California’s Medicaid Hospital Financing Waiver: A Three-Part Perspective

Authors: Peter Harbage and Jennifer Ryan

Prepared with support from California Health Care Foundation

April 2006 – In September 2005, the State of California, with the approval of the federal government, fundamentally altered the way the Medi-Cal program pays for hospital care. Under the authority of a waiver granted by the Centers for Medicare and Medicaid Services (CMS), state officials implemented sweeping changes to the process of financing inpatient treatment at the private and public hospitals that contract with Medi-Cal. At its most basic level, the new system shifts funding responsibilities for Medi-Cal inpatient hospital payments (Table 1). The key alterations are to the non-federal share of Medicaid matching funds for 22 Designated Public Hospitals (DPHs). Specifically, the state General Fund will no longer be the primary source of funding for these hospitals. Rather, primary responsibility for the non-federal share of the Medi-Cal inpatient hospital expenditures will fall to the county governments, which own and operate the DPHs, and the University of California, which administers state-funded teaching and research hospitals. The amount of federal matching funds is determined based on the hospitals’ expenditures.