Medicaid Waiver Big, Innovative and Worth $10 Billion

Gregory Franklin seems to catch his breath every time he talks about the size and scope of California’s Medicaid waiver.

Franklin, deputy director of the state Department of Health Care Services, knows all the ins and outs of the waiver — a complex and multipronged plan to revise the state’s Medi-Cal program and prepare California to implement national health care reform.

“We’ve been working on the waiver for the better part of a year,” Franklin said. “And we’ve been negotiating continuously with CMS since the start of this year at least.”

What California’s DHCS has been negotiating over so many months are the terms and conditions around the coming expansion of health care coverage and the implementation of pilot programs and new systems to improve the quality, efficiency and delivery of health care in California.

The waiver plan was due to be finalized at the end of August, but state officials, hampered somewhat by the budget stalemate, asked for more time to iron out complex details. CMS granted a 60-day extension, so the new deadline for waiver approval is Oct. 31.  Legislators and the governor will need to approve two bills, AB 342 by John Perez (D-Los Angeles) and SB 208 by Darrell Steinberg (D-Sacramento), which would authorize DHCS to implement the agreement made with federal officials.

At issue is about $2 billion a year in federal money over the next five years, roughly half of that in new money — that is, money beyond what the federal government currently pays per year to help fund Medi-Cal, California’s Medicaid program. That additional money would go a long way toward establishing an innovative, state-of-the-art managed care system for Medi-Cal, Franklin said.

“We’re looking for better outcomes; we’re looking to do things in the patients’ best interests,” he said.

That’s the first priority of health care reform, to make health care better for all Californians, he said — while at the same time slowing down the runaway train of health care costs. Those two goals, to lower costs and improve health care, are inextricably linked in the waiver plan, Franklin said. The idea is, better care means more coordinated care, which is itself a cost-saving process.

“Now, it may turn out that, through better management and better outcomes, there may not be much savings in the first year or two or three. It may turn out, as we’re better at managing people’s health care, that it takes a whole year or even two years to align their care. They might not have received the care they needed before this,” Franklin said.

“So, we start with seeking better outcomes, we look for better quality of care, and we seek provider relationships that lead to all of that,” he said. “And hopefully, at the end of the day, that means significant cost savings.”

What Is the Waiver?

When a state needs to alter its Medicaid program, it must obtain a waiver from the federal government. Technically, California’s Medicaid waiver is dozens of waivers, as it gradually changes and refines the way it carries out the Medi-Cal program.

California has never proposed a waiver of this size before. But with the national expansion of health care coverage set to begin in 2014, state officials are redesigning systems and reorganizing the way health care is delivered to accommodate the federal directives.

The discussion over what will be included in the waiver is still ongoing. Some of the proposed elements are:

• A requirement that seniors and persons with disabilities in Medi-Cal be assigned as mandatory enrollees to managed care plans;
• New health care delivery models for children eligible for California Children’s Services;
• Pilot projects for managing the care of patients with dual eligibility — that is, people who are enrolled both in Medi-Cal and Medicare;
• Coverage expansion and enrollment demonstration projects for coverage of low-income individuals who are not otherwise eligible for Medi-Cal;
• More funding for public hospitals, including investment pools where payments could be tied to quality and efficiency improvements;
• Expansion of the number of childless adults covered in the Medi-Cal program, as well as the number of those with annual incomes falling between 133% and 200% of poverty level; and
• More funding for the state’s safety net system, including infrastructure improvements.

When the discussion over all of these changes first started, Franklin said, the pilot projects, such as converting some CCS children from fee-for-service to managed care, were the main focus of negotiation. But that has changed a bit, he said.

“The pieces that are having greater discussion right now,” Franklin said, “are the plans to move seniors and people with disabilities into managed care.”

California Is First

California is leading the way in its approach to converting to national health care reform, according to health care expert Peter Harbage of Harbage Consulting. Harbage wrote an analysis of the 2005 waiver for the California HealthCare Foundation, which publishes California Healthline.

“This waiver is big and innovative,” Harbage said. “It’s the first waiver in the post-ACA world [Affordable Care Act, the national health reform law also known as the Patient Protection and Affordable Care Act]. And it’s really designed to be a bridge to health reform in a way that people haven’t thought about before.”

Because California went through its own statewide health care reform process a few years ago, Harbage said, it’s in a better position than most states to implement federal reform.

“Nationally, most other states are trying to consider how to move forward,” he said. On the other hand, California already has an exchange bill passed, he said, and has moved forward with establishing a high-risk health insurance pool. This waiver is the first of its kind, he said, which is why the scrutiny over it has been so intense.

“That’s part of what CMS is considering,” Harbage said. “What they’re thinking about is what kind of precedent do they want to set in going forward for other states. They’re looking at California’s waiver, and they’re also looking at it with respect to other states.”

California has been equally cautious, because it wants to make sure health care reform gets done right, Harbage said.

“The question California has struggled with is: Can you do managed care well?” Harbage said. “Because managed care done poorly becomes just a way to deny care. And managed care done well is better care at a better price.”

Public Hospital Funding

Beyond the push to get children, seniors, the disabled and the underinsured into well-run managed care plans, the waiver also may provide relief for public hospitals, which have been losing money on Medi-Cal patients.

“One of the challenges for public hospitals has been the high number of uninsured, and the high number of Medi-Cal patients,” according to Melissa Stafford Jones, president and CEO of California Association of Public Hospitals. “With Medi-Cal, we get about 50 cents on the dollar, so it’s been hard to be sustainable, let alone make improvements to the system.”

Stafford Jones hopes the waiver will help public hospitals in a number of ways.

“It will expand coverage to more people, and given California’s population, that’s an important pathway to be on,” she said. “It will increase actual access and not just coverage. So we can have a strong safety net, so more people are actually getting the health care services they need.”

She hopes when the waiver is approved at the end of October it will foster a more coordinated approach to health care, especially for seniors and the disabled. She expects to see an expansion of the health care Coverage Initiative and higher Medi-Cal reimbursement rates.

“Another key piece is the investment pool,” Stafford Jones said, “and we’re hopeful it will be an important part of the waiver.”

The idea of the investment pool is to have money set aside for system infrastructure improvements, which would be distributed to hospitals based on certain quality and efficiency incentives.

“It would be looking at system infrastructure,” Stafford Jones said, “things like improving outpatient clinic capacity, making sure chronic disease registries are being used, establishing medical homes throughout the system, instituting team-based approaches to care, increasing the efficiency of outpatient clinics, expanding productivity so you can see more patients.”

Those are all concrete examples of how quality and efficiency can be improved and rewarded, Stafford Jones said.

“It will provide the kind of funding and investment into more complicated systems of care,” she said. “We’ve been using grants to demonstrate and test how to deliver better care. We’re looking at improving waiting times, improving outcomes, designing better ways to serve patients, providing a medical home for those people. We’ve had some good successes there. But it’s not yet systemic in the public hospital system or across the state,” she said.

“It’s critical for California to have the ability to prepare for improving the safety net [in 2014, when national health care reform starts],” she said.

That means shoring up public hospitals, expanding health care coverage to more Californians and coordinating patients’ health care so that quality goes up and cost goes down.

“At the end of the day,” Stafford Jones said, “we need an entire waiver package that works across all the issues that are there.”

KFF Health News is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF—an independent source of health policy research, polling, and journalism. Learn more about KFF.