Proposals Could Affect Federal Funding for Medi-Cal

California is a land of extremes. We have some of the highest geographic points on the continent, as well as the lowest. In addition, California is the most populous state and has one of the highest per capita populations of young people among all states.

Two more superlative statistics:

  • California pays more — by far — in federal taxes than any other state.
  • California receives a smaller percentage of its federal tax money back as federal spending than any other state.

For every dollar Californians pay in the form of federal taxes, 79 cents come back to the state, according to the California Institute for Federal Policy Research.

Although this is not a new situation, it is causing a lot of hand-wringing up and down the state, in part because of federal proposals to reduce Medicaid spending and concern from some in the health care community about what this could mean for the state’s health care system.

Gov. Arnold Schwarzenegger (R) recently traveled to Washington, D.C., hoping to drum up more federal money for California. Some state legislative leaders traveled with Schwarzenegger to meet with California’s congressional delegation. Everybody agreed California should get more money.

But unless something gives, it’s not likely.

By the Numbers

In a nutshell, California residents on average are younger and have higher incomes than people in other states. California has roughly 50% more high-income people per capita than the national average, according to the U.S. Census Bureau. In the 2000 census, about 410,000 California households, or about 3.6%, reported annual incomes of at least $200,000, the top income bracket. Nationwide, about 2.4% of households earn at least $200,000 annually.

By contrast, about 4.7 million California residents in the 2000 census reported incomes below the federal poverty level. That’s about 14.2% of the state population, slightly higher than 12.4% of the U.S. population with incomes in that bracket.

Some estimates on undeclared residents, indicate that California has considerably more low-income residents than any official census shows. Such people affect the state health care system by using services when they get sick or injured.

In addition, California has the sixth-lowest percentage of people ages 65 and older in the country. Because much of the federal tax money states send to Washington, D.C., is spent on seniors through Medicare and Social Security, California’s relatively young population further affects its return on federal taxes.

In 2003, the most recent year for which all the numbers have been crunched by the Tax Foundation, California residents paid the federal government about $235 billion in taxes. New York was a distant second at $145 billion, and Texas was next at $122 billion. Federal spending in California that year was about $220 billion, $15 billion less than California sent in.

What This Means

Until more Californians age sufficiently to qualify for Social Security and Medicare, arguing for more money on those two fronts would be difficult.

However, there is growing interest in re-examining how Medicaid funds are distributed.

Currently, state Medicaid programs are funded by a combination of federal and state dollars. The proportion of federal and state contributions based on per capita income. The calculation, known as the federal medical assistance percentage, is determined annually for each state using a formula that compares a state’s average per capita income with the national average income level. FMAPs range from 50% in states with higher average incomes to 77% in states with lower average incomes. On average, the federal government covers 57% of states’ total Medicaid spending.

But it’s not as simple as it sounds. The parceling is done state-by-state, based not on how many low-income people live in each state, but on the state’s average income. Once again, the number of high-income residents in California comes into play, pushing the average income higher, which means less federal funding for Medi-Cal.

Based on its FMAP, California’s Medicaid spending is reimbursed by the federal government at a rate of 50 cents per dollar.

California officials say that if the funding formula were based on the number of low-income residents rather than per capita income, the state would be at the 58% or 59% reimbursement level.

Some Proposals Would Affect Federal Funding

President Bush has proposed federal spending cuts on Medicaid that he said would reduce costs by as much as $60 billion over the next decade and $14 billion over five years. The Congressional Budget Office projected that Bush’s plan would reduce Medicaid spending by $9 billion over five years.

Senate Budget Committee Chair Judd Gregg (R-N.H.) in March proposed reducing Medicaid spending by about $14 billion over the next five years, but the Senate voted to remove the changes from the 2006 budget resolution and instead create a commission to study and recommend possible changes to the program.

However, the House has approved a budget that would require the House Energy and Commerce Committee, which has jurisdiction over Medicaid and shares jurisdiction over Medicare, to find $20 billion in savings over five years.

In addition to being the major safety net for the state’s growing population, Medi-Cal is a huge part of the state’s economy, accounting for about 30% of the state’s spending each year. Medi-Cal spending has nearly doubled over the past decade.

There is great incentive to keep Medi-Cal healthy.

One approach being considered by the governor and legislators is to lobby for a revised system of allotting Medicaid funds based on actual numbers of people falling at or below the poverty level rather than based on the state average income.

Some analysts predict California could reap as much as $4 billion more per year under such a revised system.

And if cost of living is figured into any new formula — showing things cost more here than they do in states such as Mississippi or North Dakota — that number could easily go higher.

Related Topics

Health Care Costs Insight Insurance Medi-Cal Medicare