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Fiscal Analysis

4. Fiscal Analysis

This section identifies the savings as well as the costs associated with the recommendations. A conservative approach has been taken in the calculation of these fiscal estimates; in all situations where exact implementation costs cannot be known at this time, a high-end assumption is made. For the LSG1 recommendations, the current process costs are compared with costs for the changes being recommended to derive the fiscal impact resulting from the conversion. The major cost factors involved in the LSG2 recommendations are also identified, and some projections are made.

Costs included in this fiscal analysis, especially those for initiatives beyond the next two years, are difficult to calculate in light of the rapidly changing technology and the decreasing costs of implementing these technological changes. One must keep in mind that falling prices for this technology could result in a significantly different fiscal environment five years from now. Also, the recommendations listed above have much greater potential for affordability by the state when taken as a package, rather than approaching such initiatives as individual projects. There are potentially significant, but unquantifiable values to be added in terms of savings - like fraud prevention and reduction of health care costs. The non-financial impact must also be considered, such as the increased convenience to both consumers and providers.

4.1. LSG1

The current Lone Star EBT card is a magnetic stripe card. The other services recommended for addition to the Lone Star card in the LSG1 model use the same technology. These are Medicaid eligibility verification and child support payments for the non-direct deposit population. If the developments currently underway for WIC result in the use of chip technology and integration with the Lone Star Card, the new card would be a hybrid card, used in the WIC pilot area only during the timeframe for LSG1. The hybrid would use magnetic stripe technology to deliver TANF and food stamp services and microprocessor (chip) technology to deliver WIC services.

4.1.1. Med ID

The new electronic process for Med IDs would produce significant cost reduction through the elimination of the current paper card production and mailing costs. In addition, transaction fees, currently included in the NHIC contracted cost to the state for eligibility checks, could be eliminated in favor of a lower cost transaction fee that would be charged by the EBT host vendor. There would be an increase in number of transactions and the total fees collected from third-party processors for eligibility database access. This combination of changes would net substantial fiscal improvements.

The fiscal analysis focuses on these savings as well as the costs to convert the existing paper-based Med ID process to an electronic process. The complete fiscal analysis for Med ID is a part of the Medical Identification Analysis, Appendix B. A summary of that analysis is included here.

A number of related factors would lower costs to state funds or would increase state revenue. In addition to the savings that would result from the elimination of monthly mailings, there would be a small decrease in staff employed to handle undeliverable Med ID cards and route updated information to appropriate workers.

The existing process was examined to identify the technical infrastructure, labor, and materials required to produce and mail the 1.3 million paper Med IDs each month, along with associated costs. That is the biggest expense to the current system. Those costs are estimated to reach $5.6 million a year, and would be eliminated if the electronic Med ID were implemented. 57

It has not been possible to obtain specific numbers regarding the volume of eligibility checks for which the state is incurring a cost from NHIC. The total number of transactions involved is believed to be about 24.0 million per year. 58 That figure includes all transactions, whether the inquirer is using a third party processor or not. Although the fees related to these transactions are no longer shown as a separate line item, the figures in the contract do include a historical agreement of 15 cents per transaction. If NHIC is no longer the point for eligibility checks, the state should save about $3.6 million a year in contract costs. Eligibility checks would now be made against the new Medicaid database at TDHS. The vendor that functions as the host for the EBT system also charges a transaction fee to access the database, and the vendor is expected to do so if the Med ID database is lodged there, as recommended. However, the transaction fee charged by the EBT vendor is an estimated nine cents, compared to the NHIC charge of 15 cents. The state would continue the practice of charging third-party processing vendors a fee for the data access, which allows them to sell a service to providers.

The number of monthly transactions to the new TDHS database for eligibility verification through third-party processors is expected to increase from the almost 1.0 million a month currently being submitted to NHIC, to about 2.5 million a month. 59 With the expansion of the third-party processor transactions, the revenue from the 7.5 cents fee, less the fees currently being collected, would be over $1.6 million a year. These savings and revenue are included in Exhibit 8.

Exhibit 8
ANTICIPATED REVENUE/SAVINGS
USING PROPOSED LONE STAR/MED ID CARD
Savings/Revenue Item Annual Amount
Monthly Printing and Mailing of Paper Med ID $ 5,600,000
Elimination of Transaction Fees to NHIC $ 3,600,000
Income to State From Third-party Processor Transaction Fees, at 7.5 Cents per Transaction $ 1,620,000
Staff Costs (4 FTEs) $ 93,118
Total Annual Revenue/Savings $10,913,118

The transition from the old to the new system would involve several cost elements: one-time software conversion, as well as on-going software maintenance; initial issuance of the new card to Medicaid recipients that do not already have a Lone Star card; and on-going card issuance/replacement. Costs related to the automated voice response system (AVRS) and transaction fees for the EBT vendor would be included, as well as increased TDHS staff to design and develop the system. Additionally, there would be a twice-yearly mailing required to deliver various program information to clients beginning in 2004. These costs are included in Exhibit 9.

Exhibit 9
TRANSITIONAL AND RECURRING COSTS FOR THE
PROPOSED LONE STAR/MED ID CARD
Cost Item Cost
Transitional Costs:
Initial Card Issuance60 $1,551,975
Software Programming, Specification Development61 1,945,000
Total Transitional Costs $3,496,975
Recurring Costs:
New Card Issuance
- Newly Eligibles 62
- Replacements63

$ 512,000
409,920
Required Mailings64 900,000
Software Maintenance65 185,250
AVRS66 1,000,000
Transaction Fee to EBT Contractor67 2,160,000
New Staff 68 (6) 420,000
Total Recurring Costs $5,587,170

To use the electronic verification process, health care providers could own their own card reader, contract with a third-party processor to access the database directly, or use the toll-free number to activate a free voice response system. There are currently five third-party processing companies approved and operating in Texas. They typically charge providers a one-time subscription fee, a monthly access fee, and a fee per transaction. The average subscription fee is about $500 - $600, and the monthly fee for an average of 500 transactions is $100 - $200. These fees are not paid by the state, but are included here as a point of reference. 69 This average monthly charge to the provider for the third-party processor's service could easily be compensated by one or two fewer claims being rejected.

Funding for this system would be through a combination of state and federal funding for Medicaid administration. The fiscal impact summary is shown in Exhibit 10.

Exhibit 10
FISCAL IMPACT SUMMARY
FOR THE PROPOSED LONE STAR/MED ID CARD
Fiscal Year Savings to General Revenue Fund Savings to Federal Funds Cost to the General Revenue Fund Cost to Federal Funds Net Savings to
the General Revenue Fund
Net Savings to Federal Funds Change in FTEs
2002 $ 0 $ 0 ($ 105,000) ($ 315,000) ($ 105,000) ($ 315,000) 6
2003 2,825,246 3,540,739 (1,597,232) (4,700,497) 1,227,415 (1,159,758) 2
2004 4,843,280 6,069,839 (1,945,226) (3,675,678) 2,898,054 2,394,161 2
2005 4,843,280 6,069,839 (1,945,226) (3,675,678) 2,898,054 2,394,161 2
2006 4,843,280 6,069,839 (1,945,226) (3,675,678) 2,898,054 2,394,161 2

Additional, but not quantifiable, savings would accrue to local taxpayers, as a result of publicly supported hospitals being able to submit a more timely Medicaid claim. Claims to Medicaid must be submitted within certain time limits, otherwise the client or the provider absorbs the cost. 70 If a hospital can determine that Medicaid eligibility has been determined on a new applicant in time to submit a timely claim, then there is a savings to the local tax budget. The new card system, and the ability to access the DHS database, would help providers with more timely and accurate claims.

4.1.2. Child Support Payments

The electronic card process for child support payments would produce cost reduction through elimination of the current paper warrant production and mailing costs. This fiscal analysis focuses on these savings as well as the costs to convert the existing paper-based process to an electronic process. To do this, the existing process was examined to identify the technical infrastructure, labor, and materials required to produce and mail the paper warrants along with associated costs.

Currently, a tape containing child support payment information is sent from the OAG to the CPA. There, the information is processed through the Uniform Statewide Accounting System (USAS). The system updates the payment subsystem then generates a print file. The printed paper warrants are then shipped back to the OAG, where they are mailed to the recipients.

The conversion would occur at the point the file is currently sent to the printer to produce paper warrants. That file information would be sent instead to an EBT processor who would deposit the appropriate funds into accounts set up for recipients who would access those funds through ATM machines using their Lone Star Card. The process flow for both the current and the proposed systems can be found in Exhibit 11.

Exhibit 11
CURRENT AND PROPOSED PROCESSES FOR CHILD SUPPORT PAYMENT

Current and Proposed Processes For Child Support Payment

Currently, about 6.5 million child support warrants are produced and mailed each year, with an estimated cost of $2.3 million for fiscal year 2000. The cost for that process is shown in Exhibit 12. These figures show an average cost of approximately 35 cents to produce and deliver each paper child support warrant in Texas. 71

Exhibit 12
CURRENT CHILD SUPPORT WARRANT
PRODUCTION AND DISTRIBUTION COSTS FOR FISCAL 2000
Cost Item Total Cost Cost Per Payment
Warrant Production $ 130,664 $0.020
Disbursement Specialist 49,473 0.008
Cashier 18,240 0.003
Temporary Staff 14,607 0.002
Postage 1,724,767 0.264
Envelope 111,849 0.017
Stuffers 261,329 0.040
Total $2,310,928 $0.354
Source: Office of the Attorney General. 72

The transition to the new system would involve a one-time software conversion cost. The EBT2 host application software is designed to track and disburse funds from up to 18 different cash accounts through a single card. It also includes the software module necessary for the system to interface with ATM networks. The software is table driven. Consequently, there should be only minimal conversion costs to use the EBT2 host software for the child support application. It is assumed that this work would be outsourced. It would require an estimated 138 hours, at an average cost of $100 per hour, for a total of $13,800. 73 In addition to the conversion costs, there will be a software licensure cost to add other, non-TDHS programs to the EBT2 system. That cost would be up to $1 million, but it is possible that a lower fee could be negotiated.

It is estimated that 70 percent of approximately 544,000 monthly child support warrants could be delivered via direct deposit, for a total of about 381,000 monthly payments that would be delivered by that process. 74 The cost to CPA to perform that function would be of negligible difference from the cost for the current warrant function.

The state would incur a cost of roughly $1.22 per card for production and mailing of a magnetic stripe card. That figure is calculated based both on Texas' experiences with costs of mailing Med ID cards (about 31 cents per card), and Texas' current EBT2 contract cost for card production of 91 cents per card. 75 It is estimated that the state would initially issue 121,273 cards to those child support payment recipients who do not have bank accounts or do not choose to use direct deposit, for a total initial issuance cost of about $147,953. On-going issuance (new clients, lost and replaced cards) would cost about $20,000 per year.

The EBT2 host vendor charges an estimated nine cents for processing each transaction that hits the EBT2 database. Since the child support payment system would be based in the EBT2 system, the state will be charged that fee. 76 Based on the estimated number of child support recipients who would receive payments using the card each month, and the fact that about 50 percent of those recipients receive two payments a month, the transaction cost is estimated to be about $196,000 per year. There is also a per transaction fee of 2.7 cents charged to the state by retail grocers each time a Lone Star Card is used in the store. 77 Assuming that each child support recipient used the card at the grocers once a month, those fees would reach about $53,000 a year.

TDHS estimates that four additional staff would be required in order to support this recommendation. These staff would perform the same tasks and functions as the EBT2 staff. The cost of salaries and benefits is estimated to be $280,000 per year. The costs and savings elements of this recommendation are included in the following Exhibit.

Exhibit 13
TRANSITIONAL AND RECURRING COSTS FOR THE
CHILD SUPPORT PAYMENT RECOMMENDATION
Cost Item Cost
One Time Transitional Costs  
Software Conversion $13,800
Transactive Licensure Fee $1,000,000
Initial Card Issuance $ 147,953
Total Transitional Costs $1,161,753
Annual Recurring Costs  
On-Going Card Issuance $19,764
Transaction Fees to Retailers 52,919
Transaction Fees to EBT Host 196,453
Additional Staff (4) 280,000
Total Recurring Costs $ 549,136

The startup costs of about $1.2 million to convert child support payments to an electronic system would be incurred in fiscal 2003, since the statewide rollout is to begin September 1, 2003. The recurring costs in fiscal 2004 and beyond would be just over a half million dollars. The fiscal impact summary is shown in Exhibit 14.

Exhibit 14
FISCAL IMPACT SUMMARY
FOR THE CHILD SUPPORT PAYMENT RECOMMENDATION
Fiscal Year Savings to General Revenue Fund Savings to Federal Funds Cost to the General Revenue Fund Cost to Federal Funds Net Savings to the General Revenue Fund Net Savings to Federal Funds Chg. In FTEs
2002 $0 $0 $0 $0 $0 $0  
2003 0 0 ( 584,981) ( 856,772) ( 584,981) ( 856,772) 4
2004 924,371 1,386,557 ( 219,648) ( 329,488) 704,723 1,057,069 4
2005 924,371 1,386,557 ( 219,648) ( 329,488) 704,723 1,057,069 4
2006 924,371 1,386,557 ( 219,648) ( 329,488) 704,723 1,057,069 4

The recommendation is that the recipient of the child support payment pay the ATM transaction fee of up to $1.25 to withdraw the payment (or less, if the state negotiates a lower rate). If the state were to share in the burden of this fee, it would be necessary to recalculate the net savings, taking that cost into consideration. The state may choose to negotiate with retail grocers for free use of the card by child support payment recipients to purchase groceries.

4.1.3. LSG1 Summary

The following table summarizes the net fiscal impact to the state as a result of implementing all the recommendations for LSG1. The figures in Exhibit 15 do not include, in the outer years, costs of upgrading to LSG2, beginning in fiscal 2006. This table represents the fiscal situation if only LSG1 were implemented.

Exhibit 15
LSG1 FISCAL IMPACT SUMMARY
FOR THE PROPOSED MED ID AND CHILD SUPPORT PAYMENT RECOMMENDATIONS
Fiscal Year Savings to General Revenue Fund Savings to Federal Funds Cost to the General Revenue Fund   Cost to Federal Funds Net Savings to the General Revenue Fund   Net Savings to Federal Funds   Chg. In FTEs
2002 0 0 $ ( 105,000) $ ( 315,000) $ ( 105,000) $ ( 315,000) 6
2003 $ 2,825,246 $ 3,540,739 (2,182,213) (5,557,269) 642,434 (2,016,530) 6
2004 5,767,651 7,456,396 (2,164,874) (4,005,166) 3,602,777 3,451,230 6
2005 5,767,651 7,456,396 (2,164,874) (4,005,166) 3,602,777 3,451,230 6
2006 5,767,651 7,456,396 (2,164,874) (4,005,166) 3,602,777 3,451,230 6