California budget has not solved the Medi-Cal crisis

Gov. Schwarzenegger has signed a budget that holds spending down to $103 billion. Unfortunately, the governor and legislators missed the chance to wrangle Medi-Cal, the state’s Medicaid program, under control. Medi-Cal is a big part of the state’s deficit problem. It’s the second largest chunk of the general fund, after K-12 education.
The budget agreement held the line pretty well on this gargantuan program for the short term, appropriating $14.5 billion for 2008-2009 versus $14.2 billion last year. But that’s not the whole story. Total Medi-Cal spending will be more than twice as much, $39.4 billion, because the federal government pays the state for most of it. You get taxed twice to fund one program, but Medi-Cal’s long-term spending trend is still out of control.

Between 1997-1998 and 2006-2007, Medi-Cal spending increased at an annual rate of 7 percent, nearly doubling. And fully one-third of this increase was due to increased enrollment. Because of the federal matching payments, California has an incentive to enroll more and more people into government dependency for their health care.

The budget demands that families enrolled in Medi-Cal prove their low-income eligibility every six months, instead of every year. This will likely reduce the rolls of some who become ineligible because they get higher-paying jobs, but it also increases the fragmentation of health coverage. If someone on Medi-Cal is offered a job that pays wages too high to keep him eligible, but the job doesn’t provide health benefits, he’s likely to turn down the job.

This “poverty trap” could be avoided if the state turned Medi-Cal dollars into premium support for individual private health insurance that assures low-income workers continuity of coverage as they move from job to job. Such states as Missouri and Georgia have taken similar steps, which will benefit low-income workers and their employers. Such a reform would also benefit providers, such as physicians and hospitals, who face far worse terms from Medi-Cal than private plans.

A 2001 survey by the California Health Care Foundation concluded that nearly half of physicians in the state’s urban counties were not willing to take Medi-Cal patients, despite a fee increase in August 2000. As a result, there were only 46 primary care physicians per 100,000 Medi-Cal dependents, versus 75 per 100,000 other Californians. The differences were similar for specialists. Although more recent surveys are not available for California, national data from the Center for Studying Health System Change found that 14.6 percent of physicians reported serving no Medicaid patients in 2004-2005, up 13 percent from 12.9 percent in 1996-1997. Why physicians drop out is no mystery.

In 2003, Medi-Cal paid physicians only 59 percent of what Medicare (itself a poor payer) paid, on average. The situation got worse when California started drifting into this year’s budget crisis. During the special session last February, the governor signed a bill rolling back fees for Medi-Cal providers by 10 percent, starting July 1. This resulted in massive lobbying and litigation.

Doctors and pharmacists argued that the rollback violated federal Medicaid law, and a federal judge agreed. The state has partially restored the cuts imposed last summer, but continues its appeal. The governor and Legislature must be pretty confident they will prevail. The budget extends the 10 percent payment cut until March 1, 2009, after which providers will get some relief — or perhaps not.

Even if the federal court decision stands and blows up the rollback, the state still couldn’t pay providers what the judge demands. In fact, the “annual” budget doesn’t really cover the whole fiscal year. There will have to be a special election (likely next March or June) to authorize borrowing $5 billion against future lottery receipts.

Despite years of out-of-control spending, Medi-Cal still fails both providers and patients. At its core, the problem is not a budgetary crisis: It’s a crisis of government dependency.

John R. Graham is the director of health care studies at the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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