BILL ANALYSIS
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Elaine K. Alquist, Chair
BILL NO: SB 726
S
AUTHOR: Ashburn
B
AMENDED: April 23, 2009
HEARING DATE: April 29, 2009
7
CONSULTANT:
2
Hansel/sh
6
SUBJECT
Hospitals: employment of physicians and surgeons
SUMMARY
Modifies an existing pilot project under which a hospital
that is owned and operated by a health care district may
directly employ physicians. Allows any hospital located in
a medically underserved area that has been unsuccessful in
recruiting a core physician, as defined, to participate in
the pilot project. Eliminates the existing cap on the
number of physicians that may be employed in total under
the pilot project and allows an individual qualified
hospital to expand the number it employs, as specified.
Requires the Medical Board of California (MBC) to provide
reports to the Legislature on its evaluation of the revised
pilot project, and extends the sunset date for the pilot
project from January 1, 2011 to January 1, 2018.
CHANGES TO EXISTING LAW
Existing federal law:
Authorizes the U.S. Department of Health and Human Services
(DHHS) to designate medically underserved areas and
populations (MUAs and MUPs), and health professions
Continued---
STAFF ANALYSIS OF SENATE BILL SB 726 (Ashburn)Page 2
shortage areas (HPSAs), as specified.
Existing state law:
Under the Medical Practice Act, prohibits corporations and
other artificial legal entities from having professional
rights, privileges, or powers in relation to the practice
of medicine. Under the Corporate Practice of Medicine (CPM)
doctrine, the state prohibits hospitals and other entities
from employing physicians to provide professional services.
Establishes exemptions from the CPM restriction for:
Certain nonprofit clinics organized and operated
exclusively for scientific and charitable purposes, that
have been conducting research since before 1982, and that
meet other specified requirements;
Clinics operated primarily for the purpose of medical
education by a public or private nonprofit university
medical school;
Narcotic treatment programs operated under, and regulated
by, the State Department of Alcohol and Drug Programs;
and
Medical or podiatry professional corporations organized
and practicing pursuant to the Moscone-Knox Professional
Corporations Act, that require a majority of shareholders
of the corporation to be licensed physicians, surgeons,
or podiatrists.
Establishes, until 2011, a pilot program that establishes
an exemption from the CPM prohibition for qualified
district hospitals, enabling them to directly employ
physicians and surgeons, if they meet several requirements.
To be eligible to participate in the pilot project, the
district hospital must provide at least 50 percent of its
patient days to Medicare, Medi-Cal, and uninsured patients,
must be located in a county with a total population of less
than 750,000 persons, and must have reported net losses
from operations in fiscal year 2000-01, as specified.
Limits the total number of physicians that may be employed
STAFF ANALYSIS OF SENATE BILL SB 726 (Ashburn)Page 3
under the pilot project to 20 statewide, and limits the
total number that may be employed at any given hospital to
2. In addition, under the pilot an employment contract
may not exceed four years.
Requires the Medical Board of California (MBC) to report to
the Legislature no later than October 1, 2008, on the
effectiveness of the pilot project.
Existing state law defines rural hospitals as those that
fall within certain peer groupings, based on their
characteristics and size.
This bill:
Modifies the pilot project under which qualified district
hospitals may employ a limited number of physicians as
follows:
Defines a qualified hospital as any hospital that is
located within an area that is designated as a medically
underserved area or population, or health professions
shortage area, or is a rural hospital, as defined, whose
chief executive officer has provided certification to the
MBC that it has been unsuccessful in recruiting a "core"
physician for 12 consecutive months during the period of
July 1, 2008 to July 1, 2009.
Defines a "core" physician as a physician specializing in
family practice, internal medicine, general surgery,
orthopedic surgery, or obstetrics and gynecology.
Eliminates the 20 physician cap on the total number of
physicians that may be employed under the pilot project,
and allows an individual hospital to employ more than two
physicians at any time, upon an affirmative vote of the
medical staff and elected trustees of the hospital.
Extends the date by which a physician must enter into an
employment contract with a qualified hospital under the
pilot project from December 31, 2006 to December 31,
2017, and extends the maximum time period for a contract
from four to ten years.
Requires the MBC to provide a preliminary report to the
Legislature that evaluates the revised pilot project by
July 1, 2013, and a final report by July 1, 2016.
STAFF ANALYSIS OF SENATE BILL SB 726 (Ashburn)Page 4
Extends the overall sunset date for the pilot project from
January 1, 2011 to January 1, 2018.
Modifies the current exception to the corporate practice of
medicine law to include the pilot project, as revised by
the bill.
FISCAL IMPACT
Unknown.
BACKGROUND AND DISCUSSION
According to the author, California is one of a small
number of states that do not allow hospitals to directly
hire permanent staff doctors. The author points out that
at a time when increasing access to health care has been a
top priority of the state's leadership, the Legislature
needs to revisit the exclusion against the corporate
practice of medicine. The
author states that small and rural hospitals have asked
repeatedly for authority to recruit and hire physicians
directly. According to the author, SB 726 will address the
shortage of physicians who practice in medically
underserved areas. Specifically, the author states that
there would be advantages for physicians who enter into
employment contracts under the bill, including lower
overhead costs and employment benefits, that would attract
doctors to areas where they would not normally be inclined
to practice, but where the need is great.
Corporate Practice of Medicine Doctrine
The state's corporate practice of medicine statute
prohibits the employment of physicians by hospitals and
other for-profit, or non-profit corporate entities. The
rationale for the CPM doctrine was to ensure that
unlicensed and untrained persons would not inhibit the
practice of medicine by licensed physicians and surgeons.
Physicians were fearful that a physician's loyalty to
his/her patient and his/her employer would be divided. In
addition, the CPM doctrine was a means of ensuring that
profit motives would not lead to the commercial
exploitation of physicians and the lowering of professional
standards.
STAFF ANALYSIS OF SENATE BILL SB 726 (Ashburn)Page 5
According to an October 2007 report by the California
Research Bureau (CRB), five states (California, Colorado,
Iowa, Ohio, and Texas) statutorily prohibit direct
employment of physicians by hospitals. Among these states,
there are exceptions, such as California. CRB cites
evidence however, that if one also includes case law and
states' Attorney General opinions, 37 states bar this
practice.
CRB notes that although the CPM prohibition has an
historical and legal basis, most states today, including
California, allow a number of exemptions, including those
for professional medical corporations, teaching hospitals,
and certain community
clinics and non-profit organizations. CRB calls into
question the utility of the CPM doctrine and whether it
makes sense in light of more recent statutes and
regulations that directly address patient safety concerns
raised by the doctrine and because of today's changing
health care landscape.
Health Care District Hospital Pilot Project
The district hospital pilot project was established to
address the problem of recruiting and retaining physicians
in rural and underserved communities. The premise behind
the pilot project was that many district hospitals lack
viable alternatives to attract physicians to their staff,
and that direct employment may offer a better incentive to
encourage physicians to relocate to or remain in rural and
underserved areas.
While it was expected that the maximum allowed number of 20
physicians would end up being employed under the pilot
project, according to the MBCs report to the Legislature in
October 2008, due to a number of constraints, only six
physicians have been employed (by five qualifying
hospitals) under the pilot. Of the six, only one
represented a physician who came from outside of the area
of the hospital; the remaining five were in practice in the
areas served by the hospital prior to their employment. In
the report, the MBC notes that due to the limited
participation in the pilot, and the limited responses from
hospitals that elected and decided not to participate in
the pilot, it is difficult to draw conclusions regarding
the effectiveness of the pilot. However, the MBC states
that it believes there may be justification to extend the
STAFF ANALYSIS OF SENATE BILL SB 726 (Ashburn)Page 6
pilot so that a better evaluation of direct employment of
physicians can be made, and recommends broadening the pilot
to include more hospitals, while maintaining limits on the
number of physicians employed under the pilot and while
maintaining the general prohibition on the corporate
practice of medicine.
Health Care Districts
Health care districts operate roughly two-thirds of the
public hospitals in California. The vast majority of
facilities are located in rural parts of California. Most
of these facilities are quite small, and tend to serve a
disproportionate percentage of uninsured and Medi-Cal
patients. In many cases, 50 percent or more of the
patients served by the health care districts and their
health facilities are insured by Medi-Cal and Medicare.
Medically underserved areas and populations and health
professions shortage areas
Several types of medically underserved areas are designated
by the federal Health Resources and Services
Administration, including the four types that are targeted
by this bill.
A primary care health professional shortage area
generally must have a population to physician ratio 3,500
to 1 or greater (an area with a ratio of 3,000 to 1 that
has "unusually high need" may also qualify) and have a
lack of access to health care in surrounding areas
because of excessive distance, over-utilization, or
access barriers;
A mental health professional shortage area must have a
population to mental health professional ratio of 6,000
to 1 or greater and a population to psychiatrist ratio of
20,000 to 1 or greater, or a 9,000 to 1 ratio for mental
health professionals solely, or a 30,000 to 1 ratio for
psychiatrists solely;
A dental health professional shortage area must have a
population to dentist ratio of 5,000 to 1, or have a
ratio of 4,000 to 1 and be an area of "unusually high
need" and have a lack of access to dental care in
surrounding areas because of distance, overutilization,
or access barriers; and
STAFF ANALYSIS OF SENATE BILL SB 726 (Ashburn)Page 7
Medically underserved areas and populations must meet an
index that takes into account four criteria of medical
need: (1) percentage of population below 100 percent of
the federal poverty level (FPL); (2) percentage of
population age 65 and over; (3) infant mortality rate;
and 4) primary care physicians per 1,000 population.
Health care providers providing services in health
professional shortage areas qualify for student loan
repayment programs and placement through the National
Health Service Corps, and in some cases enhanced Medicare
reimbursement.
Related bills:
AB 646 (Swanson) repeals the existing pilot project and
allows district hospitals in rural areas, or public or
independent community hospitals or clinics located in a
medically underserved areas that serve medically
underserved populations, to employ physicians and surgeons
without limitations, as specified. Scheduled to be heard
in the Assembly Health Committee on April 28.
AB 648 (Chesbro) modifies the current pilot project to
allow rural hospitals to employ up to 10 physicians and
surgeons at one time, to provide medical services at the
rural hospital or other health facility that the rural
hospital owns or operates, subject to certain requirements.
Establishes penalties for rural hospitals that are found
to have interfered with the independent medical judgment of
an employed physician. Extends the sunset of the pilot
project to January 1, 2020. Requires the MBC to report to
the Legislature on the revised pilot project by January 1,
2019. Scheduled to be heard in the Assembly Health
Committee on April 28.
Prior legislation
SB 1294 (Ducheny) of 2007-08 would have revised the pilot
project to allow the employment of more than 20 physicians
and surgeons, at the discretion of the MBC, and allowed the
total number of physicians employed by a qualified district
hospital to exceed two, if deemed appropriate by the MBC on
a case-by-case basis. Would have revised the definition of
a qualified hospital to a district hospital that is located
in a medically underserved area that had net losses in the
most recent fiscal year. Would have extended the pilot
project until January 1, and made other conforming changes.
STAFF ANALYSIS OF SENATE BILL SB 726 (Ashburn)Page 8
SB 1640 (Ashburn) of 2007-08 would have revised the
district hospital pilot project to allow general acute care
hospitals that meet specified requirements to directly
employ up to five physicians each and collectively to
employ an unlimited number of physicians statewide. Would
have extended the pilot project until January 1, 2016, and
required MBC to report to the Legislature no later than
October 1, 2013, on the evaluation of the
effectiveness of the pilot project. Failed passage in the
Senate Business, Professions, and Economic Development
Committee.
AB 1944 (Swanson) of 2007-08 would have eliminated the
district hospital pilot project and instead authorized such
hospitals to directly employ physicians to primarily treat
Medi-Cal patients without limits, if specified requirements
are met. Failed passage in the Senate Health Committee.
SB 376 (Chesbro), Chapter 411, Statutes of 2003 establishes
a pilot project in which qualified healthcare district
hospitals may employ physicians, and charge for
professional services rendered by the physician. Limits
the number of physicians employed by all qualified district
hospitals in the state to 20, and also limits each district
hospital to two employed physicians or surgeons. Sunsets
the pilot project in 2011, and requires to submit report to
the Legislature by October 2008 on the effectiveness of the
pilot project.
Arguments in support
The Regional Council of Rural Counties (RCRC) states in its
letter, on the introduced version of SB 726, that rural
communities throughout California have had tremendous
difficulty recruiting and retaining physicians, threatening
public health, health care access, and the operational
stability of rural hospitals. Given the dominant mix of
Medi-Cal and uninsured patients, establishment of
independent physician practices in rural areas is
problematic. RCRC states that the current hospital pilot
is an excellent recruitment and retention program for rural
hospitals and should be expanded into needy areas.
Arguments in opposition
Writing in reference to the introduced version of SB 726,
the California Medical Association (CMA) argues that the
MBCs report on the existing pilot project notes that until
STAFF ANALYSIS OF SENATE BILL SB 726 (Ashburn)Page 9
there is insufficient data to perform a full analysis of an
expanded pilot, the MBC believes that statutes governing
the corporate practice of medicine should not be amended as
a solution to the health access problems. CMA argues that
SB 726 is overly expansive and would result in the collapse
of important patient protections in California. CMA
further questions whether the expanded pilot provided for
in SB 726 would have the intended effect of increasing
access in underserved areas. CMA states that it does
support limited expansions of the current pilot, as
provided for by SB 1294 (Ducheny) of last session, and
sponsored legislation last session to direct $1 million
towards loan repayments for physicians who are willing to
serve in rural and underserved areas.
The Children's Specialty Care Coalition (CSCC) states that
it does not believe SB 726 offers a real solution to
problems of access to physician care and believes that it
will not solve the access problem in Medi-Cal, which is
driven by low reimbursement rates. CSCC states that SB 726
would create a fundamental conflict of interest for
physicians.
COMMENTS
1. Bill is double-referred to Business, Professions and
Economic Development. SB 726 was double-referred to the
Business, Professions, and Economic Development (BPED)
Committee and the Senate Health Committee. BPED heard this
measure on April 27 and adopted it on a do-pass motion.
2. Proposed definition of qualified hospital both expands
and restricts universe of eligible hospitals. Redefining a
qualified hospital to include any hospital that is located
in an underserved area, and eliminating the requirements
that the hospital serve large numbers of Medicare and
Medi-Cal patients, have sustained losses in the past, and
be located in a county with a population of less than
750,000 persons, would broaden the universe of hospitals
that could potentially participate to about 184 qualifying
hospitals, including many that are located in urban areas
of the state. However, restricting the pilot to hospitals
who can certify that they have been unsuccessful in
recruiting a physician for the specific 12-month period,
July 1, 2008 to July 1, 2009, would restrict the number of
hospitals that are eligible to participate in the hospital
STAFF ANALYSIS OF SENATE BILL SB 726 (Ashburn)Page 10
to less than that, and would likely focus eligibility on
hospitals that are located in rural areas or outlying areas
of metropolitan centers.
3. Proposed criteria for participating physicians are
likely to expand the number of physicians in the pilot.
Lifting the caps on the number of physicians who can
participate in the pilot, in total and at any individual
hospital, and extending the time period during which
physicians can enter into employment contracts, as proposed
by the bill, would likely expand the number of physicians
who could participate in the pilot. Even though the bill
restricts the specialties of participating physicians to
"core" specialties, as defined, the overall effect of these
changes is likely to be a significant increase in the
number of physicians who participate in the pilot project.
4. Impact on clinics and other entities seeking to attract
physicians. Expanding the number of physicians who may be
employed by hospitals under the pilot project may make it
more difficult for clinics and medical practices in the
same areas to attract physicians.
5. CMA proposed amendments. CMA has proposed amendments
to the author that would do the following:
Make hospitals located in health professional shortage
areas ineligible for the pilot project, thus restricting
the scope of hospitals to those located in medically
underserved areas and populations;
Require hospitals to certify that they have been
unsuccessful using commercially reasonable efforts in
recruiting a core physician, and to specify the
commercially reasonable efforts that were unsuccessful
and the reason for the lack of success;
Delete orthopedic surgery as one of the core specialties
for which qualified hospitals could employ physicians
under the pilot;
Limit the number of additional physicians a qualified
hospital may employ, beyond two at any time, to three
additional physicians, based on a showing of clear need
in the community following a public hearing; and
STAFF ANALYSIS OF SENATE BILL SB 726 (Ashburn)Page 11
Delete the findings in Section 1 of the bill regarding
shortages of physicians in certain areas of the state.
POSITIONS
Support: Regional Council of Rural Counties
Oppose: Children's Specialty Care Coalition
California Medical Association
California Radiological Society
California Society of Pathologists
San Bernardino County Medical Society
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