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6. Financing Options

6-A. Financing Arrangements

California’s health care system has been chronically underfunded for 25 years, and the current economic and budget crises will make it nearly impossible for the state to make the necessary investment to serve increasing numbers of uninsured while undertaking significant reforms unless new sources of funding can be found in an environment of federal flexibility.  

Unlike many other states, California does not use provider taxes to finance hospital or other provider Medicaid costs, and so decades of state budget pressures have limited state general fund expenditures for Medi-Cal.  Medi-Cal has had only one across-the-board provider rate increase in the last 24 years. Hospital outpatient rates have been increased just four times in 24 years.58  Physician fees in California have also been historically well below the national average.  As a result, hospitals rely on inpatient payments as their main source of funding, and increases in the amount and volume of those payments make inpatient hospital expenditures the largest cost driver in the Medi-Cal program.  This payment structure does not create incentives to efficiently deliver health care services, which raises program costs and compounds budget problems.  California’s efforts to minimize state general fund spending on Medi-Cal have also saved the federal government hundreds of millions of dollars, but the state has not received any official “credit” for those savings from the federal government.

At the same time that budget pressures continue to limit available state funding for Medi-Cal, the need for the program is greater than ever.  California’s latest budget deficit has been reported to be as high as $26 billion.  The continued loss of state and local tax dollars as a result of the economic conditions stifles California’s ability to generate the funds necessary to reform its health care delivery system.  California’s significant rate of uninsured residents continues to grow as economic conditions worsen.  The underfunded and inefficient system is straining to support the health care needs of California’s vulnerable and low-income populations.  Further, California’s budget climate, and the uncertainty around it, puts its health care industry at risk for not being able to obtain necessary private investment.

Part of the federal government’s commitment to improving the efficient delivery of health care should be a commitment of necessary investments into the California health care system in order to effectuate reform.  The Obama Administration should consider giving the state “credit” for the savings achieved through more than 25 years of extremely low hospital and physician Medi-Cal payment rates and the Medi-Cal managed care program.  If these federal funds are made available, the State must have a source of funds for the non-federal share of these payments.  The state and federal government must work together to identify innovative solutions to help fund reforms to California’s health care system.  

Current Status of California

58 Steinhauer, Jennifer, “California’s Solution to $24 Billion Gap is Going to Bring Some Pain,” New York Times, June 21, 2009.  Available at http://www.nytimes.com/2009/06/22/us/22calif.html.

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