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Governor’s Revised Budget Includes Important Health Care Investments but Does Not Address Hospitals’ Inflationary Challenges

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On May 13, Gov. Newsom released the May Revision with modifications to the proposed state budget he first presented in January. 

CHA released a media statement on May 13 noting that, while the budget includes important health care investments, it does not address hospitals’ inflationary challenges. CHA will continue to have discussions with the administration and the Legislature to address inflation relief for California’s hospitals.  

Tax revenue estimates have surged by $55 billion since the governor’s January budget proposal, creating a discretionary budgetary surplus of $49 billion and allowing the state to make new investments beyond what was proposed earlier this year.   

However, to prepare for an uncertain fiscal future given high inflation, stock market declines, global supply chain disruptions, and constitutional spending limits expected to constrain future fiscal flexibility, the May Revision dedicates 94% of the discretionary surplus to one-time projects and builds the state’s reserves. The proposed budget does not exceed the state’s constitutional spending limits in 2020-21 and 2021-22, but the governor urges caution against new ongoing spending due to likely future impacts from the constitutional spending limits. 

The May Revision contains a number of new proposals affecting hospitals, health systems, and the patients they serve, including: 

  • Retention Pay: In an announcement on May 12, Gov. Newsom put forth a $933 million proposal for retention pay for workers in hospitals, skilled-nursing facilities, and psychiatric hospitals. The state will provide a base payment, with an additional match for an optional employer retention payment. Under the current proposal, the total state payment will be up to $1,500 per worker. 
  • Minimum Wage Increase: The May Revision projects inflation to exceed 7% in 2021-22, automatically triggering the state’s minimum wage to increase to $15.50 for all employers on Jan. 1, 2023. 
  • Children’s Behavioral Health: The May Revision proposes $290 million in one-time funding to address the youth mental health crisis. This funding would support a variety of initiatives, including the development of a youth suicide prevention program, the creation of a school- and community-based crisis response pilot, the establishment of a center for researching and applying new technologies to improve youth mental health, and other projects.  
  • State Subsidies for Covered California Coverage: The American Rescue Plan (ARP) provides enhanced federal premium subsidies for individual market coverage for 2021 and 2022. No federal action has been taken to extend these subsidies, resulting in the loss of about $1.6 billion in annual federal support for individual market health care coverage beginning in 2023. To backfill a portion of this potentially lost federal support and help maintain existing levels of coverage, the May Revision includes $304 million from the General Fund to reinstate a state premium subsidy program in place prior to the ARP.  
  • Homelessness and Mental Health: The May Revision builds on prior-year allocations and the $2 billion January budget proposal by allocating $500 million to develop interim housing and $150 million to fund additional Project Homekey projects.  
  • Funding for Community Assistance, Recovery and Empowerment (CARE) Court: While the May Revision indicates the administration continues to work with counties to estimate implementation costs, $64.7 million is provided to the Department of Health Care Services (DHCS), Department of Aging, and the judicial branch for costs associated with training, technical assistance, data collection and evaluation, new CARE Court supporter services, self-help centers, and CARE Court hearings.  
  • Health Information Exchange: The May Revision proposes $50 million over two years for a grant program to provide technical assistance to small or under-resourced providers, particularly small physician practices, rural hospitals, and community-based organizations, as well as education and technical assistance for entities new to health information exchange.  
  • Equity and Practice Transformation Payments: The May Revision includes an additional $300 million, for a total of $700 million over five years, to address gaps in preventive, maternity, and behavioral health care measures; reduce COVID-19-driven disparities; support upstream interventions to address social drivers of health and improve early childhood outcomes; and prepare practices to accept risk-based contracts and move toward value-based care. This includes $25 million to support a statewide learning collaborative for grantees and $25 million to support practice-level activities. In addition, $200 million will be used to prepare practices for value-based care by supporting provider infrastructure, including infrastructure to support data exchange and advanced data analytics.  
  • COVID-19-Related Funding: The May Revision provides $100 million for medical surge staffing to support upfront staffing costs for facilities needing additional staff during COVID-19 surges, until facilities can be invoiced and reimburse the state for such costs. It also includes $530 million for the state to purchase additional antigen test kits, support school testing with end-to-end vendors and laboratory network costs, and continue rapid testing and treatment sites.  
  • Medi-Cal Caseload and Eligibility Redeterminations: As a result of the extension of the federal COVID-19 public health emergency (PHE), Medi-Cal eligibility redeterminations will continue to be suspended. It is assumed this will result in Medi-Cal caseload peaking at 14.9 million enrollees before redeterminations resume in October. 

Previous proposals from the governor’s budget in January for which CHA will continue to advocate on behalf of the hospital field include: 

  • Office of Health Care Affordability: No changes to the proposal are included in the May Revision. However, updated statutory language could be forthcoming.  
  • Community Benefits Proposal: This proposal remains in the budget and is unchanged from the April trailer bill language, which would require hospitals to dedicate 25% of their community benefits spend for community-based organizations addressing the social determinants of health. CHA continues to oppose this proposal.  
  • Investment in the Care Economy Workforce: With some adjustments, the $1.7 billion proposal that would expand the health care workforce remains intact. CHA continues to support this proposal.  

Additional proposals that could affect hospitals and health systems include: 

  • Insulin Affordability: With the goal of lowering insulin costs, the May Revision provides $100 million from the General Fund in one-time funding to assist in the development of low-cost biosimilar insulin products and a California-based manufacturing facility. 
  • Reproductive Health: The May Revision adds $68 million to improve access to reproductive health care through grants for uncompensated reproductive health care, outreach and education, and research on unmet reproductive health care needs. 
  • Opioid Response: $41.8 million in additional opioid settlements funds would be allocated to workforce training, naloxone distribution to unhoused populations, and a public awareness campaign targeting youth. 
  • Increased Revenue Projections for County Behavioral Health Services: The May Revision projects 1991 and 2011 realignment funds (from sales tax and vehicle license fees) increased by 11.5% between 2020-21 and 2021-22 and are projected to increase by 5% between 2021-22 and 2022-23. Counties receive these funds for several mental health and substance use disorder services realigned to them by the state (e.g., Medi-Cal specialty mental health, Drug Medi-Cal). Mental Health Services Act revenues from a 1% personal income tax for those making over $1 million are also projected to grow in 2022-23. 
  • Support for Aging and Community Living: One-time and ongoing funding ($36.3 million) for continued implementation of the state Master Plan on Aging. Specific investments are directed toward the support of home and community living for older adults and persons with disabilities regardless of income level and include funds for home and community-based services, family caregiver resources, and the establishment of the Aging and Disability Institute of Learning and Innovation. 
  • Extension of Flexibilities Authorized Under the PHE: The May Revision proposes to extend certain flexibilities when the PHE ends. They include: 
    • Separate Billing by Federally Qualified Health Centers (FQHCs) for COVID-19 Vaccine Administration. A total of $47 million ($7 million from the General Fund) in fiscal year 2022-23 to continue separate billing by FQHCs for COVID-19 vaccines.  
    • Presumptive Eligibility for Individuals 65 and older, Blind, or Disabled. A total of $73 million ($37 million from the General Fund) to continue presumptive eligibility for these populations. 
  • Additional Quarter of Increased Federal Medical Assistance Percentage (FMAP): The governor’s budget released in January assumed the enhanced FMAP authorized under the PHE would expire at the end of June. Due to the extension of the PHE, the May Revision assumes additional General Fund and Special Fund savings due to the enhanced FMAP being extended through September.   
  • Delay of Managed Care Carve-In of Intermediate Care Facilities for Individuals with Intellectual Disabilities and Subacute Care Services: DHCS proposes to delay the transition of Intermediate Care Facilities for Individuals with Intellectual Disabilities and Subacute Care Facilities into managed care from Jan. 1 to July 1, 2023, in order to provide more time to adequately prepare for the transition. The remainder of long-term care facility benefits for skilled-nursing facilities will transition to managed care on Jan. 1, 2023. 
  • Conform Coverage of Clinical Trials in the Medi-Cal Program to Federal Law: DHCS proposes to update coverage and reimbursement policy related to clinical trials in the Medi-Cal program to conform with federal law. Currently, federal law defines clinical trials more broadly than current state law. This update will result in additional costs of $4.3 million in total funds ($1.6 million from the General Fund) in fiscal year 2022-23. 
  • Health Enrollment Navigators: The May Revision includes $60 million in total funds ($30 million from the General Fund) for the Health Enrollment Navigators Project through fiscal year 2025-26 to continue project activities with an emphasis on PHE-related activities. Specifically, this includes helping beneficiaries retain Medi-Cal coverage by assisting with annual renewals and engaging in outreach, enrollment, and retention of difficult-to-reach target populations.  
  • Extension of Time Limitation Restrictions for Working Capital Financing: The California Health Facilities Financing Authority is proposing trailer bill language that would change the definition of “working capital” to include two years’ worth of interest on any loan for working capital, as opposed to only one year, and would also extend the time to repay and discharge a loan for working capital from 15 months to 24 months. 

With the release of the May Revision, budget deliberations in the state Legislature will move into high gear over the next four weeks. The Legislature must send the governor the state budget by June 15.