BILL ANALYSIS                                                                                                                                                                                                    Ó



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          SENATE THIRD READING
          SB 335 (Ed Hernandez and Steinberg)
          As Amended August 18, 2011
          2/3 vote.  Urgency

           SENATE VOTE  :35-2  
           
           HEALTH              16-0        APPROPRIATIONS      17-0        
           
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          |Ayes:|Monning, Logue, Atkins,   |Ayes:|Fuentes, Harkey,          |
          |     |Eng, Garrick, Gordon,     |     |Blumenfield, Bradford,    |
          |     |Roger Hernández, Bonnie   |     |Charles Calderon, Campos, |
          |     |Lowenthal, Mansoor,       |     |Davis, Donnelly, Gatto,   |
          |     |Mitchell, Nestande, Pan,  |     |Hall, Hill, Lara,         |
          |     |V. Manuel Pérez, Silva,   |     |Mitchell, Nielsen, Norby, |
          |     |Smyth, Williams           |     |Solorio, Wagner           |
          |     |                          |     |                          |
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           SUMMARY  :  For the period from July 1, 2011, through December 31, 
          2013, enacts a Medi-Cal hospital provider quality assurance fee 
          (QAF), provides supplemental payments to private hospitals in 
          the Medi-Cal Program, provides for grants to public hospitals, 
          funds for children's health care coverage and for supplemental 
          payments to hospitals for services provided through the Low 
          Income Health Program (LIHP) Medicaid Expansion (MCE).  
          Specifically,  this bill  :  

          1)Establishes a per diem fee assessed on every private acute 
            care hospital for every acute, psychiatric, and rehabilitation 
            inpatient day at a rate of $86.40 per managed care day (other 
            than Medi-Cal), $383.20 per Medi-Cal day, $48.38 per prepaid 
            health plan hospital managed care day, $214.59 per prepaid 
            health plan hospital Medi-Cal managed care (MCMC) day, $309.86 
            per fee-for-service day (other than Medi-Cal).

          2)Imposes the requirement to pay the fee on all private general 
            acute care hospitals, on a 30 month basis from July 1, 2011, 
            to December 31, 2013, exempts any hospital that has been 
            converted from a private hospital to a public hospital or 
            district hospital, long term care hospitals, specified 
            specialty hospital and small and rural hospitals.

          3)Authorizes the Department of Health Care Services (DHCS) to 








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            deduct fee payments owed by a hospital from other payments due 
            to the hospital, to assess interest and penalties, authorizes 
            the penalties to be waived and provides that such 
            determination is not subject to judicial review.

          4)Requires DHCS to make supplemental payments to private 
            hospitals for Medi-Cal inpatient services from the proceeds of 
            the fees, other funds established by this bill, plus matching 
            federal funds, in addition to payments otherwise payable to 
            these hospitals, up to the maximum amount allowed under 
            federal upper payment limits (UPL) and other law, as follows:

             a)   For each general acute care day, $917.66 for fiscal year 
               (FY) 2011-12; $1,086.72 for FY 2012-13; and, $1,305.53 for 
               FY 2013-14;

             b)   For each acute psychiatric day directly reimbursed by 
               DHCS, $695 for FY 2011-12; $790 for FY 2012-13; and, $955 
               for FY 2013-14;

             c)   An additional $1,350 for each high acuity day, as 
               defined, for hospitals with Medi-Cal inpatient utilization 
               rates between 5% and 41.1%;

             d)   An additional $1,350 for each high acuity day for 
               qualifying hospitals with certain trauma centers, as 
               specified; and,

             e)   For Medi-Cal sub-acute services:  40% for FYs 2011-12; 
               and FY 2012-13; and, 20% for FY 2013-14 of the amount of 
               Medi-Cal sub-acute payments made to the hospitals in 2009 
               for hospitals with Medi-Cal inpatient utilization rates 
               between 5% and 41.6%.

          5)Requires DHCS to increase monthly capitation payments to 
            Medi-Cal mental health managed care plans for supplemental 
            payments to private hospitals for acute psychiatric inpatient 
            days at the same rate as for days that are reimbursed directly 
            by DHCS and authorizes direct payment by DHCS for days that 
            were the financial responsibility of the mental health plan as 
            an alternative, as permitted by federal law.

          6)Requires DHCS to increase monthly capitation payments to MCMC 
            plans to the maximum total amount allowable under federal law 








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            for supplemental payments to hospitals, including district and 
            public hospitals, for inpatient services within specified time 
            limits and authorizes DHCS to set aside fee revenue as 
            specified in order to accumulate the required amounts.

          7)Requires DHCS to determine the amount of increased capitation 
            for each plan by considering the composition of Medi-Cal 
            enrollees in each plan, anticipated hospital utilization and 
            other factors related to ensuring access, but in no event to 
            exceed an amount certified by the state's actuary as meeting 
            federal requirements, and provides that payments made to 
            managed care plans in the absence of these payments are not to 
            be reduced as a consequences of these payments and requires 
            the MCMC plans to expend 100% to make payments to hospitals 
            based on actuarial certification, enrollment and hospital 
            utilization within 30 days of receipt in a total amount that 
            equals the increased capitation amount, to document the 
            payments, and specifies that these provisions are not intended 
            to create a private right of action by a hospital.

          8)Specifies legislative intent that payments made to Designated 
            Public Hospitals (DPHs) by MCMC plans are to replace revenue 
            that would otherwise be payable from the managed care 
            Intergovernmental Transfer (IGT) program enacted by SB 90 
            (Steinberg), Chapter 19, Statutes of 2011 and further states 
            that if necessary future legislation will be enacted to ensure 
            this result.

          9)Requires DHCS to deposit the fees in the Hospital Quality 
            Assurance Revenue Fund (HQARF), provides for the disposition 
            of funds that are remitted after the date final payments are 
            due and funds that are collected in excess of the amount 
            needed for payments and to be used as specified in the 
            following order of priority:

             a)   To pay for staffing and administrative costs of DHCS up 
               to $2.5 million;

             b)   To pay for health care for children in the amount of $85 
               million quarterly during 2011-12, and in the amount of 
               $96.75 million quarterly during 2012-13 and 2013-14;

             c)   To make increased capitation payments to MCMC plans;









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             d)   To reimburse the General Fund (GF) for the increase in 
               compensation due to a hospital that changes status from 
               contracting to noncontracting;

             e)   To make increased payments or grants to hospital;

             f)   To make increased payments to mental health plans; and,

             g)   To make supplemental payments to private hospitals for 
               out of network emergency and post stabilization services 
               provided to LIHP MCE enrollees in the amount of $37.5 
               million per quarter.

          10)Creates a contractually enforceable promise on behalf of the 
            state to use the proceeds of the fee and the HQARF only for 
            the purposes, in the amounts authorized by this bill and to 
            comply with all obligations imposed pursuant to this bill.

          11)Authorizes DHCS and the Director to make modifications to the 
            QAF, payment methodologies, and other adjustments as 
            necessary, in consultation with the hospital community, to the 
            extent necessary to obtain federal approval and provides that 
            the fee is inoperative if the federal Centers for Medicare and 
            Medicaid Services (CMS) denies approval before July 1, 2014, 
            and the provisions cannot be modified as authorized in order 
            to meet federal requirements.

          12)Requires the 21 DPHs, (hospitals owned or operated by the 
            University of California and counties) to be paid direct 
            grants, for health care expenditures other than Medi-Cal, 
            funded by the QAF, in the aggregate amount of $50 million in 
            FY 2011-12, $43 million in FY 2012-13 and $21.5 million in FY 
            2013-14, to be allocated by the Director of DHCS pursuant to a 
            methodology to be developed in consultation with the DPHs.

          13)Requires nondesignated public hospitals (NDPH), which are 
            public hospitals owned or operated by local hospital 
            districts, to be paid direct grants, for health care 
            expenditures funded by the QAF, in the aggregate amount of $10 
            million for FYs 2011-12 and 2012-13 and $5 million in FY 
            2013-14, to be allocated by the Director of DHCS pursuant to a 
            methodology to be developed in consultation with the NDPHs.

          14)Establishes the LIHP MCE Out-of Network Emergency Care 








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            Services Fund to consist of:

             a)   For FYs 2011-12 and 2012-13, $20 million and for FY 
               2013-14, $10 million from optional IGT funds transferred 
               from local entities; and,

             b)   For FYs 2011-12 and 2012-13, $75 million and for FY 
               2013-14 $37.5 million transferred from the HQARF.

          15)Requires proceeds of the LIHP Fund to be used by the LIHPs 
            solely for the nonfederal share of supplemental payments for 
            emergency and post-stabilization services provided by private 
            and NDPH hospitals to individuals covered under the LIHP MCE, 
            as established by the State's 2010 Bridge to Reform Medi-Cal 
            Section 1115(a) waiver and specifies legislative intent that 
            IGT funds are to be used first and requires DHCS to obtain 
            federal financial participation (FFP), to disburse the funds 
            as specified, in consultation with the hospital community and 
            based on an allocation of 70% of the funds for inpatient and 
            30% for outpatient emergency and post-stabilization services 
            and authorizes DHCS to adjust the allocation and other 
            operational requirements as necessary to obtain federal 
            approval.

          16)Requires compliance with the out-of-network emergency care 
            services payments program as a condition of participation in 
            the voluntary LIHP. 

          17)Ensures that payments made to hospitals or reimbursement 
            rates set pursuant to other provisions of existing law are not 
            affected or reduced as a result of the supplemental payments 
            established by this bill.

          18)Authorizes DHCS to implement by means of policy letters, 
            provider bulletins, or all plan letters.

          19)Requires DHCS to seek approval from CMS, as specified, and 
            allows for conditional approval and implementation based on 
            receipt of a letter from CMS indicating likely federal 
            approval as specified, provides that the provisions requiring 
            supplemental payments shall be inoperative if this 
            notification of approval is not received by September 1, 2013, 
            and provides that if federal approval, as specified, is not 
            obtained by December 1, 2013, the statutes creating the 








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            hospital provider fee shall become inoperative.

          20)Provides that supplemental payments under the bill are in 
            addition to Disproportionate Share Hospital (DSH) replacement 
            supplemental payments, do not impact eligibility for DSH 
            payments, DSH replacement payments, or stabilization payments 
            under the 2005 hospital waiver or the 2010 Medi-Cal Bridge to 
            Reform waiver and are not to be considered in the 
            determination of adequacy of any rate under federal law.

          21)Provides that, if the Selective Provider Contracting Program 
            (SPCP) is in effect, the supplemental payment to a hospital 
            that becomes a noncontracting hospital during the period of 
            this bill shall be reduced by the resulting increase in costs 
            and the amount shall be transferred to the GF. 

          22)Prohibits payment rates for hospital outpatient services 
            furnished before December 31, 2013, by any hospital from being 
            reduced below those in effect on July 1, 2011.

          23)Prohibits payment rates for hospital inpatient services 
            furnished before December 31, 2013, under contracts negotiated 
            under the SPCP from being reduced below those in effect on 
            July 1, 2011, allows changes to supplemental payments as long 
            as the aggregate is not reduced as specified and establishes a 
            methodology to measure this requirement if a new 
            diagnosis-related groups (DRG) hospital reimbursement 
            methodology is implemented.

          24)Prohibits payments to private hospitals for inpatient 
            services furnished before January 1, 2014, that are not under 
            contracts negotiated under the SPCP from being reduced below 
            the amount that would have been made under the methodology in 
            effect on the effective date of this bill and establishes a 
            methodology to measure this requirement if a new 
            diagnosis-related hospital reimbursement methodology is 
            implemented.

          25)Reduces DSH replacement payments to private hospitals by 
            $10.5 million in FY 2012-13, by $5.25 million for FY 2013-14 
            and prohibits any further reductions during the effective date 
            of this QAF. 

          26)Reduces funds available for payments to private hospitals 








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            from the Private Hospital Supplemental Fund by $17.5 million 
            for FY 2012-13 and by $8.75 million for FY 2013-14, requires 
            the reductions to be allocated equally between children's 
            hospitals and other private hospital and provides for 
            alternative distribution if a DRG payment methodology is 
            implemented. 

          27)Makes this bill inoperative if a court of appellate 
            jurisdiction or CMS determines that any element cannot be 
            implemented and the provisions cannot be modified consistent 
            with the terms of this bill or if it is not approved by CMS 
            before January 1, 2013, and the provisions cannot be modified 
            to meet the requirements of federal law or if a judicial 
            determination results in specified impact to the GF.

          28)Provides for withholding of payment to any hospital that sues 
            to enjoin implementation and conditions a hospital's receipt 
            of payments on continued participation in the Medi-Cal 
            program.

          29)Extends the sunset date on the HQARF created by AB 1383 
            (Jones), Chapter 627, Statutes of 2009, to January 1, 2015, 
            and appropriates $7.2 billion to DHCS, $6.2 billion from the 
            federal trust fund, and $237, 500,000 from the LIHP Fund to be 
            available until January 1, 2015.

          30)Specifies legislative intent to consider legislation 
            requiring the director of DHCS to seek approval for an 
            increase in the fees and increased payments if there is a 
            determination that additional FFP is available within the UPL 
            or the limits on managed care payments and specifies that 
            these increases shall have priority over any other purposes.

           FISCAL EFFECT  :  According to the Assembly Appropriations 
          Committee: 

          1)An increase of $12.4 billion total (50% hospital QAF/50% FFP) 
            paid to private hospitals through December 2013 in the form of 
            supplemental Medi-Cal payments for hospital services. This 
            estimate assumes hospitals subject to the QAF will contribute 
            $6.9 billion, and that this funding it is matched with FFP at 
            the rate of 50% and paid as supplemental payments, except for 
            those funds set aside to the state and for other purposes as 
            explained below. 








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          2)Estimated administrative costs in the Department of Health 
            Care Services (DHCS) of approximately $2 million (50% hospital 
            QAF/50% FFP) annually for the life of the 30-month program ($5 
            million total).

          3)Total estimated net GF savings of $875 million for the life of 
            the 30-month program.  This is comprised of:

             a)   GF savings associated with direct QAF revenue for 
               children's coverage of $85 million per quarter in FY 
               2011-12 and $97.5 million per quarter in FYs 2012-13 and 
               2013-14 ($920.5 million total GF savings). 

             b)   Reduced DSH replacement payments to private hospitals of 
               $21 million (50% GF) in FY 2012-13 and of $10.5 million 
               (50% GF) for 2013-14 ($15.8 million GF savings). 
              
             c)   Reduced funds available for payments to private 
               hospitals from the Private Hospital Supplemental Fund of 
               $31 million (50% GF) for FY 2012-13 and of $17.5 million 
               (50% GF) for FY 2013-14 ($26.3 million GF savings). 

             d)   Offsetting loss of GF savings associated with the repeal 
               of outpatient rate reductions in the Budget Act of 2011 of 
               $34 million.  Assumed loss of savings associated with 
               prohibition of future outpatient reductions of $35.6 
               million in FY 2012-13 and $17.8 million in FY 2013-14 
               ($87.4 million total estimated loss of savings). 

          4)Direct grants to designated public hospitals in the aggregate 
            amount of $50 million in FY 2011-12, $43 million in FY 
            2012-13, and $21.5 million in FY 2013-14.  

          5)Direct grants to non-designated public hospitals of $10 
            million for FYs 2011-12 and 2012-13, and $5 million in FY 
            2013-14. 

          6)Upon the expiration of this program in 2014, GF cost pressure 
            is created to maintain the higher level of payments to 
            hospitals and the children's health care coverage programs 
            funded by the QAF

           COMMENTS  :  According to the author, this bill is intended to 








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          enact a 30-month extension to the current Medi-Cal hospital 
          provider fee or QAF to draw down federal funds and increase 
          payments to private hospitals in the Medi-Cal Program, to pay 
          for children's health care coverage, to provide grants to DPHs 
          and NDPHs, to increase payments to MCMC plans for hospital 
          services and to assure rate stability for hospitals that 
          participate in the Medi-Cal Program.  The author points out that 
          federal law authorize states to levy fees on health care 
          providers if the fees meet federal requirements.  According to 
          the author, the Legislature last session enacted a QAF that 
          ended in December 2010 and a second QAF for the first six months 
          of this year.  The author states that this bill will enact a 
          third QAF, and enable the state to use the revenue to match 
          federal funds, in order to boost Medi-Cal payments to hospitals. 
           In addition, according to the author, the QAF would provide a 
          total of $930 million for children's health coverage.  The 
          author argues that providing increased funding to hospitals 
          using state GF dollars alone would not otherwise be possible 
          given the state's dire fiscal situation

          According to the sponsor, the California Hospital Association 
          (CHA), a new element in this 30-month proposal is the use of the 
          hospital QAF funds to provide $75 million a year for the 
          non-federal share of supplemental payments to hospitals that 
          provide out-of-network emergency services to enrollees in LIHPs. 
           The sponsor points out that under the LIHP, hospitals excluded 
          from the provider networks are only entitled to receive 30% of 
          the average Medi-Cal rate as payment for providing emergency 
          room and inpatient care services.  

          CHA estimates that over the 30-month period, the fee will raise 
          approximately $7 billion and will be matched with approximately 
          $6.1 billion in federal funds with a net benefit to the hospital 
          industry of $5.2 billion.  According to CHA, private hospitals 
          could receive up to approximately $6 billion in supplemental 
          payments for inpatient services, $1.8 billion for outpatient 
          services, and $475 million for out-of-network emergency medical 
          services to LIHP enrollees.  All hospitals will be eligible for 
          up to $3.9 billion in payments from MCMC plans.  DPHs and NDPHs 
          will be eligible for up to $139 million in grants.  In addition, 
          over $900 million will be available for children's health care 
          coverage and the administrative costs to DHCS.

          SB 90 (Steinberg) established a new QAF and hospital 








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          supplemental payment program for the period between January 1, 
          2011, and June 30, 2011, that is similar to the previous fee and 
          supplemental payment program.  SB 90 also authorized the Office 
          of Statewide Health Planning and Development to grant specified 
          extensions of hospital seismic safety requirements, contingent 
          on passage of legislation and federal approval of a new QAF that 
          allocated $320 million for children's coverage in FY 2011-12.  
          This bill meets the requirement of providing the required level 
          of funding.  As a result the authority for hospitals to request 
          additional extensions will be triggered upon federal approval.  
          Notice of federal approval is required to be sent to each 
          hospital and posted on the DHCS Web site within 10 days.  


           Analysis Prepared by  :    Marjorie Swartz / HEALTH / (916) 
          319-2097 


                                                                FN: 0002251