BILL ANALYSIS                                                                                                                                                                                                    

                                 SENATE HEALTH
                               COMMITTEE ANALYSIS
                        Senator Elaine K. Alquist, Chair

          BILL NO:       AB 1653                                      
          AUTHOR:        Jones                                        
          AMENDED:       As Introduced                               
          HEARING DATE:  June 30, 2010                                
                   Medi-Cal: hospitals: quality assurance fee


          Establishes a quality assurance fee (QAF) on specified  
          private general acute care hospitals, as a condition of a  
          hospital participating in state funded health insurance  
          programs other than the Medi-Cal Program.  

                             CHANGES TO EXISTING LAW  

          Existing federal law:
          Establishes the Medicaid program to provide comprehensive  
          health benefits to specified groups of low-income persons.   
          Requires that provider fees levied by states must conform  
          to specified standards and criteria.  Requires that rates  
          that states pay to providers must comply with specified  
          federal law and standards.  

          Establishes that the federal government will provide a  
          match for the Medicaid program, termed the federal medical  
          assistance percentage (FMAP), which varies by state and  
          territory according to a specified formula.  Under the  


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          American Reinvestment and Recovery Act (ARRA), provides a  
          temporary enhanced FMAP for states, retroactively from  
          October 1, 2008 through December 31, 2010.  Establishes a  
          base rate of 6.2 percent, plus an added amount calculated  
          by a specified formula for determining the temporarily  
          increased FMAP.
          Existing state law
          Establishes the Medi-Cal program as California's Medicaid  
          program, administered by the Department of Health Care  
          Services (DHCS), which provides comprehensive health care  
          coverage for low-income individuals and their families;  
          pregnant women; elderly, blind, or disabled persons;  
          nursing home residents; and refugees who meet specified  
          eligibility criteria. 
          Imposes a provider fee, termed a quality assurance fee, on  
          hospitals, except for designated public hospitals, for a  
          period that would end on December 31, 2010.  Requires acute  
          care hospitals to pay the fee as a condition of  
          participation in state-funded health insurance programs,  
          other than the Medi-Cal Program.  

          Requires revenue from the fee to be used only for the  
          following specified purposes:
                 Administrative costs incurred by DHCS for  
                 Health coverage for children up to $80 million per  
                 Grants to specified public hospitals and  
               supplemental payments to private acute care hospitals,  
               as specified;
                 Increased payments to Medi-Cal managed care (MCMC)  
               plans to be passed through to hospitals;
                  Increased payments to Medi-Cal mental health plans  
               to be passed through to hospitals.

          Makes the fee effective upon federal approval for all or a  
          portion of the 2009, 2010 and 2011 federal fiscal years,  
          and sunsets the fee on January 1, 2011.  Requires DHCS to  
          submit state plan amendments to the federal government and  
          seek any necessary approvals to implement a system of  
          supplemental payments for hospitals, as specified.  

          Provides, effective January 1, 2011, that there shall be a  
          specified fee assessed on hospital managed care days and  


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          provides that it will take effect only if a subsequent  
          statute, as described, is enacted to take effect on or  
          after January 1, 2011.  Directs managed care plans to pass  
          through to hospitals designated payments from the state  
          made out of revenues from the provider fee.

          Under the Local Health Care District Law, provides for the  
          formation of local health care districts.

          This bill:
          Establishes a fee, termed a "quality assurance fee" (QAF)  
          on specified private general acute care hospitals, as a  
          condition of participation in state funded health insurance  
          programs other than the Medi-Cal program.  Requires private  
          general acute care hospitals to pay the QAF from January 1,  
          2011 until June 30, 2011.  Exempts specified district  
          hospitals, county and University of California hospitals,  
          specialty hospitals, small and rural hospitals and certain  
          long-term care hospitals.

          Requires the fee and all federal funds to be deposited in  
          the Hospital Quality Assurance Revenue Fund and to be  
          continuously appropriated. 

          Provides for an unspecified method of calculating the  
          amount of the fee and an unspecified method of collecting  
          the fee.  Requires the fee proceeds plus federal Medicaid  
          funds, to be used exclusively for purposes stated in  
          existing law:
                 Administrative costs incurred by the DHCS for  
                 Health coverage for children up to $80 million per  
                 Grants to specified public hospitals and  
               supplemental payments to private acute care hospitals,  
               as specified;
                 Increased payments to Medi-Cal managed care (MCMC)  
               plans to be passed through to hospitals.
                  Increased payments to Medi-Cal mental health plans  
               to be passed through to hospitals; 

          Requires the director of DHCS to seek federal approvals or  
          waivers as necessary and obtain federal financial  


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                                  FISCAL IMPACT  

          According to the Assembly Appropriations Committee  
          analysis, AB 1653 would have the following fiscal impacts:
                 A one-time increase of $1 billion in federal  
               funding for the six-month period, January 1, 2011  
               through June 30, 2011. This estimate is based on AB  
               1383, which is expected to generate an annual $2  
               billion in federal funding, if approved by the federal  
               Centers for Medicare and Medicaid (CMS). 
                 Unknown costs in the range of $200,000 (50 percent  
               General Fund) to the California Department of Health  
               Care Services to administer the QAF until June 30,  
                 Major General Fund pressure is created when the QAF  
               expires. General Fund pressure is created to continue  
               increased Medi-Cal payments for inpatient and  
               outpatient rates paid to hospitals. The increased  
               rates under AB 1383 range from 50 percent to 100  
               percent of baseline rates.
                 The bill contains blanks for calculation of the fee  
               charged to hospitals as well as the distribution  
               method of the continuous appropriation.  The author  
               and sponsor indicate that specific information is  
               pending until additional direction from the federal  
               government about AB 1383 is provided.  For example,  
               dates in AB 1383 may need to be modified because of  
               delays in implementation. 

                            BACKGROUND AND DISCUSSION  

          According to the author, AB 1653 would extend the Medi-Cal  
          hospital provider fee to draw down federal funds for  
          supplemental payments to help hospitals that provide  
          services to Medi-Cal beneficiaries.  The author argues that  
          AB 1653 would allow the state to take maximum advantage of  
          an extension of the enhanced Medi-Cal federal match rate  
          for an additional six months, if the extension is enacted  
          by Congress.  The author notes that the enhanced rate was  
          increased from 50 to 62 percent when the formula contained  
          in ARRA was signed into law by President Obama last year.   
          The author states that the hospital fee program enacted by  
          AB 1383 (Jones), Chapter 627, and Statutes of 2009, takes  


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          advantage of this increased federal funding to supplement  
          Medi-Cal payments to hospitals and provides the state with  
          $320 million annually for children's health care coverage.

          The author argues that the current fiscal crisis is  
          stressing those hospitals which serve the most vulnerable  
          populations. Hospitals report that Medi-Cal funding is more  
          than $4.2 billion short of covering costs.  California's  
          Medi-Cal program spends less per enrollee that any other  
          state and the hospital reimbursement rate is among the  
          lowest in the country.  The author maintains that years of  
          low Medi-Cal reimbursement rates, combined with the effects  
          of the recession and an increase in the number of uninsured  
          is threatening the stability of the hospital safety-net.   
          According to the sponsors, the current rate of 1.9 hospital  
          beds per 1,000 population ranks California 49th nationally.  

          Federal law authorizes states to levy fees on health care  
          providers if the fees meet federal requirements.  Many  
          states (including California) fund a portion of their share  
          of Medicaid Program costs through a fee on health care  
          providers.  Under these funding methods, states collect  
          funds (through fees, taxes, or other means) from providers,  
          which can then be matched with federal funds.  The  
          resulting combination of state and federal funds is then  
          used to increase Medicaid reimbursement to providers. 

          Federal law has specific requirements governing provider  
          fees.  To prevent states from only levying an assessment on  
          certain providers, federal law requires provider fees to be  
          "broad based" and uniformly imposed throughout a  
          jurisdiction, meaning that they cannot be levied on a  
          subgroup of providers, such as only those who are enrolled  
          in Medicaid programs.  States are prohibited from having a  
          provision that would "hold harmless" providers from the  
          impact of the fee, meaning the funds that an individual  
          provider is paid are returned to that provider.  As a  
          practical matter, the federal requirements result in  
          provider fee programs where some providers receive a net  
          benefit and others do not.

          AB 1383 Chapter 627, Statutes of 2009 requires hospitals  
          that elect to participate in state-funded health insurance  


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          programs other than Medi-Cal to pay a hospital QAF.   
          Certain hospitals are exempt from paying the fee, including  
          all designated public hospitals, long-term care hospitals,  
          small and rural hospitals, most special district hospitals  
          and certain specialty hospitals.  DHCS is authorized to  
          alter the fee amount within limitations if necessary to  
          achieve federal approval.  

          AB 1383 is estimated to generate $2 billion in annual fee  
          revenue, a portion of which is provided to public hospitals  
          as grants.  Of the funds to be raised, $320 million  
          annually is directed for health coverage to children and  
          funds for DHCS to administer the program.  The remainder is  
          to be matched with federal Medicaid funds at an enhanced  
          rate and will be distributed as supplemental payments to  
          private hospitals based on the degree to which they serve  
          Medi-Cal and uninsured patients.  AB 188 (Jones), Chapter  
          645, Statutes of 2009, appropriates up to $15 billion for  
          these payments and provided the administrative funds to  
          DHCS immediately upon enactment in October of 2009. 

          The Governor's 2010-11 budget assumes receipt of the AB  
          1383 funds before the end of the 2009-10 fiscal year.  DHCS  
          filed a state plan amendment in June of 2009 to preserve  
          retroactive application and to take maximum advantage of  
          the enhanced FMAP.  

          Federal actions
          The federal government must approve any specific provider  
          fee.  DHCS has submitted information regarding the existing  
          hospital provider fee to the appropriate federal agency,  
          the Centers for Medicare and Medicaid Services (CMS).  

          As a first step, CMS has agreed to amend the existing  
          Section 1115 Hospital and Uninsured Waiver terms that  
          prohibited California from imposing a hospital fee.  In  
          addition, CMS has sent a reply to the state requesting  
          additional information.  CMS did note that, based on the  
          information they had received, they did not believe that  
          the state proposal met federal hold harmless requirements.   
          CMS requested additional information and/or expressed  
          concern about a number of other issues.  CMS also provided  
          suggestions on how the state proposal could be modified to  
          meet federal requirements and gain approval.  The letter  
          did not address the issue of how many, if any, retroactive  


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          quarters would be approved.

          Currently, under ARRA, the FMAP for California is 61.59  
          percent, a significant increase over the base FMAP of 50  
          percent.  This increased FMAP expires on December 31, 2010.  
           Congress is actively considering extending the enhanced  
          FMAP provisions that were in ARRA.  The House dropped  
          provisions extending the FMAP before sending the  
          legislation to the Senate.  The Senate has restored  
          provisions increasing the FMAP, but at a reduced rate.  The  
          base increase authorized by ARRA is a 6.2 percent enhanced  
          match.  The Senate amendments extend the enhanced match for  
          two additional quarters, but they reduce it 3.2 percent for  
          one quarter and 1.2 percent for the following quarter.

          Related bills
          AB 511 (De La Torre) establishes a provider fee on  
          ambulance transportation services providers to increase  
          transportation rates paid on behalf of Medi-Cal patients.   
          AB 511 is in Senate Health Committee. 

          Prior legislation
          AB 188 (Jones), Chapter 645, Statutes of 2009, appropriates  
          funding to administer requirements established by AB 1383.   

          AB 1383 (Jones), Chapter 627, Statutes of 2009, establishes  
          a provider fee on hospitals, matches a portion of revenues  
          collected from the fee with federal funds in the Medi-Cal  
          program at an enhanced match, provides funding for  
          supplemental payments to hospitals that serve Medi-Cal and  
          uninsured patients, provides direct grants to designated  
          public hospitals, funds health coverage for children, and  
          provides funds for DHCS for the direct costs of  
          administering the program. 

          Arguments in support
          According to the sponsors, the California Hospital  
          Association, California Children's Hospital Association and  
          Daughters of Charity, hospitals in California are under  
          serious financial pressures as a result of the traditional  
          low Medi-Cal reimbursement rate in California, recent  
          reductions, the increase in the number of uninsured and the  
          economic downturn.  The sponsors, in support, state that  
          this bill would extend the Medi-Cal hospital provider fee  


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          to take maximum advantage of an extension for the enhanced  
          federal match for an additional six months, if passed by  
          Congress.  The supporters note that this bill could provide  
          an additional $160 million to the state as well. 

          Arguments in opposition
          The Howard Jarvis Taxpayers Association opposes this bill  
          because they argue it is a tax increase as there is no  
          nexus between this fee and providing children's health  
          services.  They state, for that reason, the bill should  
          require a two-thirds vote of each house of the Legislature.  
           They argue that this tax should not be directed toward the  
          general fund and that taxes should not be raised on  
          California's beleaguered hospitals.
          Letter requesting amendment
          The Marin and El Camino Healthcare Districts have both  
          requested an amendment that would expand the current  
          exemption for hospitals owned by special districts from  
          paying the hospital provider fee.  Under existing law,  
          district hospitals are generally exempt from paying the  
          fee.  However, it appears that not all district hospitals  
          qualify for the exemption.  In the case of these two  
          districts, they are public entities that own the hospital,  
          but the license is held by an affiliated non-profit  
          corporation, which is entirely controlled by the respective  
          districts.  Although the particulars of the two cases vary,  
          both districts decided to maintain the affiliated  
          non-profit corporation who holds the license.  In both  
          cases, the districts made the decision to avoid having to  
          rewrite all contracts and collective bargaining agreements  
          and applying for a new license.  Also in both cases, the  
          district is the sole corporate member of the non-profit  

                                  PRIOR ACTIONS

           Assembly Health:                   16- 1
          Assembly Appropriations:      12- 5
          Assembly Floor:               63-14

          1.  CMS has not approved the existing hospital fee and  
          reimbursement proposal.  Since AB 1383 and its companion  


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          measure AB 188 were approved, there have been significant  
          discussions between the administration and CMS.  These  
          culminated in CMS sending DHCS a letter on June 16, 2010  
          stating that they do not believe that the fee and payments  
          proposed in AB 1383 meet federal requirements.  CMS made  
          extensive comments and has requested additional information  
          and clarification and suggested to the state some possible  
          modifications that meet the specific concerns they have  
          raised, as well as suggestions as to how to develop a fee  
          that does meet federal law.

          2.  The author has proposed amendments for this bill.  The  
          author will offer additional amendments in committee to  
          respond, in a general fashion, to some of the concerns of  
          CMS.  In order to gain CMS approval, there are likely to be  
          additional amendments to this bill as the administration  
          and sponsor, along with their respective consultants,  
          continue to work with CMS to gain approval of the provider  
          fee.  The amendments proposed by the author then are a  
          preliminary attempt to respond to CMS, but should not be  
          regarded as the final state response. 

          The proposed amendments address the concerns by CMS  
          regarding the payments to managed care plans.  Existing law  
          requires Medi-Cal managed care plans to receive  
          supplemental payments for the provision of Medi-Cal  
          hospital services, and then requires each Medi-Cal managed  
          care plan to pay all of the supplemental payments for  
          hospital services.  CMS expressed concerns that the state's  
          provider fee violated the federal hold harmless  
          requirements which stipulate that provider fees may not  
          have arrangements in which funds are returned to the payers  
          directly or indirectly.  The amendments contain a new  
          methodology for making payments to the Medi-Cal managed  
          care plans and for the plans to make payments to hospitals.  
           The amendments attempt to ensure that any payments made to  
          plans have an actuarial basis and do not violate the  
          federal requirement that plans are paid an actuarially  
          sound rate and are actuarially certified.

          3.  Bill will remain a work in progress even with the  
          author's proposed amendments.  The bill does not specify a  
          methodology for assessing the amount of the fee that each  
          hospital would pay.  The bill also does not specify how the  
          fee would be paid and collected.  The author and sponsors  


          STAFF ANALYSIS OF ASSEMBLY BILL 1653 (Jones)          Page  


          argue that these important elements will not be known until  
          there is federal approval of the existing fee.  Should this  
          bill pass out of committee, the committee may want to  
          rehear it when these details are finalized. 

          4.  Reduction of FMAP could threaten agreement on hospital  
          provider fee and reimbursement proposal.  This bill was  
          introduced when most observers thought that the current  
          enhanced FMAP would be extended for two quarters.  Although  
          the extension still seems likely, the enhanced rate is  
          likely to be reduced significantly, resulting in less  
          federal funds for the state.  The reduction in federal  
          funds would mean that more hospitals could lose funds under  
          the proposal, especially if the amount the state obtains  
          remains unchanged.  The committee may want to hear from the  
          sponsors and supporters whether this will affect any  
          positions on the bill.

          Support:  California Children's Hospital Association  
                 California Hospital Association (co-sponsor)
                 Daughters of Charity Health System (co-sponsor)
                 Adventist Health 
                 Alliance of Catholic Health Care
                 American Federation of State, County and Municipal  
                 Employees (AFSCME)
                 County of Los Angeles Board of Supervisors
                 County of San Bernardino Board of Supervisors
                 Health Access
                 Loma Linda University
                 Private Essential Access Community Hospitals, Inc.  
                 Service Employees International Union

          Oppose:  Howard Jarvis Taxpayers Association

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