Newsom's Updated Budget Proposal Safeguards Health Care Funds Amid Growing Deficit

Client Alert

California Governor Gavin Newsom has released his “May Revision” budget, which updates his initial FY2023-24 budget proposal released in January. His updated budget totals $307 billion--$10 billion more than he proposed in January--and addresses a projected $31.5 billion deficit--a $9 billion increase from the $22.5 billion deficit projected in January. Release of the May Revision unofficially kick starts the annual budget negotiation between the Governor and Legislature. A new budget is required to be in place by July 1, the start of the State’s fiscal year.

Health Care Programs Largely Protected

Newsom’s May Revision reflects his continued commitment to funding health care and related safety-net programs, with the Governor mostly maintaining funding levels despite the State’s projected $31.5 billion deficit. He also remains focused on renewing a managed care organization (MCO) Tax and assumes $2.5 billion in revenue to the State from a renewed MCO Tax.

A Renewed MCO Tax

Renewal of an MCO Tax is being negotiated among various health care interests, including the major health care focused trade associations, labor and others. (We summarize the Governor’s MCO Tax proposal below.)

Overview of May Revision Proposal

For decades, governors’ May Revision budgets have largely survived the legislative budgeting process unchanged, making Newsom’s May Revision likely to be a very close-to-finished state budget.

Addressing the Budget Deficit

Newsom proposes to address the $31.5 billion shortfall by capturing savings or revenues in the following ways:

  • $2.5 Billion: Increased Revenues from a New Managed Care Organization Tax     
  • $4.7 Billion: Borrowing/New Bonds
  • $1.1 Billion: Spending Reductions
  • $695 million: Delaying Funding
  • $450 Million: Withdrawal from $900 Million Safety Net Reserve Account

The Safety Net Reserve is available to support health and social services programs should funding not be available. The May Revision proposes to reduce the reserve by 50% to $450 million and use the funds to cover some as-yet unspecified program spending that the Health and Human Services Agency is to make public soon.

State Reserves

The Governor’s proposal does not utilize funds from the state’s $22 billion-plus Rainy Day Fund with exception of the Safety Net Reserve mentioned above. The Governor’s January Budget proposal would have maintained $35.6 billion in overall reserve funding. His new proposal would increase the reserves by a net $1.6 billion to $37.2 billion. The May Revise identifies the reserves as follows:

  • $22.3 Billion: Rainy Day Fund
  • $10.7 Billion: Public School Rainy Day Fund
  • $3.8 Billion: Special Fund for Economic Uncertainty
  • $450 Million: Safety Net Reserve

Department of Health Care Services (DHCS)

Medi-Cal Spending Year-Over-Year Is Increasing

The May Revision estimates the state’s General Fund share of Medi-Cal’s costs will rise to $37.6 billion in FY2023-24, a $6.7 billion increase compared to FY2022-23. This expected increase is due in significant part to the loss of increased federal financial support during the pandemic, and also includes the cost to the state of making Medi-Cal coverage available to all residents who qualify, regardless of their immigration status. Some of this increase cost is proposed to be covered by a new “MCO Tax,” discussed next.

Managed Care Organization (MCO) Tax

The May Revision lays out a plan to renew the MCO Tax, effective April 1, 2023, and ending December 31, 2026. If enacted as proposed, the Administration anticipates the renewed tax would bring in $19.4 billion. The Administration proposes to allocate the funds as follows:

  • $8.3 billion is intended to be used as a net General Fund offset, with a cash basis net General Fund offset of $3.4 billion in FY2023-24. This reflects an increase of $2.5 billion over the Governor’s January budget proposal due to the acceleration of the tax.
  • $11.1 billion is proposed to be used for Medi-Cal investments aimed at bettering access, enhancing quality, and ensuring equity in the program over an 8-10 year period. This would include:
    • Approximately $237 million ($98 million from the General Fund) in FY2023-24 and around $580 million ($240 million from the General Fund) every year after to increase Medi-Cal provider rates to at least 87.5 percent of Medicare for primary care, obstetric care (including doulas), and non-specialty mental health services, subject to federal approval.
    • The remaining $10.3 billion would be set aside to be spent in the Administration’s discretion to begin the process of assessing whether payment reforms are needed to improve access and quality of care within Medi-Cal. If an agreement can be reached, it is likely that the MCO tax negotiation among various health care interests mentioned above is proposed to be incorporated into the spending plan of MCO tax proceeds.

Medi-Cal County Redeterminations

Medi-Cal is required by federal law to annually review the eligibility of its beneficiaries. During the COVID-19 public health emergency, the federal government paused this redetermination process and extended extra funding to states to reimburse them for associated increased coverage costs. With the health emergency now legally over, the federal government reinstated the redetermination process. The May Revision projects that this eligibility review will reduce Medi-Cal enrollment from its current 15.3 million to 14.1 million in FY2023-24.

Lower Medi-Cal Expenses from Behavioral Health Programs

The May Revision shows a drop in Medi-Cal expenses by about $1.4 billion in the General Fund for 2022-23 compared to the Governor's Budget. This decrease mainly stems from revised timeline implementation updates to the Children and Youth Behavioral Health Initiative, the Behavioral Health Continuum Infrastructure Program, and the Behavioral Health Bridge Housing Program. The Children and Youth Behavioral Health Initiative, the Behavioral Health Continuum Infrastructure Program, and the Behavioral Health Bridge Housing Program are aimed at supporting and enhancing mental health services, by focusing on early intervention for young people, strengthening mental health service delivery infrastructure, and providing transitional housing for individuals transitioning from institutional care to independent living.

Funding for Crises and Traumatic Events (CalHOPE)

The May Revision continues support for the CalHOPE program, allocating $50.5 million one-time from the Mental Health Services Fund in 2023-24, instead of using General Fund dollars. CalHOPE provides crisis counseling, outreach, education, and links to resources to promote resilience, recovery, and overall mental wellness among individuals and communities affected by traumatic events.

Medi-Cal Drug Rebate Fund Depleted

The May Revision proposes $222 million in General Fund savings for FY2023-24 by depleting the Medi-Cal Drug Rebate Fund’s reserve. Usually, a reserve of about $200 million is kept in the fund to manage rebate fluctuations and reduce instability.

Department of Public Health (DPH) 

Overall DPH Funding

The May Revision includes $5.5 billion to fund DPH’s mission and goals.

  • General Fund: Of the $5.5 billion, $980.9 million would be General Fund dollars.
  • COVID-Related Public Health Emergency: The May Revision reduces the COVID-19 response budget by $50 million from the General Fund. This reduction aligns with the winding down of emergency activities nationwide, following the conclusion of state and federal emergencies.
  • Responding to Public Health Emergencies: In addition to workforce development support, the Administration reports that DPH has developed new systems to strengthen capacity and address current and emerging public health priorities, such as establishing the Office of Policy and Planning and the Regional Public Health Office.

Public Health Workforce

The Governor is proposing $300 million in ongoing General Fund support to modernize state and local public health infrastructure and transition to a more resilient public health system. This includes the hiring of over 800 new public health staff at the state and local levels.

The May Revision also proposes to reinstate and commit $49.8 million from the General Fund over four years to specifically focus on diverse public health workforce training and development initiatives.

AIDS Drug Assistance Program (ADAP) Loan

The May Revision proposes a $400 million loan from the AIDS Drug Assistance Program Rebate Fund to the General Fund. The Administration states that the loan will not negatively impact ADAP because the funding is not needed for current operations or other program needs. ADAP provides access to a range of prescription drugs, monitoring and outpatient visits for low-income individuals living with HIV and AIDS who have limited or no health insurance coverage.

Department of Health Care Access and Information (HCAI)

Overall HCAI Funding

The May Revision proposes $371.6 million to fund HCAI’s work in the coming year. This includes $189.1 million in General Fund dollars.

Distressed Hospitals

The May Revision allocates $150 million from the General Fund over two nears for the Distressed Hospital Loan Program, which offers interest-free loans to financially distressed not-for-profit and public hospitals, or entities representing closed hospitals, to prevent closures or facilitate re-openings.

Reappropriation From CalRx with Focus on Reproductive Health

CalRx was established in 2019 and authorizes the State to, directly or indirectly, produce and distribute generic drugs to be sold at a low cost to eligible residents.

The May Revision proposes statutory changes to grant the CalRx Program flexibility to acquire additional pharmaceuticals, like mifepristone or misoprostol, to meet urgent reproductive health care needs.

The May Revision includes a one-time reappropriation of $2 million from the General Fund to be available for CalRx to spend as needed on this and other reproductive health care needs. These funds are part of an unused portion of the one-time $20 million General Fund dollars supporting the same program included in the 2022 Budget Act.

Temporary Borrowing Proposals

Newsom proposes borrowing from two notable programs managed by HCAI. He notes that the funds to be lent are not required for operational or programmatic purposes.

Hospital Building Fund Reserve

The May Revision proposes borrowing $150 million from the Hospital Building Fund’s reserve, with repayment in FY2026-27. The fund is used to review and, evaluate reports and construction documents, and carry out site visits to hospital construction projects to ensure compliance with the state’s Hospital Facilities Seismic Safety Act.

Health Data and Planning Fund 

The May Revision proposes a loan of $15 million from the California Health Data and Planning Fund’s reserve, also to be repaid in FY2026-27. This fund generally pays for HCAI’s work collecting, processing, and analyzing health data.

Other Health and Human Services Items

Response to Opioid and Fentanyl Crisis

The May Revision proposes adding $141.3 million over four years to the Opioid Settlements Fund for the Naloxone Distribution Project, bringing total funding to $220.3 million over four years. The May Revision also includes a one-time $30 million allocation for the CalRx Naloxone Access Initiative to develop a cost-effective, generic Naloxone nasal spray.

Extension of Home and Community-Based Services Spending

The May Revision extends the Home and Community-Based Services current spending plan for six months, until September 30, 2024. This extension allows programs like the IHSS Career Pathways Program and the Senior Nutrition Infrastructure Program to utilize their allocated funding to meet critical programmatic needs. These programs provide training opportunities to enhance home care provider skills.

Savings from Child Support Pass-Through System

The Child Support Pass-Through to Formerly Assisted Families is a policy that allows families that were previously receiving public assistance to receive a portion of the child support payments made by the noncustodial parent. Typically, when a family receives public assistance, such as Temporary Assistance for Needy Families (TANF), the government collects child support payments from the noncustodial parent to reimburse the cost of the assistance provided to the family. The implementation of this program is contingent on automation updates to the Child Support Enforcement System. These updates are now estimated to occur in April 2024 due to system complexities. This revised implementation date is projected to yield roughly $70 million in savings (i.e., General Fund revenue).

Older Adult Behavioral Health Campaign

The May Revision proposes allocating $20 million from the General Fund in FY2023-24, $20 million FY2024-25, and $10 million in 2025-26 to the California Department of Aging to sustain the Older Adult Friendship Line, conduct a media campaign targeting older adults, and provide competitive grants to local jurisdictions to enhance their ability to address behavioral health and substance use disorders in older adults.

Health and Human Services Innovation Accelerator Initiative

The May Revision proposes adding $10 million--$9 million General Fund--to the Health and Human Services Agency’s budget to establish the Health and Human Services Innovation Accelerator Initiative. This initiative, intended as a public-private partnership, is intended to foster collaboration between researchers and developers to tackle major health challenges in California, including diabetes-related issues, maternal and infant mortality disparities, and infectious disease prevention. The overarching goal is to accelerate the translation of research into innovative solutions that directly address disparities and inequities in the state's safety-net programs.



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