that group by federal law during FY 1992 through FY 1994. Requirements for coverage of particular services would be removed; thus states could develop their own scope of benefits (with the exception of requirements regarding immunization).
Additionally, states would be free to determine the organization and financing of health services delivery methods. Such flexibility in the organization of delivery systems would eliminate the need for a federal waiver of "statewideness" or freedom of choice of providers before experimenting with alternative delivery models in all or part of the state. Flexibility in financing health care would permit experimentation with a variety of arrangements such as the use of vouchers, fee- for-service, managed care arrangements, or utilization controls. The bill also would allow states to charge premiums for Medicaid coverage (except for AFDC families below 100 percent of the poverty level) and to impose coinsurance and deductibles for medical services without securing special federal waivers.
The NGA proposal guarantees eligibility for persons and families who are eligible for AFDC. Whatever the AFDC standards, states would be required to provide Medicaid for pregnant women and children up to age 6 with incomes up to 133 percent of poverty; children aged 6 to 12 with family incomes up to 100 percent of poverty; elderly persons eligible for SSI; and persons with disabilities. This list does not include several groups whose Medicaid coverage is currently mandated by the federal government: poor children aged 13 to 18, low-income elderly also covered by Medicare, and elderly nursing home residents whose incomes are above the SSI income standard. At their option, states could cover other groups with family incomes below 275 percent of poverty.
Unlike the MediGrant bill, the NGA plan allows the federal Medicaid contribution to depend on factors other than historical Medicaid payments. The NGA proposal would require states to contribute toward Medicaid reimbursements to obtain the federal allocation, but would reduce the state's matching contribution from the current level of 50 percent to a maximum of 40 percent. The amount of the federal contribution would depend on (1) the base Medicaid allocation in FY 93, FY 94, or FY 95, (2) expected growth in Medicaidexpenditures resulting from increase in caseloads and medicalprice inflation, (3) special grants to cover illegal aliens and Native Americans, and (4) an insurance umbrella designed to provide coverage (at a fixed level) for unanticipated growth in the number of eligibles whose coverage is guaranteed under the plan.
The NGA plan would guarantee most benefits for the populations whose coverage is mandated, but states would have increased flexibility in defining the amount, duration, and scope of these services. States would be freed of statutory provisions (such as the Boren Amendment) that require states to pay "reasonable and adequate" reimbursements to providers. Thus, states could set all health plan and provider reimbursement rates without approval of the federal government or threat of legal action by the plan or provider.
Characteristics of Current, Block Grant and Restructured Entitlement Proposals for Medicaid
Because of low levels of provider reimbursements and the state's leadership in the use of managed care, California has relatively low levels of Medicaid expenditures per beneficiary compared with other states. The MediGrant proposal, which bases the block grant on historical spending patterns, seems to punish states like California that have been aggressive in controlling Medicaid costs. One analysis found that under block grants based on historical spending patterns, high-reimbursement states like New York would receive federal contributions averaging $2000 per person under 150 percent of poverty; however, the federal contribution to California's Medicaid program would average only $800 per poor person.[4]
The NGA proposal would moderate the impact of a fixed Medicaid budget on California by providing more support for states in which medical costs generally are rising faster than the national average. In the future, other states may achieve lower rates of medical cost inflation than California because California will start with low reimbursement rates and has already used managed care to control expenditures. In contrast, other states may be able to achieve greater savings by cutting "fat" from their system and moving more beneficiaries into managed care. Under the NGA plan, California's allocation would rise if its rate of increase in Medicaid costs exceeded that in other states.
The treatment of increases in caseload under the NGA proposal would also be more favorable for California than the MediGrant bill. California has had a larger share of its population covered by Medicaid than other states, partly because of more-generous eligibility standards, and partly because of the characteristics of the California population. It is likely that Medi-Cal caseloads will continue to grow at a faster rate in California than elsewhere because of increases in the share of the elderly population and increases in the number of citizen children of undocumented immigrants. An inflexible block grant, such as that in the MediGrant proposal, makes no allowance for differential growth rates in numbers of persons in need across the states. California would fare better under the NGA proposal, which bases the block grant partially on a growth factor.
Financing the medical care of the uninsured is a critical concern in California. Despite a high level of per-capita income, California has an uninsured rate of that is matched only in the poorest states. Twenty-three percent of Californians have no health insurance, compared with 18 percent nationally. The uninsured rate in Los Angeles County is 31 percent--nearly twice the national average (Cousineau et al., 1994). Most of these uninsured persons have low incomes, yet many do not qualify for full-scope Medi-Cal because they are not citizens (46 percent of Latinos living in L.A. County have no health insurance [Cousineau et al., 1994]). Currently, the state relies on DSH payments and general funds to cover the cost of the uninsured.
Both the MediGrant and NGA proposals would alter DSH payments to hospitals. This may impose a large burden on California, which is heavily invested in this approach to financing the medical care for residents who lack health insurance. DSH payments are based on the total number of Medicaid funded inpatient days; thus, the greater the number of days that Medicaid beneficiaries are hospitalized, the greater the DSH payments. Currently, there is little incentive to move toward policies that reduce hospital use in order to limit Medicaid expenditures.
There is no requirement for private inpatient facilities to care for the uninsured. These facilities can provide services only to Medicaid beneficiaries, for whom they can garner better DSH supplemental payment, leaving the burden of care for the more expensive uninsured patient to public facilities. Although federal legislation in 1991 and 1993 placed significant restrictions on DSH payments, these restrictions were specifically aimed at abuses of DSH payments and are unlikely to affect the degree to which California relies on this mechanism for reimbursing the cost of care to Medi-Cal and uninsured patients.
The MediGrant proposal would particularly disadvantage California because it builds in no alternative provision for financing the medical care of the uninsured. The NGA proposal allows for the allocation of special grant funds, with no matching requirement, to cover illegal aliens and Native Americans. The NGA proposal also protects the state in the event of business cycle downturns that result in growth in the Medicaid-eligible population. It would therefore help to finance otherwise uncompensated care, and would build in protection against growth in the numbers of persons without health insurance.
After engaging in a series of problematic prepaid health experiments in the early 1970s, the State of California resumed prepaid Medi-Cal activities in 1982, when the Department of Health Services was granted authority to establish managed health care delivery systems for the Medi-Cal population in Santa Barbara and San Mateo counties.[5] These demonstration projects, while established as County Organized Health Systems (with responsibility for securing but not directly providing health services to Medi-Cal beneficiaries in all program aid categories), operate much like traditional health maintenance organizations. Reimbursement for health services employs a capitated model, and the primary care provider assumes responsibility for care coordination.
Since that time, the state has encouraged the development of other managed care systems, including a limited-risk gatekeeper model known as Primary Care Case Management (PCCM) and a Geographic Managed Care (GMC) model. Under GMC, the state contracts with a sufficient number of commercial prepaid health plans to cover the entire Medi-Cal population in a given county. Sacramento County undertook the development of a GMC demonstration in 1992, the implementation of which has been quite problematic.
In 1993, the California State Department of Health Services disseminated its plan for expanding the role of managed health care delivery systems for the Medi-Cal population by developing a fourth, so-called two-plan model. This model allows Medi-Cal beneficiaries in counties designated for expansion to choose between a locally-developed managed care plan composed largely of traditional providers of Medi-Cal services (the Local Initiative) and a commercial health maintenance organization with which the state will contract.
At the time of this writing, the California State Department of Health Services anticipates that 12 counties will proceed with the two-plan model, five as County Organized Health Systems (COHS), and two as Geographic Managed Care sites.[6] The Primary Care Case Management model, which was intended as a transitional model allowing individual providers to gain experience with managed care, will be phased out. If implemented as proposed, the plan would increase the number of Medi-Cal beneficiaries enrolled in prepaid health plans from approximately 600,000 (as of March 1993) to over 2 million by 1997, focusing primarily on beneficiaries who are categorically eligible as AFDC recipients.[7]
Managed care has the potential to improve the quality of care for Medi-Cal beneficiaries by encouraging access to primary care for routine health problems. Under Medi-Cal managed care, each beneficiary would be enrolled in a plan with a contractual obligation to provide necessary Medi-Cal services. Medical case managers may be able to provide the type of comprehensive, ongoing care that has been lacking for the beneficiaries who seek treatment in outpatient departments and emergency rooms.
On the other hand, prepaid plans create incentives for providers to limit the amount of care delivered. The conflict between plan incentives and state mandates may limit, rather than expand, access to care in the short term. This is of particular concern because the monthly capitation rate negotiated for the most recent managed Medi-Cal expansion is much lower than capitation rates under previous managed Medi-Cal demonstrations, and consequently is very low relative to what plans receive for their commercial enrollees. In recent years, Medi-Cal capitation rates have approximated the capitation rates that managed care plans charge their commercial subscribers (about $105/month/enrollee). However, the capitation rate for Los Angeles' Medi-Cal beneficiaries is currently projected at $75/month/enrollee, which is about two-thirds of commercial and earlier Medi-Cal capitation rates. Further, because prepaid plans do not file claims itemizing the services they deliver, it will be difficult for the state to monitor whether the beneficiaries actually receive the full range of services to which they are entitled.
Changes in Medi-Cal Providers. The competition among providers for Medi-Cal beneficiaries and dollars may dramatically alter the nature and types of Medi-Cal providers. Providers who are newly assuming responsibility for the medical care of Medi-Cal beneficiaries will have much to learn about the spectrum of diseases, utilization patterns, and health-related needs of their new patients. For example, Medicaid children are more likely than children from higher-income families to have complications in routine childhood illnesses, use emergency rooms as their primary source of care, and require psychosocial and other support services (Starfield, 1992). Moreover, because many Medi-Cal beneficiaries have relied on county hospitals and clinics for their care, they may continue to seek care at those sites even after they have been required to enroll in a managed care plan.
This latter phenomenon may be a double-edged sword fortraditional Medi-Cal providers. It would work to their advantage if beneficiaries chose to enroll with traditional providers who are participating with the Local Initiative (rather than having to provide unauthorized care to unenrolled patients who return to these providers out of habit). However, if the Local Initiative enrolls a large share of the chronically ill, it will be in the position of paying for the care of the sickest patients, while receiving only an average level of capitation. This type of selection would threaten the financial viability of the Local Initiative.
Role of Public Health and School-Linked Health Services. Under Medi-Cal managed care, the state may allocate funds that previously would have supported traditional public health functions to private managed care plans. This "privatization" of state health resources may undermine traditional public health functions such as communicable disease control/prevention (e.g., sexually transmitted diseases, tuberculosis, vaccine-preventable disease), population-based health services (e.g., vital statistics, disease-specific investigations/analyses), and even the assurance and policy-development functions outlined by the Institute of Medicine (1988). At the same time, the demand for these services may rise. A recent study of immunization rates in low-income areas in Los Angeles suggests that some commercial managed care plans reduce their own costs by referring their enrollees to public health clinics for such routine care as immunizations (Wood, Halfon, et al., 1994).
The increasing role of schools as a locus for health care may be reversed by Medi-Cal managed care. Initial plans call for the maintenance of screening services designated under the Local Education Agency (LEA) legislation, but these services will be maintained only for those children receiving special education services. Schools have served as an important model for expanded access to preventive and acute care services for all children with the establishment of school-based clinics (Healthy Start, 1991). Much of the financing for this care has come from billing Medi-Cal for eligible children. However, if financing for all Medi-Cal children is allocated directly to health care plans, school-based clinics will have difficulty getting reimbursed for their services. If several plans serve each area, there will be little incentive for any one plan to allocate some of its funding to provide these school-based services.
Before October 1995, the LA DHS operated six hospitals, 39 health centers, and six comprehensive health centers. These facilities provided 85 percent of uncompensated inpatient care and 60 percent of trauma care for the entire county. In recent years, the number of both inpatient and outpatient services delivered at these facilities has declined dramatically, while the organization of this public health delivery system essentially remained unchanged. During this same time period, the private health care market shifted the delivery of care from costly inpatient and emergency services to more-efficient (capitated) outpatient primary and preventive services.
At the same time, funding sources for county medical services have changed. Legislative changes in the State of California over the past 25 years have resulted in a decline in revenues for indigent care available directly from state and county revenues, and a shift to federal revenues.[8] The 1994-1995 LA DHS budget contributions were distributed as follows: 6 percent from the county, 27 percent from the state, 58 percent from the federal government, 9 percent other. It is important to note that historical trends in federal and state financing for indigent care have been disproportionately oriented toward inpatient and emergency (trauma) services, thereby supporting and even encouraging the heavy emphasis on inpatient services by county health systems like the LA DHS. For example, DSH and SB 1255 funding, which together account for almost 40 percent of the $2 billion budget of the LA DHS, are critically dependent upon the number of inpatient Medi-Cal days. OBRA/IRCA payments are likewise aimed largely at inpatient and emergency services (for undocumented aliens). Although the LA DHS currently provides about 3 million outpatient visits each year, similar spending increases for outpatient (Medi-Cal) services have not occurred.
This most recent fiscal crisis occurred in the face of proposals for dramatic restructuring of the nation's Medicaid program that threaten to curtail the availability of federal dollars to state and local governments. Recognizing that LA DHS could not make a rapid transition from its heavy emphasis on hospital-based health care delivery, and consequently its dependence on inpatient revenues, local and federal officials requested a waiver of Federal Medi-Cal regulations. The federal ([[currency]] 1115) waiver was designed to facilitate a transformation of the LA DHS, while preserving its critical contribution to the health care safety net. The main provisions of the waiver are as follows:
Uncertainty about changes to the federal Medicaid program makes it difficult to plan for state and local restructuring of Medi-Cal. However, it is clear that whether or not the federal program changes, the state and counties must deal with a number of crucial issues: financing care for the uninsured, interfacing with changes to AFDC, providing incentives for cost-efficient health care delivery, and ensuring that Medi-Cal delivers quality care for its beneficiaries.
To date, California has relied on revenues tied to the federal Medicaid program to cover much of the cost of treating the uninsured. Under MediGrant, coverage for the uninsured is left to the state's option. The NGA proposal would also fundamentally change the manner in which the county receives payments to cover the uninsured and immigrants.
The problem of paying for the uninsured is exacerbated by the state's transfer of Medi-Cal beneficiaries into managed care. The state may realize a greater efficiency in caring for Medi-Cal beneficiaries, but separating the providers for Medicaid and uninsured patients reduces opportunities to use Medi-Cal revenues to fund services for the uninsured. If the state allocates its Medicaid funding to health plans that treat a defined population on a prepaid basis, there is little possibility of using Medi-Cal revenues to fund services for the uninsured.
The current method of financing care for the uninsured with DSH payments has contributed to the inefficiency in Los Angeles County's health system by emphasizing inpatient care. The loss of these transfers will leave Los Angeles County hard-pressed to pay for medical care for the poor. With only limited powers to raise revenue, the counties must look to national and state governments as well as private entities to help shoulder the cost of the uninsured.
To the extent that undocumented immigrants account for a significant share of these costs, state and local governments bear the burden of yet another "unfunded federal mandate." There is an argument that the federal government has an obligation to contribute toward the cost of medical care for the undocumented, since the number of immigrants in California depends on actions and rules at the federal level.
The counties will continue to seek health funding from state government, which has much greater power to collect revenue. In addition, the state will have the power to allocate federal health funds under block-grant reforms. Yet neither the MediGrant nor the NGA proposal requires states to pay for the uninsured.
Private medical providers are currently able to evade the costs of paying for the uninsured. As discussed above, even the DSH payments allow private facilities to ignore uninsured patients in favor of Medi-Cal patients for whom they receive larger supplemental payments. By encouraging public-private partnerships, particularly among facilities that do not have a history of providing care to Medicaid or uninsured patients, the county could facilitate cost-shifting from commercial populations to the uninsured. Licensure requirements or "sick taxes" imposed on either hospitals or capitated plans that contract to care for Medi-Cal beneficiaries provide another mechanism to distribute the costs of paying for the uninsured more evenly across providers.
Cousineau, Michael R., E. Richard Brown, Simon M. Shen, Roberta Wyn, Hongjian Yu, William Cumberland, and Gerald Kominski, The Uninsured in Los Angeles, Policy Brief of the UCLA Center for Health Policy Research, July 1994.
Health Care Financing Review, Supplement, Winter 1995.
Healthy Start bill (SB 620), 1991 Cal. Stat. 759.
Institute of Medicine (U.S.), The Future of Public Health, Committee for the Study of the Future of Public Health, Division of Health Care Services, IOM, National Academy Press, Washington, DC, 1988.
Kaiser Commission on the Future of Medicaid, Medicaid Expenditures and Beneficiaries: National and State Profiles and Trends, 1984-1993, Urban Institute, Washington, DC, 1995.
Kaiser Commission on The Future of Medicaid, Medicaid Special Financing Arrangements: Disproportionate Share Hospital (DSH) Payments, Provider Taxes, and Intergovernmental Transfers, Kaiser Family Foundation, Washington, DC, April 1995.
Starfield, Barbara, CHIP: Child Health and Illness Profile: Development of a Child Health Status Measure, 1990.
Winterbottom, C., D. Liska, and K. Obermaier, State-Level Data Book on Health Care Access and Financing, 2nd Edition, Urban Institute Press, Washington, DC, 1995.
Wood, D., N. Halfon, C. Sheibourne, and M. Grabowsky, "Access to Infant Immunizations for Poor Inner City Families: What is the Impact of Managed Care?" Journal of Health Care for the Poor and Underserved, Vol. 5, No. 2, 1994, pp. 112-129.
[2] CaliforniaÕs per-enrollee expenditures for children averaged $601 in 1993, or 62.9 percent of the national average. Expenditures per adult enrollee averaged $1422, or 82.8 percent of the national average (Winterbottom et al., 1995, p. 126).
[3] DSH payments and payments for services to illegal aliens would not be included in computing the base-period spending percentages.
[4] Policy Brief, The Kaiser Commission on the Future of Medicaid, March 1995 (prepared by the Urban Institute), as quoted in California Institute for Federal Policy Research, The National GovernorsÕ Association Medicaid Proposal: Overview and California Implications, February 28, 1996.
[5] Access, quality, and marketing abuses in the 1970s resulted in the passage of two key pieces of legislation that eliminated most existing Medi-Cal contracting by prepaid health plans. The Waxman-Duffy Prepaid Health Plan Act established contracting au-thority and organizational standards for Medi-Cal prepaid health plans, and the Knox-Keene Health Care Service Plan Act designated the State Department of Corporations as the regulatory agency for all prepaid health plans.
[6] Two-plan counties are Alameda, Contra Costa, Fresno, Kern, Los Angeles, Riverside, San Bernardino, San Francisco, San Joaquin, Santa Clara, Stanislaus, and Tulare. COHS counties are Santa Barbara, San Mateo, Orange, Solano, and Santa Cruz. GMC counties are Sacramento and San Diego.
[7] This number could reach 3 million, if voluntary enrollment in HMOs is included.
[8] Despite Proposition 13, which allowed shifting of county tax revenues to the state, during the 1980s responsibilities continued to be shifted from the state back to the counties. For example, the Medically Indigent Adult program (MIA), which was funded through Medi-Cal, became a county responsibility in the mid 1980s.