Restructuring the Medicaid Program

Arleen Leibowitz and Helen DuPlessis

Medicaid is a jointly funded federal-state entitlement program that finances the majority of medical and long-term care services for America's low-income and disabled population. Recent surges in Medicaid expenditures, attributable in large part to increases in the numbers of Medicaid recipients, have caused lawmakers to consider restructuring proposals that address both the entitlement character of the program--which mandates benefits to anyone meeting eligibility criteria--and the overall expenditures. This paper discusses recent trends in Medicaid financing and explores the implications of restructuring proposals for the nation's health care delivery system with special emphasis on the implications for California.

Medicaid Today: A Federal/State Program

Established in 1965 by Title XIX of the Social Security Act, Medicaid is jointly funded by the federal and state governments but administered by the states. Federal regulations mandate minimum standards for eligibility and coverage of benefits, but grant considerable discretion to states in a number of program areas, including (1) expansion of eligibility to groups above the minimum required by the federal government, (2) expansion of health care services above the minimum, and (3) establishment of provisions for reimbursement to providers. Under current law, federal funds pay for at least 50 percent of allowable Medicaid costs in every state. However, the federal government pays a larger share of the cost in low-income states. Currently the federal share ranges from 50 to 80 percent of Medicaid expenditures in a state.

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

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.

California's Medicaid Program

The California Medicaid program, known as Medi-Cal, has been more generous with eligibility than have other states' programs. California has high per-capita enrollment rates compared with the national average (200/1000 in California versus 144/1000 in 1992). Thirty-seven percent of children receive Medi-Cal, in contrast to 28.6 percent nationally. Higher percentages of non-elderly adults also receive Medi-Cal than in other states--9.2 percent of persons under 65 versus 5.5 percent nationwide (Table 1). Although children account for more than half of the 6.1 million Medi-Cal enrollees (3.1 million), and their mothers and other non-aged adults account for another 1.7 million recipients, the program also covers many elderly (0.6 million) and blind and disabled (0.7 million). Following the national trend, the number of Medi-Cal beneficiaries grew 12.5 percent a year from 1990 to 1993.

Table 1

Medicaid Enrollees and Enrollment Rates: United States and California, 1992

Table 1

Spending for mandated services in California was distributed somewhat differently than was typical in other states, perhaps owing to the disproportionately large number of children and non- elderly adults covered by the program (Figure 2). The largest portion of the Medi-Cal dollar was spent on hospital services (47 percent), including 19 percent on DSH, with the remainder being distributed as follows: 29 percent on outpatient services; 17 percent on long- term care, and 8 percent on Medicare premiums. California's heavy reliance on DSH payments to cover the cost of inpatient care for the uninsured contributed in part to the funding crisis in Los Angeles County and will be discussed in further detail below.

Figure 2

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.

Proposals for Restructuring the Medicaid Program

The MediGrant Proposal

Federally mandated expansions in Medicaid eligibility have driven the inexorable rise in both federal and state Medicaid expenditures. A proposal introduced in the fall of 1995 in the U.S. House of Representatives would fundamentally change the "entitlement" characteristic of the Medicaid program, which mandates the provision of services to all persons meeting eligibility criteria for the program. The House MediGrant proposal would replace the current Medicaid program with block grants to states. Block grants would allow increased flexibility (with approval from the Secretary of Health and Human Services [HHS]) in the determination of eligibility standards, scope of benefits, and financing with regard to the provision of medical assistance to low-income individuals and families. The amount of money received as a block grant would be based on historical allocations, and would not increase or decrease with the numbers of persons eligible.[3]

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 National Governors' Association Proposal

In February 1996, the National Governors' Association (NGA) put forward a Medicaid reform proposal that modifies the MediGrant plan to allow the continuation of some of the elements of an entitlement program. At the same time, the NGA plan allows states greater freedom than under the current Medicaid program to determine eligibility standards and benefits. Federal financing would be fixed in any year, but would depend partly on growth of the eligible population.

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 Medicaid expenditures resulting from increase in caseloads and medical price 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.

Implications for California of Medicaid Restructuring

The MediGrant and NGA proposals represent two different approaches for restructuring the Medicaid program. Although neither may be adopted exactly as proposed, they provide a blueprint for two different options. Table 2 presents the principal features of the current Medicaid program and the two "prototype" reforms proposed.

Table 2

Characteristics of Current, Block Grant and Restructured Entitlement Proposals for Medicaid

Table 2

Historically, California has had low Medicaid reimbursement rates and high rates of growth in eligible Medicaid populations, as compared to other states. These two factors imply that block grants will severely disadvantage the California Medi-Cal program.

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.

Medicaid Managed Care

Mandating Managed Care in California Counties

Many states are seeking to enroll their Medicaid beneficiaries in managed care plans in order to contain Medicaid outlays and reduce the uncertainty surrounding Medicaid expenditures. Prepaid health plans may provide health care at a lower cost than fee-for-service plans through the use of delivery system characteristics such as utilization management and care coordination, and financing innovations such as monthly capitation rates that are independent of the amount of care the beneficiary actually uses.

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]

Projected Effects of Managed Care for Medi-Cal

Access to Care. Access to medical care historically has been difficult for many Medi-Cal beneficiaries, owing to the limited number of providers who would accept the relatively low reimbursement rates offered by Medi-Cal for their treatment. Many Medi-Cal beneficiaries who cannot find private providers who accept Medi-Cal payment seek care in county hospital emergency rooms and outpatient departments. County hospitals provide the services because they are required by law to treat all persons in need of care. Much of this care is for routine health problems, which could be treated in less-expensive settings than outpatient departments and emergency rooms.

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 for traditional 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.

Reorganizing the Los Angeles County Health Delivery System

In the spring of 1995, the Los Angeles County Department of Health Services (LA DHS) predicted a budget deficit in excess of $655 million for fiscal year 1995-1996. This projected shortfall represented the most severe deficit among many the department has faced in the past decade, and necessitated a temporary reduction in services of county hospitals. These fiscal difficulties are best interpreted in light of the organizational structure of the health care delivery system and the trends in financing strategies.

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:

  • Expand access to primary care in outpatient settings through public-private partnerships.
  • Federal Medicaid matching payments will be made available for outpatient services.
  • State and county governments must develop an interagency agreement regarding the funding of indigent inpatient care.
  • Payments to county hospitals will be restructured to encourage the provision of care in outpatient settings.
  • Growth in LA DHS Medicaid spending must be limited to base spending for 1994-1995 plus an inflation factor.
  • Los Angeles County must fund the (50 percent) match (the state will not fund the waiver).

Assuming the county will be able to fund the match, the waiver provides a unique opportunity for the LA DHS to begin a restructuring process into a public sector health system that provides services in the most-appropriate and least-costly setting. This sort of planning process is one that all state and local governments will have to undertake to weather future reforms with the least amount of difficulty.

What Steps Should be Taken to Prepare for Medicaid Restructuring?

Developments at the federal, state, and county level point to extensive changes in California's Medicaid program in the near future. Federal policymakers may fundamentally change the nature of Medicaid, transforming an entitlement program into a block grant. Whether or not the federal funding changes, Medi-Cal must transform itself into a more-efficient, rational program. That change has already begun at the state level, with the mandatory enrollment of Medi-Cal beneficiaries in managed care in the largest California counties. In Los Angeles County, the attempt to move the county health system away from inpatient services and into enhanced outpatient services is another, parallel effort to increase the efficiency and reduce the cost of delivering health care to county residents who are unable to pay the full cost of their care.

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.

Financing Uncompensated Care

In addition to their role in paying a share of Medicaid costs, states (and counties) have responsibilities as "providers of last resort" to pay for the medical care of poor persons who do not meet the categorical requirements for Medicaid eligibility. Indeed, many Medicaid beneficiaries lose eligibility and become uninsured only to regain eligibility at a later date. This drift between Medicaid and uninsured status provides a rationale for offsetting the cost of uncompensated care with Medicaid funding. The demands on state and local government to pay for such care have been growing with increases in the numbers of people who lack health insurance and with the growth in numbers of undocumented immigrants (who are not eligible for Medicaid).

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.

Interfacing with Welfare Reform

State decisions about welfare reform will affect the numbers of uninsured that counties must provide for. If California succeeds in moving large numbers of families off of AFDC and into work, the numbers of uninsured may increase. All AFDC recipients are guaranteed Medicaid coverage. However, persons leaving AFDC for employment are unlikely to be offered employer-paid health insurance in the types of low-paying jobs often available to them. Thus, unless California mandates extended Medicaid coverage for families leaving AFDC, the numbers of uninsured who look to the county for health care will certainly grow. Clearly, the state can make employment a more attractive option for AFDC eligibles by ensuring health insurance for low-income workers whose jobs do not provide it. To ease the transition from welfare, the state might encourage the development of low-premium commercial insurance that is affordable by those individuals moving off of welfare or currently covered under Medicaid expansions. Subsidies could be graduated and required of state/local governments, private sector providers, and employers, thus unhinging the provider of care from the responsibility of financing the care.

Provide Incentives for Cost-Efficient Health Care Delivery

Disproportionate Share Hospital payments, OBRA/IRCA, and other such financing mechanisms support perverse incentives to provide care in expensive settings like hospitals and emergency rooms. The federal [[currency]]1115 waiver gives Los Angeles County the opportunity to reverse its reliance on inpatient care while still receiving support for the uninsured. However, the county's ability to receive these DSH payments depends on federal restructuring and the evolution of Medi-Cal managed care.

Maintaining Quality Assurance and Monitoring Capacity

None of the restructuring proposals advanced to date maintains rigorous standards for the quality and organization of the health care delivered under the new systems. In fact, most proposals unencumber states from federal standards aimed at securing the most basic assurances of quality. Medicaid HEDIS, an adaptation of a private sector tool, has been proposed as the means of monitoring the care delivered by managed care organizations to Medicaid recipients. However, it will provide only the most basic utilization information, and will not adequately handle the needs of children and individuals with significant acute or chronic health care needs. The large changes in both eligibility and covered services that may result from block grants may bring about equally large changes in health. The state has a proper role in monitoring the effects on health of these massive changes in health policy.


California Institute for Federal Policy Research, The National Governors' Association Medicaid Proposal: Overview and California Implications, February 28, 1996.

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.

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[1] Without DSH payments, expenditures would have risen by only 18.9 percent.

[2] California's 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 Governors' 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 authority 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.