On May 14, Gov. Newsom announced his revisions (often referred to as the May Revise) to the budget he proposed in January. He opened his comments by stating these are not ordinary times and that this will not be an ordinary budget. As was announced a week ago, the state is facing a $54.3 billion budget deficit.
The Governor plans to address the budget shortfall over the next several years by using the state’s reserves, relief from the federal Coronavirus, Aid, Relief, and
Economic Security Act, eliminating budget enhancements he announced in January, new revenues, and budget cuts.
This budget revision excludes critical funding that hospitals have been seeking. Not only does the Governor’s May Revise fail to include a much-needed financial lifeline
for hospitals dealing with the COVID-19 crisis, but there are also significant payment reductions for hospitals and health care providers in the form of Medi-Cal managed care efficiencies. They include:
Managed Care Efficiencies — $283 million total fund (TF), $91.1 million general fund (GF)
Effective Jan. 1, 2021, the Department of Health Care Services (DHCS) is proposing to implement a new directed payment program that targets base inpatient services reimbursement. The proposal has language referring to directing health plans to cap inpatient reimbursement at rates no greater than fee-for-service (FFS) APR-DRG.
- This would impact any private hospital or district hospital that has negotiated with health plans for reimbursement of inpatient services at levels greater than the FFS APR-DRG equivalent. This is believed to reflect the significant portion of these “efficiencies.” It also reduces health plans’ profit from 2% to 1.5% built into the rates.
Contractual 1.5% Reduction of Managed Care State Fiscal Year 2019-20 Rates — $585 million TF, $181 million GF
- Rates developed prior to COVID-19 pandemic are going to be adjusted.
- DHCS has contractual flexibility to implement up to a 1.5% reduction without redoing their actuarial rates.
Additional proposed reductions to health care providers, unless sufficient federal funding comes through, include:
- Elimination of Proposition 56 supplemental payments ($2.17 billion TF, redirecting $671 million to GF). This impacts physicians, dentists, family
planning, developmental screenings, Community-Based Adult Services, Non-Emergency Medical Transportation, Intermediate Care Facilties/
Developmentally Disabled, women’s health, and hospital-based pediatric
- Discontinuing adult optional benefits ($282 million TF, $125 million GF). This includes audiology, incontinence creams/washes, speech therapy, podiatry, and optical benefits.
The budget includes significant savings from decreases in FFS utilization:
- $650 million TF, $230 million GF savings from reduction of FFS volume due to COVID-19.
The Governor’s revised budget also defers the establishment of the Office of Health Care Affordability that had been proposed in January.
The May Revise assumes that the Medi-Cal caseload will increase significantly due to the COVID-19 recession. It assumes that caseload will peak at 14.5 million by July 2020, or approximately 2 million above what caseload would have been. This is up from the projected 13 million. This budget does maintains Medi-Cal program eligibility, including optional expansion for undocumented children and young adults.
However, this latest budget no longer proposes expanding Medi-Cal to undocumented adults age 65 and older. It also proposes to delay the California Advancing and Innovating Medi-Cal Program, as well as funding for the Behavioral Health Quality Improvement Program.
The budget also assumes increased federal funding associated with the receipt of an enhanced Federal Medical Assistance Percentage of 6.2% to be $5.1 billion and expected to continue through June 2021.
The Legislature must send the Governor a balanced budget by June 15. However, in early April, the Governor postponed the deadline to file taxes until July 15. Given this delay, this year’s May revenue estimates are largely projections to ensure the Legislature can provide a baseline, balanced budget by the Constitutional deadline of June 15.
As the pandemic continues to be an ever-evolving situation, the state budget will follow suit. After the July 15 deadline, the Governor and Legislature are expected to pass additional spending bills to address budget shortfalls before the Legislature adjourns for the year on Aug. 31.