California, Federal Officials Address Medi-Cal Funding Strategies

For more than two decades, California officials have used an accounting strategy — basically moving money from one column to another — to increase federal Medicaid payments to the state. This year the strategy increased federal Medicaid payments by nearly $2 billion.

Every other year for the past 25 years, federal officials checked California’s books, fully aware of the state’s accounting practices, and approved.

Not any more.

California is one of a handful of states called on the federal carpet this spring for “questionable” accounting practices in the midst of a sometimes unpleasant wrangle to reduce Medicaid spending by $10 billion over a five-year period. The cuts, which Congress approved at the end of April as part of the fiscal year 2006 $2.6 trillion federal budget resolution, are not as deep as President Bush requested in February, but they’re deep enough to elicit strong reactions from some Democratic members of Congress.

House Minority Leader Nancy Pelosi (D-San Francisco) said, “This budget is an assault on our values.”

Sen. Hillary Rodham Clinton (D-N.Y.) said, “It’s unconscionable to balance the budget on the backs of our most vulnerable Americans.”

Some Republican legislators were more accepting of the cuts.

House Budget Committee Chair Jim Nussle (R-Iowa) said, “Is this a perfect budget? Of course not.” He added, “Having a plan is better than not having a plan.”

Regarding the funding cuts, Sen. Gordon Smith (R-Ore.) said, “It was made clear to me that a minimum of $10 billion was necessary to get a budget.” He added, “I would have preferred $5 billion, but it is important to remember that a budget is just a number.”

The new scrutiny on accounting methods started in February when newly confirmed HHS Secretary Mike Leavitt announced the federal government’s goal of saving $60 billion in Medicaid spending over the next decade in part by prohibiting what he called “accounting gimmicks” used by states to receive more federal matching funds.

Leavitt also called for the end of “loopholes” that allow middle-class seniors to receive benefits and the elimination of excessive spending on items such as prescription drugs.

Neither the Bush administration nor Congress will be able to do much long-range cutting without the approval of a Medicaid commission to be formed as a byproduct of heated funding negotiations in Congress this spring. Democrats and Republicans agreed that a commission was needed to guide the federal program, which has become vital in maintaining states’ fiscal health and their residents’ physical health.

15 States Come Under Scrutiny

California is one of 15 states singled out for extra scrutiny in Medicaid funding. The White House and its allies in Congress estimate the federal government could save as much as $20 billion over the next five years by clamping down on those states’ creative accounting practices.

Jim Frogue — project director of California’s Center for Health Transformation, an organization founded by former Speaker of the House Newt Gingrich (R-Ga.) — said California officials were “basically money laundering,” with their accounting methods.

The accounting tactic in question in California involves intergovernmental transfers of money from counties, the public university system and public hospitals to Sacramento where state health officials add the money to the state’s contribution to Medi-Cal.

Medicaid — called Medi-Cal in California — is a team effort in which the federal government matches state money using a complex formula, the biggest factor of which is the state’s own contribution. By adding county, university and hospital money to the mix, California increases its federal Medicaid match. This year’s total in transfers was more than $1.9 billion — about 11% of the state’s final tally of $17 billion. Medicaid’s matching funds bring California’s annual Medi-Cal budget to about $34 billion.

State health officials compare their methods to household budget balancing to make ends meet.

“Let’s say you’re living paycheck to paycheck,” says Stan Rosenstein, deputy director of medical care services for the California Department of Health Services. “You’re doing fine until something comes along — tires for your car or a new refrigerator. You take $100 out of your savings account and put it into checking so you can pay all your bills. Then when your paycheck comes, you put $100 back into savings.”

“That’s like our intergovernmental transfers,” Rosenstein says. “If you just look at the last transaction, it looks like you’re getting overpaid. We’re trying to work out a system that takes the whole picture into account, including expenditures.”

California officials say every dollar in the Medi-Cal program, no matter where it comes from — federal, state or county coffers — is used to deliver health care to low-income and indigent residents.

“We have legitimate health care expenditures that justify every dollar we spend,” Rosenstein said.

California’s predicament is made murkier by federal regulations that allow state governments to use county funds for Medi-Cal reimbursement totals, provided that the county contributions don’t exceed 60% of the final figures. Rosenstein contends that California’s intergovernmental transfers are part of that county contribution and don’t come anywhere near 60% of the total.

Rosenstein offers a hypothetical example of an intergovernmental transfer: A county sends the state $100 which is added to the state account. “That allows us to make $200 in payments,” after the state receives $100 in matching funds, Rosenstein said.

The county does not necessarily get all of that $200 back. The state distributes Medi-Cal funds using a need-based formula.

“We may pay that county $160 based on our formula,” Rosenstein said, and send the balance to a children’s hospital or another institution. “The reality is governments move money so often and at so many different levels — federal, state, county — you find yourself wondering, ‘So whose money was it anyhow?'” Rosenstein said. “It’s a very complex situation.”

At least one of California’s accounting practices will probably end this year, or at least change significantly. For several years, the state has taken an “administration fee” for collecting county, UC and hospital funds. This year’s total take in intergovernmental transfers was actually about $1.98 billion. The state planned to keep $85 million in fees.

Federal officials object to the administration fee and California officials, in their latest proposal, agreed to drop it.

California Negotiates With CMS

While politicians publicly duke it out and risk further polarization, state and federal officials appear to be more amicable and cooperative in their efforts to make the system work.

“California has told us they want to come into compliance, and we’re getting there,” Peter Ashkenaz — spokesperson for CMS, the federal agency that doles out the money — said. “We’re working on a concept paper now. That’s the next step before a waiver comes into effect.”

California health officials hope they can reach a compromise with the federal agency especially regarding supplemental payments to public hospitals that depend on Medi-Cal payments to stay in business.

“We chose not to fight the federal government,” Rosenstein says. “The federal government is our partner here, and you don’t want to fight with your partner.”

Ashkenaz and Rosenstein agree the complex, almost Byzantine payment systems involved in Medicaid and Medi-Cal need fixing, “but it’s not a swift process,” Ashkenaz said.

“There are various states moving money around in creative ways, and each state requires a different set of negotiations,” Ashkenaz says. “How long this is all going to take, I honestly can’t say. But I can say we’re making progress with California.”

Related Topics

Health Care Costs Insight Insurance Medi-Cal Public Health