Politics & Policy

California’s Medicaid-Spending Crisis

California Governor Jerry Brown speaks at a 2015 news conference in Sacramento. (Reuters photo: Max Whittaker)
It’s the fault of California politicians, not of D.C. Republicans.

California officials, intimately familiar with seismic activity, are forecasting a “Big One” coming to the Golden State — in the form of the Republican Congress’s health-care legislation.

On Tuesday, the Los Angeles Times editorial board accused Republicans of planning to “slash” Medicaid and “devastate” Los Angeles County, where 40 percent of the population are Medicaid recipients. Their projection reflects a sentiment shared by many across the state. About 14 million Californians — more than one-third of the state — are Medi-Cal recipients (nearly 19 percent of the nationwide Medicaid population), and the nearly $100 billion program is two-thirds funded by the federal government. What will happen if California has to shoulder more, or most, of that burden?

But while Democrats are decrying the prospective Medicaid changes as, among other labels, “inhumane,” it’s worth recalling that California’s woes are largely the result of a longer-term policy failure in the state — one authored largely by Democrats.

California’s Medicaid program has, by a certain metric, been a success. That metric is health-insurance coverage. The Affordable Care Act offered generous financial help to states that expanded their Medicaid programs, and California was one of the most aggressive adopters. Since 2014, when the ACA went into full effect, California has added 5 million people to the Medi-Cal rolls, 3.7 million of them under the ACA’s expanded eligibility criteria.

This was an “explosion” that no one expected, including the state’s health-care officials, and it made what was an obviously expensive undertaking debilitatingly costly. According to the National Association of State Budget Officers, more than one-third of California’s total expenditures last year were on Medicaid; only Indiana (35.9 percent), Pennsylvania and Missouri (37.2), and Ohio (37.7) spent at higher rates. In 2010, California was at just 19 percent. It should come as no surprise that California’s average Medicaid spending (state and federal) increased by 11 percent annually from 2010 to 2014, one of the highest rates in the nation.

These are trends that would be a challenge to negotiate under normal circumstances, but California’s fiscal situation is hardly normal. As has been amply documented, the Golden State’s generous public-employee pension arrangements (CalPERS) are notoriously underfunded. According to Stanford University’s Institute for Economic Policy Research, California’s public-employee pension debt stands at about $228 billion, accepting state officials’ assumption that the pension system experiences a 7.5 percent return on investment. But Professor Joe Nation, who runs the Institute’s California Pension Tracker, says that official expectations are rosy; assume a bleak 3 percent return, and California’s pension system is underfunded by $969.5 billion. It’s not a coincidence that several California cities have declared bankruptcy, and that dozens more are in economic distress.

California has managed to contain its Medi-Cal costs so far largely by limiting reimbursements to physicians who see Medi-Cal patients — California has some of the lowest physician-reimbursement rates in the nation — but this has caused other problems. As Medi-Cal enrollment has increased, the number of doctors willing to take Medi-Cal patients has declined, to 63 percent of physicians in a voluntary survey conducted by the California Health Care Foundation in 2015 (and for methodological reasons, that number is probably high); as of last fall, 40 percent of physicians accounted for 80 percent of Medi-Cal visits. This situation has intensified California’s long-term physician shortage (one-third of California’s physicians and nurse practitioners are at least 55 years old). Retirements and rapidly expanding Medi-Cal rolls are responsible for the fact that two of California’s nine regions currently have so few primary-care physicians that they are in violation of California law for managed-care plans, which requires 50 primary-care physicians per 100,000 people.

This week, Governor Jerry Brown signed into law the state’s largest-ever budget, which does little to resolve these problems. The state plans to borrow $6 billion from its Surplus Money Investment Fund to pay down some of its pension debt — but as various observers have noted, this is like paying down one credit card with another. Meanwhile, Medi-Cal spending is being increased further, to accommodate an expected caseload in excess of 14 million people.

The vast majority of California’s Medicaid recipients are unlikely to find themselves expelled from the state’s rolls. Republicans’ intentions toward Medicaid have been grossly misrepresented — they are not “slashing” the program; it will continue to grow, only at a slower rate — and even the reforms they propose (such as capping reimbursements to the states) will be implemented gradually, the most significant cost-cutting measures not coming into effect until after 2020.

The Medicaid expansion made promises that were unlikely ever to be met.

Nonetheless, it’s true that a reduction in federal funding means that states will have to shoulder more of the burden of their own programs, and that certain states are going to struggle more than others to do so. That was inevitable when Medicaid stopped being a safety net for the citizens most in need and became a backdoor single-payer system for an ever-expanding definition of “impoverished.” The Affordable Care Act, and the Medicaid expansion that states such as California pursued, made promises that were unlikely — for plain, bottom-dollar reasons — ever to be met, and that’s finally becoming clear. Whatever happens next, the shocks, however great, to California’s system will be the result less of Republican cruelty than of the failure of California’s officials to create the conditions in which its expanded Medicaid program could be financially sustainable.


Editors: The Senate Health-Care Bill’s Needed Medicaid Reforms

The GOP Is Right: Medicaid Needs Fundamental Reform

The Medicaid Spending Caps Are More Complex Than They Seem

Ian Tuttle — Ian Tuttle is the former Thomas L. Rhodes Journalism Fellow at the National Review Institute.

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