June 15, 2017: CALIFORNIA BUDGET CENTER - Governor and Legislative Leaders Agree to Split the Difference on Proposition 56 Tobacco-Tax Revenues for Medi-Cal

June 15, 2017

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The 2017-18 state budget package negotiated by Governor Brown and legislative leaders resolves a months-long disagreement over how to spend new Proposition 56 tobacco-tax revenues that go to Medi-Cal, which provides health coverage for more than 13 million Californians. Approved by voters last November, Prop. 56 raised the state’s excise tax on cigarettes by $2 per pack and triggered an equivalent increase in the state excise tax on other tobacco products. These increases, which took effect on April 1, will generate nearly $1.3 billion in new funding for Medi-Cal in 2017-18, according to state projections.

At the moment, the Prop. 56 compromise is included in two bills: Assembly Bill 120 and Senate Bill 105. The Legislature will approve — likely later today — one of these bills as part of the state’s overall spending plan for the 2017-18 fiscal year, which begins on July 1. The Prop. 56 compromise includes the following elements:

  • Of the $1.3 billion in Prop. 56 revenues that are projected to flow to Medi-Cal in 2017-18, up to $546 million could go to doctors, dentists, and certain other Medi-Cal providers as “supplemental payments.” These payments would be divided among five groups of providers: up to $325 million for physicians; up to $140 million for dentists; up to $50 million for women’s health providers; up to $27 million for providers serving people with developmental disabilities; and up to $4 million for providers caring for people with HIV/AIDS. This use of Prop. 56 revenues — which lawmakers promoted, but the Governor initially resisted — reflects the measure’s requirement that the tobacco-tax dollars directed to Medi-Cal be used “to increase funding for the existing [program]…by providing improved payments for all healthcare, treatment, and services.”
  • The state Department of Health Care Services (DHCS) will determine the rules for allocating these supplemental payments. These rules must be posted on the DHCS website by July 31, 2017. The legislation does not require DHCS to solicit public input in developing the rules, although it seems likely that the Department will reach out to key stakeholders for feedback.
  • Prop. 56-funded supplemental payments will be disbursed only if:
    • California receives “all necessary federal approvals” in order to ensure that federal Medicaid matching funds will be available to the state. Supplemental payments would be independently allocated by provider type as federal approval is received for that category of providers. At a Senate Budget and Fiscal Review Committee hearing on June 13, Senator Holly Mitchell — the committee chair — indicated that the intent is to provide supplemental payments retroactive to July 1, 2017, even if federal approval were received much later in the fiscal year.
    • The federal government does not cut funding for Medi-Cal. Supplemental payments would not go into effect (or would be suspended) if the federal government reduces support for Medi-Cal below the level projected in the state budget. (The Governor’s Department of Finance would make this determination.) While President Trump and Republicans in Congress are attempting to make deep cuts to Medicaid, it’s unclear whether those cuts will be approved and, if they are, how soon they would take effect.
  • If California allocates the full $546 million in Prop. 56-funded supplemental payments in 2017-18, the state would receive a projected $613 million in federal Medicaid matching funds. With these federal funds, a total of up to $1.2 billion in supplemental payments would be available to Medi-Cal providers in 2017-18.
  • The remaining Prop. 56 funds that flow to Medi-Cal will be used to pay for ordinary spending growth in the program. For example, if the state allocates the full $546 million in supplemental payments in 2017-18, the remaining $711 million in Prop. 56 revenues for that year would go toward routine year-over-year cost increases in Medi-Cal, costs that typically would be paid for with state General Fund dollars. This part of the compromise reflects the Governor’s interpretation of Prop. 56 — one that is at odds with how many lawmakers and Medi-Cal providers interpret the measure.
  • The compromise sets an expectation that the Governor could disburse up to $800 million in Prop. 56 funds as supplemental payments to Medi-Cal providers in 2018-19, the fiscal year that begins on July 1, 2018. However, the amount of supplemental payments provided in 2018-19 will ultimately be determined based on negotiations between the Governor and legislative leaders as part of the typical state budget deliberations in 2018.

What comes next? On the state front, once the Prop. 56 compromise is signed into law, attention will turn to DHCS as it moves swiftly to develop the rules that will apply to supplemental payments. Medi-Cal provider payment increases that are funded with Prop. 56 dollars must be based — according to the measure — on criteria that include 1) ensuring timely access to care, 2) bolstering the quality of care, and 3) addressing provider shortages in various parts of the state. By seeking input from key stakeholders, DHCS can help to ensure that supplemental payments are structured in a way that will actually achieve these important goals, thereby improving Medi-Cal for the millions of children, seniors, people with disabilities, and other Californians who rely on it.

At the same time, however, anyone who cares about the future of Medi-Cal, and health care in our state in general, will be keeping an eye on federal deliberations and the actions of California’s congressional delegation. If President Trump and Republicans in Congress succeed in scaling back federal support for Medicaid, California would lose billions of dollars that fund Medi-Cal each year. This massive cost-shift would force state policymakers to make difficult choices regarding Medi-Cal coverage and benefits — and would almost certainly undo any progress on provider payments afforded by Prop. 56 revenues.

— Scott Graves