Editor’s Note: Over the past few years, California’s Medicaid program, known as Medi-Cal, has been catapulted into a new role. It has evolved from a program designed to provide health coverage to a subset of low income individuals and help counties meet their longstanding obligations to provide indigent care to a program that is the largest single source of health insurance in California and the foundation of the state’s healthcare coverage continuum for people who do not have affordable health insurance through the workplace. Medi-Cal needs a vision, structure and plan that recognize and support this evolution.

In a new report for the California Health Care Foundation (CHCF), Manatt Health considers the current state of Medi-Cal and potential pathways for the next chapter of delivery reform, focusing particularly on Medi-Cal managed care. The report, summarized below, provides an overview of the Medi-Cal landscape, shares perspectives from a diverse array of Medi-Cal stakeholders, assesses key challenges and opportunities, and articulates a route for advancing Medi-Cal delivery system and payment reform. In addition, Manatt Health produced a companion chart pack with a landscape assessment of how the Medi-Cal program operates, is financed and performs, as well as how some individuals use the system. Click here to download a free PDF of the full report and chart pack.


Medi-Cal Today

Medi-Cal is the largest Medicaid program in the nation, as measured by both enrollment and total spending. Its purchasing power has enormous potential to improve care and outcomes.

  • Enrollment. Medi-Cal covers more than 13 million individuals—more than 30% of the state’s population. Between December 2013 and January 2015, Medi-Cal enrollment grew by 41% as a result of Medicaid expansion.
  • Spending. Medi-Cal costs have grown nearly threefold over the last decade and today total $92 billion in annual expenditures. Spending growth has been driven largely by new coverage. Even with expansion, most of the spending remains focused on high-needs beneficiaries, with 5% of beneficiaries accounting for 51% of spending. While Medi-Cal is the largest Medicaid program in the country in terms of enrollment and expenditures, its spending per enrollee ranks among the ten lowest in the country.
  • Managed care. Nearly 80 % of Medi-Cal beneficiaries are now enrolled in managed care, including most of the elderly and people with disabilities that the program covers. As a result, the state and managed care organizations (MCOs) are changing their contracting and care management models to serve beneficiaries with very different healthcare needs than those who traditionally have been cared for through managed care.
  • Medi-Cal delivery system. Beneficiaries covered by Medi-Cal get their primary and acute care in doctors’ offices, community clinics, health centers and hospitals. Federally-Qualified Health Centers (FQHCs) play an important role, serving 41% of Medi-Cal MCO enrollees.
  • Beneficiary characteristics. Medi-Cal beneficiaries are, by definition, low income. Coverage expansion has spurred an influx of adults, such that nonelderly adults and children now make up 84% of the population. Even with expansion, senior and nonelderly adults with disabilities—now served mostly through managed care—account for 60% of spending. Medi-Cal covers a diverse population in terms of age, employment status, ethnicity, language and educational level. Overall, Medi-Cal beneficiaries report lower health status than other Californians. Mental health illnesses are some of the most commonly treated conditions among Medi-Cal patients and tend to co-occur with physical health conditions.
  • Access, quality and health outcomes. Reports suggest that Medi-Cal is not meeting expectations for health access, quality and equity. For example, adult Medi-Cal enrollees are twice as likely as Californians with employer-sponsored insurance to report difficulty getting care from a provider due to insurance. Within Medi-Cal managed care, reports show that MCOs have highly variable performance on quality of care indicators.

Medi-Cal Managed Care Vision

In its “Medi-Cal 2020” waiver application, California articulated a high-level vision for Medi-Cal—to foster “shared responsibility among all providers to achieve high-value, high-quality and whole person care.” Stakeholders interviewed for Manatt Health’s report strongly agreed with this vision, focusing on three components:

  • Coordinated systems of care, with special focus on the integration of physician and behavioral health services;
  • Value and accountability, with mechanisms for holding the components of the systems accountable for achieving results;
  • Stable and adequate financing and strong state-level leadership, with stakeholders noting that delivery system and payment reform will only be successful if built on a platform of sustainable financing and guided by strong management at the state level.

Stakeholders also articulated barriers to achieving this vision for Medi-Cal. Their vantage points varied, but they told a similar story of structural roadblocks to reform:

  • Fragmented administration and delivery of care. The current Medi-Cal system is composed of a complex mix of plans, counties and provider systems with lines drawn based on geography, beneficiary age and health condition, funding source and a mix of older and more recent policy goals. California’s managed care system typically involves multiple layers of delegation and sub-delegation of risks and responsibilities for the coordination and provision of care. Plan-to-plan delegation in Los Angeles County adds another layer to an already complex system. The two plans that contract directly with the state subcontract to other plans, retaining a portion of the premium for administrative services that may be redundant to services delivered by the delegated entity. These complexities are further exacerbated because certain services (i.e., treatment for serious mental illness, pediatric services for certain complex conditions and some long-term services and supports) are “carved out” of the primary health plan’s responsibilities, leaving no single entity responsible for the whole person.
  • Fragmented financing. Like the delivery system, financing of the care to managed care enrollees is highly fragmented with large dollar amounts being transferred as institutional subsidies rather than as payments for services and outcomes. About 25% to 30% of the payments for hospital services provided under contracts to the plans are made through supplemental payments that are passed through to the counties and hospitals at the end of the plan year. FQHCs also are compensated for their care of Medi-Cal beneficiaries through supplemental payments, required by federal law, based on the volume of care provided to patients.

    Medi-Cal’s payment structure is further fragmented by carve out arrangements. Under federal law, the state is responsible for the care provided to Medi-Cal beneficiaries for mental health conditions, but in California, the funds for the care of people with serious mental illness go to the counties (which pay the nonfederal share). The state Medi-Cal agency has no authority over how those funds are spent.

    Medi-Cal’s rate setting methodology further undermines efforts to advance accountable, coordinated systems of care and reward value. Rates are generally based on prior year utilization and pegged at the lower end of the range of what is actuarially sound. There is no mechanism for the state to share savings to provide financial incentives that drive improvements in care delivery and redirect care to less costly settings.
  • Uneven access to providers. Historically, provider participation in Medi-Cal has been lower than participation in the commercial market. California falls significantly short of the national benchmark for a sufficient supply of Medi-Cal participating primary care providers to meet the needs of beneficiaries. While the data indicate the California has a sufficient supply of Medi-Cal specialty care providers, there is variation in access by specialty and geography.
  • Workforce challenges. Stakeholders noted challenges recruiting primary care physicians and specialists, particularly to safety net institutions and FQHCs, that do not have the resources to offer salaries on par with health systems that serve an exclusively or heavily commercially insured population.
  • Lack of transparency and effective accountability mechanisms. Under federal law, the Department of Health Care Services (DHCS) is accountable for the overall administration and oversight of Medi-Cal, including its managed care system. DHCS works with the Department of Managed Health Care (DMHC), the state agency that oversees full-service health plans. There are concerns that the state’s oversight activities do not ensure accountability, with some stakeholders noting that the DMHC’s requirements are typically more process- than outcome-oriented. Compounding the challenge of program oversight is the limited visibility into the networks and performance of contracted and delegated entities. In addition, the state has limited levers for achieving a high degree of accountability.
  • Under-resourced program management. Stakeholders interviewed noted that the bandwidth, skill sets and infrastructure for accountability have not kept pace with the growth and changes in Medi-Cal managed care.

A Path Forward

It is time to reconsider the longstanding assumptions and constraints that underpin Medi-Cal. The recently renewed “Medi-Cal 2020” waiver will contribute to positive change but does not tackle the significant realignment, restructuring and financing issues critical to successful transformation. While the waiver presents new opportunities and investments, implementation will generally not address the system as a whole.

Achieving the broadly-shared vision of accountable, coordinated systems of care will require a phased, multi-year approach. Below are a set of near-term priorities to improve care and strengthen the foundation for reform.

  1. Intensify efforts to coordinate care for people with serious mental illness. The state and counties should establish a clear set of expectations and milestones for achieving integration of care; actively engage plans, providers and consumer groups in implementation; and ensure that care teams have the systems in place to communicate and coordinate patient care across the physical and mental health divide.
  2. Invest in initiatives that address the pressing health-related needs of the Medi-Cal population with complex health conditions. The Medi-Cal 2020 waiver includes funding to implement voluntary, county-based “whole-person” care pilot programs, bringing together healthcare, social services and community-based service providers to design and test innovative models of care. To supplement waiver funds, revisions in rate setting can help support these efforts.
  3. Strengthen accountability by revising rate setting methodologies. Given the strong message from plans and other stakeholders that the current rate setting methodology is actually a disincentive for care improvements, a change in rate setting and payment strategies is needed. One approach would be to allow plans to share savings achieved through improvements in care. A variation to this approach would be to develop a new rate setting methodology that allows plans to keep savings if those savings are reinvested in care improvements.
  4. Align incentives across Medi-Cal and across the marketplace. With some exceptions, Medi-Cal lacks common goals across its managed care delivery system. A core set of initiatives can help stimulate reform while allowing for local strategies that take into account regional assets, challenges and community needs. Medi-Cal also should intensify its collaboration with Covered California and CalPERS to promote opportunities for the three payers to align their delivery system reform strategies.
  5. Focus on data improvement. Cost, quality, utilization, patient satisfaction, equity and access data from all plans and subcontractors/delegated entities (by entity) should be made publicly available for ongoing assessment of the system’s health, ability to meet the needs of diverse members and effectiveness of resource deployment.
  6. Invest in health information technology and health information exchange across the state. The state should deepen its efforts to help equip providers with the tools, technology and incentives to go digital.
  7. Address workforce shortages. Though not approved as part of the renewed waiver, workforce investments are necessary to ensure access to care and the cultural competence of the workforce to treat the Medi-Cal population—many of whom don’t speak English as their first language.

Structural Transformation

A far more ambitious agenda of restructuring the underlying Medi-Cal delivery and payment system is needed to achieve the vision of coordinated and accountable systems of care:

  • Re-think the core structure of the Medi-Cal managed care delivery. The current structure of Medi-Cal’s managed care delivery system was designed when a much smaller and more homogenous group of enrollees was enrolled in managed care; much has changed since the system first took shape in 1993. It is time to consider whether the current delivery models are best suited to reach the level of performance and accountability that Californians expect.
  • Re-examine Medi-Cal’s financing system. Financing needs a thorough examination, including resolving the following four questions:
    1. Is the overall level of funding sufficient to support adequate networks and encourage coordinated systems of care?
    2. Is it possible to move to a value-based system of paying for care given how much money is directed to hospitals through supplemental payments?
    3. Should the financing for serious mental healthcare be revised so that payment strategies support integration between mental healthcare and physical healthcare?
    4. What are the implications of these issues for the nonfederal funding of the program?


California is a national leader in extending Medicaid to low-income people and other aspects of health reform. Yet Medi-Cal’s current status and trajectory raise deep concerns. Open dialogue is required to address the structural impediments to change. Medi-Cal is too large and important to miss the opportunity to achieve the vision of accountable, coordinated systems of care.