The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
About the Series
Assessing the New Federalism is a multi-year Urban Institute project designed to analyze the devolution of responsibility from the federal government to the states for health care, income security, employment and training programs, and social services. Researchers monitor program changes and fiscal developments, along with changes in family well-being. The project aims to provide timely nonpartisan information to inform public debate and to help state and local decision-makers carry out their new responsibilities more effectively. Key components of the project include a household survey, studies of policies in 13 states, and a database with information on all states and the District of Columbia, available at the Urban Institute's Web site. This paper is one in a series of reports on the case studies conducted in the 13 states, home to half of the nation's population. The 13 states are Alabama, California, Colorado, Florida, Massachusetts, Michigan, Minnesota, Mississippi, New Jersey, New York, Texas, Washington, and Wisconsin. Two case studies were conducted in each state, one focusing on income support and social services, including employment and training programs, and the other on health programs. These 26 reports describe the policies and programs in place in the base year of this project, 1996. A second set of case studies to be prepared in 1999 will describe how states reshape programs and policies in response to increased freedom to design social welfare and health programs to fit the needs of their low-income populations.
The income support and social services studies look at three broad areas. Basic income support for low-income families, which includes cash and near-cash programs such as Aid to Families with Dependent Children and Food Stamps, is one. The second area includes programs designed to lessen the dependence of families on government-funded income support, such as education and training programs, child care, and child support enforcement. Finally, describe what might be called the last-resort safety net, which includes child welfare, homeless programs, and other emergency services. The health reports describe the entire context of health care provision for the low-income population. They cover Medicaid and similar programs, state policies regarding insurance, and the role of public hospitals and public health programs.
In a study of the effects of shifting responsibilities from the federal to state governments, one must start with an understanding of where states stand. States have made highly varied decisions about how to structure their programs. In addition, each state is working within its own context of private-sector choices and political attitudes toward the role of government. Future components of Assessing the New Federalism will include studies of the variation in policy choices made by different states.
Contents
Highlights of the Report
Overview
California health policymakers face an insurance system in which only 57 percent of the nonelderly population is covered by employer-sponsored insurance. This is among the lowest rates of employer-sponsored coverage in the country. As is the case in other states with similar rates of employer-sponsored coverage, California has a very high rate of uninsurance and associated concerns related to access to care and public health outcomes. Recognizing these concerns, to address the needs of its population California has assembled a set of policies that try to compensate by relying on broad Medi-Cal eligibility (Medicaid is called Medi-Cal in California), private health insurance market reforms, and a county-based system of providing indigent health care. Despite these efforts, one out of five nonelderly Californians lacks health insurance coverage. This has created significant demands on the state's safety net providers.
Meeting these demands is complicated by the large numbers of documented and undocumented (illegal) immigrants in the state. These individuals tend to have lower incomes, on average, and are less likely to have private insurance coverage. Under welfare reform, many immigrants will lose access to income support and food stamp benefits. However, the state has chosen to keep documented immigrants eligible for Medi-Cal under the same rules that existed before welfare reform. Although this decision was affected by the reality that they would still be eligible to receive emergency Medi-Cal benefits in any case, it lessens the potentially adverse consequences of welfare reform on documented immigrants. For undocumented immigrants who can receive emergency Medi-Cal services, there have been efforts to reduce nonemergency, state-funded health programs after welfare reform.
In a state as large and diverse as California, it is not surprising to find this diversity reflected in the design of the state's health policies. Within Medi-Cal, for example, the state is advancing three distinct county-based approaches to managed care that reflect the development of the local health care markets. Similarly, within the indigent care system, counties are free to design their own approaches to meet their obligations to the low-income uninsured. When California has implemented statewide initiatives during the past decade, they have relied on the private market and built on the highly developed nature of managed care in the state. Most recently, when the state decided how it would respond to the federal State Children's Health Insurance Program, it chose to bypass a major Medi-Cal expansion and establish a program— Healthy Families— that provides subsidies to allow families to purchase children's coverage through commercial plans.
Medi-Cal Program
Medi-Cal enrolled 6.8 million Californians at some point during 1995, at a cost of $17 billion. Despite these high aggregate costs and the decision to cover almost all optional services, California is able to cover this many individuals by keeping expenditures per enrollee well below the national average. In 1995, Medi-Cal spent $1,959 per enrollee, 39 percent below the national average of $3,202. While these spending differences hold for all eligibility groups (adults, children, the blind and disabled, and the elderly), spending per enrollee is particularly low for the elderly because of very low spending on long-term care. State officials view these patterns as evidence that Medi-Cal is one of the most cost-efficient Medicaid programs in the country.
Medi-Cal keeps coverage broad by setting relatively generous eligibility standards and by going beyond the minimum federal mandates. The "efficiency" that allows the state to afford broad eligibility is the result of successful efforts at keeping provider payment rates low. The best example of this may be the Selective Provider Contracting Program that has allowed the state to negotiate hospital-specific rates since 1982 under a waiver from the federal government. However, these low hospital payment rates may have been sustainable in recent years only because of the state's ability to supplement them with spending through the Medi-Cal disproportionate share hospital (DSH) program. Medi-Cal DSH has been an attractive way to pay certain safety net hospitals more because it draws federal dollars into the state without outlays from the state general fund.
Medi-Cal is in the process of implementing a major expansion in its mandatory managed care requirements. More than 3 million beneficiaries in most of the major counties will be required to enroll in some type of managed care plan. According to state officials, this policy initiative has been driven by the state's desire to increase access and improve quality, particularly for primary care and preventive services, and not to save money. Some county officials and representatives of providers do not share this impression. They believe the state's emphasis on Medicaid managed care is driven by cost as well as access concerns. There are three basic models of managed care in California that will play a significant role in the future of the program. The major new approach that is currently being implemented is the two-plan model, which provides capitated services to Aid to Families with Dependent Children (AFDC), poverty-related, and medically needy beneficiaries in 12 counties and requires that safety net providers be included in at least one of the managed care options.
County Indigent Health Services
California takes a different approach from most other states in financing and delivering medical care to the indigent population. The state provides some funding support for basic medical care to low-income people who are not eligible for Medi-Cal and who cannot pay for their own health care. However, responsibility for additional funding, program administration, and operation rests with the counties. Section 17000 of the California Welfare and Institutions Code establishes that counties are required to be the providers of last resort. Although expenditure data are incomplete, it is estimated that between $2 billion and $2.5 billion is spent annually on services for roughly 1.7 million indigent persons through county programs.
Because each of the counties is responsible for running indigent care programs, there is considerable variability among counties in the size, scope, and design of their indigent health care programs. Instead of providing a detailed picture of all 58 counties in California, this report focuses on three— Los Angeles, Alameda, and San Diego— that contain more than 40 percent of the state's population and represent a range of approaches to delivering services to the medically indigent population. Los Angeles and Alameda operate public systems of hospitals and clinics, but try to partner with private providers in the county. Alameda County, which contains Oakland, has been working with private providers for a longer time than has Los Angeles. San Diego takes a completely different approach, contracting for indigent health care services solely through the University of California hospital— county-owned until the 1970s— and private-sector providers.
Health Insurance Reforms and the Market
California passed comprehensive small-group market reforms in 1992 to make it harder for indemnity and managed care insurers to refuse to sell to firms with 2 to 50 employees. The key provisions of California's small-group reform laws are guaranteed issue, guaranteed renewal, limits on preexisting condition exclusions, and modified community rating. The guaranteed issue provision was particularly significant because it was for all products. Most states at that time required that only one or two products be made available to all small groups, and thus permitted more market segmentation than California allowed. The law also established a voluntary, publicly sponsored, small-employer health insurance purchasing pool, known as the Health Insurance Plan of California (HIPC). The HIPC will also serve as the model of coverage offered through Healthy Families. Both the HIPC and Healthy Families are administered by the Managed Risk Medical Insurance Board.
California's small-group reforms are widely perceived to have worked well, in part because they helped stabilize the small group insurance market— that is, premiums fell or increased only slightly in the first few years of reforms. Still, the fact that smaller percentages of California's nonelderly population are covered through employer-sponsored health insurance than in the nation as a whole suggests that while premium inflation may have abated, relative premium declines have not been enough to induce significant increases in coverage. Thus, the problems of the uninsured in general and uninsured workers in particular remain, despite the perceived success of the small-group reforms, because of structural economic conditions.
Health delivery and financing systems are changing everywhere, but California's may have been the most extensively reorganized of any in the country. Traditional indemnity insurance has virtually disappeared, and health plan competition centers around for-profit and nonprofit health maintenance organizations (HMOs) and preferred provider organizations (PPOs) formed by health insurers. In response to this financing revolution and the excess provider capacity that changing delivery patterns have created, provider groups have begun to reorganize themselves to improve their bargaining power and to maintain autonomy in the new health marketplace. Mergers among physician groups, hospitals, and health plans have played a significant role in these developments in California, as has the conversion of some health plans and hospitals from nonprofit to for-profit status.
Long-Term Care
Long-term care services for the elderly are administered by several different agencies in California, which is the cause of some problems. This fragmentation in responsibility across state departments has resulted— according to a December 1996 report of an independent state oversight agency, the Little Hoover Commission— in the lack of a single point of access for assessment and referral for the continuum of long-term care service options offered by the state. An intergovernmental task force is working to design a standardized admission instrument for all Medi-Cal long-term care, including nursing homes, home care, and personal care. There is considerable concern, however, that this effort toward integration will not be successful.
Long-term care services are also provided to younger persons with disabilities, including mental illness and developmental disabilities. Four different state departments and the counties have responsibility for different groups and different types of services. For example, while most of the mental health programs are administered by the counties, the state Department of Mental Health directly operates the state hospitals and oversees the county programs. As a result of spreading responsibility and programs across so many departments, California's long-term care system for younger persons with disabilities, like that for the elderly, is not well integrated. Many people express desire for a reorganization that would create a single department for long-term care. However attractive, this does not seem likely in the near term, at least for services for younger persons with disabilities.
Two programs of note in California with respect to long-term care are the Partnership for Long-Term Care and the Long-Term Care Integration Program. California participates in the Partnership for Long-Term Care, which encourages the purchase of private long-term care insurance policies through a state guarantee of asset protection for policy purchasers. The state is also attempting, through implementation of a planned Long-Term Care Integration Project, to combine state-supported long-term care services provided by the Department of Health Services (DHS), the Department of Aging (DOA), and the Department of Social Services (DSS) at the community (county) level.
Overview of California: Thumbnail Sketch of the State
Sociodemographic Portrait of California
In 1995, California had a population of 31 million, making it the largest state in the country. Population growth in California has been slightly greater than that of the U. S. population since 1990 (table 1). One in six Californians— 16.2 percent of the state's population— has an income that falls below the federal poverty level (FPL), slightly higher than the rest of the nation; just more than one-fourth of the children live below the FPL. The state is highly urban, with metropolitan areas of more than 1 million accounting for about three-fourths of the total population. The Los Angeles metropolitan area alone accounts for almost one-third of the state's population.
California is one of the most ethnically diverse states in the nation. Approximately 30 percent of California's population is Hispanic, and more than 10 percent of the population is Asian.1 One in three foreign-born people in the United States resides in California,2 and one-fourth of California's population was born outside the United States, giving California the highest concentration of immigrants in the nation.3 Of the state's immigrants, 42 percent are from Mexico.4
Economic Indicators
In 1995, California's per capita income was slightly higher than that of the rest of the country, $24,073 versus $23,208 (table 1). But the growth in per capita income from 1990 to 1995 was much less in California than in the rest of the nation, 13.1 percent compared with 21.2 percent. California did not experience as much growth because it emerged from the recession of the early 1990s at a much slower pace than did other states. According to the state's analysis, the economy started its recovery in 1995, and since then California has seen steady, moderate economic growth and low inflation.5 These trends are expected to continue through the decade. By 1996, the state's unemployment rate had declined to 7.2 percent but was still above the national average of 5.4 percent.
The overall poverty rate and the poverty rate among children were higher in California than in the nation as a whole in 1995. Although the nationwide income gap between rich and poor families has widened considerably since the 1970s, it has happened more rapidly in California than in any other part of the country.6 In California, income has grown very little at the top of the income range, and incomes at the mid-and low levels have dropped significantly.7
Health Insurance and Health Care Conditions
Some 19.7 percent of California's nonelderly population was uninsured in 1994— 95. This rate was almost 20 percent higher than the national average of 15.5 percent and stems from the low number of people who have employer-sponsored insurance; only 56.9 percent of nonelderly people had employer-sponsored coverage in 1994— 95. Because of California's high poverty rate and broad eligibility criteria for Medi-Cal (the state's Medicaid program), a larger percentage of the nonelderly population is covered by this program than is the case nationwide: 18.1 percent in California compared with 12.2 percent for the nation.
Despite high rates of uninsurance, when clinical and public health status performance are examined, California ranks better than most states. An analysis by ReliaStar indicated that in 1997 California ranked 18th8 among all states in overall health status, a slight improvement from its 1996 ranking of 20th.9 This improvement is attributed in part to declines in smoking. California's infant mortality rate was the 15th lowest among all states. California is also outperforming many other states in areas such as low prevalence of cancer, support for public health care, and a low rate of occupational fatalities.10 But southern California is still plagued with high levels of violent crime and infectious disease (e. g., tuberculosis, sexually transmitted disease). AIDS is still a large problem as well, especially in the San Francisco and Los Angeles areas.
Political Overview
Since 1990, California has had a Republican governor, Pete Wilson. During Wilson's term in office, for all but the 1994— 96 period, the state legislature has been Democratically controlled by a small margin. Under the state constitution, Governor Wilson must vacate his position after his second term ends in 1998. As of early 1998, there were 43 Democrats and 37 Republicans in the State Assembly, and 16 Republicans, 23 Democrats, and one Independent in the State Senate. In 1990, California voters approved term limits for state legislators and other statewide officials by a 52 percent majority (Proposition 140), and they have survived a series of legal challenges and court decisions. Term limits have made it difficult to gain consistent leadership in the legislature. In many instances, legislators have had to vacate their positions just as they were gaining sufficient experience and understanding of the lawmaking process.
State Budget Overview
California's fiscal outlook is good. After the recession in the early 1990s, the state has seen moderate, yet steady, economic growth and increased revenues. In state fiscal year (FY) 1995-96, general fund revenues were $46.3 billion. Revenue increased by 5 percent in FY 1996-97 to $48.7 billion.
11 Since this decade's recession, FY 1996-97 is the first year the state has had a small general fund reserve; therefore, the state will still have to be cautious about spending.
The federal Balanced Budget Act of 1997 (BBA) will also affect the state's revenues. The state could receive up to $859 million in 1998 for its Healthy Families program under the federal State Children's Health Insurance Program. (To receive these funds, the state will be required to pay for approximately 35 percent of the program's costs.) The state, however, is expected to lose about 9 percent, approximately $460 million, of its total federal Medi-Cal disproportionate share hospital (DSH) funds over the next five years.12 By 2002, federal DSH spending through Medi-Cal will be almost 20 percent lower than it was in 1995— 96.
State and county flexibility in budgeting decisions is often constrained by the state constitution, legislative rules, or ballot initiatives that have been adopted through the electoral process. For example, a long-standing rule severely restricts the state's ability to raise revenues through the income tax by requiring a two-thirds majority to pass a tax increase through the legislature. After a period of reductions in some marginal tax rates, the rates have now sunsetted back to 1991 levels. Ballot initiatives affect the state budget process by limiting tax options (Proposition 163 prohibited future sales taxes on food), mandating spending requirements (Proposition 98 established funding guarantees for K— 12 education and community colleges), or creating dedicated tax sources (Proposition 99 imposed a cigarette tax to fund health education and indigent health programs). Counties have also been affected by these types of initiatives, most visibly by Proposition 13 in 1978, which limited their ability to raise property taxes and transferred the authority to allocate local property taxes to the state. In addition, many counties feel that by directing new revenues that become available to the state toward education programs, Proposition 98 is causing them to lose access to resources required to meet their population's needs. These propositions have played a significant role in shaping the state's health programs, especially those related to the funding available to county indigent health programs (discussed below).
Among California's major budget sectors— Medicaid, corrections, primary and secondary education, higher education, and Aid to Families with Dependent Children (AFDC)— Medicaid was the second largest budget item in 1995, the largest being primary and secondary education. Expenditures from the state general fund for Medicaid in 1995 totaled nearly $6.4 billion, 15 percent of overall state spending (table 2). Over the past several years, spending for Medicaid has been growing at a faster rate than overall state spending. Since 1990, Medicaid spending has grown on average 12.5 percent per year, while overall state expenditures have increased only 1.1 percent per year— a substantial difference. From 1990 to 1995, Medicaid spending also increased more than any other budget sector.
When other state and federal expenditures are included, as shown in the second panel of table 2, expenditure patterns are similar but of a different magnitude. Medicaid and primary and secondary education are the largest budget items, each consuming around 20 percent of the total budget in 1995. Medicaid remains the fastest-growing budget sector between 1990 and 1995; it had an average growth rate of about 18.6 percent each year, dramatically outpacing all other budget sectors. Although not reflected in table 2, some of the growth in Medicaid spending represents a shift in funding from other state health programs. As a result, the rapid growth in Medicaid spending should not be viewed as an indicator of the growth in overall health spending by the state.
Roadmap to Rest of Report
The rest of this report introduces the major health care policy issues, initiatives, and challenges that California is facing in 1998. It presents:
- The context of the state's current health policy;
- A review of state health care programs, with a particular focus on the MediCal program;
- A description of the health care financing and delivery systems, highlighting the role of managed care in the state;
- A summary of the role of safety net providers in the state, focusing on Los Angeles, Alameda, and San Diego Counties;
- A description of long-term care for the elderly and disabled populations; and
- A summary of health care policy challenges that California may face in the future.
Health Policy Context
Despite the large numbers of uninsured adults and children in California, state budgets throughout the 1990s have placed a higher priority on programs aimed at improving primary and secondary education and corrections than they have on new public initiatives to expand health insurance coverage. California's health policy efforts have primarily focused on maintaining an already well-developed two-pronged strategy for dealing with the low-income uninsured: broad eligibility for Medi-Cal and support for a county-based indigent health care system. The responsibility placed on counties to care for the uninsured distinguishes California from most other states. It also shapes the debate over many health policies and programs, especially those that affect the funds available to counties to pay for indigent care. Where statewide health policy innovations have occurred, they have tended to result in small programs whose goal is to insure limited numbers of individuals through private health plans or to provide specific types of services (e. g., family planning or immunizations) to specific groups. The most prominent of these innovations have been Access for Infants and Mothers (AIM), the Health Insurance Plan of California Purchasing Cooperative that the state administers for small employers, and a high-risk pool for those individuals with severe medical problems.
Through Medi-Cal, the state covers almost all optional services and has chosen to go beyond the income eligibility levels required under the federally mandated expansions for pregnant women and children. The state is able to afford a Medi-Cal program with generous coverage because its spending per enrollee is well below national averages. The prevalence of private managed care plans and the competitiveness of California's health care market in the face of excess capacity have created an environment in which hospitals, and other providers, are willing to accept the low rates offered by Medi-Cal. Until the early 1990s, the state was hesitant to have Medi-Cal join with the private-sector managed care explosion that has been dominant in California since the 1980s. This was largely because of the success the state has had in keeping provider payments low and because of lingering concerns related to marketing abuses that occurred in the 1970s, when Medi-Cal tried to use managed care to save costs without adequate state oversight of managed care plans.
Designing health policy in California is complicated because a large portion of the uninsured are immigrants, many of them undocumented (illegal). The state is obligated to cover emergency services for low-income undocumented immigrants through Medi-Cal. However, public opinion tends to support the view that because immigration policy is set at the federal level, the costs of programs for immigrants should be a federal responsibility— a view reflected in voter approval in 1994 of Proposition 187, which attempted to block the provision of a broad range of publicly funded services to undocumented immigrants in California. Despite this tension, the state has been funding a program to provide prenatal care to approximately 70,000 undocumented immigrant women each year. Court intervention has blocked the cuts in the prenatal program proposed by the Wilson administration as part of the state's response to federal welfare reform. However, observers indicate that the program probably will not survive through 1998.
Even with broad Medi-Cal eligibility, there are still many low-income individuals who do not qualify or who have not sought coverage. To serve these people, the state relies on a county-based health care system. Under California law dating back to the 1930s, counties are required to serve as the providers of last resort for the medically indigent population. A variety of approaches to indigent care have emerged throughout the state. Because counties have autonomy in designing programs to fulfill this obligation, some counties (e. g., Los Angeles, San Francisco, and Alameda) have built and maintained large systems of public facilities, while others (e. g., San Diego and Sacramento) have contracted with private providers to serve the indigent population. Although data on this system are incomplete and somewhat out-of-date, approximately 1.7 million people— 5 percent of the state's population— receive care through this system at a statewide cost of between $2 billion and $2.5 billion annually.
The state recognizes that counties would be unable to meet these programmatic obligations without some state participation in funding indigent health care services. Over the years, the nature of this financial support, as well as the ultimate responsibility for setting program rules, has shifted. In the early 1970s, the state created a medically indigent adult (MIA) Medi-Cal eligibility category to help counties meet their obligations to provide indigent care. In the face of 1978's Proposition 13, which limited counties' ability to increase taxes and continue funding their obligations for county health programs, California created a block grant program to pay for services to those not eligible through the MIA program. By 1983, the state felt it could no longer continue to fund the MIA program, and so eliminated it. To offset this loss, the state increased block grants to the counties by 70 percent of the state's cost of MIA. To receive these block grants, counties had to submit reports to document how the money was spent, and they had to maintain the level of spending they had before Proposition 13.
In 1991, a recession was putting fiscal pressure on the state's budget, and the funding levels for the block grants were in question. This led to a fundamental change in the state's approach to funding county indigent health care programs. Funding was "realigned" through a dedicated fund stream that was created from an increase in the sales tax and an earmarked portion of the vehicle license fee. Dedicated funding streams were also created to help the counties fund their obligations for mental health services and social services. The state was no longer obligated to fund the block grants, which had served their purpose for more than a decade. In exchange, the counties were no longer subject to the uncertainties of annual budget decisions (although they still had financial maintenance-of-effort requirements). If the realignment funds fell short of expectations, which they did as the recession deepened immediately after realignment was put in place, counties would have little recourse. Although counties are required to be the providers of last resort for indigents, they have very limited ability to raise additional tax revenues that can be used to offset shortfalls in state funding and thus to fulfill this obligation.
The pressure to change that realignment and the recession put on the counties would have been far worse had it not been for the state's willingness to work with the counties to draw federal dollars into the state through the MediCal program. Specifically, beginning in 1991, the state established a large MediCal disproportionate share hospital (DSH) program (discussed in a later section) that allowed safety net hospitals to receive additional Medi-Cal revenues with no additional net expenditures of state or county funds. Many of these safety net hospitals were county-operated facilities that used these additional federal dollars to offset the costs of meeting their obligations to the medically indigent population, as intended under the DSH program.
However, even the DSH funds have not been stable for public providers. Throughout the 1990s, as the California health care market has become increasingly competitive, private hospitals have become very willing to treat Medi-Cal patients, especially when they also receive DSH payments. This has caused the volume of Medi-Cal patients treated at county facilities to fall while the volume at private hospitals has increased. DSH payments, which are tied to Medi-Cal inpatient stays, have also shifted from county to private providers. This DSH shift, in combination with the movement of dollars into managed care, is viewed as a serious problem by public hospitals, because the private providers treat far fewer indigent patients than do the county hospitals, leaving county hospitals with the indigent patients but less Medi-Cal revenue to help pay for their care.
As in many states, the federal Personal Responsibility and Work Opportunity Reconciliation Act (welfare reform) that was passed in 1996 led California to reassess many of its social programs. In the health care area, the state had to decide how welfare reform was going to affect Medi-Cal eligibility and whether the state was going to continue covering the large number of legal immigrants who had initially lost categorical eligibility for Medi-Cal. Overall, California has not used the flexibility it received under welfare reform to move away from its generous Medi-Cal eligibility standards. Nonimmigrants that were eligible for Medi-Cal continue to be eligible. Despite the governor's proposal to exclude legal immigrants arriving after August 1996 from full Medi-Cal benefits as federal rules allowed (they still would have been eligible for emergency services), the legislature did not adopt this provision, and all legal immigrants continue to be eligible for Medi-Cal if they meet other eligibility standards. This places California among the more generous states, given the number of immigrants residing in the state. However, there has not been a reaffirmation of the prenatal care program for undocumented immigrants, although, as mentioned above, the program is still being funded, in part as a result of court intervention.
Despite the potential changes that could take place under welfare reform, the state's approach to health policy has not shifted dramatically. The state has worked with existing federal and state programs to try and meet the needs of its residents. Despite an interest in expanding health care coverage for children, the Wilson administration has been reluctant to continue expanding Medi-Cal because of the federal rules attached to the program. There was action, however, after Congress passed the State Children's Health Insurance Program. At that time, the governor proposed and the legislature passed a program that involves a limited expansion of Medi-Cal and the creation of the Healthy Families program, which subsidizes the purchase of private coverage for low-income children through a health insurance purchasing cooperative.
During 1996, when Medicaid block grants were considered by Congress, California policymakers discussed some options without developing formal proposals. The general sense was that the state would move in the direction of combining the various funds it currently uses (e. g., federal Medi-Cal, realignment, and cigarette taxes) to develop programs that were less dependent on categorical eligibility than Medi-Cal. One block grant option that was considered was to replace current programs with one that offered insurance coverage at no cost to all individuals with income up to some threshold. Higher-income individuals could also obtain coverage, but a sliding scale premium related to income would be imposed. Counties remain quite concerned about how block grants and changes in state programs might affect the funds currently available through the Medi-Cal DSH program.
State Health Insurance Programs and Other Initiatives
The Department of Health Services (DHS) is one of the largest departments in the California state government. It is responsible for administering both the Medi-Cal program and a broad range of public health programs. In its role as the Medi-Cal administrator, DHS enters into agreements with other departments to perform specific functions related to Medi-Cal. These departments include the California Medical Assistance Commission and the Departments of Social Services, Aging, Developmental Services, Alcohol and Drug Programs, and Mental Health. The extent of these collaborative efforts has created coordination problems for the state, especially in the area of long-term care (discussed in a later section). As the state's primary public health agency, DHS runs programs that complement and support local health department activities related to controlling environmental hazards, disease prevention, and serving populations with special health needs. In addition, DHS issues licenses to health facilities.
The state also funds the Managed Risk Medical Insurance Board, a voluntary, semi-independent state board, which administers four programs that offer health insurance to selected individuals through commercial health plans. The populations served by these programs are (1) people who are unable to obtain insurance because of a preexisting condition; (2) small employers who have difficulty purchasing coverage for their workers through the private market; (3) pregnant women and infants; and (4) low-income children up to age 18 (through Healthy Families). In addition to these publicly funded health insurance programs, California has implemented health insurance initiatives, such as small-group and individual insurance reforms, aimed at encouraging more coverage through the private sector by improving access to affordable health insurance. California differs from most states in that more low-income citizens have Medicaid than have private group or individual insurance.13
The Medi-Cal Program
During 1995, the Medi-Cal program enrolled 6.8 million people at a cost of almost $17 billion, making it the largest health care purchaser in the state. In terms of eligibility and service coverage, Medi-Cal is one of the most generous programs in the country. The maximum allowed income for AFDC in relation to the federal poverty level (FPL) in 1996 was 56 percent in California, higher than the average for the nation of 39 percent. Through two eligibility expansions, Medi-Cal now covers pregnant women and infants up to age one whose income is below 200 percent of the FPL, regardless of assets. Eligibility generosity is also reflected in the state's medically needy program,14 which has standards above those of the nation. The income limit for the medically needy in relation to the FPL in 1996 was 86 percent, whereas the average for the nation was only 48 percent.
The comprehensiveness of Medi-Cal's service coverage is reflected in its decision to provide 32 of the 34 optional services for which the federal government provides matching funds. Except for personal care services, including in-home support services (California incorporated its supplemental in-home support services program into the Medi-Cal program for the categorically eligible and called it personal care), medically needy recipients receive the same benefit package as the categorically needy. Although the governor has maintained Medi-Cal's broad eligibility, it is routine for budget proposals to suggest modest reductions in service coverage as a way of meeting fiscal challenges. However, these service reductions generally have not been adopted by the legislature.
Expenditure and Enrollment Trends: 1990—1995
In the early 1990s, Medi-Cal expenditures increased rapidly but at a somewhat lower rate than in the rest of the country: an average increase of 21.6 percent annually in California versus 27.1 percent in the country as a whole from 1990 to 1992 (table 3). From 1992 to 1995, Medi-Cal expenditure growth averaged 11.0 percent each year, a rate that exceeded the national annual average of 9.9 percent. The high growth rate at the beginning of the decade occurred largely because of rapid increases in caseload (table 4); during this period, California's spending, on average, for each enrollee (table 5) grew more slowly than in the rest of the nation. The caseload growth in California was the result of federal and state expansions in Medicaid eligibility and more people needing public assistance because of the recession.
Growth in the Medi-Cal DSH program was another important reason for expenditure increases in the early 1990s.Table 3 documents the development and size of California's DSH expenditures. Medi-Cal DSH grew from an $11 million program to a $2.2 billion program between 1990 and 1992. This rate of increase far exceeded the national average growth in DSH during this time. By 1992, DSH accounted for almost 18 percent of Medi-Cal spending. From 1992 to 1995, DSH continued to account for a high share of Medi-Cal spending. Average annual DSH growth was 10.0 percent, while the nation overall experienced modest annual growth of 2.7 percent.
The deceleration in Medi-Cal DSH growth during the 1992 to 1995 period played a large role in the overall reduction in Medi-Cal spending growth. Spending on Medi-Cal services, however, grew at a constant rate of roughly 10 percent through the entire period. In contrast, the deceleration in overall spending growth for the nation as a whole was a result of slower growth in both DSH and payments for acute and long-term care services.
Table 3 also highlights that California, compared with other states' Medicaid spending, spends a smaller share of its Medi-Cal budget on long-term care and services for the elderly. In 1990, 32 percent of California's Medi-Cal expenditures went to pay for long-term care services, whereas the national average was 44 percent. Part of the reason is that a smaller share of California's population is older than 65 (table 1) than is the case for the nation overall. By 1995, there was some shift toward greater spending for long-term care within Medi-Cal, but long-term care spending as a share of the total program was still lower in California relative to the national average. In 1995, California spent 24 percent of its Medi-Cal service-related dollars on services for the elderly, whereas the nation as a whole spent 30 percent. In contrast, in 1995 California spent 18 percent of Medi-Cal service dollars on nondisabled, nonelderly adults versus 12 percent for the nation.
Table 4 shows that overall enrollment growth in California over the 1990 to 1995 period was comparable to growth in the nation overall. Between 1990 and 1992, average annual growth in Medi-Cal enrollment was 12.5 percent in California versus the national average of 11.3 percent. This difference is largely the result of higher growth rates among noncash adult and elderly recipients in the Medi-Cal program. Between 1992 and 1995, California experienced 3.8 percent average annual growth in its Medi-Cal enrollment while enrollment growth in the rest of the country was 5.2 percent annually. Data not shown in the tables indicate that since 1994 enrollment in Medi-Cal has been leveling off.15 State officials forecast that in 1997 and 1998 the number of enrollees will grow by less than 1 percent each year.
As mentioned above, Medi-Cal has a long history of keeping rates paid to providers low relative to other states. The results of this are documented intable 5. In 1995, California spent on average 39 percent less per Medi-Cal enrollee—$ 1,959 versus $3,202— than the country as a whole. California spent less per enrollee than the nation for all Medi-Cal eligibility groups— elderly, blind and disabled, adults, and children. The greatest differential in spending between Medi-Cal and the nation occurs among expenditures per enrollee for the elderly, again reflecting the state's low outlays for long-term care. In 1995, California spent 42 percent less than the country as a whole per elderly Medi-Cal person. For other groups, the difference was closer to 30 percent less than the national average. California is sometimes viewed, particularly by state officials, as having one of the nation's "most cost-efficient" Medicaid programs. For example, analyses of American Hospital Association survey data (for both inpatient and outpatient services)16 indicated that in 1995, Medi-Cal paid hospitals 85 percent of costs, while the national average Medicaid payment was 94 percent. In addition, the average reimbursement rate per day for freestanding nursing facilities in FY 1992— 94 was 8.9 percent less than the national average.17
Consistent with the state's low spending levels, spending per enrollee in California grew only half as fast as the nation's spending between 1990 and 1995. The differences were particularly dramatic during the 1990 to 1992 period across all eligibility groups. However, the 1.9 percent reduction shown intable 5 is largely a result of the federally mandated eligibility expansions that changed the overall composition of Medi-Cal enrollment. Adults and children— the lowest cost groups— made up a larger share of enrollment in 1992 than they had in 1990, and this caused average spending per enrollee across the program to fall by more than it did for all but one of the eligibility groups shown (noncash elderly). California was not able to achieve the same low growth in spending per enrollee between 1992 and 1995 as it had in the 1990 to 1992 period. Spending per enrollee grew at rates that were much more comparable to nationwide rates. However, growth in Medi-Cal per enrollee costs in 1992 to 1995 was not so high as to offset the lower growth rates that had been achieved over the prior two years.
Recent Medi-Cal Eligibility Policies
California implemented two Medi-Cal optional eligibility expansions during the 1990s. In 1992, it waived asset requirements for pregnant women and infants up to age one with incomes at or below 185 percent of the FPL. In 1994, it expanded Medi-Cal coverage to pregnant women and infants up to age one with incomes up to 200 percent of the FPL, regardless of assets. More recently, asset requirements have been waived for all children eligible for Medi-Cal through the poverty-related expansions. According to state officials, these expansion efforts were undertaken as an attempt to reduce the state's high rate of infant mortality resulting from low birth weight. Data indicate that infant mortality rates declined from 7.9 per 1,000 births in 1990 to 6.1 in 1995.
Welfare reform and Medi-Cal. The federal welfare reform law and subsequent state laws have changed the relationship between Medi-Cal and cash welfare for families, the latter of which has been the path of Medi-Cal eligibility for a majority of adult and child enrollees. As a part of welfare reform, California has decided to maintain Medi-Cal eligibility for all of those who receive benefits under CalWorks (the state's Temporary Assistance for Needy Families program that replaced AFDC). In some areas, CalWorks eligibility is more liberal than AFDC had been. Thus, the substantial increase in earned income disregards under CalWorks also means that there is a higher income standard for Medi-Cal families who are working. The net effect is that California has expanded its eligibility criteria for Medi-Cal, as it relates to welfare. Even so, cash assistance caseload levels in Medi-Cal probably will still decline.
Legal immigrants. About one quarter of California's Medi-Cal enrollees are noncitizen immigrants, the highest proportion of any state in the country.18 Thus, the recent federal change in immigrant eligibility for Medicaid will have a substantial impact on California. The federal law stipulates that most legal immigrants entering the country after August 22, 1996, are ineligible for Medicaid, but are still covered for emergency services. Governor Wilson proposed adopting these guidelines, but the state legislature did not enact them, so the state is still providing full coverage to all post-enactment legal immigrants. Presumably, the state will be responsible for funding nonemergency services for those immigrants who are not covered under the federal law.
Essentially, none of the immigrants who participated in Medi-Cal in August 1996 will lose eligibility, provided they meet other income and categorical criteria. At one point, some immigrants on Supplemental Security Income (SSI) were going to lose Medi-Cal eligibility, but the passage of the BBA of 1997 reversed that policy and grandfathered the elderly and disabled who participated as of August 1996 or who were in the country on that date and become disabled later.
Undocumented immigrants. Since 1994, controversy over health care provision to undocumented (illegal) immigrants in California has been highly charged. At that time, California voters enacted Proposition 187, which declares that undocumented immigrants are ineligible for a range of government health and education programs.19 Governor Wilson has repeatedly sought to reduce state expenditures involved in caring for undocumented aliens, such as the prenatal care program, independent of federal action, and to increase federal aid to cover expenses under the belief that immigration policy and the related costs are a federal responsibility. In FY 1996— 97, Congress refused to give the state $216 million of additional federal funds to finance a budget deficit caused by Medi-Cal emergency benefits to undocumented immigrants. For the first time, in FY 1998, the federal budget includes some funds to offset these expenses.
By federal law, undocumented immigrants are eligible for emergency services under Medi-Cal, including labor and delivery, if they otherwise meet current eligibility requirements for Medi-Cal. Undocumented immigrants who do qualify receive a Medi-Cal card indicating that they are eligible for Medi-Cal emergency care only.
The state does not have a comprehensive list of what emergency care services are reimbursed under this benefit. Instead, it relies on the provider to determine initially whether the service is an emergency. Because the scope of emergency services is not clear, providers complain that they risk having claims denied if the state decides a given service was not an emergency.
Since 1986, California has extended prenatal care to undocumented women through Medi-Cal. These services are supported by state-only funds. Each year, California provides about $84 million in prenatal care to about 70,000 undocumented women. In his budget for 1997— 98, Governor Wilson again proposed eliminating this prenatal program and cited federal welfare reform law as justification. (A provision in the federal law mandates that states cannot provide state or locally funded benefits to unqualified immigrants— other than emergency services, immunizations, and tests for communicable disease.) Governor Wilson had proposed eliminating this program in budgets proposed before welfare reform. Termination of the prenatal program has been delayed in response to court challenges brought by advocates, but its future is uncertain.
California also uses state-only money to fund institutional long-term care services for undocumented immigrants. Approximately 200 undocumented immigrants live in nursing homes at a cost of about $10 million per year. Governor Wilson has proposed finding a legislative solution that would allow undocumented immigrants currently receiving long-term care to continue to receive it until other arrangements, such as family-or other community-based alternatives, could be made. Under this proposal, no new recipients would be added to the program.
The Public Health System
The majority of California's public health programs are located in two divisions of the Department of Health Services: (1) Prevention Services and (2) Primary Care and Family Health. The Division of Prevention Services is responsible for communicable diseases, AIDS, chronic disease, injury control, and environmental health issues. The Division of Primary Care and Family Health oversees the Women, Infants, and Children (WIC) Supplemental Nutrition program, maternal and child health (MCH), health services for children with special needs, and family planning. This division is also addressing issues related to the adequacy of public health services within Medi-Cal as the program shifts to managed care.
The governor's 1996— 97 budget allocated about $1.7 billion to public health, a sum that included federal and state funds. As a share of total expenditures on health in California, public health accounted for 7.6 percent in 1995— 96. Under Governor Wilson, the state has directed spending increases at children's health, emphasizing prevention, despite lack of broad political appeal for these programs. Observers suggested that the weak political support derives from the perception that the programs are targeted only at low-income populations. The major revenue sources for public health activities in the state are federal categorical funds, including the MCH block grant; state and county general funds; dedicated sales tax and vehicle license fees (i. e., realignment, as described earlier); and tobacco tax revenues. Realignment and tobacco tax revenues both support county responsibilities for indigent health care, including medical services and public health services. The percentage of these dollars spent on public health is not known with certainty and appears to vary by county; estimates range from 15 to 40 percent.
Medi-Cal has also become an increasingly important source of funding for public health activities, particularly MCH services. Many prenatal services that were once provided with MCH block grant dollars are covered by Medi-Cal as a result of eligibility expansions and increases in provider participation in and certification for Medi-Cal.
The state shares legal responsibility with counties to protect and enhance the health of the public. Counties (and three cities) carry out their responsibilities through local health departments; 11 of the smallest counties contract with the state to provide public health services. Some counties operate hospitals and large clinics, and the public health department is often integrated into this larger system. Among the more populous counties, public health expenditures comprised about one-fifth of total county expenditures on health in 1995— 96.
A recent trend in at least a few counties, including Los Angeles, is the separation of core public health activities from the delivery of personal health services. Personal health services that have traditionally fallen in the domain of public health include immunizations and family planning. Services such as these, in at least three counties, have been removed from public health clinics and are instead being provided in primary care clinics. One impetus for this change is to allow public health agencies to focus on core activities such as epidemiological studies, community assessment, and monitoring.
In an environment of expanding Medi-Cal managed care, California's public health officials are redefining their role in other ways as well: establishing standards of care for health plans, evaluating the population-based impacts of Medi-Cal managed care, and developing memorandums of understanding (MOUs) with health plans that outline the division of responsibilities for services within the realm of public health. These MOUs are part of a strategy that would allow for contracts in which health plans pay local health departments for public health services (e. g., family planning, HIV testing, sexually transmitted disease services, and immunizations) when they are provided to Medi-Cal managed care plan members. Some state officials felt they had underestimated how difficult it would be for managed care plans to agree to these public health arrangements, suggesting that plans' reluctance to cooperate was a result, in part, of the low capitation rates paid by Medi-Cal.
Other Publicly Funded Health Programs
California sponsors two subsidized health insurance programs, the California Major Risk Medical Insurance Program and the Access for Infants and Mothers program. In addition, the governor has just signed into law the Healthy Families program in response to the State Children's Health Insurance Program that will be jointly subsidized by the state and federal governments. These programs are administered by the Managed Risk Medical Insurance Board, a voluntary, semiindependent state board. In addition, there are many programs aimed at improving access to specific services for vulnerable subgroups of the population.
Major Risk Medical Insurance Program
The Major Risk Medical Insurance Program (MRMIP), established in 1991, is a program through which individuals who are ineligible for Medicare and MediCal, and who cannot get health insurance because of a preexisting condition, can obtain medical coverage. The program covers a relatively small number of highrisk individuals, having served only 45,000 people since it was established. As of January 1997, MRMIP contracted with seven private health plans throughout the state. The largest plan is Blue Cross of California, with nearly three-quarters of the enrollees. Inpatient and outpatient services are included in the benefit package. The program is supported by tobacco tax revenues collected by the state under Proposition 99 and premiums from subscribers.
Access for Infants and Mothers Program
The Access for Infants and Mothers (AIM) program, started in 1992, provides subsidized health insurance for pregnant women and infants with incomes between 200 and 300 percent of the FPL. The program is supported by about $40 million in state funding from tobacco tax revenues collected under Proposition 99 and premiums from subscribers. This funding level can support 450 enrollees and their infants per month, but only about 300 are enrolled in an average month. Given the size of California's population, this is a small program. To participate, in addition to meeting the income criterion, a woman must not be eligible for Medicare or Medi-Cal (other than those who spend down); must not be more than 30 weeks pregnant; must have lived in California for at least six continuous months; and must not have private insurance that covers maternity care or that has a maternity-only deductible of less than $500. Currently, the state contracts with eight private health insurance plans, one of which is Blue Cross of California, which has about 50 percent of the enrollment. Plans participate as full-risk providers, with a negotiated rate that is neither age-nor risk-adjusted. Participants pay 2 percent of total gross family income adjusted for family size. In 1995, the average subscriber contribution for the basic service package was $630. AIM benefits include prenatal visits, hospital delivery, and full health services during pregnancy and 60 days postpartum. Health services are provided to the infant born from the AIM-covered pregnancy for the first two years of life.
Healthy Families Program
In response to the federal State Children's Health Insurance Program in the BBA of 1997, California will provide medical, dental, and vision coverage for all children through age 18 whose family incomes are below 200 percent of the FPL. It will do this through the creation of the Healthy Families program and the expansion of Medi-Cal eligibility. Proposed implementation is July 1998.
The Healthy Families program envisions using two approaches, subject to federal government rules and approval, to ensure maximum enrollment: (1) a purchasing pool in which families select a private health plan, and (2) a purchasing credit component to help families pay the premium for dependent coverage in an employer-sponsored plan. The second component still requires legislative action. In order to be eligible for Healthy Families, a family must have an income of between 100 and 200 percent of the FPL, it must be ineligible for Medi-Cal, and it must not have been insured by an employer-sponsored plan for the previous three months.20 The only group of children through the age of 18 that would not be covered are those between the ages of 14 and 18 in families whose income is below 100 percent of the FPL, and the Medi-Cal program will be expanded to cover them.
Health Education and Direct Service Programs
As part of its overall strategy to improve preventive services and assure the public's health, California has many programs aimed at health education and direct provision of services. Among the areas these programs address are family planning, immunization, HIV/ AIDS, and cancer screening. From a spending standpoint, these programs are small relative to Medicaid, but the outlays for them are greater than those for AIM, for instance, and they are designed to serve larger numbers of people. For example, the Planning, Access, Care and Treatment (PACT) program is designed to address the family planning needs of approximately 500,000 clients by contracting with more than 1,700 providers statewide to provide comprehensive services to low-income men and women. The budget for PACT in FY 1996-97 was about $65 million.
Insurance Reform Initiatives
Private insurance, especially employer-sponsored insurance, is an important source of coverage for the low-income population of California. More than 3.1 million low-income individuals— 15.4 percent of the poverty population and 41.1 percent of the near-poor— are covered by private group or individual insurance. In total, this is two-thirds of the number covered by Medi-Cal. Furthermore, 85 percent of the 2.9 million uninsured are in households with at least one working member, so that private insurance remains their most likely route to health coverage. Making private insurance affordable for the low-income population was only part of the reason California pursued insurance reforms. Nonetheless, the state recognized that the low-income nature of California's uninsured made it unlikely that insurance reforms could have any more than a marginal effect on expanding coverage.
The California legislature had two primary motivations for passing comprehensive small-group market reforms in 1992: (1) Health care costs were rising rapidly, and (2) California workers were less likely to have employer-sponsored health insurance offered to them than were workers elsewhere in the country. The purpose of the laws, as implemented in 1993, was to make it harder for insurers to refuse to sell to any particular employment-based group. The laws apply to all health insurance products— indemnity and managed care alike— sold to firms with two to 50 employees. (The group size was originally set at five to 50, and the minimum dropped to four and then to three over the next two years, as part of an established transition, and to two in 1997. The legislature never enacted a proposal to lower the minimum group size to one.) The laws apply to all insurers, be they indemnity carriers regulated by the Department of Insurance (with an elected commissioner) or health care service plans (i. e., health maintenance organizations or HMOs) regulated by the Department of Corporations (headed by a gubernatorial appointee). California passed much less extensive reforms for the individual market, as will be discussed later.
The key provisions of California's small-group reform laws are guaranteed issue, guaranteed renewal, limits on preexisting condition exclusions, and modified community rating. The law also established a statewide voluntary, publicly sponsored small-employer health insurance purchasing pool, known as the Health Insurance Plan of California (HIPC), which is operated by the Managed Risk Medical Insurance Board.
Guaranteed issue in California means that insurers must offer all products to all small groups and to all members of those groups. They can no longer categorically deny (or "redline") particular industries or professions, nor can they offer some insurance products exclusively to preferred groups. Most states with guaranteed-issue rules in the small-group market merely required insurers to offer one or two products on a guaranteed-issue basis. The new federal health insurance reform law, the Health Insurance Portability and Accountability Act (HIPAA, popularly known as Kassebaum-Kennedy, PL 104-191), requires guaranteed issue for all products sold to small groups in all states, as of July 1, 1997.
Guaranteed renewal means that an insurer must offer to continue coverage of a currently insured group— that is, the policy cannot be summarily canceled because of claims experience or a change in the health status of the group members. While insurers can increase the premium charged at renewal, such increases must conform to the prescribed rate band (discussed below). Exclusions from coverage of preexisting conditions were limited to six months (the waiting period), and then allowed only for conditions that were treated or the subject of a medical consultation in the six months before coverage (the look-back period). Alternatively, an HMO may require a 60-day waiting period for any coverage to begin for any new member of an insured group. HMOs were also required to give enrollees credit for prior coverage, although indemnity insurers did not have to do so.
Pure community rating would entail charging all insured persons the same premium. Most states use modified community rating, meaning they allow specific and limited deviations from identical pricing. California's modified community rating provision has two dimensions. One is the set of factors that insurers use to adjust premiums: six age groups (under 30, 30— 39, 40— 49, 50— 59, 60— 64, 65+), four family types (employee only, employee and spouse, employee plus children, employee with spouse plus children), and nine geographic regions. This means that there are potentially 216 premium categories. The other dimension is rate bands, constraints on the amount that premiums may vary within any premium category. The total permissible variation within a category was 20 percent (0.8 to 1.2 times the standard rate) until July 1, 1996, when it narrowed to 10 percent. This approach preserves insurers' ability to charge lower premiums to younger subscribers, but reduces the effect of individuals' experience on their specific premiums.
The HIPC has been operating since July 1993. It is governed by the Managed Risk Medical Insurance Board originally created to run the state high-risk pool. As of January 1, 1996, more than 5,000 employer groups and more than 100,000 individuals had enrolled in one or more of the HIPC's 24 participating health plans. The small-group reforms, including the rating restrictions, that are within California's private insurance markets also apply within the HIPC. In addition, HIPC plans feature standard benefit packages and annual open enrollment periods in which subscribers may change health plans. The HIPC uses data on enrollees' health risks (last year's claims) to adjust premiums received by insurers in order to reduce the effect of risk selection on insurer cash flow.21
Like most states, California has taken fewer steps to reform the individual health insurance market. The only substantive reform is a limit on preexisting condition exclusions, to 12 months for a condition discovered in the previous 12 months. Twenty-five states have some limits on preexisting condition exclusions for individual policies, most with shorter look-back periods than California has.22 HIPAA requires group-to-individual portability for certain eligible individuals, and this will be a big change for the California individual market. In part for this reason, California was unable to agree on its own provisions to enforce HIPAA and will therefore accept the default of federal enforcement.
Effects of Reforms on Markets
The state health reform laws passed in 1992 required both the Department of Insurance and the Department of Corporations to do analyses of the effects of the first year of reforms on their licensees— commercial insurers and HMOs, respectively.
Most of the 46 carriers that responded to the Department of Insurance survey reported that base rates were increased to compensate for the added risk that must now be shifted to healthy groups. A majority felt affordability had been adversely affected by the reforms. Overall, indemnity carriers reported losing about 28,000 covered lives in the small-group market in the period of study (June 30, 1993, to June 30, 1994), a loss that was more than made up by HMO enrollment expansions (see below). This represented a loss of about 5 percent of the indemnity small-group enrollment base and about 10 percent of the small groups that were enrolled. The indemnity plan losses were absolutely and proportionately greater in the Los Angeles County region, where HMO competition is particularly fierce.23
The Department of Corporations conducted a survey of its licensees in 1994.24 Overall, health care service plans reported that enrollment in the small-group market increased by 22 percent (330,000) in the first year of reform, more than enough to compensate for the decline in small-group coverage by indemnity carriers, described above. This suggests that HMO competition had the net effect of lowering average premiums charged. Many carriers were worried that the healthiest groups would drop their insurance when the 10 percent rate bands went into effect (July 1996). The Department of Corporations concluded that there was too much uncertainty to predict the future direction of "affordability" and "continuity" of coverage in California.25
Effects of Reforms on the Small-Group Market
There have been no formal studies of the direct and indirect impacts of the HIPC on insurance markets in California, so this assessment is based on interviewees' opinions. A consensus exists that the HIPC has become a kind of bellwether for many more people than those who buy or sell insurance through it. Because the HIPC's benefit packages are standardized, and because the prices that insurers charge for HIPC enrollees are publicly available, many participants in the small-group market are able to use HIPC premiums as a benchmark. Thus, HIPC premiums are likely to be upper-bound constraints on prices outside the HIPC, because small employers can join the HIPC fairly easily. HIPC premiums fell in the first three years of the plan's existence, and there is considerable evidence that average health insurance premiums for a number of organized groups in California also declined each year in nominal (absolute) terms from 1993 until 1997.26 HIPC enrollment is expanding steadily, not astronomically, and the plan is still a very small part (less than 2 percent) of the small-group market in California as a whole.
Health Insurance Market Prospects
California's small-group reforms are widely perceived to have worked well, in part because premiums fell or increased only slightly in the first few years of reforms. Whether this is coincidence or the actual result of reforms is not important, politically, as long as premiums are falling. Some, perhaps most, of this favorable premium experience was probably a result of the excess capacity and competitive pressures in health care provider markets, and it could be reversed when that excess capacity finally disappears from the health delivery system. Still, the fact that a smaller percentage of California's nonelderly population is covered through employer-sponsored health insurance than in the nation as a whole suggests that while premium inflation may have abated, relative premium declines have not been enough to induce significant increases in coverage. Thus, the problems of the uninsured in general and uninsured workers in particular remain because of structural economic conditions, despite the perceived success of the small-group reforms (i. e., promoting access to insurance).
Health Care Delivery and Financing System
Health care delivery and financing systems are changing everywhere, but California's may have been the most extensively reorganized (with the possible exception of Minneapolis-St. Paul) of any in the country. Unmanaged indemnity insurance has virtually disappeared,27 and health plan competition centers around for-profit HMOs, nonprofit HMOs, and preferred provider organization (PPO) products of more traditional insurers. MediCal has recently decided to take advantage of this managed care health plan competition, as will be discussed after the delivery system as a whole is described.
Overview of California's Health Care Markets
Current Health Insurance Markets
Nearly three-fourths of California's insured population is enrolled in managed care, about 46 percent in HMOs.28 Only nine indemnity carriers still offered purely unmanaged fee-for-service plans. In 1996, there were more than 500 traditional indemnity insurers— 18 large ones29 —and 48 full-service HMOs.30 In California the latter are legally termed "health care service plans" or Knox-Keene licensees, after the legislation that governs HMOs in the state. A few insurers (notably Blue Cross and Blue Shield) have both kinds of licenses.
California has six large HMOs with more than 1 million enrollees each. Combined, they account for 70 percent of 1996 total health care service plan enrollment (12.5 million out of 17.9 million as of March 31, 1996).31 About half of the indemnity carriers offer individual policies, whereas more than two-thirds of HMOs offer individual products.32
Overall, the indemnity health insurance market was estimated to be $2.1 billion in 1994, and it seems to be slowly losing market share to HMOs. About 40 percent of the total, $851 million, is accounted for by groups in the size range of three to 50. The top eight carriers account for two-thirds of all indemnity premiums and three-fourths of small group indemnity premiums. The top three products of each firm account for 90 percent of all business written, which implies that the public is buying or being offered relatively few of the many commercial plans.33
In response to this financing revolution and the excess provider capacity that changing delivery patterns have created and exposed, provider groups have begun to reorganize themselves to improve their bargaining power and to maintain autonomy in the new health marketplace. To a much greater extent than elsewhere, California physicians have formed large, integrated medical groups that are capable of bearing capitation risk for large numbers of patients. These physician groups are developing complex relationships with hospitals and specialists outside their groups, and they represent the core of an emerging delivery system that is based on capitation.
Mergers among physician groups, hospitals, and health plans have played a significant role in these developments in California, as has the conversion of some health plans and hospitals from nonprofit to for-profit status. Some mergers reduce redundancies, confer economies of scale, increase clinical integration, improve health outcomes, and increase overall efficiency, while others are more likely to simply increase the market power of the merged entities and reduce competitive pressures in the long run. Mergers among hospitals and conversions of nonprofit hospitals to for-profit status, especially amid a systemwide drive toward cost efficiency, also raise questions about continued commitments to community-based uncompensated care. This commitment is especially important in California, given the large number of uninsured (20 percent of the nonelderly population, or 6.2 million people, in 1995).
Competition Policy
To date, California has not granted blanket antitrust immunity to any provider group or specific joint venture. The state prefers to address contested market phenomena (mergers or particular anti-competitive actions) on a case-by-case basis. This policy approach may have contributed to the creation of larger physician organizations and to mergers among them, because mergers permit the kind of "collective bargaining" with managed care plans that providers want, whereas concerted pricing by independent physicians risks running afoul of the antitrust laws. There are also efficiency reasons that large medical groups are more successful than small independent practices in competitive marketplaces: economies of scale; ability to spread capitation risk; reduced transactions costs of negotiating, monitoring, and enforcing agreements with other components of the delivery system; and the creation of an organizational context for continuous clinical process innovation.34
Hospital mergers were the original focus of antitrust activity in California, but with occupancy rates between 50 and 60 percent, it is difficult to argue that most proposed mergers present risks to future competition. The attorney general's office is generally pleased with the level of federal-state cooperation on important cases in recent years (at least since 1989). An example was the Stanford— University of California at San Francisco hospital merger, simultaneously analyzed by the Federal Trade Commission, the California Department of Health, and the state attorney general (AG) and approved on competitive efficiency grounds. Pacificare/ FHP, a 1997 merger of two of the largest HMOs in the state that received a similar level of antitrust and press attention, had a combined statewide market share of less than 13 percent. The reality is that most health plan, hospital, and physician service markets in California are extremely competitive at present, and the authorities are watching but letting the players affiliate and consolidate as they see fit. The greatest current policy focus is not in merger analysis but in price-fixing cases among PPOs and physician groups that participate in networks (price fixing is illegal per se, regardless of market share). Experienced observers, both policymakers and local academics, expect considerably more health market shakeout and reorganizations in California.
Nonprofit Conversion Policy
Nonprofit conversion policy matters because uncompensated health care is a crucial community benefit that nonprofit hospitals have traditionally provided. Estimates suggest that nonprofit hospitals provide over half of all uncompensated hospital care in California.35 Uncompensated care may be provided directly by a hospital or financed with the income from assets transferred from a formerly nonprofit corporation— either a hospital or a health plan— to a foundation that is chartered to use the assets to serve the hospital's community.
Legally, a nonprofit entity is organized for a purpose other than to produce returns to owners; its net earnings may not be distributed but must be used to further its mission. The assets of a nonprofit entity are held "in trust" and are required to be used for these charitable purposes for the benefit of a local community or in a manner consistent with its state charter or enabling statute (as in the case of some Blue Cross and Blue Shield plans). A nonprofit conversion to for-profit status is a transaction in which the new proprietary owners buy the assets that were held in trust. The proceeds of that sale, by law, must be constituted and managed to further a charitable purpose (not necessarily the original one) and may not be diverted to private gain by the nonprofit's trustees, directors, or managers.
Jurisdiction over the conversion of nonprofit health care entities in California was split until very recently. The Department of Corporations had complete jurisdiction over conversions of HMOs and Blue Cross and Blue Shield plans (i. e., Knox-Keene plans), whereas the AG had authority over the conversion of nonprofit hospitals. The 1980s saw a large number of health plan conversions, and it was widely perceived that the Department of Corporations was less effective than the AG in protecting the public's interest by preserving the original charitable purposes of the nonprofit entity. Complaints about the department's oversight performance centered on two facts: Former directors of nonprofit health plans became wealthy as owners of the new for-profit plans, and the purchase price or wealth left behind in the new foundations was considerably lower than the value of the assets that had been held in public trust, as manifested by stock market value soon after conversion.36
This dissatisfaction with the Department of Corporations' oversight of nonprofit health plan conversion reached a peak with the Blue Cross/ WellPoint conversion process that began in 1991 and culminated in a 1996 law, A. B. 3101, which gave the AG veto power over health plan conversion agreements. It also mandated that public hearings be conducted by the AG's office, that an analysis be done of the transactions' likely impact on the local community, and that the state be reimbursed by the parties proposing a conversion for the expense of hiring experts and doing the proper analyses. Finally, the bill codified the transaction review protocol that the AG's office had been using for years with respect to nonprofit hospital conversions. Eventually, in the Blue Cross case, two foundations were created with a combined net asset value of $3 billion. These foundations are still defining their missions, but they could extend to subsidizing direct patient care as well as clinical and health services research. The original deal approved by the Department of Corporations had allowed Blue Cross to transfer 90 percent of its assets to a for-profit subsidiary and avoid any obligatory transfer of assets to new foundations created to maintain the public benefits once held in trust by Blue Cross.
One important current issue in nonprofit conversion policy in California is what to count as a potential community benefit when calculating a foundation's obligation to maintain the original charitable purposes of the assets held in trust by the nonprofit. The AG's office takes the view that uncompensated care, as the most tangible and measurable community benefit, should be the focus. Some advocates (and health plans and hospitals) argue for a more expansive definition (e. g., educational and outreach services and investments in population-based public health). There has been recent legislative debate on this issue. To date, idiosyncratic accounting systems and definitions have kept this more expansive view off the table in conversion analyses, but the AG's office is open to better measurement of such benefits in the future.
Regulation of Managed Care Plans
The state recently has seen significant political activity on the quality improvement, provider autonomy, and patient protection fronts. Two major ballot initiatives were voted on in 1996 that, among other things, would have banned financial incentives to withhold care and prohibited denials of care without a physical examination. Although the propositions were defeated, the fact that they were on the ballot, that they garnered 40 percent or more of the votes, and that many of their provisions were substantially reintroduced in the legislature during 1997 indicates that many citizens in California are concerned about access to quality health care in a market dominated by managed care. A Managed Health Care Improvement Task Force, chaired by Alain Enthoven of Stanford University, was created by the legislature in 1996. It was charged to report by the beginning of 1998 on the effects of managed care on costs, quality, access, and medical research in California. Governor Wilson stated, "This task force will advise me and the legislature on how to update California's governance of the managed care industry to preserve its best features with the fewest side-effects."37 The task force's report, among many specific recommendations, called for the creation of a new consolidated state entity to oversee managed care plans and recommended establishing a third-party review process to appeal denials of claims as well as a risk adjustment process for health plans.38 One of the biggest ongoing health policy issues in California and the nation continues to be whether and how to regulate managed care to satisfy competing and sometimes contradictory objectives of low-cost, high-quality health care services.
Medi-Cal Managed Care
One of the most important policy areas for Medi-Cal is the implementation of managed care. The first push toward placing Medi-Cal beneficiaries in managed care occurred in the early 1970s. At the time, it was thought that the state might be able to save Medi-Cal dollars. Over time, it became clear that managed care could not improve upon the low amounts being paid under the fee-for-service program. Among other things, the state has been successful in negotiating highly competitive fee-for-service rates through its selective contracting program for hospitals.
The current era of California's thinking about Medi-Cal managed care began in 1991. No longer focused on saving costs, the movement to managed care, as articulated by state officials, is intended to provide Medi-Cal beneficiaries with more than a "shopping card" for services. Officials within California's Department of Health Services stated that the expansion of Medi-Cal managed care since 1991 has been based on a desire to increase access, particularly for primary care and preventive services. Some county officials and representatives of providers do not share this impression. They believe the state's emphasis on Medi-Cal managed care is driven by cost as well as access concerns.
There are five different models of managed care in California, although only the first three play a significant role in the future of the program: (1) The major new approach being implemented is the two-plan model, which will provide capitated services to AFDC, poverty-related, and medically needy beneficiaries in 12 counties. Beneficiaries in other eligibility groups can choose managed care through the two-plan model, but their enrollment is not mandatory. (2) County-Organized Health Systems (COHSs) in five counties provide services to a full range of eligibility groups. (3) Geographic Managed Care (GMC)— limited to two counties— in which the state Medi-Cal program negotiates capitation rates with multiple plans from which beneficiaries can choose, is mandatory for AFDC beneficiaries and optional for other beneficiaries. The two other models, Prepaid Health Plan (PHP) and Primary Care Case Management (PCCM), are being phased out in counties after one of the other three models has been implemented. PHPs are state-licensed managed health care organizations that typically provide care to privately insured individuals as well as Medi-Cal beneficiaries and enroll AFDC and Supplemental Security Income (SSI) beneficiaries on a voluntary basis. The PCCM program was developed in 1983 to provide a transitional managed care model with limited financial risk. Under PCCM arrangements, primary care providers provide and assume risk for primary care and specialty physicians' services and selected outpatient preventive and treatment services. They are also responsible for arranging and authorizing inpatient services, which are paid for by the fee-for-service fiscal intermediary, and for case managing services provided to their members.
Around 1990, California had planned to implement managed care more widely by expanding the role of private PHP and PCCM models, but counties and other traditional providers strongly voiced their concern about possible exclusion from a managed care Medi-Cal program that was based on PHPs. This gave rise to the two-plan model that guarantees a role for safety net providers but still gives beneficiaries a choice of a commercial HMO.
Although California has the highest overall HMO penetration rate of any state in the country, it has been cautious in shifting its Medi-Cal beneficiaries into managed care. With respect to Medi-Cal managed care penetration in July 1997, 1.9 million of the 5.4 million Medi-Cal beneficiaries, or 35 percent, were in Medicaid managed care. The growth in Medicaid managed care by type of plan from 1988 through 1997 is shown in table 6. As can be seen, 258,124 enrollees were in the PHP model in 1988. By July 1997, enrollment in the PHP and PCCM models had decreased considerably, while enrollment in other models had grown. Tremendous growth occurred in the two-plan model between June 1996 and June 1997; it moved from 6 percent of those in managed care to 61 percent.
Different Models of Managed Care
All prepaid health plans are required by the Knox-Keene legislation to be licensed by the Department of Corporations. These prepaid plans must be able to demonstrate their capacity to perform and show relevant prior experience consisting of both medical and administrative ability. They must also demonstrate that they have appropriate financial capacity and expertise to undertake the proposed financing and provision of health care services.
Two-plan model. Under the two-plan model's structure, AFDC, poverty-related, and medically needy beneficiaries choose from two plans: (1) a local initiative, which must contract with all disproportionate share hospitals and traditional providers (e. g., federally qualified health centers, or FQHCs) and (2) a commercial plan. The state believes this structure will enhance recipients' choices, while giving traditional providers a chance to compete for enrollees. Elderly and disabled beneficiaries in the two-plan counties can voluntarily elect to receive services through one of these two plans, or they can remain in fee-for-service Medi-Cal. The state does not plan to make the program mandatory for these population groups in the future.
California is phasing in the two-plan model in 12 of its most populated counties: Alameda, Contra Costa, Fresno, Kern, Los Angeles, Riverside, San Bernardino, San Francisco, San Joaquin, Santa Clara, Stanislaus, and Tulare. Alameda was the first county to be fully operational, followed by Kern, San Francisco, San Joaquin, and Santa Clara. Tulare is the only county where the date when the plans will be operational is a question. The California Association of Health Plans sees implementation of the two-plan model as a shift away from a Medi-Cal program that offers choice of providers from multiple plans, which it does not consider a positive policy change.
The current implementation dates for the 12 counties are given in table 7. The two-plan model gained a 1915( b) waiver from the Health Care Financing Administration in January 1995. It served 72,000 beneficiaries in June 1996, and 1.13 million beneficiaries (61 percent of those in managed care) were enrolled as of July 1997 (table 6). However, there are now serious concerns in some counties (such as San Francisco) that there may not be enough Medi-Cal enrollees to support two plans, and in several counties implementation may be halted. Many of the counties are now pursuing the COHS strategy. In addition, questions are being raised about the costs of the two-plan administrative structure in, for example, Los Angeles, where each plan is a consortium of other HMOs.
County-organized health systems. Under a COHS, a local agency with representation from providers, beneficiaries, local government, and other interested parties is created by the county Board of Supervisors to contract with the MediCal program. Operating under a federal Medicaid freedom of choice waiver and other waivers, a COHS is required to provide, on a capitated at-risk basis, all basic benefits covered by Medi-Cal and to administer a comprehensive managed health care delivery system for all Medi-Cal beneficiaries residing in the county, including the elderly and disabled. Beneficiaries are given a wide choice of providers within the COHS; however, they may not obtain Medi-Cal services under the traditional fee-for-service system.
Five counties are currently operating COHSs. Santa Barbara and San Mateo have been operating them since the 1980s, and Solano, Santa Cruz, and Orange Counties began in the mid-1990s. As of July 1997, 394,000 Medi-Cal beneficiaries were served in COHS counties. In addition to covering all eligibility groups, four of the five COHSs cover or will cover all Medi-Cal services. The exception is San Mateo, which does not cover nursing home care. Of the five COHSs, all but Orange County's have awarded contracts directly to FQHCs. FQHCs contracting with the other four counties are trying to obtain a cost-based reconciliation payment from DHS. However, the San Mateo COHS is suing the state to exclude any of its gains from their risk pool arrangements from the FQHC cost adjustment.
Geographic managed care. GMC has been implemented in Sacramento and will be implemented in San Diego. GMC is designed to provide a choice of managed care plans, all of which are expected to assure access to comprehensive primary care, preventive services, and other necessary health care. Sacramento County began the development of the GMC project in early 1992 and implemented it in April 1994. At that time, the California DHS entered into contracts with 11 managed care plans (7 comprehensive medical plans and 4 prepaid dental plans) to cover Sacramento County's AFDC, poverty-related, and medically needy populations on a mandatory enrollment basis. Enrollment is voluntary for elderly and disabled beneficiaries. As of July 1997, 139,000 beneficiaries in Sacramento were enrolled. GMC is just being implemented in San Diego County. The start date estimate is July 1998. Six PHP and PCCM contracts in San Diego now serve 119,687 Medi-Cal beneficiaries.
Enrollment
How states enroll beneficiaries into capitated plans is often an issue in Medicaid managed care. States often use enrollment brokers to avoid risk selection, which can increase the state's fee-for-service costs, maximize the number of beneficiaries who make voluntary selections of plans and are not just assigned by the system, and provide appropriate educational and other materials to beneficiaries to help them in the selection process. For the two-plan and GMC models, California decided to work with enrollment brokers. GMC had fairly high voluntary enrollment. DHS officials suggested that the achievement of higher voluntary enrollment rates under GMC was a result of the lack of overlap of physicians within the seven different networks. In the two-plan model, beneficiaries' incentive to make plan choices may be reduced because, according to state officials, many providers will be available through both plans.
Beneficiaries in the two-plan model who do not select between the local initiative and the mainstream HMO will be assigned to the local initiative to a level sufficient to maintain disproportionate share hospital (DSH) funding to the county. After this assignment, beneficiaries are split between the local initiative and the mainstream plan. Auto assignment for COHSs is basically determined by the counties, which are able to make their own rules. Most counties have rules that provide advantages to safety net providers. The COHS counties may auto-assign beneficiaries to either health plans or providers depending on the contractual arrangements a county has used in establishing the COHS.
Setting Capitation Rates
The state sets capitation rates essentially the same way for all of the managed care models, although there are some differences related to the COHS and GMC models (discussed below). Capitation rates are based primarily on fee-for-service equivalent costs adjusted by age, sex, geographic area, Medi-Cal aid category, and eligibility for Medicare. Rates are calculated first for past periods and then projected to the future considering legislative changes and trends. Adjustments are made for services provided under other programs (child health and disability prevention, health insurance recoveries, stop-loss insurance). The costs of mental health services and psychotherapeutic drugs prescribed by psychiatrists are not included in the rates. Medi-Cal DSH payments to eligible hospitals are also made outside of the managed care capitation rates. An administrative allowance by category of eligibility is added to the rate, and if there is dental coverage, an amount for that is also added.39
Family rates used for AFDC eligibles, who make up more than 90 percent of the enrollees, ranged from $61 to $97 per month and are shown for the local initiative and the mainstream plans in table 8. As can be seen, the rates for the local initiatives are higher, reflecting the requirement that they contract with the traditionally more expensive providers (FQHCs and hospitals receiving DSH payments). These rates are also much lower than those in other states, reflecting California's historically low Medi-Cal payment rates, in part achieved through selective contracting. DHS reserves the right to redetermine rates annually on an actuarial basis or move to a negotiated rate.
In GMC and COHS models, capitation rates are set through a bid-negotiation process. In GMC, rates differ by capitated entity because different providers actually cover a different range of services. For example, in the Sacramento GMC, Kaiser, one of the participating plans, covers special services otherwise paid through California Children's Services, whereas the other plans do not. In the COHS model, both the county capitation rate from the state and any county capitation payments to providers are determined by a negotiation process.
FQHCs subcontracting with Medi-Cal managed care contractors may elect to be reimbursed on an at-risk basis or a reasonable-cost basis. The California Primary Care Association, which represents these providers, believes that implementation of the two-plan model is problematic, especially in counties where both county-operated FQHCs and FQHCs run by community-based organizations exist. In these cases, the legislation provides that the local-initiative health plans assign beneficiaries who do not make a provider selection to county-based FQHCs, thus minimizing the involvement of other FQHCs. There are also incentives for the mainstream commercial plans to contract with FQHCs. Despite these incentives, the California Primary Care
Association has expressed concern that community-based FQHCs will experience financial crisis and the possibility of closure. These concerns also apply to the GMC and COHSs. A recent Legislative Analyst's Office study has concluded that rural FQHCs have not been adversely affected by Medi-Cal managed care so far.40
Quality Assurance
The process for monitoring quality within managed care plans is still evolving in California. DHS officials said the quality assurance plan in the two-plan model demonstrates the direction of quality assurance activities for all MediCal managed care.
In the two-plan model, contractors must have an ongoing quality improvement program that demonstrates organization commitment. Contractors must perform ongoing studies of both clinical care and health service delivery. Applicants must also show a network capacity to serve 60 percent of the MediCal beneficiaries in the proposed region, and they receive favorable treatment in contracting decisions if they include traditional and safety net providers (county-operated health systems, community health centers, and disproportionate share hospitals) in their service delivery networks. Credentialing and recredentialing at least every two years is required of physicians and other health care providers. Also, contractors must offer second opinions by specialists to their members upon request. Provider network changes must be summarized in a monthly report to DHS.
The Future of Medi-Cal Managed Care
There are no immediate plans for bringing the elderly and disabled into mandatory managed care in the two-plan or GMC models. DHS has not decided whether it wants to include these groups in mandatory managed care. The exception to this is the COHS model, where the elderly and disabled are included in some counties. State officials believe that the experience with the COHSs will help DHS determine what needs to be done to meet the needs of the elderly and disabled populations.
The future of Medi-Cal managed care in California, a state with a high penetration of managed care in its commercial market, will be determined by the state's attitude toward expanding managed care to more rural counties and mandating managed care for the aged and disabled. Because the elderly and disabled beneficiaries are not perceived to have access problems similar to those of other Medi-Cal beneficiaries, there is no urgency to move these population groups into managed care. In addition, some groups (e. g., developmentally and physically disabled persons and chronically ill children) are very suspicious of managed care because of concerns that it would impede their access to care and disrupt established care patterns and relationships with providers.
Medi-Cal Hospital Payment and the Disproportionate Share Hospital Program
California uses a selective contracting program to reimburse hospitals that participate in the state's Medi-Cal program. The selective contracting program, operated by the California Medical Assistance Commission (CMAC), negotiates per diem payment rates with hospitals each year on an individual basis. About 260 of 500 hospitals in the state were under contract with CMAC in 1996, and selective contracting accounted for about 90 percent of total inpatient dollars for Medi-Cal. Through annual contract negotiations, it is entirely possible that two similar hospitals located near each other could have vastly different negotiated rates. The state received a waiver from the Boren amendment when selective contracting was first implemented in the early 1980s.
As a result of excess capacity and intense competition in the California market, selective contracting has achieved inpatient hospital payment rates that are among the lowest in the nation.41 In combination with other factors, low MediCal payment rates have elevated the importance of California's DSH program (commonly referred to as "855" after the state bill number of the enabling legislation) for funding of the state's health care safety net. The dollars involved are substantial— California's DSH program is the second largest in the country, with annual expenditures of $2.1 billion. Net federal financial participation contributes about $850 to $900 million per year to safety net providers. (Although California's Medi-Cal match rate is 50 percent, less than 50 percent of DSH spending is available to providers because
PDF