California's $10 Billion "Bridge" to Healthcare Reform: Understanding California's Section 1115 Waiver

California has gotten a head start in preparing for the expansion of the Medicaid Program, a centerpiece of federal healthcare reform.  The Medicaid expansion — which is to be reviewed by the Supreme Court when it hears arguments on the Affordable Care Act -- will not begin in most states until 2014.[1]  California, however, has already begun to receive funds through what is known as a “Section 1115 Waiver.”[2]

The Section 1115 Waiver at issue was a State of California proposal that the Center for Medicare and Medicaid Services (CMS) approved in November 2010.  Known as the “Bridge to Reform,” the waiver allocates $10 billion over the next five years for California to restructure key public health programs and improve the quality of care to Medi-Cal[3] recipients while controlling spending.

The size of the grant signals the colossal change that healthcare reform is bringing to the Medi-Cal Program.  In addition to expanding coverage to more low-income uninsured adults, the grant will be used to improve the county based “safety net”[4] and extend the capacity of the Medi-Cal Program.

Mandatory Transition from Fee-For Service to Medicaid Managed Care Plans

One critical change that the Section 1115 Waiver is driving is the transition from traditional “fee for service” Medi-Cal to managed care.  For beneficiaries in the seniors and persons with disabilities (SPD) population, the transition is already underway: since June 2011, SPD beneficiaries are being automatically transferred into Medicaid HMO’s. (Dual eligibles, the so-called “Medi-Medi” beneficiaries who qualify for Medicare and Medicaid are exempt from mandatory enrollment.) The implications of this change are significant not only for beneficiaries, but for providers as well; for many services, providers can only be reimbursed for services to Medi-Cal beneficiaries by virtue of their contracts with the Medi-Cal managed care organizations in each county.  In Los Angeles County, the two entities who are “dividing” the beneficiaries are LA Care and HealthNet.

Low-Income Health Program Coverage Expansion

Another consequence of the Section 1115 waiver is the expansion of health care coverage to as many as 500,000 low-income individuals who were previously uninsured.  The Low-Income Health Program (LIHP) allows each county to choose to extend coverage to either Medicaid Coverage Expansion (MCE) adults, [5] Health Care Coverage Initiative (HCCI) adults,[6] or both.  As of August 2011, ten counties had implemented LIHP’s, enrolling a total of 196,500 adults.  Those counties that implement the coverage initiatives are intended to serve as the testing ground for the programs so that, in 2014, state-wide coverage will be significantly streamlined and much more effective.

The program seeks to veer from a more costly reactive approach to proactive health care.  Uninsured residents are to receive important health care services before a disease or health issue gets out of control and forces an emergency room visit.  Those eligible will have significantly greater access to care under a “medical home” model[7] in which they receive a core set of services, including hospital, outpatient, primary and preventive care, and a wide range of specialty care services by contracted providers.[8]  By incorporating the use of medical homes into the delivery of care, the Medi-Cal Program will not only be more effective but will also be better able to implement more systematic efforts to improve the quality and reduce the cost of health care.

Delivery System Reform Incentive Pool (DSRIP)

The Delivery System Reform Incentive Pool (DSRIP) is intended to expand California’s safety net system by enabling safety net providers to participate successfully in organized delivery systems of care in advance of 2014.  DSRIP is premised on the essential role that community health centers play in ensuring the success of health care reform.  In particular, it is critical that the public hospital systems that service the Medi-Cal population prepare for reform by expanding their capacity for more integrated, coordinated, and efficient care delivery to high needs populations.

Specifically, California will distribute $3.3 billion over five years to support efforts by public hospitals in four areas: (1) investments in infrastructure development (including technology, tools and human resources); (2) investments in new and innovative care delivery models; (3) investments in population-focused improvement which will enhance care delivery for the five to ten highest burden conditions in public hospital systems for the low-income populations for whom they are responsible; and (4) investments focused on the urgent improvement in care including hospital-specific interventions that have substantial evidence of being able to achieve major and measurable improvement in care within five years.  The fear is that, without this investment, public hospital systems will be unable to respond to patient demand for high quality services in 2014.  Under the DSRIP, each public hospital system will be held accountable to defined standards, and responsible to return federal funds if the milestones are not achieved.

Payment Reforms Demand Efficiency

Through the Section 1115 Waiver, California has already to begun the process of  transitioning the Medi-Cal program and safety net system away from fee-for-service and cost-based care towards risk-based payment structures that include incentives for providing high-quality care in the most efficient setting. 

The next payment reform ahead is the “Global Payment System Project.”  Similar to a health maintenance organization (HMO), California will pressure public hospital providers to offer more cost effective and high quality care, again transitioning from an “input-based” fee-for-service model to a global “results-oriented” capitated payment model.

It is critical for providers to recognize that, irrespective of what happens in the coming months when the Supreme Court reviews the constitutionality of healthcare reform, the reform process is underway in California.  Providers need to be focused on driving towards  quality and care coordination goals and getting ready to function in an outcome-driven environment. Through this process of adaptation, providers can position themselves to flourish as healthcare reform moves forward.