FY 2007-08 STATE BUDGET
PRESCRIPTION FOR PENNSYLVANIA

The Governor’s Fiscal Year 2007-08 budget proposal for the Insurance Department is dominated by his comprehensive health care reform proposal Prescription for Pennsylvania, or Rx for PA.

The Governor’s Rx for PA proposal comes at a time when states across the nation are beginning to enact bolder and bolder reform initiatives to tackle the problems of burgeoning health care costs and growing uninsured populations. Governor Rendell’s plan is in many ways the most ambitious and all-encompassing of any that have been proposed or enacted.

The Rx for PA will cost a total of $150.9 million in state funds in FY2007-08 with an addition $104.4 million in leveraged federal matching funds, a portion of these funds will be raised through an increase in the Cigarette Tax, and a new tax on other tobacco products which will raise a combined $77.5 million. Funds for the Rx for PA plan will be disbursed through various state agencies including the Departments of Insurance, Health, Education, Labor and Industry, and Public Welfare, the Health Care Cost Containment Council, and the Office of Health Care Reform. The majority of the funding issues for the Rx for PA, however, revolve around the Governor’s Cover All Pennsylvanians initiative.

Cover All Pennsylvanians
At the heart of the Governor’s plan is the Cover All Pennsylvanians initiative which will offer an affordable basic health insurance plan for small businesses and the uninsured.

A recent study conducted by the Pennsylvania Insurance Department found that there are approximately 767,000 Pennsylvanians who do not have health insurance. The survey also found that most of these 767,000 people are employed, and that most of them do not have health insurance because of the prohibitively high costs for both small businesses and individuals. Finally, of the 767,000 uninsured people in Pennsylvania, almost 581,000 earn less than 300% of the Federal Poverty Level.

Cover All Pennsylvanians will be an insurance program that is supported by the state and offered through private insurance companies. Employers can participate in the program if they have not offered health insurance to their employees for the past six months, they have 50 or fewer employees, and on average these employees earn less than the state average wage.

Additionally, all uninsured individuals will be eligible to purchase insurance through the program. Those earning less than 300% of the Federal Poverty Level ($62,000 for a family of four) will receive help from the state in paying part of their premiums.

The health care premium and administrative costs of the CAP program in fiscal year 2007-08 are expected to be approximately $235 million, of that amount $104 million will be provided by the federal government. This figure is based upon an expectation to enroll 153,600 adults in the Cover All Pennsylvanians program in FY2007-08. Enrollment is expected to increase to 431,300 by FY2011-12 at which time the cost of the program will be significantly larger and dependant upon future health care costs and the mix of people taking part in the program.

The Governor plans to fund the program in FY07-08 from a variety of sources: existing money from the tobacco settlement agreement totaling $31.3 million; existing money from the Community Health Reinvestment Agreement totaling $52.2 million; Federal matching funds totaling $104 million; and $60.4 million from a new Fair Share Assessment tax.

The Fair Share Assessment will be a 3 percent tax levied on the payrolls of businesses that do not offer health insurance to their employees. The Community Health Reinvestment money will be available because the adultBasic program will be collapsed into the Cover All Pennsylvanians plan.
In addition to Cover All Pennsylvanians, the Rx for PA has provisions designed to address the three issues of Affordability, Access, and Quality.
Rx for Affordability
• $268,000 to expand the Commonwealth’s premium rate review authority to all insures providing coverage in the individual and small employer market.
• Require hospitals to immediately screen and redirect patients who go to emergency rooms but do not require emergency room care to more appropriate places within the hospital.
• $120,000 to develop recommendations and criteria for the review and approval of health care services and facility planning.
• $810,000 to develop standardized policies and reporting and auditing procedures for non-profit hospitals required to meet community benefit obligations.
• $510,000 to develop and enforce standardized hospital admission criteria and fair billing and collection procedures for uninsured and underinsured patients.
Rx for Access
• Eliminate the barriers in existing laws, regulations, and insurance reimbursement policies that limit the ability of health care providers- such as nurses, nurse practitioners, midwives, physician assistants, pharmacists, and dental hygienists- to practice to the fullest extent of their training.
• $5.4 million to increase access to primary health care in underserved rural areas.
• Provide incentives to increase the number of care centers that offer services in the evening and on weekends.
Rx for Quality
• $2.3 million to standardize identification and reporting of hospital acquired infections and to provide training in infection-control best practices.
• Commonwealth will lead a coalition of other health care purchasers from the private sector to align provider payments with their expectations for quality care and will introduce a pay-for-performance program into state funded health care programs.
• $2.5 million to develop a chronic care information system with the ultimate goal being the implementation of a nationally recognized and proven chronic care model.
• $719,000 to promote health literacy by enhancing the delivery of health-promotion and risk-reduction messages.
• $1 million to reduce health disparities by increasing the number of health professionals equipped to address the needs of racial and ethnic minorities.
Overall Wellness Initiatives
• Ban smoking in all Pennsylvania workplaces, restaurants, and bars.
• $6.5 million to increase the number of school breakfasts served and to provide incentives for schools that adopt best-practice nutritional guidelines.
• $30,000 for elementary school teachers to integrate healthy living concepts into lesson plans.

DEPARTMENT OF PUBLIC WELFARE
The Commonwealth’s General Fund total expenditures are projected to grow by $948 million or 3.6%, while DPW’s General Fund spending will grow by $367 million or 3.9%, which is in line with the Commonwealth’s overall budget growth.

Of the $212 million in supplemental appropriations requested by the Governor, $201 million or 95%, are in the Department of Public Welfare. The largest supplemental requests are for Medical Assistance.
Despite constrained general fund spending, the Department’s budget still contains expansion in program spending and does not include any client or service reductions in the MA service program.
Medical Assistance

The most significant issues in the department’s budget relates to Medical Assistance. This is part of a NATIONAL TREND. Caseloads are increasing. Pennsylvania has the 3rd highest elderly population and the fastest growing number of persons over 85. While the elderly and disabled are only 34% of the total Medical Assistance population, they account for 65% of the Medical Assistance dollars.

The current demographics for the Medical Assistance system are as follows:

“Big 5” Medical Assistance Appropriations:

Medical Assistance Cost Containment Initiatives
The Administration is proposing to support the 2007/08 Medical Assistance program through a number of Cost Containment initiatives:

1) Redirect Voluntary Managed Care: Clients will be moved from the Voluntary Managed Care program to fee-for-service system. $65 million savings
2) MCO Pharmacy Carveout: Consolidate Medical Assistance pharmacy services in the Fee-for-Service system. $45 million savings ($94 million savings when fully implemented)
3) Healthy Women Waiver: Additional federal revenue estimated at $24.5 million will provide preventative health services for additional women
4) Behavioral Health Service Expansion: Expand the availability of behavioral health services through the Managed Care program. $25 million savings
5) Change Managed Care Contracts: $315 million savings when changes are made to MCO contract payment terms, including performance incentives
6) Nursing Home Resident Assessment Schedule: Change resident assessment from monthly to quarterly $30 million savings
7) Reduce Hospital Payments: $33 million savings due to Prescription for PA initiative Dual Eligible Drug Costs

The Medicare Part D Prescription Drug Program took effect in January 2006. The new program moved persons who are dually eligible for Medicaid and Medicare into a new Medicare Part D prescription program. In order to fund the prescription drug costs of these dual eligibles, the Federal Government is requiring States to pay a portion of those costs. This is referred to as the “clawback” provision of the Medicare Part D program. The Administration separates these costs from the existing MA Outpatient appropriation. For FY 2007/2008, the Commonwealth’s clawback costs are $325 million, a savings of $13 million over current year payments.

Medical Assistance Rates
The Governor proposes the following rate increases for Medical Assistance providers:

1. Managed Care Organizations: 3% with the opportunity to earn an additional 2.5% increase based on performance
2. Nursing Homes: 2%
3. Hospitals: 2%

Reforming the Long Term Care System
In order to meet the challenge of the Commonwealth’s growing elderly population, the Governor is proposing to use over $17 million in state funds to expand long-term living options and the overall long-term living system.

Beginning with home and community based service, the Governor is proposing to use $12.7 million to serve an additional 2,200 individuals over the age of 60 and an additional 1,000 individuals with disabilities under the age of 60 in the Medicaid waiver program.

The Nursing Home Transition program will receive $3.8 million to build up long term counseling and transition support services for individuals who are able to be served safely in a home and community based setting.

In order to educate the public on this initiative, $1.5 million will be used for an outreach campaign to help Pennsylvanians make informed decisions. To help balance of the continuum services, the Governor is proposing $3.7 million for the development of domiciliary care homes; $400,000 for additional housing; and $4.7 million to encourage a balance between institutional care and home and community based care over the next five years.

Income Maintenance
When compared to FY 06/07, the amount requested for Cash Grants in FY 07/08 will be a significant decrease over the current year. The $157 million decrease is due to moving the TANF and former TANF recipients childcare program to a new line item, Childcare Assistance. This will allow the Governor to monitor the quality and availability of childcare for TANF and low income families.

Due to Federal changes to TANF reauthorization, the Commonwealth was required by October 1, 2006 to have 50% of its TANF clientele in some kind of federal approved work activity. In a recent DPW briefing, Secretary Richman announced that Pennsylvania was just shy of the 50% goal. States will not face a penalty for non compliance until State FY 2009/10.

The appropriation for Supplemental Grants for the Aged, Blind and Disabled will increase by $2.6 million, including $1.6 million to offset additional caseload costs.

There is no provision for a state supplement for LIHEAP for 2007/08.

Mental Health and Mental Retardation
The Mental Health program will receive a significant increase of 30.1 million over current year funding. Part of the $30.1 million is for a new initiative, Expanding Community Mental Health Services, which will provide 200 individuals currently residina in state hospitals an opportunity to live in a home and community based program. In addition, 2,000 families of children with mental illness will receive respite care services.

The Governor recommends a 3% cola for Mental Health Services.

The Mental Retardation program will receive substantial increases under the Governor’s budget: $78.5 million or a 9.9% increase for Community Mental Retardation Services and nearly $14.5 million or a 13.7% increase for Early Intervention.

The Mental Retardation appropriation includes a $28.9 million initiative, Expanding Community Mental Retardation services to provide home and community based mental retardation services for 3,428 additional individuals on the waiting list.

The Early Intervention appropriation includes $8.3 million to provide early intervention services to an additional 1,529 children ages birth to 3 years of age.

$1.9 million has been proposed to serve an additional 100 persons with Autism in a home and community based care system.

Community MH/MR Programs and the Early Intervention program contain funding for a 3% cost - of - living adjustment.
Services for Children

Child Welfare funding will increase from $881 million in 2006-07 to $948 million 2007-08. This includes $56.2 million to support county needs-based budgets.

In 2007-08, the TANF Child Welfare Transition appropriation will be reduced by $30 million from current year funding. The phase-out of the funds is part of the initiative the Administration proposed in the 2005-06 budget.

In addition, the Governor has proposed to strengthen the Early Education and Care Initiative by providing a $19 million increase to Child Care Services. These funds will provide additional subsidized child care services to 400 low – income children and improve accountability of early learning experiences through the Keystone Stars programs.

The Nurse Family Partnership program will receive an additional $587,000 to provide services to 184 additional families.

In order to monitor the quality and availability of childcare for TANF and former TANF families, the Governor has proposed a new line item, Childcare Assistance. This new line item is composed of $157 million transferred from the Cash Grant appropriation and $52 million in funding to strengthen the existing program, including funding for a $10.8 million initiative to increase provider rates to ensure access to child care.

Other Social Programs
The Governor’s budget provides substantial increases in General Fund appropriations for Services to Persons with Disabilities and Attendant Care, as well as Home and Community Based Services in the Tobacco Fund.
• $2.9 million has been provided in the Persons with Disabilities appropriation to provide services to an additional 405 persons.
• $3.7 million is recommended to provide Attendant Care to an additional 595 individuals.
• Both the Persons with Disabilities and Attendant Care appropriations contains funds for a 3% COLA.
In addition, Domestic Violence, Rape Crisis, Breast Cancer Screening, Legal Services, and Homeless Assistance will receive a 3% COLA.

DEPARTMENT OF AGING
The Governor proposes funding all general fund line items, with the exception of the Alzheimer’s Outreach program, from the lottery fund. This would save the general fund in excess of $19.0 million.
Family Caregiver Support Program

The Family Caregiver Support Program appropriation contains a small increase to provide for a 3 percent cost-of-living adjustment. This program is also supported by $10 million in federal funds. The program assists families who maintain frail relatives in their home. Working through AAA’s, the program provides benefits counseling and, depending on income, financial assistance including supplies, services and home adaptations and devices. It is anticipated that 5,545 families will receive these services in 2007-08.
Alzheimer’s Outreach Services

The Governor’s budget includes $250,000 for Alzheimer’s Outreach Services. Federal Funds used for Memory Loss programs are no longer available, however it is anticipated that Pennsylvania will receive $350,000 in federal funds for an Alzheimer’s Demonstration Grant program.
Pre-Admission Assessment

Funding for the Pre-Admission Assessment Program is increased by 34 percent for a total of $10.3 million in lottery funds, in the Governor’s recommended budget. This increase reflects the transfer of assessment activities from PENNCARE to maximize federal earnings. This nursing home pre-admission screening program helps older Pennsylvanians and their families determine the least restrictive environment needed and assists them in securing and managing intensive in-home services tailored to their needs. It is anticipated that assessments and referrals to community services will increase in 2007-08. Referrals to nursing homes are expected to decrease.

PENNCARE
This budget proposal includes a $15.0 million increase in the lottery funded PENNCARE appropriation to continue the current Attendant Care Program and provide services to an additional 346 recipients. Funds are also used for Older Adult Protective Services to investigate suspected elder abuse reports. The increase would also be used to provide a 3 percent cost of living adjustment for direct care workers and to provide services as a result of nursing home transition activities.

In addition, the Governor is proposing an initiative – Reforming the Long-Term Living System – aimed at reducing reliance on institutional long-term care and promoting growth of high quality home and community-based services. The PENNCARE appropriation includes $4.8 million to fund this initiative.
Home and Community-Based Services – Tobacco Settlement Fund

A total of $21.3 million in Tobacco Settlement funding is included in the Governor’s budget to provide home and community-based services to older Pennsylvanians. This includes an increase of almost $2.0 million to continue current home and community-based services and expansion to additional recipients, as well as nursing home transition activities. In addition, $4.6 million is proposed to be used for the Governor’s Reforming the Long-Term Living System initiative, to reduce reliance on institutional care. Federal funds in the amount of $2.4 million are also provided for this initiative.

Reforming the Long-Term Living System
The Governor’s budget includes a total of $12.9 million in lottery, tobacco and federal funds under the Department of Aging to fund an initiative to reduce reliance on institutional long-term care and promote growth of high quality home and community-based services. An additional 2,200 individuals over the age of 60 will be able to remain in their homes or a community-based setting rather than moving to a nursing home.

Pennsylvania has the third oldest population of any state, and the fastest growing segment of this population is over age 85. The demand for services is expected to grow over the next several years until the 85+ population stabilizes in 2011.

Providing services for the rapidly growing number of seniors, especially those 85 and older, will present a major challenge for the commonwealth in the coming years. The number of seniors using home and community-based services has increased 70 percent since 2002-03. An additional 14 percent increase is projected in the current year.

The problem will come to a head in the near future, as 2006 was the year that the first wave of baby boomers, many struggling to care for elderly parents, joined the ranks of the 60-plus year olds. By the year 2020, one in every four Pennsylvanians will be age 60 or older.

PACE and PACENET
The Pharmaceutical Assistance Program provides help to qualified older Pennsylvanians who are 65 years of age and over and whose cost of drugs is a burden to them. The program is financed by the Lottery and Tobacco Settlement Fund revenue.

The commonwealth has expanded its PACE and PACENET programs to make them compatible with and complementary to the new Medicare prescription drug program. PACE Plus Medicare enables cardholders to take advantage of the features of both PACE and the new Federal Medicare Part D benefit by filling the gaps encountered by cardholders in Medicare Part D including deductibles, the donut hole phase of no Medicare coverage, and co-payment differentials between the Part D plan coverage and the PACE and PACENET copayments. PACE Plus pays the Medicare premiums for Part D coverage PACE cardholders, while PACENET cardholders pay the Part D premium.
With a heavier reliance on lottery funds and a reduced use of tobacco settlement funds, the Governor’s budget proposes funding for 2007-08 that will allow the average number of seniors covered by PACE, PACENET or PACE Plus Medicare to rise to 357,725 which represents an additional 32,000 seniors. This represents a 10 percent increase over those receiving services in 2006-07 and a 60 percent increase since 2002-03. The budget includes $276.4 million in state funds to continue these programs.
CORRECTIONS

In the Governor’s proposed budget, state spending for the Department of Corrections would reach nearly $1.6 billion, an increase of $155.4 million or 11% over current year funding level.
Increases in the daily inmate population have required the Department to request a $163 million increase for the State Correctional Institutions. The increase is necessary to house an offender population that reached nearly 44,365 inmates in December 2006. Currently, there are 4,313 inmates in excess of operational bed capacity. Inmate population forecasts show an average increase of 1500 inmates per year over the next five fiscal years. Of the $163 million, $11.7 million is for The Community Corrections Centers, which will also see a capacity increase and require additional housing unit needs.
The 2007/2008 cost per inmate is projected at $34,021, an increase of $3,185 per day per inmate over current year funding level. The increase in the inmate population is the biggest challenge facing the Department and the Commonwealth. In order to begin to deal with prison overcrowding, the Governor is reactivating SCI Pittsburgh, with an initial capacity of 750 beds by July 2007. The cost to reopen SCI Pittsburgh is $32.5 million.

The Governor has proposed two new initiatives to reduce prisoner recidivism. The Vocational Education Improvement initiative will receive $2.4 million to better equip offenders with vocational skills to increase their chances at employment and lessen their chance of recidivism. Another initiative, Reintegration Program, will receive $792,000 to enhance inmate skills and treatment in order to improve their chances of success outside of the prison environment.

As the inmate population continues to rise so do the medical care expenses for the inmates. The Department has requested a $12.6 million (6.6%) increase in the medical care appropriation for the continuation of current medical services.

GENERAL FUND
2007-08 Fiscal Year
The Governor’s proposed general fund budget contains modest expenditure growth of 3.6% or $27.27 billion for the 2007-08 fiscal year. However, he anticipates revenue growth to be only 2.25% so he proposing a tax increase of $921 million to balance the budget.
The tax increase revenue will primarily come from a 1% increase in the sales tax. Each 1% of sales tax brings in over $1.4 billion in revenue, the Governor’s plan, however, diverts $420 million to Property Tax Relief Fund so only $826 million goes to the General Fund. The remainder of the tax proposal will be detailed later in this report.

2006-07 Fiscal Year (Current Year)
The Governor’s budget book shows two changes to the 2006-07 fiscal year. First the amount of requested supplemental appropriations increases from $39.5 million expected in December in his mid-year briefing to $211.6 million. These additional supplementals are entirely for spending in the Public Welfare realm and will be listed elsewhere in this report. The second change is there is $161.7 million more revenue expected in this fiscal year. This revenue results from a reduction of $95 million in the amount of money expected for tax refunds and an expected revenue surplus of $66.7 million at the end of the fiscal year.

TAX CHANGES 2007-08
In order to balance the budget the Governor is recommending $921 million in additional taxes and revenues. As the chart below shows 90% of the expected new revenue is from a 1% increase in the sales tax.

Sales Tax The sales tax increase should raise about $1.424 billion annually. The increase would be effective July 1, 2007. Since there is a one month delay from the time the sales tax is collected by the merchant and when it is sent to the Commonwealth the first year will only contain 11 months of collections. The Governor’s proposal transfers $420 million to the Property Tax Relief Fund, which leaves $826 million for the General Fund. For all subsequent years half of this sale tax increase or about $700 million will go into the Property Tax Relief Fund.

Transfer from Oil Company Gross Profits Tax The Governor’s transit plan creates a new tax that will be utilized to fund that proposal. There is, however, a small impact on the General Fund: If oil companies are going to be paying this new tax they will be exempted from the CNI collected into the General Fund. This transfer of $17 million simply makes the General Fund whole.
Cigarette Tax There is a10 cents a pack increase proposed for the cigarette tax. That increase is expected to raise $49.7 million.

Other Tobacco Products A new tax is proposed on other tobacco products such as snuff, pipe tobacco and cigars. These items are current only taxed under the sales tax and not by an excise tax.
Abusive Tax Shelters The Governor continues his campaign against abusive tax shelters used by corporations to avoid paying taxes to Pennsylvania. This proposal is expected to raise $10 million this year. There will be additional costs to the Department of Revenue in order for them to raise this additional money.

Educational Improvement Tax Credit A small increaqe of $1.4 millihn ip propmqdd bhr phir popular tax credit.

Fee Increases Within DEP Various fees that have not been adjusted in some time are slated to be raised to bring in an additional $9.1 million. Fees such as inspection of dams are the fees to be raised here.

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