BILL ANALYSIS                                                                                                                                                                                                    

                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair

                                           1653 (Jones)
          Hearing Date:  8/12/2010        Amended: 8/2/2010
          Consultant: Katie Johnson       Policy Vote: Health 6-2
          BILL SUMMARY:  AB 1653, an urgency measure, would amend the  
          methodology for the calculation, collection, and distribution of  
          the existing provider fee on general acute care hospitals for  
          the 21 months spanning April 1, 2009, to December 31, 2010, and  
          would also establish a similar fee, effective January 1, 2011,  
          through June 30, 2011.
                            Fiscal Impact (in thousands)

           Major Provisions         2010-11      2011-12       2012-13     Fund
          Fee revenue prior to     ($3,081,000)        $0   $0   Special*
          December 31, 2010 

          Supplemental payments    $2,000,000 $0       $0         
          to hospitals prior to    $3,215,000 $0       $0        Federal
          December 31, 2010

          Grant to DPHs prior      $516,000   $0       $0              
          to December 31, 2010            

          Children's coverage prior       $560,000     $0   $0         
          to December 31, 2010    $560,000 - $1,040,000     $0   $0Federal

          QAF revenue January 1,   (likely $500 million - $1 billion)  
          2011, to June 30, 2011
          Supplemental payments    likely $500 million - $1.5 billion   
          to hospitals January 1, 2011,                          Federal
          through June 30, 2011-includes
          managed care, DPH payments, children's coverage             


          DHCS QAF start-up and admin-    likely hundreds of thousands of  
          dollars       General/****
          istration January 1, 2011 to    commencing upon the passage of  
          this bill  Federal
          June 30, 2011                   

          *Hospital Quality Assurance Revenue Fund (Hospital QA Revenue  
          **Approximately 50 percent federal funds, 50 percent Hospital QA  
          Revenue Fund; significant General Fund cost pressure upon the  
          expiration of the QAF
          ***35-50 percent Hospital QA Revenue Fund, 50-65 percent federal  
          ****50 percent General Fund, 50 percent federal funds

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          AB 1653 (Jones)

          This bill would: 1) amend the provisions of existing law set in  
          statute by AB 1383 (Jones), Chapter 627, and its companion  
          measure AB 188 (Jones), Chapter 645, Statutes of 2009 (further  
          referred to as AB 1383), to conform to a pending agreement  
          between the Department of Health Care Services (DHCS) and the  
          federal Centers for Medicare and Medicaid Services (CMS), the  
          federal entity that approves provider fees, in order to allow  
          DHCS to collect the AB 1383 fee and to make the subsequent  
          supplemental payments to hospitals, as specified, and, 2)  
          establish a similar quality assurance fee (QAF) on specified  
          general acute care hospitals for the period January 1, 2011, to  
          June 30, 2011.

          Existing federal law permits the use of health-care related  
          taxes levied on providers of health care. However, they must  
          conform to specified standards, as follows, and be approved by  
          CMS: 1) be broad-based; 2) not exceed 25 percent of the state  
          share of Medicaid expenditures; 3) payers of the tax cannot be  
          explicitly held harmless. 

          Many states, including California, utilize health-care related  
          taxes, such as QAFs to fund a portion of the state share of  
          health care costs. These revenues are available to draw down  


          matching federal funds and enable states to increase provider  
          reimbursement rates. California currently imposes three provider  
          fees for Medi-Cal, specifically, a quality improvement fee on  
          Medi-Cal managed care plans, a quality assurance fee on skilled  
          nursing facilities (SNFs), and a quality assurance fee on  
          intermediate care facilities for the developmentally disabled  

          In February of 2009, President Obama signed the American  
          Reinvestment and Recovery Act (ARRA) into law. As a result, the  
          federal medical assistance percentage (FMAP) increased from 50  
          percent to 61.59 percent. Retroactively from October 1, 2008,  
          through December 31, 2010, the federal government would pay for  
          61.59 percent and the state General Fund would pay for 38.41  
          percent of benefit-related Medi-Cal expenditures. 
          Amendments to Existing AB 1383 and Estimated Revenue Adjustments
          AB 1383 was enacted with the intent to maximize the state's  
          opportunities to utilize the enhanced ARRA FMAP. It expires  
          December 31, 2010, and DHCS is in final negotiations with CMS.  
          This bill would make the agreed upon changes to existing  
          statute. In AB 1383, hospitals were required to pay a provider  
          fee to DHCS, which would deposit the revenues into the Hospital  
          Quality Assurance Revenue Fund, as follows:

             1)   $233.66 per fee-for-service day;
             2)   $27.25 per managed care day;
             3)   $293 per Medi-Cal day.

          Total QAF revenue over a period of 21 months, April 1, 2009, to  
          December 31, 2010, was expected to be approximately $3.6 billion  
          in total and federal matching funds were estimated to bring the  
          total aggregate amount of supplemental payments to  
          non-designated public hospitals to $6.5 billion. 
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          AB 1653 (Jones)

          This bill would change those amounts to be as follows:

             1)   $232.00 per Medi-Cal day;
             2)   $22.50 per managed care day;
             3)   $215.30 per fee-for-service day.

          Over the same 21 month period, revenue estimates based on the  
          updated methodology in this bill are now $3.08 billion in total.  
          The decrease is expected revenue is mainly due to a decrease in  


          Medi-Cal managed care payments from $1.4 billion to $730 million  

          Additionally, under AB 1383, designated public hospitals (DPHs)  
          were expected to receive $310 million per year; this bill would  
          decrease that amount to $295 million annualized, or a total of  
          $516 million over the 21 months. The $320 million annual QAF  
          revenue set aside for children's coverage would remain unchanged  
          and would total $560 million over 21 months and would be  
          eligible to draw down a federal match of $560 million - $1.04  
          billion depending on whether the funds would be matched at the  
          50 percent FMAP rate for Medi-Cal or at the 65 percent FMAP rate  
          for Healthy Families.

          After subtracting out $516 million for DHPs and $560 million for  
          children's coverage, as discussed above, it is expected that $2  
          billion in QAF revenue would be eligible to be matched with  
          federal funds. The total federal funds would be $3.2 billion,  
          for a total of $5.2 billion in payments to hospitals other than  
          DPHs, as specified by the methodology updated by this bill.  
          Other amendments to AB 1383's existing payment methodology  
          include changes to the amount of supplemental payments to which  
          hospitals providing subacute services and hospitals that are  
          small and/or rural are entitled, and increased capitation  
          payments to managed care plans, as specified. QAF revenues would  
          represent 38.41 percent and the federal funds would be 61.59  
          percent of the $5.2 billion in payments.

          The timing of the QAF payment and collection and the subsequent  
          matching with federal funds and supplemental payments to  
          hospitals will ultimately determine if these revenue and payment  
          projections are achieved. DHCS would need to disburse all of the  
          supplemental payments by December 31, 2010, in order to maximize  
          federal financial participation. While this bill contains a  
          timeline, the department has yet to confirm that it could meet  
          that timeline or to suggest an alternative.
          Establishment of QAF for January 1, 2011 - June 30, 2011
          This bill would establish a QAF on specified private general  
          acute care hospitals, as specified, as under AB 1383. The  
          revenues would be used to make supplemental payments for the  
          same purposes as provided for in AB 1383. The QAF would be  
          computed commencing January 1, 2011, and would continue through  
          June 30, 2011, via a method of calculation that is signified by  
          a blank space in this bill. This bill's timeframe is meant to  
          coincide with a possible extension of the enhanced FMAP. On  


          August 5, the Senate passed H.R. 1586 by a vote of 61-39, which  
          would extend the ARRA enhanced Medicaid match for six additional  
          months-January 1, 2011, through June 30, 2011. 
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          AB 1653 (Jones)

          However, rates would be lower than for the existing enhanced  
          FMAP of 6.2 percent. The enhanced FMAP extension would be 3.2  
          percent for January 1, 2011, through March 31, 2011, and would  
          then decrease to 1.2 percent for April 1, 2011, through June 30,  
          2011. The House is expected to vote on H.R. 1586 on August 10. 

          Since the enhanced FMAP extension would be at a different level  
          than the one established by ARRA in 2009, the hospital QAF and  
          payment methodologies provided for in this bill to implement AB  
          1383 would need to be altered and approved by CMS for the  
          proposed January 1, 2011, through June 30, 2011, QAF to be  
          implemented. Although this bill would require DHCS to seek any  
          federal approvals necessary to implement these provisions and to  
          obtain matching federal financial participation to the maximum  
          extent possible, staff recommends that this bill be amended to  
          specify that its implementation be contingent upon federal  
          financial participation. 

          Since the method of calculation and the details of disbursement  
          are represented by blank spaces in this bill, the amount of  
          revenue expected to be collected and matched by federal funds  
          and the amount in payments DHCS would subsequently make to  
          hospitals are unknown. However, revenue estimates for AB 1383  
          are expected to be roughly $1.76 billion annually. Therefore, it  
          is likely that the revenue generated and the subsequent  
          supplemental payments made pursuant to this bill would be $500  
          million - $1.5 billion in the latter half of FY 2010-2011.

          This bill would specify that the monies collected would be  
          "continuously appropriated, without regard to fiscal year, as  
          follows: ___." Staff recommends this bill be amended to instead  
          make the expenditure of the funds contingent upon appropriation  
          of the Legislature in order to make expenditures consistent with  
          those in the Hospital Quality Assurance Revenue Fund, which may  
          only be appropriated by the Legislature, and to maintain  
          Legislative oversight.

          Staff additionally recommends that the bill be amended to  
          specify that QAF revenue and federal matching funds be  
          sufficient to cover the cost of the supplemental payments and  


          the department's administration of the QAF when specified by  
          this bill. AB 188 appropriated a $1 million loan from the  
          Private Hospital Supplemental Fund and $1 million in matching  
          funds from the Federal Trust Fund for administrative costs  
          related to the implementation of AB 1383. At its March 25  
          hearing, the Senate Budget Committee approved the proposed $2  
          million expenditure to fund 14 staff for two years to implement  
          AB 1383. A final budget has yet to be signed by the Governor. It  
          is possible that DHCS AB 1383 staff could absorb the  
          administrative workload related to this bill.

          Staff notes that there would be considerable General Fund cost  
          pressure to continue to pay supplemental payments to hospitals  
          beyond June 30, 2011. In light of California's budget problems  
          and its already low Medi-Cal provider rates, it is unlikely that  
          the state would be able to fund provider supplemental payments  
          in the absence of a new funding source, such as subsequent QAF.

          The author's proposed amendments would restore language relating  
          to district hospitals that was adopted in the Senate Health  
          Committee and subsequently removed.