The PARCA Quarterly A Progress Report on Research Aimed at Improving State and Local Governments

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1 The PARCA Quarterly A Progress Report on Research Aimed at Improving State and Local Governments PUBLIC AFFAIRS RESEARCH COUNCIL OF ALABAMA Fall 2014 In this issue Alabama s Ailing General Fund Page 1 A New Prescription for Medicaid..... Page 3 Alabama s Corrections Conundrum.... Page 8 Alabama s Ailing General Fund When the new legislature convenes in 2015, it will face an old problem: a shortfall in the state s $1.8 billion General Fund account. This time, state leaders are expecting as much as a $200 million gap between revenues available for fiscal 2016 and the appropriations needed to maintain services. Any such imbalance between revenues and expenditures must be eliminated when the Fund s budget is adopted next spring. This is a persistent problem. For example, in Fiscal Year 2013 General Fund expenditures totaled over $1.7 billion, but the Fund s continuing revenue sources brought in less than $1.5 billion, leaving a gap of $245 million that had to be supported in extraordinary ways. On the revenue side, the 2013 gap was closed by enacting a law transferring $77 million of use tax revenue formerly earmarked to the Education Trust Fund, adopting temporary measures to produce another $23 million, and borrowing $146 million from the Alabama Trust Fund that will have to be repaid in later years. These kinds of revenue strategies have been used repeatedly in recent years. For instance, in 2001 a number of sales type taxes were transferred from the Education Trust Fund to the General Fund. The Legislative Fiscal Office counted over $1 billion of intermittent or temporary revenues used in balancing the General Fund from 2008 to And since 2010 the State has borrowed $599 million from the Alabama Trust Fund to support the General Fund budget. These borrowings must be repaid, and repayment schedules run to On the spending side, the 2013 General Fund budget had to accommodate Medicaid and the Department of 80% 60% 40% 20% 0% Spending on Corrections and Medicaid as a % of General Fund % Medicaid % Corrections

2 THE PARCA QUARTERLY, Fall 2014 Page 2 Corrections, which accounted for 56 percent of General Fund outlays. Ten years earlier, these two programs had required only 36 percent of the Fund s expenditures. The growth of Medicaid and Corrections has led to the crowding out of other services that historically have been supported by the General Fund. A good example is support for the Unified Judicial System (UJS), which includes the state s trial courts. Historically the UJS has received about 10 percent of General Fund appropriations, but by 2013 the percentage of the General Fund supporting the courts had been cut in half, to 5 percent. The UJS is also a good example of how the Legislature has tried to cope with the General Fund cash shortage. In an attempt to make up for cuts from the General Fund, the Legislature increased fees charged to those who come before the courts. However, collection rates for court fees are low, in part no doubt due to the fact that the burden of paying the fees is high in some cases. This limits the effectiveness of the fee approach to increasing support for court operations. What should be done? There appears to be a growing consensus that something should be done to end the need for constant tinkering with the State s General Fund. The solution is not likely to come from a top down approach that focuses only on the total amount of the Fund s revenues or expenditures. Rather, the General Fund must be analyzed in terms of what the state wishes to accomplish through the services that the General Fund supports. The General Fund is an accounting entity that in most cases provides only some of the support for the programs to which it contributes. Establishing control over the General Fund s finances requires an evaluation of the goals, strategies, and cost effectiveness of the agencies themselves, and then providing them with stable support to achieve their purposes. Otherwise, there is no bottom line to determine what is an adequate level of General Fund revenue, and no way to measure the cost effectiveness of General Fund spending. The General Fund can be structured to do its part only after this evaluation is done. Alabama s Budget Management Act calls for building the state s budget in this way, from the bottom up. However, the Smart Budgeting System intended to implement this law was allowed to lapse a few years ago. Most other states have continued to work on tightening the connection between funding and results. Long term, returning to the principles in the Budget Management Act is a must. Alabama s state government cannot be successful without systematically measuring what is being accomplished with the tax dollars invested. In the short term, the governor and the Legislature have launched efforts to think more strategically about our approach to managing the two largest and fastest growing components of the General Fund, Medicaid and Corrections. In this report, we describe those efforts. Human Resources 4% Public Health 4% Mental Health 6% 2014 Spending by % of the $1.8 billion General Fund Account Public Safety 3% Legislative 2% Medicaid 35% Judicial 6% All Other 18% Corrections 22%

3 THE PARCA QUARTERLY, Fall 2014 Page 3 A New Prescription for Medicaid Any attempt to address the perennial shortfalls faced by the state s General Fund account has to start with attention to Medicaid, the program that pays for the healthcare and long term care of the poor and disabled. Total spending on Medicaid in Alabama is budgeted to reach $6.1 billion in 2015, with about 30 percent of funding coming from state sources and 70 percent from the federal government Funding for Medicaid $5.86 Billion Total General Fund 11% Intergovernmental Transfers 4% Hospital Transfers 4% Medicaid s draw on the state s General Fund account has nearly quadrupled over the past 20 years, rising to $685 million for That s 37 percent of the $1.8 billion Fund, the largest General Fund expenditure. Back in 1995, Medicaid accounted for just 16 percent of the General Fund, around $140 million. Federal Medicaid 68% Certified Public Expenditures /Provider Tax/Misc. 13% Medicaid costs have risen because of rising medical costs and a rise in the number of people covered (due to population growth, changing demographics and expansions in coverage). In 1995, around 600,000 people were covered by Medicaid; today more than 1 million Alabamians qualify. The steep rise in the cost of Medicaid has been one of the central problems in balancing the General Fund budget, which in 2016 is expected to face a $200 million gap between expenditures and anticipated revenues. Alabama Medicaid Agency Cost to the General Fund $ 139,607,626 $ 685,125,607 Percent of General Fund spending 16% 37% Percent increase in spending since % In October 2012, recognizing that health costs were rising at an unsustainable rate, the Governor convened a Medicaid Advisory Commission and charged it with finding a way to curb the Medicaid Agency s growth trajectory while also improving the quality and types of care provided to Medicaid beneficiaries. Growing out of the Commission s work is a strategy to move most Medicaid beneficiaries from the existing fee forservice system, under which providers bill Medicaid for services rendered, into a delivery system in which Regional Care Organizations (RCOs) will coordinate medical benefits and be paid on a capitated, per enrollee basis, bearing the risk of managing costs within the established caps. To accomplish this, the state has been divided into five regions. Within each region, RCOs will be established. RCOs will consist of a coalition of hospitals, doctors, other care providers and community representatives. These RCOs will receive a capped amount of money based on the number of enrollees they are assigned to serve. With that money, the RCOs will pay for the care of their enrollees. Through a variety of mechanisms, the RCOs will attempt to encourage better health outcomes and more cost effective medical practices, thus, decreasing medical expenses. It is hoped that this new approach, by replacing the traditional fee for service model, will contain and make more predictable for the state the cost of Medicaid for the portion of the Medicaid population covered by the changes.

4 THE PARCA QUARTERLY, Fall 2014 Page 4 By capping Medicaid spending to a set level of expenditure per enrollee, the agency estimates the new delivery system will reduce future increases in state funding by between $40 million and $85 million per year compared to the current fee for service arrangements. Considering state and federal spending together, estimates are that the approach could save between $750 million and $1.08 billion over five years compared to expected expenditures under fee for service. The new system is expected to be operating by Medicaid Spending from the General Fund Budget $800,000,000 37% 40% $700,000,000 33% 35% 34% 35% $600,000,000 $500,000,000 $400,000,000 $300,000,000 16% 18% 20% 20% 20% 22% 20% 19% 18% 18% 25% 27% 24% 25% 25% 21% 25% 30% 25% 20% 15% Percent of General Fund Budget $200,000,000 10% $100,000,000 5% $ % Medicaid State General Fund Percent Medicaid of State General Fund Overview of the Medicaid Program Alabama s Medicaid Program pays medical providers (doctors, hospitals, nursing homes, pharmacies, etc.) for the care of the poor and disabled. The program is a key component of Alabama s health care sector. As of July 2014, the total number of individuals eligible for Medicaid was 1,041,588, or about 23 percent of the state s population. Medicaid provides health care services to 43 percent of Alabama s children and accounts for more than half of the births in the State. In addition to state general fund sources, Medicaid is funded by an assortment of taxes on providers, intergovernmental transfers, certified expenditures that meet requirements for matching Medicaid dollars, and miscellaneous other revenues.

5 THE PARCA QUARTERLY, Fall 2014 Page 5 The chart below tracks the trends in recent years of the number of people covered by Medicaid and the cost of the program per enrollee. $6,500 Cost Drivers: Caseloads and Healthcare Costs 1,050,000 $6,250 $6, ,000 Cost per Enrollee $5,750 $5,500 $5,250 $5,000 $4,750 $4,500 $4, , , , ,000 Medicaid Enrollees $4, ,000 Cost per Enrollee Medicaid Enrollees Source: Alabama Medicaid Agency. Medicaid enrollees are the unduplicated number of individuals who qualified for full or partial Medicaid coverage in each month of the fiscal year. Annual average is the arithmetic average of the twelve months. Average cost per enrollee is calculated by dividing total local, state, and federal expenditures by the number of enrollees. Changing Medicaid from a fee based to a managed care approach The Governor s Medicaid Commission brought together representatives from state agencies, State Senators and Representatives, insurance companies, consumer advocates, medical providers, and professional organizations representing hospitals, physicians, pharmacies, nurses, primary and rural health clinics, hospices, and nursing homes. Based on the Commission s recommendations, the Alabama Legislature passed legislation in May 2013, outlining a reform plan for Alabama Medicaid. In April 2014, the Alabama Legislature amended the RCO legislation to make some changes to the structure and operation of the RCOs. In May of 1014, the Medicaid Agency applied for a waiver from the federal Medicaid Agency seeking permission to implement the new delivery system. The federal Centers for Medicare & Medicaid Services has acknowledged receipt of the state s application and is considering it. Under the reforms, Medicaid reimbursement for the services included in the waiver will no longer be based on recipients use of medical services; instead, the health care of recipients will be paid for, coordinated and managed by Regional Care Organizations. The RCOs will be financed through a capitated model in which the RCOs receive a set payment from Medicaid based on the number of enrollees the RCO covers. The RCOs will operate within five regions that reflect existing medical referral patterns and care provider systems.

6 THE PARCA QUARTERLY, Fall 2014 Page 6 Click on the map to Explore additional information on caseloads and statistics. Under the current system, the state reimburses providers on the basis of utilization and volume, rather than value and quality. The state s only tools for constraining costs have been to limit who is eligible, what it pays providers for services, and what services beneficiaries receive. Many of these decisions are constrained by federal law and rules. The new system creates a limit to Medicaid expenditures for each region. As of October 2014, 12 organizations have applied to be certified as RCOs. About two thirds of Alabama s Medicaid population will initially be covered by the RCOs. Included populations include Medicaid enrollees who are aged, blind and disabled, those in the breast and cervical cancer treatment program, those covered by Medicaid for Low Income Families, and those covered under SOBRA, the Medicaid program for children and pregnant women. Not covered by the RCOs at this point are nursing home and institutional care recipients, foster children, recipients qualified for both Medicare and Medicaid, hospice patients, the mentally retarded, recipients of family planning services, and children in the custody of the Department of Youth Services. Dental services will also fall outside the RCO system and will continue to be provided on a fee for service basis. The RCOs are designed to replicate the successes achieved by four existing primary care networks (PCN) established by the Alabama Medicaid Agency that are currently providing a level of managed care in 21 counties. The PCN model includes the assignment of each Medicaid beneficiary to a medical or health home. According to the Agency, that program has shown reductions in emergency department utilization, hospital admissions, and total cost, as well as increases in medical compliance and delivery system efficiency. 8% 11% 18% 8% 2014 Expenditures for Medicaid $5.86 Billion Total 3% 16% 36% Administration Nursing Home Care Hospital Care Physicians Pharmaceutical Mental Health Other

7 THE PARCA QUARTERLY, Fall 2014 Page 7 Generically, the RCOs are known as accountable care organizations. A recent article in Governing Magazine describes how these organizations operate: At a basic level, an ACO gives doctors, hospitals, and clinics the responsibility to provide care for a group of patients within a specified budget. If health care providers better coordinate care to provide good quality for less money, they can share in the savings. The new approach provides a financial incentive to keep clients healthy. By providing consistent and coordinated care for Medicaid beneficiaries, many of whom have chronic conditions like asthma or mental illness, RCOs have the potential to increase health outcomes and reduce unnecessary emergency room visits and hospitalizations. Currently, some, but not all of Medicaid s most costly care recipients, will be covered under the new system. The aged, blind, and disabled make up 31 percent of the Medicaid population, but account for 66 percent of program spending. About 17 percent of those covered under the new RCO system would fall into this most expensive category. Those in nursing home care won t be part of the current reform effort. The Medicaid Agency is exploring further reforms that would reach the rest of its beneficiaries. According to the Medicaid Agency s waiver application, the anticipated growth of the aged, blind, and disabled population in the current system threatens the State s ability to maintain even a modest benefit package and eligibility criteria for Medicaid beneficiaries, and highlights the necessity for Medicaid reform in Alabama. Approaches similar to the one Alabama is trying have shown promise elsewhere. The New York Times recently reported on the reduction of costs in the Rio Grande Valley in Texas. Based on an analysis of patient data, providers in the Rio Grande Valley Accountable Care Organization (ACO) in McAllen, Texas offered quick follow ups from hospital visits, provided cell phones for patients who had trouble communicating with their doctors, and visited patients at home who could not get to offices. By focusing on high risk patients, and shifting to preventative care for many others, the ACO was able to reduce costs and improve a variety of health indicators, such as the number of patients in control of diabetes and those receiving vaccinations. Alabama hopes to have similar success in improving care and decreasing costs. Critical Dates for Implementing Medicaid Reforms in Alabama as Required by Law: October 1, 2013 Medicaid establishes RCO regions (Complete) October 1, 2014 Governing boards for each region approved (Awaiting Announcement) April 1, 2015 RCOs must prove their ability to establish an adequate network October 1, 2015 RCOs must meet solvency requirements October 1, 2016 RCOs must demonstrate ability to provide services under a risk contract (RCOs start bearing risk) no later than this date

8 THE PARCA QUARTERLY, Fall 2014 Page 8 Alabama s Corrections Conundrum The Alabama Department of Corrections has jurisdiction over more than 32,000 individuals who ve been convicted of a crime and are serving sentences in prisons, work release centers, supervised reentry programs, and community based corrections programs. That s more than double the number of convicts the system had in its charge in 1990, but over that same period, Alabama has added little to the designed capacity of its prisons. AL Dept. of Corrections 2015 Budget: $473,923,402 $80 million, 17% From the General Fund Agency revenues, fees, and grants As a consequence, Alabama prisons hold almost twice the number of prisoners they were designed to accommodate. According to the most recent comparative figures, Alabama has the highest level of prison over crowding in the U.S. Alabama s Department of Corrections depends on the state s cash strapped General Fund for 83 percent of its budget. Due to the increasing costs of housing an ever greater number of prisoners, corrections spending has more than doubled since 1995, now accounting for 22 percent of General Fund appropriations, or $384 million in the 2015 budget, trailing only Medicaid as a cost to the General Fund. Alabama Department of Corrections Cost to the General Fund $145,579,511 $394,281,304 Percent of General Fund spending 17% 22% Percent increase in spending since 171% 1995 $394 million, 83% State officials are expecting a shortfall of $200 million in the General Fund for 2016, which means Alabama doesn t have the wherewithal to begin building its way out of prison over crowding. Corrections officials estimate they d need a minimum of $420 million to add 6,000 new prison beds and $92 million more annually to operate the added space. The prison problem also has acute aspects needing attention. Prison officials have declared a state of emergency in response to Department of Justice findings on conditions at Julia Tutwiler Prison for Women, including overcrowding, understaffing, and sexual abuse of prisoners by system employees. The Justice Department concluded conditions there constituted a violation of the U.S. Constitution s prohibition against cruel and unusual punishment. In the face of this array of problems, the Legislature earlier this year created a bipartisan Prison Reform Task Force, composed of state and local leaders drawn from all three branches of government. The creation of the Task Force was endorsed by the Governor, leaders of both Houses of the Legislature, and the Chief Justice of the Supreme Court. The Task Force is charged with finding solutions for the prison overcrowding problem while at the same time protecting public safety. With funding support from the U.S. Department of Justice and the Pew Charitable Trusts, the Task Force is employing the technical assistance of the Council of State Governments Justice Center (CSG Justice Center). The

9 THE PARCA QUARTERLY, Fall 2014 Page 9 CSG Justice Center, a nonpartisan, nonprofit organization, has helped guide 18 states through similar exercises in corrections system reform. It began work in Alabama in the spring, presented preliminary findings in June, and updated the Task Force on September 30. The approach advocated by the CSG Justice Center is known as Justice Reinvestment. States that have been through the Justice Reinvestment process (North Carolina and Texas among them) have been able to decrease prison populations, increase successful reentry from prison, and at the same time experience drops in crime. Strategies employed included restructuring sentencing, improving treatment and diversion options, and employing more effective practices in probation and parole supervision. The Justice Reinvestment approach assumes that money saved by reducing the prison population can be shifted to pay for improved practices elsewhere. This will be particularly difficult in Alabama. It would take a significant decline in prison population to achieve any savings in Alabama, considering the current level of overcrowding and understaffing in the prison system. Cutting prison costs under existing circumstances seems unlikely. Alabama spends about $43 a day per inmate to clothe, feed, house, and supervise its prisoners, about $15,308 per year, per inmate in the prison system. Alabama prisons are staffed at 58 percent of authorized levels, at a ratio of 12 prisoners per correctional officer. Reform efforts depend on an enhanced system of community supervision as an alternative to prison. However, in Alabama, the Board of Pardons and Paroles, which administers probation and parole supervision, has seen a significant erosion of its budget. The ratio of probation and parole officers to offenders is 1 to 192, far in excess of levels recommended for a successful system of supervision. U.S. Census Bureau data indicate that Alabama spends less on corrections, probation and parole than any state other than Mississippi and Louisiana. Other agencies involved, including the courts and the Alabama Department of Mental Health, which also depend significantly on the General Fund, have seen erosion in their financial support as well. To save money in the long run, Alabama may very well have to find more money to spend in the short term. Bottom 10 States in Corrections Spending per State Prisoner,* 2011 Mississippi $14,481 Louisiana $14,820 Alabama $16,477 South Carolina $19,405 Oklahoma $19,877 Texas $21,043 Nevada $21,160 Tennessee $21,196 Indiana $21,406 Arizona $21,631 Median State Spending per prisoner $36,853 The Task Force hopes to have legislative recommendations ready for the 2015 session. How we got here Alabama s prison problem has been long in the making, and our state is by no means alone in its struggles. Most states have seen their prison populations swell in recent decades. However, Alabama is among the top states in the number of people it locks up as a percentage of its population. Alabama s incarceration rate ranks fourth in the United States, and the U.S. leads all other countries in the rate at which it jails its citizens. U.S. imprisonment rates have surged since the 1970s. Several factors have contributed, including legislation requiring longer sentences and the passage of habitual offender laws, which enhanced sentences for repeat

10 THE PARCA QUARTERLY, Fall 2014 Page 10 offenders. Lawmakers also responded to the proliferation of drugs and drug related crimes by enacting long sentences for those offenses. Efforts to move people with mental illness out of prolonged confinement in state mental hospitals may also have also played a role. Several studies have shown that close to 20 percent of the prison population suffers from serious mental illness. And once in the criminal Justice system, the mentally ill have a harder time getting out. Data suggest that a focus on incarceration may not be the most cost effective approach to improving public safety. Alabama, with one of the highest incarceration rates in the country, continues to experience higher than average levels of crime. According to figures presented to the Prison Reform Task Force by the CSG Justice Center, Alabama in 2012 ranked 8th among U.S. states in total crime, 14th in violent crime, and 7th in property crime. The Public Safety Performance Project of the Pew Charitable Trusts recently pointed out that Incarceration Rates: Top 10 U.S. States Prisoners per 100,000 residents Louisiana 847 Mississippi 692 Oklahoma 659 Alabama 647 Texas 602 Arizona 586 Arkansas 578 Georgia 533 Florida 524 Missouri 521 between 1994 and 2012, the top five states where incarceration rates declined the most also saw significant drops in crime Prisoners per 100,000 residents in selected states, Louisiana Mississippi Alabama Texas Georgia Florida South Carolina Tennessee All U.S. States North Carolina

11 THE PARCA QUARTERLY, Fall 2014 Page 11 Signs of progress In its most recent report to the Task Force, the CSG Justice Center presented findings indicating some relief in the upward pressure on Alabama s prison population. The total number of people under the jurisdiction of the Alabama Department of Corrections declined slightly in 2013, and so far in 2014 that trend seems to be continuing. Declining crime rates resulted in 10,000 fewer arrests in 2013 compared to Felony convictions have declined during the same period, including a 34 percent drop in felony sentences for robbery and a 33 percent drop in convictions for felony possession of a controlled substance. The number of prison sentences for drug and property crimes declined by 24 percent from 2011 to 2014, with the sharper decline coming after October That s when new presumptive sentencing guidelines went into effect. The guidelines establish uniform parameters in sentencing for non violent offenders and promote community supervision for non violent offenders in appropriate cases. The CSG Justice Center data indicate that under the guidelines there has been an acceleration in the number of offenders diverted from prison and toward probation and community corrections. These latest changes to sentencing are only the most recent. Alabama has been working for more than a decade to relieve pressure on prisons. Drug courts have been established in 66 of Alabama s 67 counties and mental health courts operate in some jurisdictions. Despite these measures to decrease in in flow, the prison population has remained stubbornly high. The number of people being released from prison has dropped. CSG is in the process of determining why the rate of approvals for parole rates is declining when there appears to be a backlog of inmates eligible for parole. Breaking the cycle Facts on Criminal Justice Supervision in Alabama ADOC Jurisdictional Population, June ,235 ADOC In House Population 25,020 ADOC In House Designed capacity 13,318 Occupancy rate 188% Individuals on Probation 54,288 Individuals on Parole 9,873 Individuals on Probation and Parole 364 Total on Probation and Parole 64,525 Total individuals under the supervision of Dept. of Corrections and Board of Pardons and Paroles 96,760 Ratio of Inmates to Correctional Officers 12 to 1 Ratio of Individuals on Probation/Parole to Supervising Officers 192 to 1 Spending per prisoner per year $15,308 Cost Per Day Prison $43 Supervised Release Program $17 Community corrections $10 Cost per day probation/parole $1.70 Alabama s approach to probation and parole and other forms of community supervision may end up being a central focus of the Prison Reform Task Force. A robust system for improving the success rate of those on probation or parole can result in long term savings by decreasing returns to prison, while at the same time increasing public safety. In Alabama in 2013, 40 percent of all admissions to ADOC custody had violated the terms of probation or parole. A growing body of research suggests that recidivism rates can be reduced by careful assessment of individuals admitted to probation and parole, to determine their likelihood of reoffending. Using such assessments, intense supervision and treatment can be given to those at the greatest risk of re offending. Research also suggests that a Parole and Probation program must have a swift, consistent, and cost effective system for dealing with violations to parole, using a graduated range of sanctions and incentives. According to CSG Justice Center research, no such system exists in Alabama. At its current level of support, the Board of Pardons and Paroles employs one parole officer for every 192 individuals under supervision. The American Probation and Parole Association has developed recommended

12 THE PARCA QUARTERLY, Fall 2014 Page 12 staffing levels, which vary according to the type of offender being supervised: a ratio of one officer working with 20 individuals deemed to be at a high risk of reoffending; one officer for 50 medium risk individuals; and one officer for every 200 low risk individuals. Probation and parole are very cost effective when employed correctly. In Alabama, 64,525 individuals are under the supervision or the Board of Pardons and Paroles. That amounts to about $1.70 per day, per supervised individual. Even if the Board were staffed at twice the level of today, which would more nearly approximate the recommended staffing ratio, the cost would be $3.40 per day, less than a tenth of the cost per day in Alabama s prisons. However, even as the system is putting more emphasis on community supervision, General Fund support for the Board of Pardons and Paroles has declined significantly in recent years. That decline in General Fund support has been only partially offset by an increase in the fees required of those under supervision, from $30 a month to $40. $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Spending on Department of Corrections, in millions $60 $50 $40 $30 $20 $10 $0 Spending on Board of Pardons and Paroles, in millions General Fund Other Sources General Fund Other sources, fees

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