Bloomberg: The Health-Care Spoiler in California’s Rosy Budget

California’s recent announcement that it had balanced its budget for the first time since the 2007-08 fiscal year received broad coverage. Yet next to nothing has been said about the change in the state’s spending priorities over that six-year period.

Despite a 30 percent increase in the top income tax rate, higher sales taxes and fees, and greater total revenue, the state is spending less on education, transportation, courts, welfare and parks than it was six years ago. The reason: State spending on health care, employee compensation and benefits, interest, and prisons is greater than it was six years ago.

The largest spending growth is in Medi-Cal, which is California’s version of Medicaid. The program is the state’s second-largest and fastest-rising expenditure, and accounts for most of the Department of Health Care Services’ outlays, which grew 65 percent over the six-year period, to $24 billion a year, from $14 billion. (See chart.)

Worse, the increase in Medi-Cal costs occurred before implementation of the Patient Protection and Affordable Care Act. The law is expected to cost the state budget an additional $2 billion to $4 billion in health-care spending a year, according to the Rand Corp. That means even less money for California’s colleges and universities, parks, courts, transportation, environment, and welfare, and even more pressure for fee and tax increases.

Catastrophic Cost

Health-care spending requires urgent attention from California’s legislators, yet Californians would be hard pressed to remember the last time Governor Jerry Brown or the state’s leading lawmakers uttered a word about the catastrophic crowding-out consequences of Medi-Cal spending.

Financial projections through 2020 released this week by the state’s Legislative Analyst’s Office show 3 percent annual spending growth for the budget, but that includes 6 percent annual growth for Medi-Cal spending, which is expected to increase faster than any other segment.

The report also projects zero percent growth in expenditures for the University of California and California State University, along with declining spending on welfare and courts. Even with revenue expected to keep rising thanks to last year’s tax increase and an improving economy, state spending on many services will probably stay flat or decrease, in large part because of the higher cost of Medi-Cal. Although the legislative analyst’s projections about California’s budget have been unreliable in the past, they do provide a picture of the priorities of California’s leaders.

Still, Brown recently warned the legendary University of California system about the limits to state assistance, even though the state has already materially cut its support and now devotes to the universities only 10 percent of what it spends on Medi-Cal.

It isn’t surprising that the university system is being picked on: It’s much easier to be tough on politically weak college and university students, welfare recipients, court and park users, fee-payers and taxpayers than to confront the politically powerful Medi-Cal lobby, which consists of well-organized patient, provider and government-employee organizations. But that is precisely why those defenseless constituents need the support of the state’s elected officials.

The people who should be hearing a lecture from Brown are the members of the California Legislature, and the subject should be the limits to state financing of Medi-Cal. The explosive spending growth won’t be addressed until the state’s leaders publicly admit there’s a problem.

Generous Enrollment

That problem will be very hard to solve. California already spends less per Medicaid enrollee than any other state, and it has already cut adult dental coverage and reimbursement rates. But as the Volcker-Ravitch State Budget Crisis Task Force pointed out last year, California has historically chosen to enact more generous eligibility criteria than most other states, leading to larger enrollment.

In 2012, Medi-Cal covered 7.6 million Californians, up from 5 million in 2000; and by 2014, the program is expected to cover 9 million, and will swallow ever-greater shares of the state budget.

Continuing to ignore the problem would mean the destruction of funding for other services. To reduce the growth of Medicaid spending, California needs to undertake comprehensive reforms that, according to California Common Sense, a nonprofit research group, would increase the fiscal role of the patient and change the way providers are paid. Those reforms would include proven cost-control measures such as tying pay to performance, allowing bundled payments, injecting price sensitivity, measuring outcomes and rationalizing reimbursement methodologies.

California’s congressional delegation would also need to start paying attention and help the state arrange concessions from the federal government that would allow the state to rationalize its Medicaid coverage.

Politicians love to make promises, but they don’t like to tell citizens about the costs of those promises or to challenge powerful lobbies funded in part by expenditures approved by those politicians. To protect its public services and residents, California’s leaders will sooner rather than later have to face down the elephant in the budget, Medi-Cal.

(David Crane, a former financial-services executive, is a lecturer at Stanford University and president of Govern for California, a nonpartisan government-reform group. He was an economic adviser to California Governor Arnold Schwarzenegger from 2004 to 2011. Follow him on Twitter at @DavidGCrane.)

To contact the writer of this article: David Crane in San Francisco at

To contact the editor responsible for this article: Max Berley at

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