crane_-ca-state-budgetAs a new Congress takes office, newspapers are filled with articles about the potential consequences for California of federal changes to Medicaid but not about how California’s existing version of Medicaid — known as “Medi-Cal” — is already in need of serious reform.

Medi-Cal is a single-payer healthcare entitlement program covering 13.5 million low-income Californians. Funded jointly by the state and the federal government, the program is budgeted to cost $93 billion in the current fiscal year, which ends June 30, 2017. Together, California’s General and Special Funds will provide $27 billion of that spending, 58% more than just six years ago. As a result, Medi-Cal spending growth is crowding out other spending, including spending on the University of California and California State University systems funded by the General Fund:

To be fair, Medi-Cal is not the only contributor to crowding out UC, CSU and other programs. State spending on pensions and OPEB is growing even faster. But state spending on Medi-Cal is 2.7 times bigger.

UC and CSU have been losing ground even in the best of budget times.

UC and CSU are budget weaklings in large part because they are discretionary programs without serious political power. In contrast, compare Medi-Cal, which is both fiscally protected because cuts by the state would mean less federal reimbursement and politically protected by healthcare providers (hospitals, pharmaceutical companies, doctors, nurses, et al.) for whom Medi-Cal is a source of revenue. The same is true of other major programs funded by the state. K-14 is constitutionally protected and politically protected by government employee unions; debt service is contractual, constitutionally protected and politically protected by Wall Street; pensions and OPEB are contractual and politically protected by unions; and compensation for prison system employees is politically protected by unions. Not surprising given those political dynamics, FYE17 budget allocations to UC and CSU grew at only 70% of the pace at which General Fund revenues grew compared to FYE11.


State spending on Medi-Cal is likely to continue growing faster than state revenues because of general healthcare cost growth and already-scheduled reductions in federal support. That portends even more crowd-out, especially when — as Governor Brown has repeatedly warned — California gets hit as it always does with a revenue-reducing economic slowdown. Now that a new Congress and president are taking office with the intention of changing Medicaid, even greater reductions of federal support are likely, portending even more crowd-out. It’s by no means unfathomable that UC and CSU are on their way to being zero’d out of California’s budget.

For UC and CSU to be healthy, Medi-Cal must become more efficient.

Reforming Medi-Cal is very tough in part because Medi-Cal is very big business for hospitals, pharmaceutical companies, doctors and nurses who are very active politically. They are not likely to be favorably inclined towards reforms designed to reduce costs — which means reduce their revenues — or to make their revenues dependent upon Medi-Californians actually getting healthier as a result of that $93 billion of spending. It’s not that healthcare providers are bad or greedy people. It’s that their incentives are to grow revenues and to do so with as few conditions as possible, no different than other businesses and unions.

Reforming Medi-Cal is also tough because California is already a leader in controlling Medicaid costs. I don’t have the answer but I know that if California wants UC and CSU to be healthy, the governor and legislature must wring more healthcare out of each dollar being spent on Medi-Cal.