Governor's Special Session on Health Care Financing

Samantha Beasley, Director, Public Policy

July 17, 2015

Facing billions in funding challenges for our state’s health care infrastructure in 2016, Governor Jerry Brown recently began a special legislative session on health care financing. In this, hearings are being held in the Senate and Assembly to discuss the needs of our continuously expanding Medi-Cal population, services for people with developmental disabilities, and - most prominently - expiration of the current Managed Care Organization (MCO) tax structure.

 For more than a decade, California has levied a tax on Medi-Cal managed care plans. The generated revenue is collected by the state and matched by the federal government, drawing approximately $1 billion annually. The cumulated matching funds are used to increase payments to Medi-Cal providers as well as act as a key financing resource that offsets state health care costs that would otherwise be extracted from the General Fund. This MCO tax has been vital for the financing and success of California’s Medi-Cal program; but last year, the national Centers for Medicare & Medicaid Services (CMS) notified state officials that California’s existing MCO tax is inconsistent with federal Medicaid regulations. If the current structure of the MCO tax is extended to future years, CMS will deduct these revenues from the state’s allowable Medicaid expenditures - putting $1 billion of Medi-Cal funding at risk.

Governor Brown introduced provisions in his 2015-16 budget proposal to revise the existing MCO tax system and replace it with a tiered approach, but major concerns arose that the tiered system would disproportionally impact small to mid-size health-insurance providers and significantly distort the overall health insurance market.

This probable loss of $1 billion in federal matching funds is further exacerbated by the recently expanded Medi-Cal coverage for undocumented children (at $40 million); a growing number of Medi-Cal patients under the Affordable Care Act (2 million+) and the dwindling pool of Medi-Cal providers; and proposed 5-7 percent rate increases to fund Supported Living Services, In-Home Respite Services, and Supported Employment Services for the developmentally disabled.

The state is actually facing an estimated $5-6 billion funding deficit in 2016.

In response to the Governor’s call, the Assembly and Senate have each held one informational meeting on shoring up the state’s public health care and developmental services financing. Special Committees in each house are expected to have two additional hearings in August. One will focus on the Medi-Cal program and the other on developmental services. These hearings will have stakeholder witnesses and ample time for public comment, after which the Committee will be ready to hold bill hearings to consider special session legislation. Bills to watch during this time include SB2X 1, SB2X 2, SB2X 3, AB2X 1, AB2X 2 and AB2X4 (introduced by Assemblyman Levine on July 16, 2015.)

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