An Alternative to the “Medi-Cal as Pac-Man” Storyline

Last week, we highlighted two storylines about the state budget that are holding back California from adequately investing in broadly shared prosperity. Just a few days ago, another common storyline about state spending surfaced in the news media. This third narrative places exaggerated emphasis on the state budget impacts of rising enrollment in Medi-Cal, our state’s Medicaid program. Medi-Cal has expanded rapidly in recent years, largely due to California’s successful implementation of federal health care reform, and the program now provides affordable health care coverage to more than 12 million Californians with low or moderate incomes. The following discussion provides a more accurate and balanced perspective on the impact — and significance — of rising Medi-Cal enrollment under health care reform, a process that began with the passage of the federal Patient Protection and Affordable Care Act (ACA) in 2010 and fully took effect in California in 2014.

State Costs Related to Increased Medi-Cal Enrollment Are Much Smaller Than the Commonly Cited “Sticker Price” Suggests

The state’s cost for providing services to Californians who’ve enrolled in Medi-Cal due to health care reform is far smaller than the “sticker price” that’s often highlighted, as we noted earlier this year. For example, Governor Brown recently estimated that California would spend $969 million from the state’s General Fund in 2014-15 — the fiscal year just ended — on services for the more than 1 million Medi-Cal enrollees who (1) were already eligible for the program prior to health care reform and (2) signed up for coverage due to new outreach efforts, simpler eligibility and enrollment rules, and other factors associated with the ACA. (The state and federal governments generally share, on a 50/50 basis, the cost of providing health care services to these enrollees.)

However, as anyone who’s ever stepped onto a car lot knows, the sticker price — in this case $969 million — doesn’t tell the whole story. In fact, state lawmakers and the Governor have identified alternative revenues that are being used to reduce other state General Fund spending, essentially creating savings that offset the state’s costs for ACA-related enrollment in Medi-Cal. (We described these alternative revenues in a previous blog post.) The total amount of these funding “offsets” was expected to surpass $1 billion in 2014-15, according to the Governor’s estimates. Put differently, these offsets are estimated to exceed the state’s sticker price ($969 million) for already-eligible Californians who signed up for Medi-Cal after health care reform was fully implemented in January 2014. After taking into account these funding offsets, the state’s actual cost for this group “nets out” to $0 — as opposed to the $1 billion that’s typically cited.

State Spending on Medi-Cal for ACA-Related Enrollment Will Rise Modestly Starting in 2017, but the Federal Government Will Continue to Pay the Vast Majority of the Costs

State spending for ACA-related enrollment in Medi-Cal will increase modestly in the coming years. This is because California will soon begin to pay a small share of the cost for enrollees — currently more than 2 million — who became newly eligible for Medi-Cal under health care reform. As allowed by federal law, California extended Medi-Cal eligibility to parents and childless adults under age 65 who were previously excluded from the program and whose incomes are at or below 138 percent of the federal poverty line (equal to $16,243 for an individual in 2015). Currently, the federal government pays 100 percent of the costs for this group. Starting in 2017, California will pay 5 percent of these costs, and the state’s share will gradually increase to a maximum of just 10 percent in 2020 and beyond. The Brown Administration estimates that state spending for newly eligible Medi-Cal enrollees could be roughly $370 million in 2016-17, the first fiscal year in which California will have a share of cost. This amount will increase modestly in subsequent years — relative to the size of the state budget — as California’s share of the cost steps up to the 10 percent level.

State policymakers understood that California would eventually pay part of the cost for newly eligible Medi-Cal enrollees when they agreed in 2013 to expand eligibility for the program. Moreover, it’s been clear for more than a year that the number of Californians enrolling in Medi-Cal due to health care reform would be larger than state analysts had originally anticipated. In effect, policymakers initially assumed that many more Californians would remain uninsured — and therefore that Medi-Cal enrollment would be lower — than has actually been the case. Still, the additional state costs associated with higher-than-expected Medi-Cal enrollment aren’t a surprise, and these costs have been built into the Governor’s spending forecasts for at least the past year. In our view, the key takeaway is that state policymakers have decided — with good reason — that boosting access to affordable health care coverage is a key state priority. Therefore, as General Fund revenues rise — the Governor projects a $10 billion increase over the current level by 2018-19 — a portion of these revenues will be used to maintain the health care coverage gains that California has made in recent years.

Of course, it would be fabulous if the feds changed their minds and decided to pay the full cost of services for newly eligible Medi-Cal enrollees forever. But this option was never in the cards, given perennial concerns about the federal budget deficit along with the fact that Medicaid has a “hybrid” financing structure that funds services with a mix of federal and state dollars. Instead, Congress offered states the next best thing: 100 percent federal financing from 2014 to 2016, gradually ratcheting down to a 90/10 sharing ratio, in which the federal government will pay — ongoing — 90 cents out of every $1 in costs for newly eligible Californians enrolled in Medi-Cal.

These generous financing terms mean that the federal government will continue to fund the vast majority of ACA-related costs for Medi-Cal, bringing substantially more federal dollars to California each year than if the feds had insisted on a 50/50 sharing ratio for the newly eligible population. For example, in the current fiscal year (2015-16), the state is on track to receive nearly $17 billion in federal Medicaid funds to provide services to Californians who have signed up for Medi-Cal as a result of health care reform, including both already eligible and newly eligible enrollees. (Total federal funding for Medi-Cal in 2015-16 is estimated to be roughly $60 billion.) These federal dollars will flow to doctors, clinics, and other health care providers in communities across the state, boosting local economies and supporting vital health care services for millions of Californians.

Rising Medi-Cal Enrollment Highlights California’s Success in Implementing Health Care Reform as Well as the Tough Economic Circumstances That Many Californians Face

Over the past few years, state and federal policymakers have paved the way to affordable health care coverage for millions of Californians. With respect to Medi-Cal, more than 2 million low-income adults who were previously excluded from the program are now enrolled because California exercised its option under the ACA to expand eligibility. In addition, more than 1 million Californians who were already eligible for Medi-Cal are now enrolled because the state removed the red tape that previously hindered Californians’ ability to sign up for — and maintain — Medi-Cal coverage. Absent California’s comprehensive approach to implementing health care reform, it’s likely that millions of Californians of limited financial means who now receive health care services through Medi-Cal would instead be uninsured, facing the health and financial consequences that come from not having health care coverage.

At the same time, it’s important to point out that California’s success in boosting Medi-Cal enrollment speaks to California’s relatively high poverty rate and the difficult economic circumstances that millions of residents currently face. Nonelderly adults can enroll in Medi-Cal only if they have incomes at or below 138 percent of the poverty line. For a family of three, this currently equals about $2,300 per month — a paltry sum in a state where the statewide fair market rent for a two-bedroom apartment is nearly $1,400 per month. Clearly, Medi-Cal provides a health care coverage lifeline for millions of Californians and, in recent years, “has truly become a Main Street program,” according to one well-informed observer. But the state’s long-term goal should be to reduce the number of residents living on the edge — with incomes low enough to qualify for Medi-Cal — by helping families boost their incomes, such as by further increasing state’s minimum wage and expanding California’s new state Earned Income Tax Credit (EITC). While rising incomes would cause some residents to lose eligibility for Medi-Cal, they could purchase coverage — with federal financial assistance — through Covered California, the state’s health insurance marketplace that was established as part of the ACA.

Medi-Cal Under Health Care Reform: A Great Deal, Not a Budget Pac-Man

The “Medi-Cal as Pac-Man” storyline exaggerates the impact of increased Medi-Cal enrollment on the state’s finances. As explained above, the state’s current cost for providing services to Californians who have enrolled in Medi-Cal due to health care reform is significantly smaller than the oft-cited “sticker price” suggests. It’s true that the state will take on, in 2017, a small share of the cost for services provided to newly eligible Medi-Cal enrollees: parents and childless adults who gained eligibility beginning in 2014. However, the state’s cost will be modest relative to the expected increase in General Fund revenues, which the Governor projects will rise from $117.5 billion in 2015-16 to $127.6 billion in 2018-19. Moreover, the state’s share of this cost will top out at 10 percent in 2020, with the federal government covering the rest. A 90/10 sharing ratio for newly eligible enrollees is a great deal for California and ensures that the feds will continue to pay the vast majority of ACA-related costs for Medi-Cal, bringing billions in additional federal dollars to California each year to support vital health care services in communities across the state.

So yes, California has a little skin in the game as the state enthusiastically implements federal health care reform. But these relatively small costs are outweighed by the enormous benefits of moving toward a more rational, inclusive, and cost-effective health care system that embraces many — though not all — Californians of limited financial means who would otherwise face the possibility of crushing medical bills and the other uncertainties that come from living without health insurance.

— Scott Graves