BILL NUMBER: AB 378	AMENDED
	BILL TEXT

	AMENDED IN ASSEMBLY  APRIL 4, 2011

INTRODUCED BY   Assembly Member Solorio

                        FEBRUARY 14, 2011

   An act to amend Sections 139.3 and  139.31  
5307.1  of the Labor Code, relating to workers' compensation.


	LEGISLATIVE COUNSEL'S DIGEST


   AB 378, as amended, Solorio. Workers' compensation: pharmacy
products.
   Existing law establishes a workers' compensation system,
administered by the Administrative Director of the Division of
Workers' Compensation, to compensate an employee for injuries
sustained in the course of employment.
   Existing law provides that it is unlawful for a physician to refer
a person for specified medical goods or services  , 
whether for treatment or medical-legal purposes  ,  if the
physician or his or her immediate family has a financial interest
with the person or in the entity that receives the referral 
, except in prescribed circumstances  . A violation of this
provision is a misdemeanor.
   This bill would add pharmacy goods, as defined, to the list of
medical goods or services for which it is unlawful for a physician to
refer a person under this provision, except in prescribed
circumstances. By creating a new crime, this bill would impose a
state-mandated local program. 
   Existing law requires the administrative director, after public
hearings, to adopt and revise periodically an official medical fee
schedule that establishes reasonable maximum fees paid for medical
services, other than physician services, and for other prescribed
goods and services, in accordance with specified requirements. Under
existing law, prior to the adoption by the administrative director of
a medical fee schedule for any treatment, facility use, product, or
service not covered by a Medicare payment system, the maximum
reasonable fee paid cannot exceed the fee specified in the official
medical fee schedule in effect on December 31, 2003.  
   This bill would, for pharmacy services, drugs, or other pharmacy
products not covered by a Medi-Cal payment system, instead make the
maximum fee 83% of the average wholesale price, as defined, of the
lowest priced product of equivalent therapeutic effect. This bill
would, until the date that the administrative director adopts an
official medical fee schedule for compounded drug products, as
defined, set the maximum reasonable fee for compounded drug products
and the ingredients as prescribed. This bill would not allow a fee
for a compounded drug ingredient, as specified.  
   This bill would, until the date the administrative director adopts
an official medical fee schedule specifically applicable to
physician-dispensed products, require that the fee for any product,
as defined, dispensed, as defined, by a physician not exceed the
lesser of 120% of the physician's documented paid cost, as defined,
or the physician's documented paid cost plus $250.  
    This bill would also delete obsolete provisions relating to the
adoption of a medical fee schedule for patient facility fees for burn
cases. 
   The California Constitution requires the state to reimburse local
agencies and school districts for certain costs mandated by the
state. Statutory provisions establish procedures for making that
reimbursement.
   This bill would provide that no reimbursement is required by this
act for a specified reason.
   Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: yes.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

  SECTION 1.  The Legislature finds and declares all of the
following:
   (a) In 2002, the Legislature passed Assembly Bill 749 (Chapter 6
of the Statutes of 2002), which directed an official medical fee
schedule for pharmaceuticals to be created to contain workers'
compensation costs and to ensure that injured workers had access to
appropriate treatment.
   (b) Since the creation of the official medical fee schedule
governing pharmaceuticals, there has been a growing practice by some
prescribing physicians to utilize medications that are not covered by
the fee schedule, to dispense these medications directly to workers'
compensation patients, and to bill employers and insurers at highly
inflated rates. These practices unfairly enrich the physicians who
engage in these efforts, cost employers and insurers millions of
dollars, and prevent these wasted dollars from being used to enhance
benefits for injured workers.
   (c) One of the ways that these physicians accomplished the goal of
billing at inflated rates was by repackaging common medications from
bulk supplies so that the packages did not have fee schedule codes,
and dispensing them in common amounts at prices far above the fee
schedule for the same products sold through pharmacies. This practice
continued until the Administrative Director of the Division of
Workers' Compensation adopted a regulation in 2007 that required any
repackaged medication to be reimbursed at the same fee schedule as
the same drug distributed through pharmacies and not reimbursed based
on arbitrary prices associated with unscheduled packages.
   (d) Prior to the adoption of the physician dispensing regulation,
compounded medications, creams, copacks, and other medical foods
constituted a small percentage of the overall cost of prescription
medications. However, once the abusive repackaging practice was
outlawed, the practice of physicians prescribing or dispensing
compounded medications, creams, copacks, and medical foods expanded
rapidly.
   (e) The percentage of California workers' compensation medication
dollars that are used toward  compound  
compounded  drugs, copacks, and medical foods has increased from
2.3 percent in 2006 to 12 percent in 2009. This increase in 
compound   compounded  drugs, copacks, and medical
foods has increased costs for insurers and led to rising premiums
for employers. For example, the State Compensation Insurance Fund
reports that what was rarely billed prior to 2007 rapidly escalated
to over $58 million in billings in a 16-month period. Another insurer
reported a 16-fold increase in less than a two year period.
   (f) Compounded drugs are not evaluated for safety or efficacy by
the federal Food and Drug Administration (FDA). According to the FDA,
 compound   compounded  drugs carry
significant health risks that can lead to permanent injury or death.
   (g) In order to alleviate California's employers and insurers from
this significant increase in costs, to enhance the efficiency of the
workers' compensation system, and to ensure that injured workers
receive safe, appropriate health care, the Legislature hereby
declares the need to remove the financial incentive for prescribing
costly and questionable compounded drugs, copacks, and medical foods
and to create a new process for the prescription of  compound
  compounded  drugs, copacks, and medical foods.
  SEC. 2.  Section 139.3 of the Labor Code is amended to read:
   139.3.  (a) Notwithstanding any other law, to the extent those
services are paid pursuant to Division 4 (commencing with Section
3200), it is unlawful for a physician to refer a person for clinical
laboratory, diagnostic nuclear medicine, radiation oncology, physical
therapy, physical rehabilitation, psychometric testing, home
infusion therapy, outpatient surgery, diagnostic imaging goods or
services, or pharmacy goods, whether for treatment or medical-legal
purposes, if the physician or his or her immediate family has a
financial interest with the person or in the entity that receives the
referral.
   (b) For purposes of this section and Section 139.31, the following
shall apply:
   (1) "Diagnostic imaging" includes, but is not limited to, all
X-ray, computed axial tomography magnetic resonance imaging, nuclear
medicine, positron emission tomography, mammography, and ultrasound
goods and services.
   (2) "Immediate family" includes the spouse and children of the
physician, the parents of the physician, and the spouses of the
children of the physician.
   (3) "Physician" means a physician as defined in Section 3209.3.
   (4) A "financial interest" includes, but is not limited to, any
type of ownership, interest, debt, loan, lease, compensation,
remuneration, discount, rebate, refund, dividend, distribution,
subsidy, or other form of direct or indirect payment, whether in
money or otherwise, between a licensee and a person or entity to whom
the physician refers a person for a good or service specified in
subdivision (a). A financial interest also exists if there is an
indirect relationship between a physician and the referral recipient,
including, but not limited to, an arrangement whereby a physician
has an ownership interest in any entity that leases property to the
referral recipient. Any financial interest transferred by a physician
to, or otherwise established in, any person or entity for the
purpose of avoiding the prohibition of this section shall be deemed a
financial interest of the physician.
   (5) A "physician's office" is either of the following:
   (A) An office of a physician in solo practice.
   (B) An office in which the services or goods are personally
provided by the physician or by employees in that office, or
personally by independent contractors in that office, in accordance
with other provisions of law. Employees and independent contractors
shall be licensed or certified when that licensure or certification
is required by law.
   (6) The "office of a group practice" is an office or offices in
which two or more physicians are legally organized as a partnership,
professional corporation, or not-for-profit corporation licensed
according to subdivision (a) of Section 1204 of the Health and Safety
Code for which all of the following are applicable:
   (A) Each physician who is a member of the group provides
substantially the full range of services that the physician routinely
provides, including medical care, consultation, diagnosis, or
treatment, through the joint use of shared office space, facilities,
equipment, and personnel.
   (B) Substantially all of the services of the physicians who are
members of the group are provided through the group and are billed in
the name of the group and amounts so received are treated as
receipts of the group, and except that in the case of multispecialty
clinics, as defined in subdivision (  l  ) of Section 1206
of the Health and Safety Code, physician services are billed in the
name of the multispecialty clinic and amounts so received are treated
as receipts of the multispecialty clinic.
   (C) The overhead expenses of, and the income from, the practice
are distributed in accordance with methods previously determined by
members of the group.
   (7) Outpatient surgery includes both of the following:
   (A) Any procedure performed on an outpatient basis in the
operating rooms, ambulatory surgery rooms, endoscopy units, cardiac
catheterization laboratories, or other sections of a freestanding
ambulatory surgery clinic, whether or not licensed under paragraph
(1) of subdivision (b) of Section 1204 of the Health and Safety Code.

   (B) The ambulatory surgery itself.
   (8) "Pharmacy goods" means any dangerous drug or dangerous device
as defined by Section 4022 of the Business and Professions Code,
 and  any medical food as defined by Section 109971
of the Health and Safety Code  , and any over-the-counter drug as
classified by the federal Food and Drug Administration  .
   (c) (1) It is unlawful for a licensee to enter into an arrangement
or scheme, such as a cross-referral arrangement, that the licensee
knows, or should know, has a principal purpose of ensuring referrals
by the licensee to a particular entity that, if the licensee directly
made referrals to that entity, would be in violation of this
section.
   (2) It shall be unlawful for a physician to offer, deliver,
receive, or accept any rebate, refund, commission, preference,
patronage dividend, discount, or other consideration, whether in the
form of money or otherwise, as compensation or inducement for a
referred evaluation or consultation.
   (d) No claim for payment shall be presented by an entity to any
individual, third-party payor, or other entity for any goods or
services furnished pursuant to a referral prohibited under this
section.
   (e) A physician who refers to or seeks consultation from an
organization in which the physician has a financial interest shall
disclose this interest to the patient or if the patient is a minor,
to the patient's parents or legal guardian in writing at the time of
the referral.
   (f) No insurer, self-insurer, or other payor shall pay a charge or
lien for any goods or services resulting from a referral in
violation of this section.
   (g) A violation of subdivision (a) shall be a misdemeanor. The
appropriate licensing board shall review the facts and circumstances
of any conviction pursuant to subdivision (a) and take appropriate
disciplinary action if the licensee has committed unprofessional
conduct. Violations of this section may also be subject to civil
penalties of up to five thousand dollars ($5,000) for each offense,
which may be enforced by the Insurance Commissioner, Attorney
General, or a district attorney. A violation of subdivision (c), (d),
(e), or (f) is a public offense and is punishable upon conviction by
a fine not exceeding fifteen thousand dollars ($15,000) for each
violation and appropriate disciplinary action, including revocation
of professional licensure, by the Medical Board of California or
other appropriate governmental agency. 
  SEC. 3.    Section 139.31 of the Labor Code is
amended to read:
   139.31.  The prohibition of Section 139.3 shall not apply to or
restrict any of the following:
   (a) A physician may refer a patient for a good or service
otherwise prohibited by subdivision (a) of Section 139.3 if the
physician's regular practice is where there is no alternative
provider of the service within either 25 miles or 40 minutes
traveling time, via the shortest route on a paved road. A physician
who refers to, or seeks consultation from, an organization in which
the physician has a financial interest under this subdivision shall
disclose this interest to the patient or the patient's parents or
legal guardian in writing at the time of referral.
   (b) A physician who has one or more of the following arrangements
with another physician, a person, or an entity, is not prohibited
from referring a patient to the physician, person, or entity because
of the arrangement:
   (1) A loan between a physician and the recipient of the referral,
if the loan has commercially reasonable terms, bears interest at the
prime rate or a higher rate that does not constitute usury, is
adequately secured, and the loan terms are not affected by either
party's referral of any person or the volume of services provided by
either party.
   (2) A lease of space or equipment between a physician and the
recipient of the referral, if the lease is written, has commercially
reasonable terms, has a fixed periodic rent payment, has a term of
one year or more, and the lease payments are not affected by either
party's referral of any person or the volume of services provided by
either party.
   (3) A physician's ownership of corporate investment securities,
including shares, bonds, or other debt instruments that were
purchased on terms that are available to the general public through a
licensed securities exchange or NASDAQ, do not base profit
distributions or other transfers of value on the physician's referral
of persons to the corporation, do not have a separate class or
accounting for any persons or for any physicians who may refer
persons to the corporation, and are in a corporation that had, at the
end of the corporation's most recent fiscal year, total gross assets
exceeding one hundred million dollars ($100,000,000).
   (4) A personal services arrangement between a physician or an
immediate family member of the physician and the recipient of the
referral if the arrangement meets all of the following requirements:
   (A) It is set out in writing and is signed by the parties.
   (B) It specifies all of the services to be provided by the
physician or an immediate family member of the physician.
   (C) The aggregate services contracted for do not exceed those that
are reasonable and necessary for the legitimate business purposes of
the arrangement.
   (D) A written notice disclosing the existence of the personal
services arrangement and including information on where a person may
go to file a complaint against the licensee or the immediate family
member of the licensee, is provided to the following persons at the
time any services pursuant to the arrangement are first provided:
   (i) An injured worker who is referred by a licensee or an
immediate family member of the licensee.
   (ii) The injured worker's employer, if self-insured.
   (iii) The injured worker's employer's insurer, if insured.
   (iv) If the injured worker is known by the licensee or the
recipient of the referral to be represented, the injured worker's
attorney.
   (E) The term of the arrangement is for at least one year.
   (F) The compensation to be paid over the term of the arrangement
is set in advance, does not exceed fair market value, and is not
determined in a manner that takes into account the volume or value of
any referrals or other business generated between the parties,
except that if the services provided pursuant to the arrangement
include medical services provided under Division 4, compensation paid
for the services shall be subject to the official medical fee
schedule promulgated pursuant to Section 5307.1 or subject to any
contract authorized by Section 5307.11.
   (G) The services to be performed under the arrangement do not
involve the counseling or promotion of a business arrangement or
other activity that violates any state or federal law.
   (c) (1) A physician may refer a person to a health facility as
defined in Section 1250 of the Health and Safety Code, to any
facility owned or leased by a health facility, or to an outpatient
surgical center, if the recipient of the referral does not compensate
the physician for the patient referral, and any equipment lease
arrangement between the physician and the referral recipient complies
with the requirements of paragraph (2) of subdivision (b).
   (2) Nothing shall preclude this subdivision from applying to a
physician solely because the physician has an ownership or leasehold
interest in an entire health facility or an entity that owns or
leases an entire health facility.
   (3) A physician may refer a person to a health facility for any
service classified as an emergency under subdivision (a) or (b) of
Section 1317.1 of the Health and Safety Code. For nonemergency
outpatient diagnostic imaging services performed with equipment for
which, when new, has a commercial retail price of four hundred
thousand dollars ($400,000) or more, the referring physician shall
obtain a service preauthorization from the insurer, or self-insured
employer. Any oral authorization shall be memorialized in writing
within five business days.
   (d) A physician compensated or employed by a university may refer
a person to any facility owned or operated by the university, or for
a physician service, to another physician employed by the university,
provided that the facility or university does not compensate the
referring physician for the patient referral. For nonemergency
diagnostic imaging services performed with equipment that, when new,
has a commercial retail price of four hundred thousand dollars
($400,000) or more, the referring physician shall obtain a service
preauthorization from the insurer or self-insured employer. An oral
authorization shall be memorialized in writing within five business
days. In the case of a facility which is totally or partially owned
by an entity other than the university, but which is staffed by
university physicians, those physicians may not refer patients to the
facility if the facility compensates the referring physician for
those referrals.
   (e) The prohibition of Section 139.3 shall not apply to any
service for a specific patient that is performed within, or goods
that are supplied for use within, a physician's office, or the office
of a group practice. Further, the provisions of Section 139.3 shall
not alter, limit, or expand a physician's ability to deliver, or to
direct or supervise the delivery of, in-office goods or services
according to the laws, rules, and regulations governing his or her
scope of practice. With respect to diagnostic imaging services
performed with equipment that, when new, had a commercial retail
price of four hundred thousand dollars ($400,000) or more, for
physical therapy services, for pharmacy goods furnished for use
outside the physician's office for which the referring physician's
office or group practice charges more than the documented paid cost
net of any rebates or refunds or discounts plus the lesser of 20
percent of the documented paid cost or one hundred dollars ($100), or
for psychometric testing that exceeds the routine screening battery
protocols, with a time limit of two to five hours, established by the
administrative director, the referring physician shall obtain a
service preauthorization from the insurer or self-insured employer.
Any oral authorization shall be memorialized in writing within five
business days.
   (f) The prohibition of Section 139.3 shall not apply where the
physician is in a group practice as defined in Section 139.3 and
refers a person for services specified in Section 139.3 to a
multispecialty clinic, as defined in subdivision (  l
 ) of Section 1206 of the Health and Safety Code. For diagnostic
imaging services performed with equipment that, when new, had a
commercial retail price of four hundred thousand dollars ($400,000)
or more, physical therapy services, for pharmacy goods furnished for
use outside the physician's office for which the referring physician'
s office or group practice charges more than the documented paid cost
net of any rebates or refunds or discounts plus the lesser of 20
percent of the documented paid cost or one hundred dollars ($100),
psychometric testing that exceeds the routine screening battery
protocols, with a time limit of two to five hours, established by the
administrative director, performed at the multispecialty facility,
the referring physician shall obtain a service preauthorization from
the insurer or self-insured employer. Any oral authorization shall be
memorialized in writing within five business days.
   (g) The requirement for preauthorization in Sections (c), (e), and
(f) shall not apply to a patient for whom the physician or group
accepts payment on a capitated risk basis.
   (h) The prohibition of Section 139.3 shall not apply to any
facility when used to provide health care services to an enrollee of
a health care service plan licensed pursuant to the Knox-Keene Health
Care Service Plan Act of 1975 (Chapter 2.2 (commencing with Section
1340) of Division 2 of the Health and Safety Code).
   (i) The prohibition of Section 139.3 shall not apply to an
outpatient surgical center, as defined in paragraph (7) of
subdivision (b) of Section 139.3, where the referring physician
obtains a service preauthorization from the insurer or self-insured
employer after disclosure of the financial relationship.
   SEC. 3.    Section 5307.1 of the   Labor
Code   is amended to read: 
   5307.1.  (a) The administrative director, after public hearings,
shall adopt and revise periodically an official medical fee schedule
that shall establish reasonable maximum fees paid for medical
services other than physician services, drugs and pharmacy services,
health care facility fees, home health care, and all other treatment,
care, services, and goods described in Section 4600 and provided
pursuant to this section. Except for physician services, all fees
shall be in accordance with the fee-related structure and rules of
the relevant Medicare and Medi-Cal payment systems, provided that
employer liability for medical treatment, including issues of
reasonableness, necessity, frequency, and duration, shall be
determined in accordance with Section 4600. Commencing January 1,
2004, and continuing until the time the administrative director has
adopted an official medical fee schedule in accordance with the
fee-related structure and rules of the relevant Medicare payment
systems, except for the components listed in subdivision (j), maximum
reasonable fees shall be 120 percent of the estimated aggregate fees
prescribed in the relevant Medicare payment system for the same
class of services before application of the inflation factors
provided in subdivision (g), except that for pharmacy services and
drugs that are not otherwise covered by a Medicare fee schedule
payment for facility services, the maximum reasonable fees shall be
100 percent of fees prescribed in the relevant Medi-Cal payment
system. Upon adoption by the administrative director of an official
medical fee schedule pursuant to this section, the maximum reasonable
fees paid shall not exceed 120 percent of estimated aggregate fees
prescribed in the Medicare payment system for the same class of
services before application of the inflation factors provided in
subdivision (g). Pharmacy services and drugs shall be subject to the
requirements of this section, whether furnished through a pharmacy or
dispensed directly by the practitioner pursuant to subdivision (b)
of Section 4024 of the Business and Professions Code.
   (b) In order to comply with the standards specified in subdivision
(f), the administrative director may adopt different conversion
factors, diagnostic related group weights, and other factors
affecting payment amounts from those used in the Medicare payment
system, provided estimated aggregate fees do not exceed 120 percent
of the estimated aggregate fees paid for the same class of services
in the relevant Medicare payment system.
   (c) Notwithstanding subdivisions (a) and (d), the maximum facility
fee for services performed in an ambulatory surgical center, or in a
hospital outpatient department,  may   shall
 not exceed 120 percent of the fee paid by Medicare for the same
services performed in a hospital outpatient department.
   (d) If the administrative director determines that a medical
treatment, facility use, product, or service is not covered by a
Medicare payment system, the administrative director shall establish
maximum fees for that item, provided that the maximum fee paid shall
not exceed 120 percent of the fees paid by Medicare for services that
require comparable resources. If the administrative director
determines that a pharmacy service or drug is not covered by a
Medi-Cal payment system, the administrative director shall establish
maximum fees for that item. However, the maximum fee paid shall not
exceed 100 percent of the fees paid by Medi-Cal for pharmacy services
or drugs that require comparable resources.
   (e)  (1)    Prior to the adoption by the
administrative director of a medical fee schedule pursuant to this
section, for any treatment, facility use, product, or service not
covered by a Medicare payment system, including acupuncture services,
 or, with regard to pharmacy services and drugs, for a
pharmacy service or drug that is not covered by a Medi-Cal payment
system,  the maximum reasonable fee paid shall not exceed
the fee specified in the official medical fee schedule in effect on
December 31, 2003.  For a pharmacy service, drug, or other
pharmacy product that is not covered by a Medi-Cal payment system,
the maximum fee shall be 83 percent of the average wholesale price of
the lowest priced product of equivalent therapeutic effect. 

   (2) (A) Until the date that the administrative director adopts an
official medical fee schedule for compounded drug products, the
maximum reasonable fee for a compounded drug product shall be the sum
of the compounding fee for route of administration and quantity, the
dosage compounding fee, the sterility fee, if applicable, and the
dispensing fee, all as provided by the Medi-Cal payment system, plus
the sum of the amounts allowed for the ingredients of the compounded
drug product pursuant to this paragraph.  
   (B) If an ingredient is available in bulk form from three or more
suppliers listed in the current version of a national pricing
compendium for the same chemical ingredient and dosage form, the unit
price shall be the lesser of 150 percent of the unit price of the
lowest cost alternative for purchases made in quantities of the
largest packaging size available from each supplier or the unit price
listed in the Medi-Cal database.  
                                       (C) If an ingredient not
subject to subparagraph (B) is listed in the Medi-Cal database, the
unit price shall be the lesser of the price listed in the Medi-Cal
database or 120 percent of the documented paid cost incurred by the
pharmacy that compounds the drug product.  
   (D) If an ingredient not subject to subparagraph (B) is not listed
in the Medi-Cal database, the unit price shall be the lesser of 83
percent of the average wholesale price for the manufacturer as
published in the current version of a national compendium of drug
pricing or the documented paid cost incurred by the pharmacy that
compounds the drug product. Both the average wholesale price for the
manufacturer and the documented paid cost shall be determined with
respect to the actual source of the ingredients used in the
compounded drug product.  
   (E) A fee shall not be allowed for any ingredient that is not
identified by a valid National Drug Code, number of units, unit
price, and where applicable, the documented paid cost per unit. A fee
shall not be allowed for a compounded drug ingredient if complete
information for any component of the fee according to this
subdivision, or as may be required by regulations adopted by the
administrative director, is not included in the initial billing to
the claims administrator.  
   (3) (A) The fee for any product dispensed by a physician shall not
exceed the lesser of 120 percent of the physician's documented paid
cost or the physician's documented paid cost plus two hundred fifty
dollars ($250).  
   (B) For a compounded drug product dispensed by a physician, the
fee shall not exceed the lesser of the amount allowed pursuant to
subparagraph (A) or the amount allowed for the compounded drug
product pursuant to paragraph (2). For a pharmacy-compounded product,
the amount allowed pursuant to paragraph (2) shall be determined
without regard to the compounding pharmacist's documented paid cost.
A billing for a compounded drug product dispensed by a physician
shall include the pricing information in accordance with subparagraph
(E) of paragraph (2).  
   (C) This paragraph shall apply until the date that the
administrative director adopts an official medical fee schedule
specifically applicable to physician-dispensed products.  
   (4) For the purposes of this subdivision, the following
definitions apply:  
   (A) "Average wholesale price" means the price published as the
average wholesale price according to a national compendium of drug
pricing.  
   (B) "Compounded drug product" means any drug product subject to
Article 4.5 (commencing with Section 1735) of Division 17 of Title 16
of the California Code of Regulations or other regulation adopted by
the State Board of Pharmacy to govern the practice of compounding.
 
   (C) "Dispensed" does not mean a product administered or applied to
a patient in the prescriber's office.  
   (D) "Documented paid cost" means the unit price paid for the
specific product or for each component used in the product as
documented by invoices, proof of payment, and inventory records as
applicable, or as documented in accordance with regulations that may
be adopted by the administrative director, net of rebates, discounts,
and any other immediate or anticipated cost adjustments.  
   (E) "Product" means any object or substance that is reimbursable
separately from the physician's fee for services, including, but not
limited to, a drug, device, or medical food. 
   (f) Within the limits provided by this section, the rates or fees
established shall be adequate to ensure a reasonable standard of
services and care for injured employees.
   (g) (1) (A) Notwithstanding any other  provision of
 law, the official medical fee schedule shall be adjusted to
conform to any relevant changes in the Medicare and Medi-Cal payment
systems no later than 60 days after the effective date of those
changes, provided that both of the following conditions are met:
   (i) The annual inflation adjustment for facility fees for
inpatient hospital services provided by acute care hospitals and for
hospital outpatient services shall be determined solely by the
estimated increase in the hospital market basket for the 12 months
beginning October 1 of the preceding calendar year.
   (ii) The annual update in the operating standardized amount and
capital standard rate for inpatient hospital services provided by
hospitals excluded from the Medicare prospective payment system for
acute care hospitals and the conversion factor for hospital
outpatient services shall be determined solely by the estimated
increase in the hospital market basket for excluded hospitals for the
12 months beginning October 1 of the preceding calendar year.
   (B) The update factors contained in clauses (i) and (ii) of
subparagraph (A) shall be applied beginning with the first update in
the Medicare fee schedule payment amounts after December 31, 2003.
   (2) The administrative director shall determine the effective date
of the changes, and shall issue an order, exempt from Sections
5307.3 and 5307.4 and the rulemaking provisions of the Administrative
Procedure Act (Chapter 3.5 (commencing with Section 11340) of Part 1
of Division 3 of Title 2 of the Government Code), informing the
public of the changes and their effective date. All orders issued
pursuant to this paragraph shall be published on the Internet Web
site of the Division of Workers' Compensation.
   (3) For the purposes of this subdivision, the following
definitions apply:
   (A) "Medicare Economic Index" means the input price index used by
the federal Centers for Medicare and Medicaid Services to measure
changes in the costs of a providing physician and other services paid
under the resource-based relative value scale.
   (B) "Hospital market basket" means the input price index used by
the federal Centers for Medicare and Medicaid Services to measure
changes in the costs of providing inpatient hospital services
provided by acute care hospitals that are included in the Medicare
prospective payment system.
   (C) "Hospital market basket for excluded hospitals" means the
input price index used by the federal Centers for Medicare and
Medicaid Services to measure changes in the costs of providing
inpatient services by hospitals that are excluded from the Medicare
prospective payment system.
   (h)  Nothing in this   This   
section  shall   does not  prohibit an
employer or insurer from contracting with a medical provider for
reimbursement rates different from those prescribed in the official
medical fee schedule.
   (i) Except as provided in Section 4626, the official medical fee
schedule shall not apply to medical-legal expenses, as that term is
defined by Section 4620.
   (j) The following Medicare payment system components  may
  shall  not become part of the official medical
fee schedule until January 1, 2005:
   (1) Inpatient skilled nursing facility care.
   (2) Home health agency services.
   (3) Inpatient services furnished by hospitals that are exempt from
the prospective payment system for general acute care hospitals.
   (4) Outpatient renal dialysis services.
   (k) Notwithstanding subdivision (a), for the calendar years 2004
and 2005, the existing official medical fee schedule rates for
physician services shall remain in effect, but these rates shall be
reduced by 5 percent. The administrative director may reduce fees of
individual procedures by different amounts, but  in no event
 shall  the administrative director  
not  reduce the fee for a procedure that is currently reimbursed
at a rate at or below the Medicare rate for the same procedure.
   (l) Notwithstanding subdivision (a), the administrative director,
commencing January 1, 2006, shall have the authority, after public
hearings, to adopt and revise, no less frequently than biennially, an
official medical fee schedule for physician services. If the
administrative director fails to adopt an official medical fee
schedule for physician services by January 1, 2006, the existing
official medical fee schedule rates for physician services shall
remain in effect until a new schedule is adopted or the existing
schedule is revised. 
   (m) (1) Notwithstanding subdivisions (a), (b), (f), and (g),
commencing January 1, 2008, the administrative director, after public
hearings, may adopt and revise, no less frequently than biennially,
an official medical fee schedule for inpatient facility fees for burn
cases in accordance with this subdivision. Until the date that the
administrative director adopts a fee schedule pursuant to this
subdivision, the inpatient fee schedule adopted and revised in
accordance with subdivisions (a) and (g) shall continue to apply to
inpatient facility fees for burn cases.  
   (2) In order to establish inpatient facility fees for burn cases
that are adequate to ensure a reasonable standard of services and
care, the administrative director may do any of the following:
 
   (A) Adopt a fee schedule in accordance with the Medicare payment
system, or adopt different conversion factors, diagnostic related
group weights, and other factors affecting payment amounts from those
used in the Medicare payment system.  
   (B) Adopt a fee schedule utilizing payment methodologies other
than those utilized by the Medicare payment system. 

   (C) Adopt a fee schedule that utilizes both Medicare and
non-Medicare methodologies.  
   (3) Inpatient facility fees for burn cases may exceed 120 percent,
but in no case shall exceed 180 percent, of the fees paid by
Medicare. Inpatient facility fees for burn cases shall be excluded
from the calculation of estimated aggregate fees for purposes of
other subdivisions of this section.  
   (4) The changes to this section made by this subdivision shall
remain in effect only until January 1, 2011. 
  SEC. 4.  No reimbursement is required by this act pursuant to
Section 6 of Article XIII B of the California Constitution because
the only costs that may be incurred by a local agency or school
district will be incurred because this act creates a new crime or
infraction, eliminates a crime or infraction, or changes the penalty
for a crime or infraction, within the meaning of Section 17556 of the
Government Code, or changes the definition of a crime within the
meaning of Section 6 of Article XIII B of the California
Constitution.