Recent Changes in Health Policy for Low-Income People in California

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).

About the Series

This state update is a product of Assessing the New Federalism, a multiyear project to monitor and assess the devolution of social programs from the federal to the state and local levels. Alan Weil is the project director. The project analyzes changes in income support, social services, and health programs. In collaboration with Child Trends, the project studies child and family well-being.

Recent Changes in Health Policy for Low-Income People received special funding from the Robert Wood Johnson Foundation as part of the Urban Institute's Assessing the New Federalism project. The project received additional financial support from The Annie E. Casey Foundation, the W. K. Kellogg Foundation, The Henry J. Kaiser Family Foundation, The Ford Foundation, The David and Lucile Packard Foundation, The John D. and Catherine T. MacArthur Foundation, the Charles Stewart Mott Foundation, the McKnight Foundation, The Commonwealth Fund, the Stuart Foundation, the Weingart Foundation, the Fund for New Jersey, The Lynde and Harry Bradley Foundation, the Joyce Foundation, and The Rockefeller Foundation.

This state update was prepared for the Assessing the New Federalism project. The views expressed are those of the authors and do not necessarily reflect those of the Urban Institute, its board, its sponsors, or other authors in the series.

Overview

Health policymakers in California are challenged to meet the needs of a population that has very low rates of employer-sponsored health insurance and, as a result, high rates of uninsurance. After a period of robust economic growth, the declining economy, which has been exacerbated by the events of September 11, 2001, may make some policy options unaffordable. Furthermore, policy choices are complicated by the fact that the state has a large population of immigrants, many of whom are undocumented and therefore not eligible for most publicly funded programs. California's basic strategy for addressing the needs of its low-income population is to maintain reasonably broad eligibility for its publicly funded health insurance system, while providing support for a county-based system of indigent care for those uninsured and not eligible for public coverage. Historically, the state has kept reimbursement rates in its public programs low relative to national averages as a means of keeping broad eligibility affordable.

With the shift in 1998 from Republican Governor Pete Wilson to Democratic Governor Gray Davis, some hoped for swift and progressive health care reform. However, Davis's preference for fiscally conservative policymaking coupled with his interest in keeping education a top priority has yielded somewhat restrained reforms in spite of substantial growth in state revenues. Since 1998, California's health policy has embodied moderate eligibility expansions and enrollment simplification, provider and health plan payment rate increases, a number of initiatives aimed at improving quality of care in nursing homes, and the creation of a new state department aimed at improving patient protections for those enrolled in managed care.

Beginning under Governor Wilson, California took a two-pronged approach in response to the State Children's Health Insurance Program (SCHIP) and the opportunity to improve children's health insurance coverage. First, the state expanded Medi-Cal eligibility to all children in families earning up to 100 percent of the federal poverty level (FPL). Second, the state created Healthy Families, a separate children's health insurance program that provides coverage to children ages 1 through 19 with family incomes between 100 and 200 percent of FPL. Healthy Families has been in the spotlight since its implementation in 1998 and is one of the governor's top health policy priorities—in part due to the program's potential to cover uninsured children, but also because it is a nonentitlement program and allows for greater administrative flexibility and a better federal matching rate than Medi-Cal. During his first year in office, Davis increased eligibility limits for Healthy Families to 250 percent of FPL. In January 2002, California received approval to expand the Healthy Families program to parents with incomes up to 200 percent of FPL.

Although initially criticized for low and slow-building enrollment, Healthy Families has been gaining momentum. California has implemented a number of strategies to simplify children's enrollment in Healthy Families and Medi-Cal, including shortening the joint Healthy Families/Medi-Cal application, piloting an electronic application (Health-e-App), and implementing 12 months of continuous coverage for children in Medi-Cal to make it consistent with Healthy Families.

Medi-Cal has also been changing under Governor Davis. In 2000, California expanded eligibility for Medi-Cal under a 1931(b) program by making all parents with incomes up to 100 percent of FPL eligible for coverage (the previous limit was roughly 74 percent of FPL). In addition, California increased the Medically Needy eligibility level for the aged, blind, and disabled to 133 percent of the FPL (up from a maintenance need level of 84 to 90 percent of FPL). As part of the federal Ticket to Work and Work Incentives Improvement Act, California has extended Medi-Cal benefits to working individuals with disabilities earning below 250 percent of FPL.

In addition to changes resulting from the recent eligibility expansions, the state's Medi-Cal managed care program continues to evolve. Although welfare reform and the improving economy resulted in actual Medi-Cal managed care enrollment falling short of projections, approximately 52 percent of Medi-Cal beneficiaries are currently enrolled in managed care and 26 of 58 counties enroll some or all Medi-Cal beneficiaries into managed care. To improve access and quality within the Medi-Cal program, and in part because it is long known for having among the lowest Medicaid payment rates in the country, California adopted a broad package of rate increases for Medi-Cal providers totaling $800 million in the budget for 2000-01. As part of these increases, California increased capitation rates by 9.2 percent for plans participating in the "two-plan" model, a managed care model that includes a county developed plan (e.g., local initiative) and a commercial plan. Also included in this broad rate increase initiative were a 10 percent rate hike for nursing homes and a 7.5 percent wage pass-through for long-term care workers in nursing homes.

The quality of nursing home care has been a pressing issue in California since a 1998 Government Accounting Office audit revealed that nearly a third of California's nursing homes had serious and often life-threatening violations. The rate increase, along with a series of measures to increase oversight of nursing home facilities, was part of the governor's Aging with Dignity Initiative—a broad-based senior care proposal targeted at improving the quality of long-term care (LTC). The initiative also included measures to promote community-based care such as a $500 tax credit for taxpayers who are eligible caregivers for individuals with LTC needs.

California has also been moving forward with managed care reform to provide patient protection and education for its 23.5 million citizens enrolled in managed care plans. In 1999, California passed a law that allows patients to hold health plans accountable in court when an HMO causes "substantial harm" to a patient. Another significant development, particularly in light of the national debate on a patients' bill of rights, is the creation of the California Department of Managed Health Care. Launched in July 2000, the Department has an HMO Help Center where consumers can go 24 hours a day, 7 days a week, for assistance in dealing with their health plan. In addition to the Help Center, the Department of Managed Health Care is responsible for licensing all plans (including SCHIP and Medi-Cal plans), providing an annual HMO report card, and monitoring the financial solvency of the state's medical groups—in response to recent medical group insolvencies that challenged plans' abilities to maintain continuity of care.

In light of the slowing economy, Davis feels that his fiscally conservative approach to policymaking has been vindicated. By not having committed to large spending increases and by dedicating the state's sizable tobacco settlement to health programs, the governor's 2001 budget revision—which reflected lower revenue projections—avoided major cuts in Health and Human Services spending. Nevertheless, the future course of California health policy is far from certain. The state does not yet know how its supplemental payment program that subsidizes many safety net hospitals will be affected by federal regulations limiting Medicaid payments. In addition, with Medicaid enrollment expected to increase and an uncertain economy, California is likely to face some difficult policy tradeoffs in the coming year.

This study is part of a series of 13 state reports examining new opportunities in health policy for low-income people over the past five years and how these opportunities have put new pressures on policy formulation. Many developments increased state flexibility, including welfare reform and delinking of Medicaid from cash assistance, new funding for children's health insurance coverage under SCHIP, repeal of federal minimum standards for nursing home and of hospital reimbursement that had constrained states' control over Medicaid payments, and federal willingness to grant waivers under Medicaid (and now under SCHIP as well). Fiscal capacity also rose—from booming revenues during the long economic expansion of the 1990s and from new tobacco settlement funds.

However, new pressures on revenues and state policy arose from recent federal economizing under Medicaid and Medicare, notably including cuts in safety net support that was believed to have been abused by some states; political pressures for state tax cuts; and, starting in 2001, an economic slowdown and fears of recession. The terrorist attacks of September 11, 2001, have accelerated the downturn in the economy that was already beginning to affect California. New pressures also arose from the Supreme Court's Olmstead decision that detailed a right to home- and community-based services under the Americans with Disabilities Act, rapid growth in pharmaceutical spending, and the difficulties faced by Medicaid managed care. Political demands for public action arose from developments such as the rise in uninsurance, growth in private and public managed care, rising pharmaceutical costs, hospital fiscal woes, as well as from events specific to each state.

To examine how states have responded to both federal constraints and state flexibility during the last half decade, this study of California and 12 other states examines state priority setting and program operations in health policy affecting the low-income population.¹ Five major sets of issues are addressed in this set of reports. First, how have the political and fiscal circumstances of the state changed over the last several years? Second, has the state expanded public or private health insurance coverage, through Medicaid, SCHIP, Medicaid research and demonstration waivers, or state-funded programs? Third, how have Medicaid managed care and other acute care issues changed? For example, has access been affected by managed care plan withdrawals from Medicaid or backlash against plans by providers or beneficiaries? How are states coping with federal Disproportionate Share Hospital (DSH) cuts? Fourth, how are states responding to pressures to expand home- and community-based services for disabled persons, their new freedom to set reimbursement rates, and the labor shortage? Fifth, what other issues were prominent?

This report examines the major health policy issues California has dealt with in the period between 1997 and 2001, highlighting Medi-Cal (California's Medicaid program) enrollment and expenditure trends, policy developments in Medi-Cal and Healthy Families (California's separate State Children's Health Insurance Program), and other recent acute and long-term care issues. Information for this report comes primarily from an early 2001 case study. As part of the case study, researchers conducted interviews with a range of health policy stakeholders, including state officials, legislative staff, and industry representatives. This report updates a 1997 study on health policy for low-income people in California.

Notes from this section of the report

1. The other 12 states are Alabama, Colorado, Florida, Massachusetts, Michigan, Minnesota, Mississippi, New Jersey, New York, Texas, Washington, and Wisconsin. The 13 states studied were selected to present a balanced view of state activity and its impact on low-income families. See Kondratas, Anna, Alan Weil, and Naomi Goldstein. 1998. "Assessing the New Federalism: An Introduction." Health Affairs 17(3): 17–24.

Note: This report is available in its entirety in the Portable Document Format (PDF).

Usage, posting and reprint of materials on the UI web site:

Most publications may be downloaded free of charge from the web site in PDF format. This information may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required. Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact paffairs@ui.urban.org.

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.

Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.