BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 408|
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VETO
Bill No: SB 408
Author: Hernandez (D)
Amended: 8/30/11
Vote: 21
SENATE HEALTH COMMITTEE : 6-3, 4/6/11
AYES: Hernandez, Alquist, De León, DeSaulnier, Rubio, Wolk
NOES: Strickland, Anderson, Blakeslee
SENATE APPROPRIATIONS COMMITTEE : 6-2, 5/26/11
AYES: Kehoe, Alquist, Lieu, Pavley, Price, Steinberg
NOES: Walters, Runner
NO VOTE RECORDED: Emmerson
SENATE FLOOR : 25-15, 6/1/11
AYES: Alquist, Calderon, Corbett, Correa, De León,
DeSaulnier, Evans, Hancock, Hernandez, Kehoe, Leno, Lieu,
Liu, Lowenthal, Negrete McLeod, Padilla, Pavley, Price,
Rubio, Simitian, Steinberg, Vargas, Wolk, Wright, Yee
NOES: Anderson, Berryhill, Blakeslee, Cannella, Dutton,
Emmerson, Fuller, Gaines, Harman, Huff, La Malfa, Runner,
Strickland, Walters, Wyland
ASSEMBLY FLOOR : 48-28, 09/01/11 - See last page for vote
SENATE FLOOR : 22-15, 9/7/11
AYES: Alquist, Corbett, De León, DeSaulnier, Evans,
Hancock, Hernandez, Kehoe, Leno, Lieu, Liu, Lowenthal,
Padilla, Pavley, Price, Rubio, Simitian, Steinberg,
Vargas, Wolk, Wright, Yee
NOES: Anderson, Berryhill, Blakeslee, Cannella, Correa,
Dutton, Emmerson, Fuller, Gaines, Harman, Huff, La Malfa,
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Runner, Strickland, Wyland
NO VOTE RECORDED: Calderon, Negrete McLeod, Walters
SUBJECT : Health facilities: licensure
SOURCE : Congress of California Seniors
Service Employees International Union
DIGEST : This bill requires a new health facility license
application to be filed for a health facility, as defined,
when there is a change of ownership, as defined, or a major
change in ownership interest, as defined and requires a
prescribed notice to be filed with the Department of Public
Health (DPH) prior to a change of ownership, major change
in ownership interest, or a change in control interest, as
defined, of certain health facilities.
Assembly Amendments require a prescribed notice to be filed
with the DPH at least 90 days prior to a an anticipated
change in ownership, permit the DPH, for specified
transactions, to require a new license application to be
filed or withhold approval of the transaction, require the
DPH to assess an penalty in the amount of $25,000 for each
violation of these provisions, permit the licensee to
request a specified hearing if the licensee disputes a
determination by the DPH of a violation, and provide that
penalties collected be deposited in the Internal
Departmental Quality Improvement Account.
ANALYSIS :
Existing law:
1. Provides for the licensing and regulation of health
facilities, including general acute care hospitals,
acute psychiatric hospitals, and special hospitals by
the DPH.
2. Requires any person desiring a license for a health
facility, or approval to manage a health facility, to
file an application with DPH, and to provide evidence
that they are of reputable and responsible character and
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have the ability to comply with statutory and regulatory
requirements applicable to health facilities.
3. Requires, under DPH regulations, a new owner of a health
facility to submit a license application and pay an
application fee when a change of ownership occurs.
(Although the term "change of ownership" is not defined
in regulations governing general acute care hospitals,
it is interpreted by DPH to mean when a new legal entity
assumes responsibility for the operation of the
hospital.)
4. Requires, under the Attorney General's administration of
charitable trust laws, a nonprofit corporation that
operates or controls a health facility to obtain the
consent of the Attorney General prior to entering into
any agreement or transaction to:
A. Sell, transfer, lease, exchange, option, convey,
or otherwise dispose of, a material amount of its
assets to either a for-profit or nonprofit entity; or
B. Transfer control, responsibility, or governance of
a material amount of the assets or operations of the
nonprofit corporation to a for-profit or non-profit
entity.
This bill:
1. Defines "change of ownership" to mean any of the
following:
A. For a partnership, the removal, addition, or
substitution of a partner, unless the partners
expressly agree otherwise, as permitted by state law;
B. For an unincorporated sole proprietorship, the
transfer of title and property to another person;
C. For a corporation, the merger of the licensee's
corporation into another corporation, or the
consolidation of two or more corporations, resulting
in the creation of a new corporation. Specifies that
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the transfer of corporate stock or the merger of
another corporation into the applicant's or
provider's corporation does not constitute a change
of ownership; or,
D. For a lease, the lease of all or part of the
licensee's facility constitutes a change in ownership
of the leased portion.
2. Defines "major change in ownership interest" to mean a
transaction where any of the following occurs:
A. A sale, transfer, lease, exchange, conveyance, or
other disposal of a limited partnership interest,
corporate shares, or limited liability company (LLC)
interest representing at least 50 percent of all
ownership interests in a general acute care hospital,
acute psychiatric hospital, or special hospital or in
the current licensee, including the final transfer or
assignment of multiple transfers over a 10-year
period that cumulatively total at least 50 percent of
ownership interests;
B. The merger of an entity that owns or operates a
general acute care hospital, acute psychiatric
hospital, or special hospital that does not result in
a change in the taxpayer identification number of the
licensee;
C. For a LLC, the merger of the applicant's or
provider's LLC into another LLC, or the consolidation
of two or more LLCs, resulting in the creation of a
new LLC. Clarifies that the transfer of LLC interest
or the merger of another LLC into the licensee's LLC
does not constitute a change of ownership; or,
D. For any unincorporated sole proprietorship,
corporation, LLC, partnership, lessee, nonprofit
corporation, or any other entity that operates or
controls a general acute care hospital, acute
psychiatric hospital or special hospital, a
substitution of a new corporate member or member of
the governing body, or any arrangement, written or
oral, that would transfer voting control of, or
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responsibility for, or governance of, that general
acute care hospital, acute psychiatric hospital or
special hospital.
3. Defines "change in control interest" to mean a
transaction where any of the following, except a "change
of ownership" or "major change in ownership interest"
occurs:
A. A sale, transfer, lease, exchange, conveyance, or
other disposal of any partnership, limited
partnership interest, corporate shares, or LLC
interest representing at least 10 percent of all
ownership interest in a general acute care hospital,
acute psychiatric hospital, or special hospital, or
in the licensee, but that represents less than 50
percent of the ownership interests in the health
facility or licensee;
B. A change in any member of the governing body or
principal officers of a general acute care hospital,
psychiatric hospital, or special hospital; or,
C. Any transaction that affects more than 10 percent
of the value of a general acute care hospital, acute
psychiatric hospital, or special hospital that are
operated or controlled by the licensee.
4. Requires a new license application for a general acute
care hospital, psychiatric hospital, skilled nursing
facility, intermediate care facility, or special
hospital to be filed before there is an anticipated
change of ownership. Prohibits a change of ownership
from occurring until DPH approves the license
application and issues a new license.
5. Requires a new license application for general acute
care hospital, psychiatric hospital, or special hospital
be filed before there is a major change in ownership
interest in the health facility. Prohibits a major
change in ownership interest until DPH approves the
license application and issues a new license.
6. Requires a notice of change to be filed with DPH, at
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least 90 days prior to an anticipated change of
ownership, a major change in ownership interest or
change in control interest in a general acute care
hospital, psychiatric hospital, or special hospital.
Requires that a new license application be filed with
the notice if the transaction is a change in ownership
or a major change in ownership interest. Requires the
licensee to notify DPH of the change on a form provided
by DPH, if the transaction is a change in control
interest.
7. Requires DPH, within 10 days of the receipt of notice
referenced in #6 above, to post receipt of the notice on
DPHs Web site.
8. Permits DPH, with regard to a transaction that is a
change in control interest, within 90 days of the notice
referenced in #6 above, to require a new license
application to be filed, or withhold approval of the
transaction, if DPH has a reason to believe, based on
past compliance history, that any person or entity whose
control interests in the facility or facilities operated
or controlled by the licensee are affected by the
transaction, has not complied with state or federal laws
or regulations, or is under investigation for any
alleged violation of state or federal laws or
regulations.
9. Permits DPH, if a licensee of a specified health
facility fails to comply with in this bill, to assess
the licensee an administrative penalty in an amount not
to exceed $25,000 per violation. Permits the licensee,
if the licensee disputes a determination by DPH
regarding the alleged violation, within 10 days of
receipt of the penalty assessment, request a hearing
pursuant to existing law. Requires administrative
penalties to be paid when appeals have been exhausted
and the penalty has been upheld. Requires all
administrative penalties collected by DPH to be
deposited in the Internal Department Quality Improvement
Account of the Special Deposit Fund created under
existing law.
10.Requires DPH, in enforcing the provisions of this bill,
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to take into consideration the special circumstances of
small and rural hospitals in order to protect access to
quality care in those hospitals.
11.Permits DPH to implement the provisions of this bill by
means of all facility letters, or similar instructions,
without taking further regulatory action.
Background
Acquisition of Alvarado Hospital by Prime . In November
2010, Prime announced the acquisition of Alvarado Hospital
in San Diego from Plymouth Health, LLC (Plymouth), a
privately-held company that had owned the hospital since
January 2007. Concurrent with the announcement, Alvarado
Hospital LLC, the entity that held the license to operate
the hospital, notified DPH that 100 percent of the
membership interests of Alvarado Hospital, LLC had been
transferred from Plymouth to Prime.
At the time of the acquisition, Prime stated that because
it had acquired Alvarado Hospital by acquiring control of
Alvarado Hospital, LLC, the entity that was licensed to
operate the hospital, the transaction did not constitute a
change of ownership requiring approval from DPH.
In November 2010, Assemblymember Marty Block sent DPH a
letter asking it to deny approval to Prime to take control
of the hospital on the grounds that the acquisition
constituted a change of ownership and that the department
had not completed its investigation of Prime's reported
high septicemia rates. Legal counsel representing Service
Employees International Union-United Healthcare Workers
(SEIU-UHW) sent DPH a similar request, arguing that the
acquisition of Alvarado Hospital by Prime constituted a
circumvention of hospital change of ownership requirements.
In December 2010, DPH replied in letters to Assemblymember
Block and SEIUs legal counsel that it lacked authority to
require a change of ownership application because, even
though 100 percent of the membership interests in Alvarado
had been transferred from Plymouth Health to Prime, the
named licensee, Alvarado Hospital, LLC would remain the
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same as before the transfer.
DPH investigation of septicemia rates at Prime hospitals .
In mid-2010, the SEIU-UHW released a report showing very
high rates of septicemia among patients treated at
hospitals operated by Prime. Septicemia is a serious form
of infection associated with the presence of bacteria in
the blood. Based on an analysis of Medicare claims data
from 2008, the report found that Prime operated five of the
six hospitals in the country with the highest reported
rates of septicemia. The report also found that 15.7
percent of Medicare patients treated at Prime hospitals had
septicemia, compared to a national rate of 4.8 percent
overall and a rate of 9.2 percent for larger health
systems.
A subsequent analysis of Medi-Cal admissions data from 2008
by SEIU-UHW found that Prime operated the four California
health facilities with the highest rates of reported
septicemia in Medi-Cal patients. The study found that
Prime hospitals had 2.4 times more septicemia cases among
Medi-Cal patients than the level that would be expected
based on average rates of reported septicemia at all
hospitals.
If substantiated, the reported high rates of septicemia
could be indications of quality of care problems in Prime
hospitals, or indications of inaccurate coding of diagnoses
or potential billing fraud.
Based on the reports, the federal Office of the Inspector
General and the California Attorney General began
investigations into Prime's billing practices related to
the high reported rates of septicemia.
In August and September 2010, Senator Alquist, then chair
of the Senate Health Committee, and Assemblymember Monning,
chair of the Assembly Health Committee, sent letters to DPH
asking DPH to investigate and to withhold approval of any
additional applications by Prime to operate additional
health facilities.
In September 2010, DPH stated in letters to the chairs that
it was investigating the high reported cases of septicemia
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and was coordinating its investigation with the Department
of Health Care Services' Audits and Investigations Unit.
DPH also stated that it was planning to conduct Patient
Safety Licensing Surveys of Prime hospitals in the fall
2010, and that it would cite Prime for any violations of
hospital infection control requirements and obtain
corrective action plans. DPH also pledged to refer its
reports and actions to the federal Office of the Inspector
General and to accreditation organizations. In a
follow-up letter to the chairs, DPH also stated that it
would not act on any change of ownership applications
submitted by Prime until all of the investigations were
concluded.
Prime has disputed the results of the SEIU analyses,
stating that the bulk of the septicemia cases represent
conditions present on admission to the hospital, that SEIUs
study failed to identify other hospitals with similar
septicemia rates, that Prime hospitals can be expected to
have higher septicemia rates because more of their Medicare
patients are admitted through the emergency department or
from long-term care facilities and that they are older on
average than at other hospitals, and that it strictly
complies with Medicare coding guidelines and no issues have
been identified with its coding practices.
A subsequent report in February 2011, prepared by
California Watch, found high rates of several forms of
malnutrition at Prime hospitals. Among the report's
findings were that in 2009, Prime reported that 25 percent
of its Medicare patients were malnourished, compared to a
state average of 7.5 percent.
In March 2011, Senator Hernandez, the Chair of the Senate
Health Committee, sent a letter to DPH asking it to
investigate the high reported rates of malnutrition in
order to determine whether Prime hospitals have been
correctly identifying large numbers of extreme malnutrition
cases among Medicare patients, or whether the numbers
reflect overbilling of seniors and the Medicare program.
The letter asked that DPH not approve any additional
facility licenses for Prime-related facilities until
completing the investigation.
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Comment
Effect on DPH:
Existing California regulations require hospitals to inform
DPH using a Form 215A of every change or corporate
reorganization including individual information on
administrators, owners, directors, board members, corporate
officers, LLC members/managers, a management company, a
parent organization, and individuals having 10 percent or
more interest in the licensee (for-profit) or parent
organization.
This bill causes a hospital to file a change of ownership
application for every Form 215A filing. DPH receives
approximately 500 annually. Additionally, a hospital would
have to file a change of ownership application for a
variety of everyday hospital operations, such as selling
radiology equipment or an out-sourcing of hospital billing
or dietary services, provided they exceed $3 million.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
According to the Assembly Appropriations Committee, this
bill triggers an unknown number of additional new hospital
licensure applications. Assuming a new hospital licensure
application is required in 10 percent of the cases of
licensure-related changes that are reported to the DPH,
this bill results in increased costs to DPH of
approximately $150,000 (special fund) annually to process
the applications. According to the Assembly Appropriations
Committee, this bill will all result in potential unknown
increases in penalty revenue to DPH from administrative
penalties assessed for failure to comply with this bill's
provisions.
SUPPORT : (Verified 8/24/11)
Congress of California Seniors (co-source)
Service Employees International Union (co-source)
California Medical Association
California Nurses Association
Consumer Federation of California
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Health Access California
United Nurses Associations of California/Union of Health
Care Professionals
OPPOSITION : (Verified 8/24/11)
California Hospital Association
ARGUMENTS IN SUPPORT : SEIU, this bill's sponsor, states
that although existing law requires any prospective
hospital operator to obtain a new license prior to
operating or managing a hospital, the law has been
interpreted to allow holding companies which hold such
licenses to be bought and sold without triggering a change
of ownership and new license application. SEIU argues that
this enables a company like Prime to acquire and manage a
new hospital even while it is under investigation.
Health Access California writes that this bill closes a
loophole in the existing hospital licensure law that allows
hospital owners with track records of questionable quality
of care to buy more hospitals, using language similar to
that used by the Attorney General with respect to mergers
and acquisitions involving public hospitals.
ARGUMENTS IN OPPOSITION : The California Hospital
Association opposes this bill and writes, "This bill would
require hospitals to complete and file a full hospital
license application for ordinary business transactions that
do not result in a change of ownership of the legal entity
that is a licensed hospital. The bill expands the new
application requirement to all sorts of business
transactions, changing supplemental information filings to
full applications. This expansion in filings would result
in unprecedented costs for both hospitals and the
California Department of Public Health (CDPH) for very
little if any benefit, and without advancing any legitimate
purpose."
GOVERNOR'S VETO MESSAGE:
"I am returning Senate Bill 408 without my signature.
The bill requires hospitals and other health facilities
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to file a new license application with the state not only
when there's a change of ownership, but when far less
important changes occur.
New license applications run several hundreds of pages
long. Under the bill, hospitals may be required to file a
new license application for normal day-to-day
transactions that do not require such scrutiny.
My administration will work with interested parties to
find the right balance for state oversight of health
facility ownership transactions."
ASSEMBLY FLOOR : 48-28, 9/1/11
AYES: Alejo, Allen, Ammiano, Atkins, Beall, Block,
Blumenfield, Bradford, Brownley, Butler, Charles
Calderon, Campos, Carter, Cedillo, Dickinson, Eng, Feuer,
Fong, Fuentes, Furutani, Galgiani, Gatto, Gordon, Hall,
Hayashi, Roger Hernández, Hill, Huber, Hueso, Huffman,
Lara, Bonnie Lowenthal, Ma, Mendoza, Mitchell, Monning,
Pan, Perea, V. Manuel Pérez, Portantino, Skinner,
Solorio, Swanson, Torres, Wieckowski, Williams, Yamada,
John A. Pérez
NOES: Achadjian, Bill Berryhill, Buchanan, Conway, Cook,
Donnelly, Fletcher, Beth Gaines, Garrick, Grove, Hagman,
Halderman, Harkey, Jeffries, Jones, Knight, Logue,
Mansoor, Miller, Morrell, Nestande, Nielsen, Norby,
Olsen, Silva, Smyth, Valadao, Wagner
NO VOTE RECORDED: Bonilla, Chesbro, Davis, Gorell
CTW:kc 1/4/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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