Capitol Alert

December 22, 2009

The Honorable Nancy Pelosi
Speaker of the House
U.S. House of Representatives
Washington, DC 20515

Dear Madam Speaker,

As one of the few governors in the nation who attempted to pass comprehensive health care reform at the state level, I have great appreciation for the historic effort you are leading in Congress. In fact, I am one of the only Republican elected officials in the country to publicly support the President's health care reform efforts.

When asked for my support, I was assured that federal legislation would not increase costs to California or include new unfunded mandates. Unfortunately, under nearly every scenario we can predict, the federal health care reform legislation being debated would cost California's General Fund an additional $3 billion to $4 billion annually. This crushing new burden will be added to a safety net that is already shredding under billions of dollars in unfunded federal mandates that we are struggling to meet. Medicaid is a partnership program between the federal government and the states. As the partner responsible for implementing this program, I am telling you that our Medicaid program is already at the breaking point, and if federal health care reform is passed without addressing the underlying faults in the system, health care reform will fail.

Let me be clear: I continue to support federal health care reform and believe that the current reform efforts could provide a historic achievement that will benefit all Americans. However, if Congress fails to address the existing unfunded mandates and adds yet another layer, federal health care reform could collapse the very safety net system it seeks to expand.

For health care reform to succeed, Congress must first and foremost give states the flexibility to meet our current obligations within the revenues available to states.

Giving California Flexibility to Manage Its Current Medicaid Budget
Under federal rules, California is locked into eligibility standards and benefit levels that are far more expansive and costly than other states'. For instance, Texas's Medicaid program covers parents with incomes up to 27 percent of the Federal Poverty Level (FPL); Pennsylvania covers those earning up to 34 percent of FPL and Florida up to 53 percent. California has expanded coverage over the years and now covers parents with incomes up to 106 percent of FPL. Federal rules for accepting American Reinvestment and Renewal Act funding prevent California from rolling back eligibility to 70 percent of the FPL to adjust our budget for lower revenues during the recession. Reducing eligibility to 70 percent of FPL in California would save more than $500 million General Fund dollars and would still cover more people than many other states.

Federal rules actually punish California twice for expanding our safety net. First, maintenance of effort rules prevent us from targeting limited resources toward the neediest populations as described above. Second, under health care reform, the federal government will shoulder almost the entire cost for states like Texas to expand their coverage from 27 percent of FPL up to whatever the federal mandated coverage level is, while California must continue to pay half the cost for populations below 106 percent. Thus, states that made little or no effort to expand coverage to low-income families are rewarded with either 82 percent or 91 percent federal funding, and states that did expand coverage, like California, are punished with costs that other states never incurred. Congress must either let states reduce their costs to live within limited resources or treat states equally by fully funding all Medicaid populations above a certain eligibility level.

Federal Medicaid rules also restrict California's ability to modify its program to reduce costs by reducing provider rates, establishing utilization controls on benefits and requiring greater financial participation by Medicaid recipients. Once again, California has over the years expanded services beyond those offered by other states including In-Home Supportive Services (IHSS), adult day health care, adult dental, pharmacy, hospice, family planning, medical supplies and so on. Over the past two years, California has reduced spending in virtually every program area, and, in more than a dozen lawsuits filed in federal court, judges have enjoined nearly every effort to reduce rates, modify optional benefits or limit eligibility. In these lawsuits, federal judges cite Medicaid rules requiring studies on the impact of those reductions on the communities served. The cumulative impact of these federal lawsuits contributes more than $1.4 billion toward our current year deficit alone. Should the state fail to ultimately win these legal challenges, the impact on future budgets will be in the billions. Congress must authorize states to reduce costs by lowering provider rates, limiting benefits and increasing co-pays as needed to live within limited resources.

Treat States Equally in Medicaid Reimbursement Rates
The Federal Medical Assistance Percentage (FMAP), the formula that determines federal reimbursement rates for states in the Medicaid program, is flawed and forces California to subsidize the Medicaid costs of other states. The current formula relies on per capita income over other indices, particularly poverty rates. California's relatively small number of high wage earners distorts our per capita income, masking the large number of low-income individuals we cover in Medicaid. This flawed formula results in California receiving the lowest possible Medicaid reimbursement rate in the country. In a 2003 U.S. Government Accountability Office report titled "Differences in Funding Ability among States Often are Widened," California was specifically called out as one of three states in the nation with one of the largest populations in poverty, while ranking 49th in per-capita costs (the second leanest Medicaid program in the U.S.). Other large states have much higher reimbursement rates: Florida receives 56.83 percent; Michigan 58.10 percent; Ohio 60.79 percent; Pennsylvania 54.08 percent; Texas 60.53 percent. The bottom line is that this flawed FMAP formula is forcing California to subsidize Medicaid costs in other states. If California received an FMAP rate equal to the average of the 10 largest states, it would be 57 percent - a difference of $2.2 billion.

Fixing the flawed FMAP rate is even more urgent in the context of national health reform. If this flawed methodology is locked into the federal health reform bill, it will be impossible for California to meet the mandatory Medicaid expansion anticipated in either the House or Senate legislation.

Enhanced Federal Matching Rates for Providers Must Extend Beyond Primary Care
Both federal health reform proposals require states to expand Medicaid to new populations. For California, that means adding almost two million people to the program. California will need to increase provider rates significantly in order to attract and retain providers willing to serve Medi-Cal patients.

This is not a theoretical problem. In 1990, a federal district court held that California's Medi-Cal reimbursement rates for certain services were so low that they violated the equal access provision of the Medicaid Act, which requires states to set reimbursement rates at a level sufficient to enlist enough providers so that services are available equally to recipients and to the insured general population. California lost its appeals in that case, and the judge ordered the state's Department of Health Services to raise the rate to 80 percent of average billing. This decision dramatically affected dental rates and increased California's dental expenditures from $167 million in 1990 to more than $800 million in 1995 - more than a four-fold increase. In large part due to California's lower-than-average FMAP rate, our state has been forced to reduce other provider rates even further to balance our budget.

Ironically, while federal courts have ruled that California cannot reduce provider rates for optional benefits such as dental services or IHSS, they have ruled that completely eliminating those same optional benefits is perfectly legal. Adult dental was eliminated as part of our effort to close a $62 billion budget gap earlier this year. If states had more flexibility to reduce rates and benefits under Medicaid rules, we might have been able to save a portion of that program. Similarly, we reduced services to specified populations in our In-Home Supportive Services program, but federal court decisions have prevented those reductions from occurring. California is now faced with a decision to eliminate the entire IHSS program.

While some argue that California's low provider rates are self-inflicted, the fact is that if California was not subsidizing other states through a notoriously flawed FMAP rate at a loss of more than $2.2 billion, we would have the resources to increase our Medi-Cal rates to more reasonable levels.

The House version of federal health reform does provide enhanced federal funding match for Medicaid provider rate, but it must be expanded to all provider groups providing outpatient services, not just primary care. Without addressing the flawed FMAP rate or adequately funding an increase in provider rates, the mandated expansion of Medicaid coverage becomes an empty promise to millions of individuals as well as an unfunded mandate for California of more than $3 billion.

Paying California Funds it is Owed
Before adding new responsibilities on states to expand Medicaid coverage, the federal government should reimburse the amount that it owes states for past errors with other safety net programs. For example, California has paid for individuals in Medi-Cal while they awaited their Medicare disability determination. This error by the Social Security Administration was acknowledged in 2001. States have never been paid back. The amount owed to California on this issue alone is nearly $700 million.

Comprehensive health care reform is essential and long overdue. As I wrote in October, I believe that the elements of successful reform have been proposed in one form or another by Congress, but additional work is required to ensure the reform package contains the necessary balance to ensure success. Congress has a chance to make history with this legislation. The current structure and the proposed expansion of Medicaid under health care reform are unsustainable for California. Governors in every part of the country have raised similar concerns. California stands ready to help achieve successful health care reform, and I look forward to continuing to work with you as the final comprehensive bill is negotiated in Congress.

Sincerely,

Arnold Schwarzenegger