Assembly Budget Subcommittee No. 1 on Health

We will now call this hearing. To begin, for Assembly Budget Subcommittee, number one. We can call role. Thank you. Today we will be discussing something that we oftentimes refer to not only in this Committee, but on the floor and also in our podcast policy committees, which deals with Medi-Cal provider rates, reimbursement rates, and also how we can start to think outside of the box in terms of how we pay for and provide healthcare for our residents here in California.

We have an amazing panel, and I will ask for all three to come up at this time. We have Jason Constantouros from the Legislative Analyst Office, Michael Heifetz from Infinite Policy Solutions, and Michelle Baass from the Department of Healthcare Services, who will be here to just provide any questions or any further information about anything that we happen to go over. So we will start with you, Jason. Thank you.

Can you hear me now? Great. Thank you. Jason Constantouros, Legislative Analyst Office my testimony today, I'll go through this handout here that should be included in your agenda, and we'll just dive right into it, starting on page one. On page one, we provide quick overview of the order of how our presentation will work. So we'll first talk about, we'll provide an overview of how specifically physician rates work in Medi-Cal, and then we will walk through four key principles that we developed to assess physician rates.

Just at the outset, I want to emphasize four key points about our presentation. The first is that this will focus specifically on physician rates in Medi-Cal. Medi-Cal has many different ways of paying different kinds of providers, so the system works a bit differently if we're talking about hospitals or long-term care facilities, or other kinds of providers. Secondly, even though our presentation will focus on physician rates, the four key principles that we discussed today we think apply pretty broadly.

So you could apply these principles in thinking about other kinds of provider rates, too. Third, you know these four key principles that we developed here. You can see access and quality, economy and efficiency, equity, simplicity, and transparency. These are concepts that we developed, but we developed them looking at many different sources. We considered existing federal policy and law. We also met with policy experts and stakeholders, and that's how we developed our principles.

And then fourth, well, a lot of our presentation will focus on how physician rates have worked historically. As we've talked about in previous committees hearings, the administration's proposing to notably change the way physicians are paid in Medi-Cal as part of the MCO tax package. We'll also touch on those changes, but that would be important to consider when you're thinking about how it's worked historically, a lot of these will be changing.

So, turning to page two of your agenda, we'll first provide an overview of physician rates and Medi-Cal. Medi-Cal has two major delivery systems. There's fee-for-service and managed care. So we'll start with fee-for-service. Fee-for-service is the historical sort of system in Medi-Cal. Today, it's a relatively small part of Medi-Cal. About 5% of beneficiaries are in the fee-for-service system, but we find it's a helpful place to start.

It is sort of the historical way the state has paid for services, and also these are the rates that the state has the most direct sort of control over. And the way physicians are paid in Medi-Cal. Generally, the way it works is a physician renders a service to a beneficiary and then submits a claim for that service. There are thousands of codes associated with different procedures, like having a visit at the office or a surgery, and those codes have a rate associated with them.

Now, historically, the system was developed in the 1960s, and it was, you know, our understanding is it was primarily developed to consider the relative cost of providing a service. So, for example, if a procedure was relatively expensive, it would get much more payment than a procedure that was relatively simple and less expensive. However, it's our understanding that over time, the state, you know, didn't sort of adjust these rates to account for empirical evidence and the changes of cost and care.

And instead, the state kind of didn't have a very specific or a well defined sort of system to adjust rates. In the absence of that, rates often went for many years, not being adjusted for things like inflation. Or if they were adjusted, it was often dependent on resources in the budget. So, for example, if the budget had a particularly strong year in terms of revenues, the state enacted rate increases.

And in years where there were recessions, the state enacted reductions to rates as a part of a budget solution. In addition to that sort of rate system, we did also want to note that there is a supplemental payment system for physicians. It's funded by Proposition 56, which is part of the state's tobacco tax revenues. The way this works is in addition to the sort of base rate that's provided, they get a sort of supplemental rate on top of that.

Turning to page three of your agenda, we then talk about how rates work in the managed care system. So Medi-Cal managed care is a bit of a different system than fee for service, and this is the primary delivery system. Most beneficiaries are in Medi-Cal managed care. The way it primarily works is the state contracts with managed care plans, and managed care plans are then responsible for overseeing the delivery of care for beneficiaries.

In this system, managed care plans historically have had a lot of flexibility over determining the level of payment and also how to structure their payments to providers. And so historically there's been a lot of variation across the state in terms of how this works. It's hard to make general statements about the managed care system for that reason.

But generally, some managed care plans pay using a fee for service system, much like the state does, so that every time a physician renders a service, they submit a claim and they get paid for that service. Other plans have more complex arrangements. For example, they have their own managed care arrangements with providers where they pay them monthly for a set of beneficiaries, and then that payment pays for the services under that contract. So there's just like a lot of variation there.

The state also does direct some payments to providers in the managed care system. The state refers to those as directed payments, and there are some specifically for physicians. They're funded by Proposition 56, just like the supplemental payments, and they work very similarly. They provide additional payment above what the managed care plans pay in their base rates. Turning to page four of your agenda, we provide an overview of how things would change under the MCO tax package.

And I know the Committee has discussed this before and you have a lot of ground to cover today, so I won't spend too much time on all the specifics, but I do want to emphasize four key changes that kind of start towards the bottom of page four. The first key change is that the administration's proposing to really benchmark physician rates and rates to other providers as well to what is paid in Medicare.

And rates would be at between 80 and 100% of Medicare depend on the kind of procedure. And then critically, this would not be a one-time increase. The state would maintain this benchmark, so every time the Medicare rates change, the rates would be accordingly changed in Medi-Cal fee-for-service so that they stay at that benchmarked rate.

Secondly, the Administration is proposing to have a regional variation in rates so there would be different rates for different parts of the state reflecting the variation in the cost of care, rather than having a statewide rate schedule, which is the approach today. Turning to page five, the third key change, the Administration is proposing to create what it calls an equity-based adjustment. This would provide an additional boost in rates in certain regions of the state where there are sort of equity issues.

This means that for some, in some areas of the state, the rates would be more than 100% of Medicare. The Department has told us that it is still working with stakeholders to design the system. So the details haven't fully been finished yet, but this is their sort of the proposal in concept. And then finally, you know, the changes we talked about are in Medi-Cal fee-for-service.

But the Administration also is proposing to require managed care plans to pay at least that fee for service level when they pay for these services. So that would basically become a floor that would determine rates for in the managed care system. Managed care plans could still pay more than that rate, but they couldn't pay less than that rate. Turning to page six, we start with our sort of assessment of physician rates, and I'll walk through each of our core principles that we developed.

The first principle we developed is access and quality. That probably doesn't seem too surprising if you consider that Medi-Cal is a system that is intended to provide access to quality care for low-income patients. In the context of rates, when we talk about access and quality, we're primarily thinking about sufficiency. So are rates sufficient to attract providers and to ensure that there is access to quality care for beneficiaries?

The way when we reviewed the literature and met with stakeholders, the way we saw it was gauged was kind of one in two ways. The first was we saw literature often makes comparisons to what is paid by other payers. So that could be Medicare is typically the threshold that's used, but sometimes folks also compared to what's paid in the private sector as well. And the idea there is that the rates should be sort of competitive with other payers.

And then the second approach we also saw was that sometimes rates are compared to the cost of care. That second approach tends to be more common for facility based providers, where there's kind of more readily available information on costs. But we also heard from stakeholders concerns around rates and whether or not they're covering the costs, for example, for physician services. And what we found is generally summarized on pages 6 and 7 of your handout.

Generally, research has found that Medi-Cal fee-for-service tends to pay less than what is paid in Medicare, and Medicare tends to pay less than what is paid in the private sector. So Medi-Cal tends to be the lowest of the three payers. We found, looking at research, that the rate tended to be about 70% of what Medicare pays. There is a lot of variation, though.

Research has found that for maternity care, for example, the ratio to Medicare is as low as 60%, as we note on the top of page seven. The Department also has done some exploration into what managed care plans pay providers, and generally they found that managed care plans tend to pay a bit more than what's paid in fee for service. That corresponds with what we've heard from managed care plans. Again, there's a lot of variation there.

For some services, it was just, just a bit more, just a bit higher. In other cases, it was considerably higher. For example, the Department found that the ratio to Medicare for primary care was close to 90%. That was quite a bit higher than what is paid in fee for service. And generally this is an area that would directly change under the administration's proposal.

The administration's proposing to set these rates at a much higher ratio, 80% to 100% of Medicare, and then there would be additional payments on top of that, for example, equity based payments. One of the things we looked at when we undertook this project is we looked at what research says about rate increases. What does that mean in terms of access to quality care? And generally, the research does find an Association between rate increases and access to care.

Certain measures of access tend to improve with rate increases, like having a usual source for care, having lower wait times for appointments, having increased utilization and services. The evidence tends to be a bit more mixed when we're talking about the impact to rates on getting more providers into Medi-Cal, and there could be many reasons for that. But one likely reason is that rate increases tend to still mean that the rates are below what is paid in the private market.

So if you have providers who rely primarily on private insurance for payment, they might need even more financial incentive to enter into the Medi-Cal system. Turning to page eight, I'll go through our second core principle that we developed, and that's economy and efficiency. And these are principles that are part of federal policy and in discussions with stakeholders and policy experts.

Our understanding is you could think of these, at least in the context of rate setting, as referring to cost-effectiveness, so keeping costs as low as they can while still achieving the policy objectives of the program, while also maximizing outcomes for beneficiaries. And that involves both the level of payment, but also how payments are structured. And in the context of physician rates, we think there are a couple issues to consider.

The first is that we think you could make a reasonable case that the physician fee schedule today is somewhat outdated. You know, in the 1960s is our understanding that that schedule was intended to reflect empirical evidence on the relative cost of care.

But that hasn't seemed to have been a major factor in many decades, and so likely isn't sort of following that. Under the administration's proposal, rates would be tied to Medicare, and the Medicare physician fee schedule is a bit more updated and tends to be more updated based on stakeholder feedback. So in that sense, that could be an improvement to some extent. There are limitations to that.

And generally, we would also emphasize that the Medicare program is set by federal policy, and so that would mean rates and their adjustments to rates would be subject to changes in federal policy, which can be uncertain. Turning to page nine, the other area in terms of efficiency that policymakers have long considered are things called alternative payment models. These are payment models that consider approaches other than just paying for the volume of services.

So they, for example, might pay for an episode of care, or they might pay for a broader suite of services, or they might tie payment to meeting certain performance objectives. It's a very broad category and can include lots of different strategies, but the aim is to incentivize providers to minimize costs and increase outcomes for patients.

What we would say here is that alternative payment models, as a concept, they have promise for the Medi-Cal system, and the state has explored alternative payment models in many ways, including in the managed care system for physician services. It is an area that requires more study as the Legislature considers it, there can be trade-offs when thinking about alternative payment models, and the details do matter to ensure that the models provide the intended incentives.

Moving to page 10, our third principle that we developed is equity. And equity is something that the Legislature has been focused on for several years. And, you know, it's arguably a key goal of the Medi-Cal program because Medi-Cal aims to mitigate disparities and access to care for low-income beneficiaries. And there are documented health disparities, and those disparities impact the Medi-Cal program too.

You know, generally, historically, the Medi-Cal fee-for-service rate system hasn't had a direct focus on equity, and the administration's proposal appears to be intended to address that in a number of ways. By varying rates regionally, by having a more consistent approach to adjusting rates over time, and most directly by having an equity adjustment. These changes could improve equity. But some of these things will matter, for example, how that equity adjustment ultimately is determined.

So some of that, it's a little hard to assess at the moment what the impact of that would be. Turning to page 11, we provide our sort of final principle here, which is simplicity and transparency. And from our perspective, you know, an ideal rate system is accessible and transparent, and that providers and policymakers can understand how the system works and what it takes to get paid, and also that providers don't face unnecessary burdens to get paid for delivering services.

We would emphasize, generally, Medi-Cal is a complicated program and there can be limitations to making rates simpler and more transparent. States do have choices though, and we would emphasize here that the administration's proposal, it's a little hard to project what the impacts would be.

Some parts of it appear to be focused on improving simplicity in the rate system, in part because as a consequence of the administration's proposal, many of these adjustments, like the supplemental payments, some reductions that had been in the system, those would be sort of folded into these new rate increases, which would just be sort of base rates, and that could better signal the providers what the payment for services is, and in that sense could make things simpler.

As we've noted in previous hearings, too, the Administration is also proposing quite a expansive change in a number of different provider payment systems, and so there could be implementation challenges there, at least in the short run. And so that could at least add some complexity, at least as the state and managed care plans and providers adjust to the new system.

Turning to page 12, we also wanted to note that the Federal Government recently adopted a package of rule changes, and those rule changes aim to do several things. But one of the effects of these could be to add simplicity and particularly transparency to the rate to provider rates, both in fee-for-service and managed care. For example, as part of those rule changes, the state must periodically compare provider payments, both in fee for service and in managed care for certain services. That concludes our presentation. We're available for questions.

Thank you so much. I will first turn to my colleague to see if he has any questions. Well, I want to thank you for this report and for digging deep into this question that many of us have. And I know it's extremely, extremely complicated. And one of the things that, for those who were able to read it, one of the recurring themes is that because of lack of transparency, it's oftentimes very difficult to determine provider payment and rates and to do that comparison.

And so you just talked about the new rules that would require transparency between the state and federal government. Would anyone else have access to that information, to your knowledge, with what you were just referring to, that the states have to talk more about provider rates and managed care plans versus fee for service, or is that just something that the federal government would have access to?

I think we'd need to, unless it sounds like the Department might have some technical expertise there they could provide.

Hi, Lindy Harrington, Assistant State Medicaid Director. So the new rules just came out. They will be finalized on May 10, formally published. But in the rule that was finalized, it would require states to do a public posting periodically of the comparison of rates in a couple of specific categories. I'm remembering them similar to primary care, mental health, as well as maternity. So the codes that we recently did an analysis, it would be similar to those codes. But we are continuing to review the new rule and we'll have more information in the future.

So to your knowledge, it doesn't cover all specialties, just those?

No, it doesn't. At this time, it does not cover all codes. There are specific categories of codes that we would be required to publish. But again, we are continuing to review the rule that came out and the finalization, and we'll have more information.

Okay, thank you. And quick question. You might know the answer before you leave. When you talk about Medicare rates, do those rates coming down from the federal government, is that a flat rate or does it vary by region?

So for Medicare, depending on the category of rate, but for physicians, it varies. I believe there's 32 regions within California that they set the rate for.

Okay, thank you. We can have the Director back.

And I also wanted to clarify that that is a core part of the administration's proposal, is to, in the past, when we've compared to Medicare, we've either compared to what the average is in the state or to the lowest rate. And what the Administration is proposing is not just to tie each region's rates to the Medicare rate. So when we say varying regionally, tying to those variation in the Medicare rates.

Thank you. And along the lines of Medicare, one of the things that LAO discussed, and it's also in their package, is that commercial pays more than Medicare and Medicaid is generally at the bottom. Understanding that, what is the rationale behind trying to get the Medicaid rates up to 80% to 100% of Medicare instead of just getting up to 100%?

Our proposal was based on just the available revenue from the MCO tax. And so kind of working with the available revenue and assessing how we can increase the rates by category depending on the amount percent to Medicare.

Okay. And I'm not sure if you know this, but you know, this conversation about reimbursement rates has been a very longstanding one for a very long time. And do you have any kind of historical knowledge as to why it has taken this long for us to have any movement in the area as far as reimbursement, I mean, we have significant shortage of providers in every area of medicine up and down the state, and one of the main things I decided, is reimbursement. Do we know what has taken so long?

I think, as the LAO noted, just that the budget situation over the last decades or so, really kind of reflecting, you know, the additional spend to increase rates to the level that we have as part of the governor's budget. So I think it's just been a matter of, you know, the budget request that that would be necessary to do so.

Now, for the proposal for 2025, in the MCO tax, in the LAO report, it says that it would broadly apply to most providers. Is there any particular healthcare provider that would not see an increase in their rates with the 2025 proposal?

So in the context of physician rates, we were talking about application across codes. So I'm sure the Department can clarify. I also just wanted to clarify that the MCO tax package does have other providers in it. Because we focused on physician rates, we didn't discuss. But there are, you know, hospitals would get an increase, and then even for what we call the physician rates, there are some non-physician providers who also would get rate increases, like audiologists, nurse practitioners.

So there's a kind of a broader bucket of medical providers. But I would defer to the Department to clarify on the particular procedures and codes, if there any.

Right. And what I'm specifically referring to is in 2024, we really focused on three main areas, primary care, maternity services, and behavioral health. Right? So are we expanding that to essentially cover every single area within healthcare? So it doesn't matter if I'm an Ob-gyn or an ENT or a general surgeon, that I would see a bump in my rates if I managed patients who have Medi-Cal? That's my question.

For physicians, it's every single physician type, but we have other Medi-Cal providers who are not part of the targeted rate increases. So it doesn't cover every single Medi-Cal provider as part of the managed care rate.

So not every Medi-Cal provider, but every physician provider will see a bump. Right? Because I was just talking with a colleague who spoke with, I believe it was the orthopedic surgeons that were down in San Diego, and they were complaining about their Medi-Cal reimbursement rights.

But so they will see a bump in 2025.

All physicians. Yeah. Professional services.

Okay, great.

And I also wanted to note that when we talk about which codes are being increased, you know, 80% to 100%, you know, some specialists also submit claims for those codes, too. So it's really the procedures that would get the rate increase. But if a provider provides an office a rate that's at 100%, they would get that 100% rate. So it's really tied to what procedure is provided, not necessarily the exact provider.

Yeah, I know, but with the initial rollout of the MCO, we focused on three very important areas, but just making sure that all physicians would be made whole in 2025 or somewhat whole. So there was a value based payment program that we had. Can someone please explain that and just let us know what it was which you were focused on? What was the outcome?

Sure. So from January. I'm looking up the dates now. So from July 1 of 2019 through June 30 of 2022, we had a derivative directed payment in the managed care program that allowed us to do a value based payment arrangement for physicians in the managed care program, and it focused on risk based incentive payments that were targeted at eligible network providers that met specific achievement on metrics targeting areas in four specific domains.

That was prenatal and postpartum care, early childhood preventative care, chronic disease management, and behavioral health care. We were authorized through the Federal Government, through CMS, to do that. They approved our directed payment. We are currently in the process of doing the evaluation, so that is not formally out yet, but we were able to demonstrate that for a majority of those metrics that were there, we did see improvement from the baseline to the end of the program period, but not for all metrics.

Okay, so you said prenatal and postpartum care, early childhood care, behavioral health, and what was the other one?

Chronic disease management.

Okay. And so for the providers that participated in this program, were they aware that they were in this new?

So it was really all physicians that were part of the managed care delivery system that provided this. No one had to apply or do anything. It was based on the submission of claims and what the results of those were. So the physicians didn't need to take an extra step to receive a payment. It was part of the delivery of services and reimbursement during that time period.

So the providers were unaware?

So the providers were aware of the program. We let them know that the program was out there and what they would be doing. There was program guides. We held multiple webinars and things so that they were aware, but it didn't require the physicians to submit an additional claim.

Okay. So they knew the targets that they should be reaching, like if you're trying to decrease.

Correct. We had very specific metrics and metric guides.

Okay. And you have no. And this finished in June of 2022.

And we're currently finalizing the evaluation.

Okay. When can we expect that? Because next month it'll be two years out from the completion of the program.

I know they are working diligently to finalize that so we can see, submit it to the Federal Government.

Okay. Do you have any preliminary information? Was it a success, do you think?

So that's why I said, I think, you know, our initial results that they're looking at, and again, they're continuing to refine, was that we saw improvement in a majority of the metrics from baseline to the end for the percentage of providers that were meeting that goal.

Okay. And back to our Director. Sorry, you're playing musical chairs. Do you think that this is something that either your Department or the Legislature should look closely into some of these alternative payment models or value-based payment models?

I think it's, you know, it's definitely a method to kind of incentivize quality, incentivize outcomes. We know our managed care plans operate some of their own incentive programs and, you know, to get to the results that they're looking at. So I think it's always kind of an idea worth exploring.

Okay. All right, I'm going to hold right now and turn it over to my colleague.

All right. So I want to get to the elephant in the living room. We hear the term bump. We're going to get a bump. Reimbursements presently do not cover the cost. We are losing physicians, we are losing access. I've got providers in Fresno that when I was elected in 2012, by 2015, they were out of business.

The question here is, will these presumed bumps cover the provider's costs, or are we still going to have providers receiving less than their cost, meaning that they're subsidizing and many of them can't do it and are closing the doors? Will the bump reach the goal of paying the provider cost? If it doesn't, what's all the work been going on? What are we achieving if it doesn't? So can I get a yes or no answer?

This is a significant new expenditure with regard to Medi-Cal rates, more than we've ever done, kind of in the Medi-Cal program's history. And so our goal is that it will achieve kind of improvements in access to Medi-Cal services and recognizing that there are lots of factors that go into kind of play in terms of access and quality for our Medi-Cal members. And we think this would be is a significant contribution contributor to ensuring that there is access.

I'm getting a little bit tired of the term complicated and all of that. Yeah, I suppose it might be, but the bottom line here is you've got providers who are doing the work, it's costing them x and they're getting x minus something. And I am witnessing in my area the slow destruction of our healthcare in Fresno and in Central California. We lost a hospital because of these Valley Children's Hospital has significant issues with respect to their mix.

We've talked about the PDCH's and I'm telling you, I'm not just angry. It's breaking my heart to take the kind of calls in my office that we take. And it's almost as if it's saying one thing but it's delivering something else. So again, the question becomes, you've been studying rates since I got here. When do we stop studying and when do we establish rates that actually pay the cost? Because if you don't pay the cost, the providers are going to go away.

Now, if you can't get there, at least somebody have the courtesy to tell us it's going to fall short. If it will meet their costs, let us know that. Is it so complicated that we can't add it costs this and that's what we're going to give them or not? So help me out with this. I mean, it seems like we just keep going round and around and around this circle and it seems to get worse the more we go around and around.

So the question is, is the bump going to cover the provider cost?

I think I would just add that while we recognize providers have cost isn't always necessarily the right approach just to reimburse based on costs. We want to reimburse based on effectiveness and efficiency as well. And so there are different models for how we pay for our financing.

We just did a reform in the behavioral health space for our county behavioral health that went from a cost-based reimbursement to more of a fee-for-service, getting towards a more capitated way of paying so that we really incentivize our providers to be efficient with their, these are state dollars and federal dollars, be efficient with their dollars. And recognize that cost-based reimbursement isn't necessarily the best approach.

That sounds like it's a presumption that you have that some of these doctors and providers and people like the PDCHs are running slip shot operations.

That wasn't the intent of my comment. It was just a matter of there's different methodologies for reimbursing providers and really recognizing that the cost-based methodology may not always be the best approach. And so that's why we have these different mechanisms of financing.

What I basically heard under all of that, was basically, if our rates don't cover your costs, then you've got to worry about your costs. You got to pay attention to your costs. That's what it sounds like to me.

We did try to look at that in the context of physician rates, and we did hear concerns from stakeholders along the lines that you just said, that there are concerns that it's not adequate to cover costs. We weren't able to find more comprehensive literature that really looked at that.

We did find some research on Medicare that found that Medicare rates may have not have been keeping pace with the increase in costs for physicians, but there just wasn't enough sort of evidence to look at to sort of say that comprehensively. So, it is a little hard to make sort of a general statement. I think another challenge is that the rate system is statewide and so, costs do vary regionally.

And what I hear from the Administration is that there's an effort to better sort of match that. But there just wasn't enough data for us to really dig into, to really definitively say, in all cases, is it inadequate to cover costs, at least in the case of physician services. There are other providers, other facility-based providers where there is more data.

How many voices raised in concern up and down the state do you have to have to have enough evidence?

Yeah, you know, we do try to stick to the evidence. I guess we did hear a lot of concerns from stakeholders, and this is a key area of interest for the Legislature. It's something that the Legislature could continue to work on. It is a sort of key area that the Legislature can consider when it's considering rate increases.

Right. I want to turn the page just a minute and just. We had some fairly direct conversations about the PDCHs and about. We brought them to the table at the MCO. They were rejected. These are pediatric daycare centers up and down the state to take care of very fragile kids. I asked if you would join me in a tour, and we have the calendar marked for July 12. I'm hoping that that's a date that can hold because inviting the parents and the kids.

I want you to see the tour that I took when the parents were there, the kids were there, the caretakers were there, and hear from those individuals. Now, there's a little bit of good news. The local. There are some negotiations with Valley Care Centers and we think they might be a little bit helpful, but we're trying to get to the place where these PDCHs don't close. I can only tell you that. Be prepared to have your emotions and your heart really pulled hard.

My tour, I mean, I wept all the way through it. When you hear the parents say, if you take this away from us, we're going to have to quit our jobs. We don't know what we're going to do. We don't know how we'll pay our bills. I heard other parents say, if we don't have a respite, and we're carrying the tension that that creates in the family and the tension that it creates in the marriage. These are real things.

But then you see the alternative. And you see what these kids get, how they're cared for, the fact that the parents have a life beyond everyday agony of taking care of children that are in such difficult shape. So, I want you to be prepared for some emotion. And then at the end of it, I'd like to have a private meeting with you and the Little Miracles executive there, and I'm going to ask you if there is some way that you can identify ways of helping.

I don't know what we can or can't do, where we are. I understand the budget and all of that. But it was a terrible disappointment that, and I think we were asking for like 2 million, maybe 3 million, that they were brought into the stakeholders' discussion and apparently didn't make the cut. And I just look at that and I say, how in the world do those children not make the cut? So, we're trying to help it, fix it, and work on it.

And I think it's important that you're coming. I appreciate that. Like I said, it will be kind of a wrenching experience because there's this threat, and that threat is scaring the daylights out of these parents and the owners of Loretta's Little Miracles. And God bless them, the owners, given the shortfall and the help from the state, they're putting their own money into it. And it shouldn't be like that. That just won't, that's not sustainable. It won't last. So, I appreciate you hearing me out. I'm grateful that we have a July 12th date. And I want to ask you to be thinking about: is there possible ways that as the director of this large and significant agency, is there some suggestions about what can be done to maybe help close those gaps? So, thank you.

Thank you, Assembly Member Patterson. I think what you're hearing, especially when he was referring to provider rates frustration, because he's been here for many, many years, is that although we may not have the data per se because of a lack of transparency, so, you can't really see physician rates, what we do see are physicians leaving. What we do see are hospitals closing. What we do see are labor and delivery units closing, other units closing.

And the number one reason that they're giving is because of low Medi-Cal reimbursement rates. And so, as we go back into our districts or have various groups or constituents come up to Sacramento, these are the things that we're seeing and we're dealing with on a weekly, sometimes a daily basis. And what has been done in the past is not working, the way in which we have paid our providers, especially those within the Medi-Cal system.

And for anyone who is familiar with Medi-Cal patients, they oftentimes have some of the most chronic illnesses. They are sometimes the sickest of the sickest because of lack of access, so they come at the very last minute. And so, these providers are oftentimes going above and beyond with the patients in this particular system, and yet they have been paid less than commercial rates, less than Medicare rates, and that is not sustainable. So, as we move forward, I hope that we look at other models.

I hope we get that data from what was stopped almost two years ago to see if those kind of things can not only incentivize our providers, but also make our residents healthier. Because what we do know, here in this country and in this state, is we pay a lot of money towards healthcare, yet we still have issues with access, and yet we still have some of the sickest people in this world. And so, we do need to do something different. I was wondering, Director, can you give us any more information on the equity index within the MCO? Any more information on what you all are thinking, how that's going to work?

As was alluded to at Governor's Budget, we have about $80 million from the Managed Care Organization Tax Reserve Fund. So, for about $200 million total funds about really doing an equity enhancement. We don't have any further details to show. Those will be available at May Revision. We've listened to stakeholders over the last few months as part of our initial proposal, gathered some feedback, and we'll have more to share later.

Oh, good. So, it'll be coming in about two weeks. Okay, great. And then my final question for you during this portion is we talk a lot about the use of Prop. 56 funding in this realm. Considering that that is a tobacco tax, and we have done such an amazing job here in California at informing people of the harms of smoking and the fact that they should not be smoking, and that revenue is significantly going down, as we would hope, how is that going to impact this system?

As part of the Governor's Budget and the 2024 rate increases, we've basically included Proposition 56 as part of the base payment in using the MCO tax revenues to kind of be used to kind of keep the rates as equal with the Prop. 56 dollars. So that's how we're thinking about it in terms of really thinking about a base rate for our providers so there's consistency in understanding what they would be receiving.

But I guess my question is, as Prop. 6 funding is going down, is that going to have an impact? Since we're using both to try to keep it stable, are we going to be decreasing or are we going to see an increase in the other pot in order to keep the numbers the same?

So, the way the 2024 rate increases is that the MCO tax revenue really does offset the kind of the loss or the kind of the reduction in Prop. 56. and so that is how we're thinking about it for the future.

Thank you. Did you have?

Oh, I thought the Department got there. It was the, just to emphasize that Prop. 56, as the revenue sort of has been declining for policy reasons that you indicated and, you know, costs have not generally been declining. That generally has meant that in the past, the state has started to use some General Fund to backfill those declines, and some of those programs have also been shifted into the base, too.

And what you see in the MCO tax proposal is to some extent a bit of a furtherance of that. The Administration is proposing to move some of these supplemental payments into the base, and then as Proposition 56 funding changes, General Fund or the MCO tax funding would sort of backfill that. There's sort of a long, broader question here given the fiscal constraints of the state. That would be something to keep an eye on as we get more information on this General Fund budget problem and just tracking to see how that's sort of working in the Prop. 56 system.

Thank you. We will now move on to our second portion of the panel. We'll start whenever you're ready.

Thank you very much. Can you all hear me okay? Excellent. Good afternoon. I'm Michael Heifetz, representing the Campaign for Transformative Therapies, and I'll be talking about a loosely related item here today that fits along with the rest of the panel. You'll see some different attacks to it, but you'll hear some similar terminology as well. Just for real quick background, I'm a former Medicaid director and state budget director from the great State of Wisconsin.

So, I've had the privilege of holding the two best and worst jobs in state government, in my humble opinion. I have also been a CEO of a Medicaid health plan in the Midwest and formerly drove a Zamboni for Badger Hockey. So, I always like to throw that in, even in a state like California. So, I've been on a lot of sides of all of these issues. So, it's fascinating to hear all of all of this discussion.

So, I'll be talking about value-based arrangements for gene therapies. You have a short handout. And I described a little bit the Campaign for Transformative Therapies. The uniqueness of it is it is a coalition of payers, patients, and the manufacturing industry itself. So, don't always see those three groups getting along together. And it's really focusing on the access issues and equity issues that we'll get to in just a second and really focusing as well on state-based solutions.

And I was instructed to say, next slide, please. Let's go one more please. Thank you. Quick question. Why value-based arrangements? As I mentioned, promoting access and equity. These new treatments, while transformative, are also expensive, and access and equity can become an issue. Equity clearly was a significant component of the previous discussion that you just had, and it rings true here as well.

We're also looking to build accountability and share some risk with the manufacturers that, when I was a Medicaid director, really wasn't a component of the conversation. Generally, folks, when they would pitch things to our Medicaid team and we would say back, well, what if it doesn't do what you say it's going to do? They would just sort of look at us and nothing much more happened. That is clearly changing across the spectrum.

A key element of this is that it would be voluntary, so the payers don't have to enter into it and the industry does not have to enter into it, but there would be incentives for both. And that's really the gist of the discussion. There would be measurement of outcomes. I know you just had a lengthy discussion about outcomes of a certain study, and this would provide for that component as well in this conversation.

It's really designed to address those issues and to determine if a expensive potential treatment is working for a patient or a set of patients, and then if it isn't working as intended and agreed to contractually, then there would be some different mechanism to address that. And the bottom line is obviously improving patient lives. And that all gets at this as well. Next slide, please. You see before you. I will not read the list to you.

These are just a few of the transformative therapies from the last few years. You can see two for sickle cell disease, most recently approved by the federal government. And then there are a few more for some other challenging diseases. Hemophilia, both on the A and B side, has had a lot of activity in this realm. And also, you see Zolgensma for spinal muscular atrophy for children age two and under. And that is obviously a very difficult disease and condition.

When I was Medicaid Director, this drug was not, this treatment was not available. There was a different treatment that had had some mixed results in the clinical trials. And it's Wisconsin, it's not a big state. We only had a couple of families that would have needed that treatment pursuant to their provider teams. So, it was easy for us to say yes. If the physicians and the team says they need this, we're not certain if it's going to work, but it's a chance, we were able to cover it.

But had it been something where the volume was much higher, we would have had to make some different policy decisions or have a different conversation with you as an appropriator about these dynamics. A one-and-two-off, so to speak, would not blow up our $8 billion budget, which doesn't compare to your $150 billion Medicaid budget, but the scale applies. But if it had been a volume issue, then we would have had to have a different conversation about it.

Next slide, please. So, the other gist of all of this is the changing environment that we're living under. You can see some of the dates of when things have been approved in the transformative gene and cell therapy universe. And you can really focus on the bottom half of that, where you see how many are expected to be approved, 60 plus, in the U.S. market by 2030. And that's the National Institutes of Health. That's not necessarily a biased group.

So, this is going to change the dynamic significantly. And when you're talking about treatments that cost seven figures occasionally, the numbers become large, even in a state like California, with the large numbers that you were just referencing in the previous conversation. So, this data really is what drives a lot of this, and partially what drives the industry to say, okay, we need to come to the table in a different way here and take some accountability in this regard.

Now, that doesn't mean it's the simplest thing in the world to do, but it's a different conversation than it used to be. And that's part of why you see something like a campaign for transformative therapies. Next slide, please. You can see the list of states that have state plan amendments that give the states the permission to pursue these types of arrangements, does not require them to do so. And you also know that California has submitted its state plan amendment for federal approval.

So that's obviously a great step forward. It's the first step, but it's a required step. And these have typically been approved in a reasonable fashion by CMS. Not a lot of back and forth where they have a ton of questions, which I'm sure the director and others on the team have lived through with other mechanisms with CMS. So hopefully this will be as smooth as it has been in other states.

And from my home state of Wisconsin, we have a unique element where the Legislature has to approve certain state plan amendments before they are sent to the federal government. And so, Legislature just approved legislation to say, hey, you must submit this state plan amendment. So Wisconsin is moving forward in that regard. Again, I would emphasize it's not a mandate on anyone involved. So that is a key component of it. You can explore it at your own pace, whoever you may be.

It could be the state, it could be the manufacturers. But it gives some flexibility as well. And that could be a part of that discretion that a state and or manufacturer might pursue. So that is a pretty high-level overview. I'm sure in the Q&A we'll get into some more specifics about it. And there's very fascinating data about what sickle cell and other diseases cost today in the traditional therapy environment versus what it looks like in this environment.

But the key elements of this are the voluntary nature and just the changing conversation of having the manufacturing industry come to the table and say, okay, let's pay for this a little differently. Let's think a little differently about how to do this, and have it be more of a two-way conversation. So those conclude my formal remarks, Madam Chair.

Thank you. I will see if my colleague has any questions. Okay, so just to kind of. You just said that in your state, the Legislature directed the implementation or the request for a state plan amendment, an SPA?

That's correct, Madam Chair. Yes, it's a legislative requirement, and there are a few other states that have something similar to it.

Interesting.

I have mixed opinions, having been a legislative staffer and a Medicaid director.

Yeah, yeah. But one thing it does is it keeps the Legislature informed.

It does. The state plan amendment process is a public one, although it's not the most high-profile one, but there is a public requirement to it, even today.

Okay. So, to our director, DHCS submitted a state plan amendment. Correct?

Correct. In March.

In March. And are you able to discuss any communication you've had with CMS? Do you have a timeframe when you think that it may be approved?

No, we don't have details on that. But I would also note that on March 24th, we also submitted a letter of intent to participate in the cell and gene therapy access model with CMS. And the first target for these models are new therapies for sickle cell, and that is expected to start in January 2025. So that's, I think, kind of the next step in terms of the work there.

And the goal of this model is really to improve the lives of individuals with Medi-Cal with rare and severe diseases by increasing access to these potentially life-saving treatments. And so, the goal is to get manufacturers and states in this model to work together to come to some of these value-based agreements. So that's kind of separate in part from the state plan amendment. We are also participating in this model as well.

Okay. And so, we have approval for that one or we're still waiting?

Well, we sent a letter of intent to the federal government, so we're waiting to hear officially. But I, you know, we are raised our hand to want to participate.

Okay, great. And once, so process-wise, once they give us the approval, knock on would that they will, then that's when you all start the conversations to figure out how the plan in California would work.

According to CMS, that's anticipated to be the beginning of January or 2025.

That you could start, or that the conversation.

That the model starts.

Okay. So then all of this conversation would happen before 2025.

My understanding is that this model, states began participation between January 2025 and January 2026.

Okay.

In this model.

Okay. So how have these alternative payment models been approached in other states? Because I saw a slide where you've got a couple of other states that.

It's been approached. Arizona is a good example with Zolgensma. A lot of the contractual terms are proprietary for various reasons, but there's transparency in regards to the effectiveness and the process in that regard. Michigan is utilizing, this gets more administrative in its nature, so it might be a little dull, but Michigan is administering a similar program, but through its claims data. And they're trying to really make it, these are my words, make it as simple to implement as possible by using some data that they clearly and often work with and understand and know how to utilize. So other states have done this in similar fashion, but that's going to differ state to state.

So, I would not, you know, California is making a decision to go through the federal mechanism, which absolutely has merits. Other states will choose not to for various reasons, and I wouldn't guess who would or who wouldn't, but there are definitely advantages to that. And the federal government has a lot of capabilities in data and understanding how these processes will work. But state to state, there are differences in how data is collected and utilized. And from my state, we had plenty of data.

It wasn't always the easiest to extract in a usable format so that I could share it with all of you in a timely fashion. That has probably changed since my time there. But other Medicaid programs will have similar or different stories in that regard about how to pull the mechanical components of this. So that's why you'll see different approaches state to state. You will also see different approaches based on various disease conditions and things of that nature. States more.

If you have a higher population with sickle cell, that might be a focus. California has ballpark 4,000 plus people with sickle cell. So that could be a point of emphasis for you. And in other states it could be something different that is their bigger healthcare challenge, and they will focus in that regard. So that's part of the simplicity of it is the state can choose what road it goes down. And the federal government, for now, is giving some pretty good latitude in that regard. Hopefully, that helps answer it. And happy to talk more.

Yeah, so I'm very happy that we will be focusing on sickle cell. Are there any other conditions that we are looking at from a statewide perspective that we may want to enter into one of these models?

I know that sickle cell is the top of our list. I don't know that we have kind of advanced any other thoughts on other conditions.

Okay, so are there any barriers to implementation of VBPs that require action by the Legislature?

Not that I'm aware of. We're pending CMS approval. That's the first step. And then, you know, this model for this particular, for sickle cell. And so, I'm not tracking any barriers or challenges.

Okay. So as far as which conditions or we have a condition now and any in the future, is this something that would be decided by DHCS alone or how would that be determined?

Based on conversations with stakeholders and kind of just, you know, looking at our data in terms of the Medicaid space, what might be the most effective utilization, cost of drugs, et cetera, I think that's kind of how we would look at it and then have conversations with stakeholders.

So, a lot of this is actually discussed and decided outside of the legislative process.

It's all kind of a public forum. As was noted before, these conversations are not really. It's kind of, as data comes up and as initiatives come forward, all of our SPAs or pending SPAs are all public noticed, and so there's opportunity for public comment in that respect. But if there's interest here, I mean, we can definitely engage on this topic and kind of have further conversations.

Okay. What obstacles have you seen, or have you encountered in implementing these value-based arrangements?

There are a couple that come to mind. Sometimes it could be contractual, just reaching an agreement with a manufacturer, between the state and a manufacturer. So that's a process that has to be a part of this. And obviously, there will be some points of discussion in how clinical efficacy is measured and how it's written down in a contract, and then how it actually practically plays out for patients and families and members. So that's a component of it.

The administrative side, as I mentioned, will vary state to state, but it depends on the clinical knowledge within the department or access to that clinical knowledge, again, depending on the condition that we may be talking about and the availability and workability of the data that you're using to determine the effectiveness and meeting the, sorry to be crass about it, meeting contractual terms regarding effectiveness and clinical results. So those are a couple of them but state to state, they will be overcome in different ways.

Okay, question for you all, and I'm not even sure if you started thinking this, but since we are looking into jumping into the sickle cell gene therapy space, how have the discussions gone as far as where this would be provided, how patients would have access to it? Will there be certain centers that individuals would have to go to, or would it be pretty much provided up and down the state?

We would have to get back to you. I know that in our application, we did list our Centers of Excellence or where these words were administered today, but we'd have to get back to you on kind of how this would actually be effectuated. I don't know that we have those details yet.

Okay. All right. Yeah. As soon as you figure that out, please let me know, because I know access is always an issue as well for many of these patients. Any questions? Okay. All right. Well, with that, we will conclude our hearing, and we will open it up to public comment. If anyone has public comment, you will have one minute to speak. Thank you.

Hi there. Abby Alvarez with the California Association for Adult Day Services, which represents 294 licensed community-based adult service, or CBAS centers. Here to ask for consideration of establishing a minimum rate floor tied to the current Medi-Cal published CBAS rate, which is being done for other provider services. Californians, especially those living in rural and underserved communities, are losing access to CBAS centers, with 18 centers closing in the last five years. We need your help to establish a sustainable rate and a minimum floor to avoid further costs or further closures. Thank you.

Thank you.

Madam Chair and Members, Rand Martin here on behalf of Aveanna Healthcare and pinch-hitting for the California Association of Health Services at Home. What we also see, Madam Chair, are 1,000 kids sitting on a waiting list waiting for private-duty nursing care. Have been authorized by Medi-Cal for a certain number of hours, are not receiving those. Those kids are sitting on that waiting list and have not moved in two years.

There must be room somewhere in MCO or elsewhere to make sure that the 40% rate increase that we've been asking for for three years can be accommodated in this budget cycle before we start seeing companies leaving California and focusing their efforts elsewhere, really encourage you to do something meaningful this year. Thank you.

Thank you.

Good afternoon, Chair and Members. Kelly Larew, with Resilient Advocacy here on behalf of PHI Health, an air ambulance provider here in California. The Medi-Cal air ambulance industry obtained a Medi-Cal supplemental rate expenditure authority last year, but it didn't come with accompanying funding. We appreciate the discussion today on maintaining critical services for Californians, and we look forward to continuing those discussions and the discussion today about Medi-Cal base rates being inadequate as typically without the augmentation, it only covers 20% of the cost of an air ambulance transport, but we pick up anyone who needs it. And we look forward to those discussions as part of the budget. Thank you.

Thank you.

Good afternoon. Nora Lynn with Children Now. We support the Medi-Cal multi-year continuous enrollment policy and think that it should be implemented. It's important to both address provider rates and for the state to follow through in making sure that young kids stay covered so they can see those providers. Thank you.

Thank you.

Chair and Committee, Norlyn Asprec with Axium Advisors representing Prime Home Health and Team Select, providers of private duty nursing. And I just align my comments with Rand Martin. Thank you.

Thank you.

Thank you, Madam Chair and Members. Sarah Bridge on behalf of Maxim Healthcare Services, also a large provider of private duty nursing care in the State of California. Align my comments with those of my colleagues, but just want to reiterate that while we are in a significant budget deficit, ours is one of the only ones that has a significant cost savings that is actualized within the first nine months of the first year that you implement a rate increase. Thank you.

Thank you.

Madam Chair, Members of the Committee, Brandon Marchy with the California Medical Association. We want to thank the Governor, the Administration, Director Baass, this Committee, and the Legislature for really implementing the MCO deal and working diligently to do so. For the last several years, the Legislature and the Newsom Administration have worked to address two legs of the three-legged stool that hold up our Medi-Cal program. We have increased benefits. We have essentially, virtually, coverage for all in California.

This MCO deal and the provider rate increases that come with it would address that third leg, which is access to care for patients in Californians. As the LAO report notes, physicians have not seen base rate increases since the late 1990s. The proposal is critical to improving access to the Medicare program, and, quote, research suggests that rate increases are associated with improvements in a patient's ability to get an appointment, have a regular survey care, and receive timely care. We look forward to working further in the future as the MCO tax gets implemented further. Thank you.

Thank you.

Madam Chair and Members, Tim Madden, representing the California Chapter of the American College of Emergency Physicians. We'd also like to voice our support for the administration's proposal for the MCO tax and the increases to the provider rates. We'd also like to also thank the Department and the Director specifically for their time in listening to our concerns around trying to bring rates up to that Medicare level. It'll go a long ways in our emergency departments to be able to increase those rates, maintain the number of emergency physicians that actually staff those hospitals, which will continue to bring a high-quality care for those individuals. Thank you.

Thank you.

Good afternoon, Madam Chair and Members. Nick Brokaw from Sacramento Advocates here on behalf of the California Academy of Audiology to express our appreciation and gratitude to the Administration for including audiologists in the provided rate increases, echoing the theme of access, in this case, for individuals who are deaf and hard of hearing.

I also just want to make note that as this Administration has dedicated resources and funding to the rollout of the Hearing Aid Coverage for Childrens Program, having adequate reimbursement rates for audiologists, and that is totally linked to Medi-Cal reimbursement rates, will go a long way in ensuring we have access to the providers who provide these services to kids. Thank you.

Thank you.

Thank you, Madam Chair. Vanessa Cajina on behalf of the California Academy of Family Physicians. Very much appreciate the work and attention that this Subcommittee has paid to the role that primary care plays to the care of Medi-Cal beneficiaries throughout the State of California. We also are very behind the MCO tax and want to ensure that primary care is adequately reimbursed in that. Som thank you for these ongoing discussions.

Thank you.

Cher Gonzalez on behalf of the Association of Northern California Oncologists as well as the Medical Oncology Association of Southern California. We're in strong support of increasing the provider reimbursement rates and we want to, of course, remind the Administration and the Legislature that cancer care is directly linked to survivability. So, it's incredibly important that the reimbursement rates for the codes be adequate. Thank you so much.

Thank you. And I want to give a sincere thank you to our panel and my fellow Assembly Member. And with that, this hearing is adjourned.