March 9, 2020 No Comments The Latest LPOC Organization

Overview and analysis of the California Governor’s Vision for Health Care in his 2020-2021 budget proposal.

By James Cruz, MD


Each year, the California budget process provides the governor an opportunity to promote a vision for California.  After several decades of both Republican and Democratic governor’s meager interest in prioritizing health care issues, Governor Gavin Newsom’s proposed 2020-2021 budget articulates a bold, progressive vision prioritizing better health care for all Californians.  Released in January, the Governor’s budget proposal promoted the following broad health care vision for 2020-2021:

  1. Pursue new initiatives to increase health care price transparency.
  2. Address hospital cost trends by focusing rigorously on cost increases being driven by health care system consolidation.  Reduce unnecessary administrative costs by increasing the use of technology and accelerating the development of value-based reimbursement models.
  3. Strengthen California public option for health insurance to provide choice and affordability.
  4. Lowering prescription drug costs, which includes evaluating feasibility of establishing a State of California brand of generic drugs.
  5. Making progress towards universal coverage.

Overall, the Governor’s budget proposes an increase of $2.9 billion (12.4 percent) over 2019-20 levels.  Most notably, the Governor’s proposal assumed renewal of the managed care health plan tax also known as the “MCO Tax”, in order to help fund his Medi-Cal reform proposals. For context, for a number of years, the state has imposed a tax on managed care health plans which provided a significant amount of California general fund support for statewide programs. The MCO Tax expired at the end of 2018-19 and the California Legislature reauthorized a new MCO Tax in 2019.

Since the MCO Tax would increase federal Medicaid share of funding, the new MCO Tax proposal required federal approval.  Late January 2020, the federal government denied approving the State’s new MCO Tax proposal.   Undaunted, California, using authority in the MCO Tax’s reauthorizing legislation, modified its MCO Tax proposal and resubmitted it to federal authorities for review.  This modified MCO Tax proposal would generate a smaller amount of revenue (approximately $300-$700 million less), and there would be different impacts on managed care plan’s tax liability. Federal approval of the modified MCO Tax remains uncertain. A positive Federal response rests heavily on the results of the November Presidential election.

One important aspect in the Governor’s budget is that it does not assume or depend on the receipt of revenues from a renewal of the MCO Tax until 2021-22.  The fiscal impact of the ultimate federal decision on the State’s proposal will not affect the Governor’s budget structure until 2021-22.

The following is an overview of the Governor’s health care priorities in the 2020-2021 budget:

The Governor proposes to transform MediCal via the Healthier California for All initiative (Formerly known as the “Cal AIM” initiative). Key priorities:

  1. Address Social Determinants of Health
  2. Build on the Whole Person Care model
  3. Institute structural changes to the BH care system
  4. Expand statewide wraparound services such as housing and social service
  5. Dental care transformation

Public Option

The Governor’s budget priorities include a specific mention of California’s local plans.  The budget document notes that the Administration plans to leverage California’s public Medi-Cal managed care plans and Covered California to “build an even more robust public option in California.”


The budget outlines proposals to curb rising pharmaceutical costs.  These include:

  1. Generic Contracting Program – the State will create its own generic drug label, contracting with generic drug companies to manufacture certain generic drugs on behalf of the State at lower costs than currently available (Note: this has not yet been done in the United States.)
  2. Supplemental Rebates – Expands authority for the state to negotiate lower prices for Medi-Cal and non-Medi-Cal drugs. Currently, DHCS negotiates supplemental rebates based on best prices manufacturers give to other purchasers in the United States. The budget proposes to have rebates be negotiated using international prices as well.
    • Medi-Cal, CalPERS, Covered California, and private insurers will negotiate drug prices under a single state-run program, Golden State Drug Pricing Schedule. Will require manufactures to offer prices at or below the price offered to any other state or nation.
    • Non-Hospital 340B Clinic Funding – Starting January 1, 2021, provides supplemental funding for 340B clinics as a result of the negative impact from the pharmacy carve out proposal.  $105 million ($52.5 million General Fund cost) ongoing.
    • The budget assumes two statutory requirements that exist in fee-for-service:  Eliminate the six-prescription limit and eliminate copayments for pharmacy services.
    • DHCS will carve out all pharmacy benefits from Medi-Cal managed.  Effective no sooner than January 2021 (2019 executive order).
    • Creates a single statewide formulary (2019 executive order).
    • DHCS will contract with a pharmacy benefit manager for the Medi-Cal carve-out (2019 executive order).
    • The budget revises the pharmacy carve-out projected savings $178.3 million ($69.5 million General Fund).
  1. Office of Health Care Affordability/Center for Data Insight and Innovation

Creation of a new “Office of Health Care Affordability” and “Center for Data Insight and Innovation” in Spring 2020.  The focus of this new office will be on hospital consolidation, improving health care access and quality (via value and incentive payments for physicians and hospitals), and decreasing out-of-pocket costs for Covered California enrollees.  The Center for Data Insight and Innovation is to serve as central focus of health care data review and analysis to improve program delivery and drive system transformation.  The Center’s focus will be to increase California’s ability to create evidence-based programs and maximize ability to access federal reimbursement. Moreover, the Center’s data and findings will be shared in partnership with University researchers to increase collaboration.

  1. Hearing Aids for Children

Creation of a state program to provide funding to assist with the cost of hearing aids for children under 18 years of age in families with an income up to 600% of the FPL that do not have hearing aid coverage.  (Would not apply to children enrolled in Medi-Cal as hearing aids are a covered benefit for Medi-Cal children).  No federal funding available – all costs will come out of the General Fund.

  1. Medi-Cal Behavioral Health
    • Behavioral Health Quality Improvement Program: $45.1 million GF in 2020-21 and $42 million in 2021-22 for county mental health plans and substance use disorder systems to prepare for changes proposed by Medi-Cal Healthier California for All, including data-sharing capability for care coordination, performance measurement, and payment reform.
    • Medication Assisted Treatment Benefit Changes: $876,000 to add all FDA approved drugs to treat opioid addiction, including buprenorphine and buprenorphine-naloxone combination.
    • Drug Medi-Cal Organized Delivery System: $426 million ($62.6 million GF) to support the ongoing implementation of the Drug Medi-Cal Organized Delivery System waiver.
  1. Behavioral Health Proposals (Non-Medi-Cal Specific)
    • Behavioral Health Task Force: Proposes the establishment of a Behavioral Health Task Force including state departments, counties, consumers, health plans, providers, and other stakeholders to be convened by Health and Human Services Agency. The Task Force will review policies and programs with the goal of improving quality of care and system transformation.
    • Behavioral health parity enforcement: The Budget proposes stronger enforcement of federal parity laws and other health plan requirements as it pertains to accessing mental health and substance use disorder treatment, including timely access, network adequacy, benefit design, and plan policies.
    • Mental Health Services Act (“MHSA”) reform: Proposed changes to the MHSA may include treatment of substance use disorders, enhancing the Act’s focus on individuals experiencing homelessness, the criminal justice population, and early intervention for youth.
  1. Adverse Childhood Experiences (ACEs) Training

Spearheaded by California’s surgeon general, this effort will be implementing ACEs Aware initiative in California.  This will be a statewide effort for California health care providers to screen children for ACEs that increase the likelihood of ACEs-associated health conditions due to toxic stress.  California will be offering provider training to screen pediatric and adult patients for ten categories of ACEs, which includes abuse, neglect, and household dysfunction.  The Administration proposes $10 million General Fund costs for the development of the training program.



The nonpartisan, California Legislative Analyst Office released a review of the Governor’s budget proposals along with recommendations. Overall, the LOA analysis stated the Governor’s budget may be over-estimating the cost savings generated by his pharmacy related proposals, and under-estimating the funding needed to expand full scope Medi-Cal coverage to income eligible seniors regardless of immigration status.  Overall, the LOA recommended the legislature take a cautious “withhold action” approach or enact temporary measures until the budget process allows a more in depth examination of data and feasibility of implementation of the Governor’s proposals.

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