California’s $17 Billion Medicaid Question for the Feds

It’s not every day that California requests $17 billion from the federal government, but state officials did just that last month. That’s the amount that California wants the feds to invest, over the next five years, in a set of initiatives aimed largely at transforming how health care is delivered and paid for through Medi-Cal (California’s Medicaid program), which provides health care services to roughly 12 million low-income Californians.

This $17 billion request is included in California’s proposal to renew its “Section 1115 Medicaid waiver,” which state officials submitted to the federal Centers for Medicare & Medicaid Services (CMS) on March 27. (Section 1115 waivers allow states, with federal permission and for a limited time — generally five years — to “test new approaches in Medicaid that differ from federal program rules.”) California’s current waiver, under which a large portion of the Medi-Cal program operates, expires this coming November. California’s ambitious proposal for a new five-year waiver kicks off what will surely be months of negotiations between state and federal officials, with the goal of having the next waiver in place by November 1.

Under the state’s plan, the requested $17 billion in federal funding would primarily be invested in new initiatives focused on Medi-Cal as well as on local public hospitals and clinics that serve both Medi-Cal enrollees and Californians who lack health care coverage. The state’s proposal is intended enhance the quality of care that patients receive, improve health outcomes, and contain costs in an effort to boost the “long-term sustainability” of the Medi-Cal program, according to the Department of Health Care Services (DHCS), which wrote the state’s plan. The initiatives proposed by the state include:

  • Boosting access to housing and supportive services for Californians who are homeless — or on the verge of becoming homeless, including due to release from jail or prison — and who meet specified criteria, such as suffering from multiple chronic conditions or a substance use disorder.
  • Providing incentive payments to doctors, dentists, and other providers to encourage them to accept more Medi-Cal patients or begin serving such patients.
  • Promoting the integration of health, mental health, and substance use disorder treatment services — as provided by managed care plans and county behavioral health systems — in order to create “a seamless care experience and reduce the total cost of care.”

Where would the feds get the $17 billion to support the initiatives that California proposes? This is where things get interesting, in a follow-the-numbers, green-eyeshade sort of way. Any state pursuing a Section 1115 waiver must show that the federal government would spend no more on the Medicaid program with the waiver in place than it would spend without the waiver. (This requirement is known as “budget neutrality.”) In order to make this case, state officials must develop alternative spending scenarios — with and without the waiver — and persuade their federal counterparts that (1) the assumptions built into these scenarios are reasonable and (2) that budget neutrality has been achieved.

Without getting into the details, California contends that over the five-year life of the waiver, total annual Medi-Cal spending would be billions of dollars less compared to spending without the waiver. In other words, the policies put in place under a Section 1115 waiver would result in significant annual savings, which the state and federal governments would share. Under the state’s plan, a large portion of these federal savings would be used to support the innovative health care initiatives that California has proposed. According to the state’s calculations, even after making these investments, the federal government would still be better off to the tune of $3.3 billion at the end of the five-year period, thus satisfying the budget neutrality requirement.

But will the feds go along with California’s plan? At this point, it’s not clear. Federal officials could argue that California has overstated the total amount of savings that would be achieved under a new waiver. Or the feds could accept the state’s savings projection, but decline to provide most or any of the dollars that California is seeking. State officials suggest that without this federal investment, the initiatives proposed in the waiver would be unlikely to move forward.

Clearly, major pieces of California’s ambitious waiver proposal hinge on the willingness of the federal government to invest even more in Medi-Cal than it already does. The outcome of state-federal negotiations won’t be known for months. In the meantime, state officials will continue to meet with interested stakeholders, and state legislators will make their voices heard as well, with bills related to the waiver submission having been introduced in both the Assembly and the Senate.

— Scott Graves