BILL ANALYSIS                                                                                                                                                                                                    Ó






                             SENATE COMMITTEE ON HEALTH
                          Senator Ed Hernandez, O.D., Chair

          BILL NO:       AB 2546
          AUTHOR:        Salas
          AMENDED:       June 10, 2014
          HEARING DATE:  June 18, 2014
          CONSULTANT:    Marchand

           SUBJECT  :  Kern County Hospital Authority.
           
          SUMMARY  :  Enacts the Kern County Health System Authority Act,  
          which would permit the Kern County Board of Supervisors to  
          establish by ordinance the Kern County Health System Authority  
          as a public agency separate and apart from the County, and  
          charges the Authority with the management, administration, and  
          control of Kern Medical Center (the county hospital) and Kern  
          Health Systems (the Local Initiative managed care plan).

          Existing law:
          1.Requires every county to be a "provider of last resort," by  
            supporting all incompetent, poor, indigent persons, and those  
            incapacitated by age, disease, or accident, who reside in the  
            county, when such persons are not supported and relieved by  
            their relatives or friends, by their own means, or by state  
            hospitals or other state or private institutions.

          2.Permits the board of supervisors of each county to prescribe  
            rules that authorize the county hospital to integrate its  
            services with those of other hospitals into a system of  
            community service. Permits the board of supervisors of any  
            county to transfer the maintenance, operation and management  
            or ownership of the county hospital to the University of  
            California or any other public agency or community nonprofit  
            corporation empowered to operate a hospital facility upon a  
            finding that the community services provided by the hospital  
            could be more efficient, effectively or economically provided  
            by the transferee than the county.

          3.Establishes the Alameda County Hospital Authority as a  
            separate public entity, established by the Alameda County  
            Board of Supervisors, to manage the Alameda County Medical  
            Center.

          4.Defines "designated public hospital" as one of a list of  
            county and UC hospitals, including Kern Medical Center (KMC).
                                                         Continued---



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          5.Establishes the Medi-Cal program, which is administered by the  
            Department of Health Care Services (DHCS), under which  
            qualified, low-income individuals receive health care  
            services.

          6.Defines a "local initiative" as the Medi-Cal prepaid health  
            plan that is organized by a county government or by county  
            governments of a region designated by the director of DHCS, or  
            organized by stakeholders of the designated region, and  
            awarded a Medi-Cal contract by DHCS.

          7.Requires, through regulation, in regions designated by DHCS,  
            eligible Medi-Cal beneficiaries to receive health care  
            services through one of two prepaid health plans (this is  
            known as the "two plan model"). Requires the two prepaid  
            health plans in the designated regions to be selected as  
            follows:

                  a.        Requires DHCS to award one contract through a  
                    competitive bid process; or, 
                  b.        Requires DHCS to award one contract to a  
                    prepaid health plan, which is organized by the county  
                    government or governments, or by stakeholders of a  
                    region designated by the director under the Two-Plan  
                    Model, or designated by the county government(s) or by  
                    stakeholders of a region designated by the director  
                    under the Two-Plan Model, and approved by DHCS.
          
          This bill:
          1.Enacts the Kern County Health System Authority Act, which  
            would permit the Kern County Board of Supervisors (County) to  
            establish by ordinance the Kern County Health System Authority  
            (Authority) as a public agency separate and apart from the  
            County, and charges the Authority with the management,  
            administration, and control of KMC and the Kern Health Systems  
            (KHS) managed care plan.

          2.Requires the purpose of the Authority to be to provide  
            management and administration for KMC to continue to operate  
            as a designated public hospital, and to provide management and  
            administration for the KHS managed care plan to continue to  
            operate as a local initiative to ensure the substantial  
            participation of the disproportionate share hospital in the  
            county, and to negotiate and enter into contracts to provide  
            health care services to individuals covered under specified  




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            federal programs, private coverage, Covered California plans,  
            other publicly supported programs, and uninsured or indigent  
            individuals.

          3.Requires DHCS and the Department of Managed Health Care (DMHC)  
            to take all necessary steps to ensure that the Authority is  
            permitted to operate KMC and the KHS managed care plan, the  
            medical center continues its status as a designated public  
            hospital, the managed care plan continues to operate as a  
            local initiative, and the Authority can participate as a  
            contributing public agency for purposes of federal financial  
            participation under Medicaid.

          4.Requires the County, in the enabling ordinance, to establish  
            the terms and conditions of the transfers to the Authority  
            from the County and KHS, including, but not limited to, all of  
            the following:

                  a.        Any transfer of real and personal property,  
                    assets and liabilities, including, but not limited to,  
                    liabilities of KMC determined and assigned by the  
                    County for County funds previously advanced to fund  
                    the operations of the medical center;
                  b.        Transfer of employees, including any necessary  
                    personnel transition plan, as specified in this bill;
                  c.        Maintenance and operation and management or  
                    ownership of KMC and KHS.
                  d.        Transfer of licenses; and,
                  e.        Any other matters as the County deems  
                    necessary, appropriate or convenient for the conduct  
                    of the Authority's activities.

          5.Requires, upon establishment of the Authority, all assets and  
            liabilities, and all operations and governance, comprising the  
            KHS managed care plan, to be transferred to the Authority  
            pursuant to the terms and conditions of the enabling  
            ordinance.

          6.Requires the KHS managed care plan to provide at least 30 days  
            advance notice for change of ownership to DMHC in a notice of  
            material modification, which is required to describe any  
            changes in the governing body or higher management of the  
            managed care plan, and requires this material modification to  
            be deemed approved upon receipt, notwithstanding any other  
            law. Requires any other changes to plan operations,  




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            governance, or financial status to be made after the change of  
            ownership, and to be subject to the requirements of the  
            Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene  
            Act). Requires the Authority to comply with the applicable  
            requirements of the Knox-Keene Act with respect to the  
            maintenance, operation, and management or ownership of the  
            managed care plan.

          7.Requires the County to terminate KHS by ordinance upon the  
            transfer of management to the Authority, and requires the  
            County to notify DHCS 30 days prior to the effective date of  
            the termination.

          8.Specifies that certain provisions of law pertaining to  
            requirements of a county when a local initiative files for  
            bankruptcy or is terminated by the county do not apply to the  
            termination of KHS pursuant to this bill, including a  
            provision requiring DHCS to conduct an audit of the local  
            initiative's records to determine the liabilities and assets  
            of the local initiative.

          9.Permits the County to contract with the Authority to provide  
            indigent care services on behalf of the County, but prohibits  
            the Authority from undertaking any of the County's obligations  
            under specified provisions of law requiring counties to be the  
            "provider of last resort," nor receive any revenue for the  
            discharge of the County's obligations, without a written  
            agreement with the County.

          10.Specifies that a transfer of the maintenance, operation, and  
            management of KMC to the Authority shall not empower the  
            Authority to transfer any ownership interest of the County in  
            KMC except as otherwise approved by the County. Permits the  
            County to retain control of the physical plant and facilities  
            of KMC except as otherwise specifically provided for in the  
            enabling ordinance, and that any lease agreement or other  
            agreement between the County and the Authority may provide  
            that the County premises shall not be sublet without the  
            approval of the County.

          11.Specifies that unless otherwise agreed to by the Authority  
            and the County, an obligation of the Authority shall be the  
            obligation solely of the Authority and not of the County, and  
            any contract executed by the Authority shall contain a  
            provision that liabilities or obligations of the Authority  
            shall not become liabilities or obligations of the County.




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          12.Specifies that the Authority is not subject to the  
            jurisdiction of a local agency formation commission, as  
            defined.

          13.Requires the County to adopt, and the Authority to implement,  
            a personnel transition plan (PTP), and requires the PTP to  
            require all of the following:

                  a.        Ongoing communication to employees and  
                    recognized employee organizations regarding the impact  
                    of the transition on existing employees and employee  
                    classifications of KMC, the KHS managed care plan, and  
                    other health care facilities;
                  b.        Meeting and conferring with representatives of  
                    affected bargaining unit employees on the timeframe  
                    for when the transfer of personnel shall occur, and on  
                    the specified periods of time during which county or  
                    KMC employees affected by the establishment of the  
                    Authority may elect to be considered for appointment  
                    to funded, equivalent, vacant County positions, and  
                    exercise reinstatement rights, for which they are  
                    eligible; and,
                  c.        Acknowledgment that the Authority, to the  
                    extent permitted by federal law, is bound by the terms  
                    of the memoranda of understanding executed between the  
                    County and its exclusive employee representatives that  
                    are in effect on the date the County adopts the  
                    enabling ordinance.

          14.Prohibits the implementation of this bill from being a cause  
            for the modification of the level of KMC, County, or KHS  
            employment benefits. Requires employees who work for KMC, the  
            County, or KHS immediately prior to the execution of the  
            enabling ordinance to retain their existing or equivalent  
            classifications and job descriptions upon transfer to the  
            Authority, comparable pension benefits, and at least their  
            existing salaries and other benefits, including unused  
            vacation and sick leave, and health care and retiree health  
            benefits.

          15.Requires the Authority to recognize, as the exclusive  
            representatives of those Authority employees who perform  
            functions transferred from the County or KMC, the same  
            exclusive representatives who represented the employees  




          AB 2546 | Page 6




            performing those functions at KMC or the County prior to the  
            transfer to the Authority.

          16.Requires the Authority, in order to stabilize labor and  
            employment relations and provide continuity of care and  
            services to the people of the County, to do all of the  
            following for a period of 24 months after the effective date  
            of the transfer of KMC to the Authority:

                  a.        Continue to recognize each exclusive  
                    representative of each bargaining unit;
                  b.        Continue to provide at least the same level of  
                    employee benefits to Authority employees who were KMC,  
                    County, or KHS managed care plan employees that had  
                    been provided to these employees; and,
                  c.        Roll over and continue to be bound by any  
                    existing KMC or County memoranda of understanding  
                    covering the terms and conditions of transferred  
                    employees for 24 months after the term end date of any  
                    memoranda of agreement, unless modified by mutual  
                    agreement.

          17.Requires permanent employees of KMC, the County, or KHS on  
            the effective date of the transfer to the Authority to be  
            deemed qualified for employment or retention in equivalent  
            positions at the Authority, and requires employees who  
            transfer to the Authority to retain the seniority they earned  
            from previous employers.

          18.Prohibits anything in this bill from prohibiting the  
            Authority from determining the number of employees, the number  
            of full-time equivalent positions, job descriptions, the  
            nature and extent of classified employment positions, and  
            salaries of employees.

          19.Requires the Authority to be governed by a board of trustees,  
            appointed by the County. Requires the County, in the enabling  
            ordinance, to specify the membership of the board, the  
            qualifications, terms of office, and all other matters the  
            County deems necessary or convenient. Permits the board of  
            trustees to consist entirely of members of the County board of  
            supervisors or include any number of the members of the board  
            of supervisors. Permits the County, after the formation of the  
            Authority, to modify the number, length of terms, and  
            appointing authority for the board of trustees.





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          20.Establishes various specified powers and duties of the  
            Authority, including to incur indebtedness and to borrow money  
            and issue bonds, to acquire property, invest surplus money and  
            manage investments, engage in managed care contracting or  
            affiliations with other health care facilities, to request the  
            County seek voter approval for a tax on behalf of the  
            Authority, and engage in other activities that may be in the  
            best interests of the Authority.

          21.Prohibits anything in this bill from precluding the Authority  
            from repayment of its debts or other liabilities, using funds  
            that are not otherwise encumbered and do not cause the managed  
            care plan's tangible net equity to drop below its required  
            level.

          22.Specifies that the Authority is a government agency separate  
            and apart for all purposes from the County, and is not subject  
            to the civil service requirements of the County, nor any other  
            policies or operational rules of the County, KMC, or any other  
            public entity, including those policies relating to personnel  
            and procurement. Requires the board of trustees of the  
            Authority to adopt rules with regard to basic human resource  
            functions not inconsistent with employees' memoranda of  
            understanding.

          23.Requires the Authority to comply with the Meyers-Milias-Brown  
            Act, the Public Records Act, and the Ralph M. Brown Act, as  
            specified, and be subject to the jurisdiction of the Public  
            Employment Relations Board.

          24.Permits the board of trustees of the Authority to hold  
            meetings in closed sessions for discussions of trade secrets,  
            and exempts records that reveal the Authority's trade secrets,  
            or rates of payment, from disclosure.

          25.Provides for peer review bodies to be formed by the  
            Authority, and exempts the activities of these peer review  
            bodies from disclosure, and extends other confidentiality  
            protections in existing law to the activities of these peer  
            review bodies.

          26.Provides the Authority with authority over procurement and  
            contracts, and permits contracting on a non-bid basis and  
            exempts these contracts from specified provisions of the  
            Public Contract Code pertaining to the acquisition of goods  




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            and services by state agencies.

          27.Specifies that transfer of KMC by the County to the Authority  
            does not affect the eligibility of the County or the Authority  
            to participate in various funding mechanisms, including  
            Medi-Cal disproportionate share hospital payments, Medi-Cal  
            supplemental reimbursements, the Low Income Health Program,  
            and any other funding source that would otherwise be available  
            to a county provider or designated public hospital.

          28.Permits the County to terminate the Authority, and to notify  
            DHCS 30 days prior to the effective date of the termination.  
            Permits the notice to include a statement of the County's  
            intent to have the medical center and managed care plan  
            transferred to the County upon the effective date of  
            termination of the Authority.

          29.Specifies that in the event that the Authority votes to file  
            a petition of bankruptcy, or the County notifies DHCS of its  
            intent to terminate the Authority, provisions in existing law,  
            setting forth certain procedures for when a local initiative  
            files bankruptcy or is terminated, will apply regarding DHCS  
            converting the beneficiaries to other managed care contractors  
            or fee-for-service systems and reviewing financial records.

          30.Makes various legislative findings and declarations,  
            including that, in order for the County and KHS to further  
            their common mission of improving the health status of the  
            people of the County through providing access to affordable,  
            high quality health care services, and to help ensure the  
            viability of the health care safety net in the County, it is  
            necessary they be permitted to combine resources and  
            consolidate efforts towards an integrated delivery system to  
            achieve health plan and provider alignment.

           FISCAL EFFECT  : This bill has been keyed non-fiscal.

           PRIOR VOTES  :  
          Assembly Local Government:Not relevant
          Assembly Floor:          Not relevant
          
          COMMENTS  :  
           1.Author's statement.  According to the author, KMC is the  
            foundation of Kern County's health care system, serving as the  
            largest provider of health care services in the county and the  
            only trauma center between Fresno and Los Angeles. In  




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            addition, the medical center provides care for 80 percent of  
            our county's high-risk infants through its neonatal intensive  
            care unit. Currently, KHS operates one local initiative  
            Medi-Cal managed care health plan, and it contracts with KMC  
            and its affiliated clinics to serve Medi-Cal lives.  County  
            leaders have put forth a plan to increase access to quality,  
            coordinated health care while reducing overall health care  
            costs by allowing for the establishment of the Authority to  
            include both KHS and KMC. The purpose of the Authority is to  
            allow for the formation of an integrated delivery system to  
            align incentives and care delivery between the local  
            initiative health plan and county run public hospital.   

          2.Background on Medi-Cal Managed Care. In 1993, DHCS began the  
            process of expanding the enrollment of its Medi-Cal population  
            into managed care health plans, which the Legislature intended  
            would reduce the cost of Medi-Cal care and provide  
            beneficiaries with improved quality of services and access to  
            care. In California, there are six models of managed care.  
            Medi-Cal managed care serves about 6.6 million Medi-Cal  
            beneficiaries in 58 counties. This is about 70 percent of the  
            total Medi-Cal population. One of the managed care models is  
            the Medi-Cal two-plan model (two-plan model) in which both a  
            county entity, known as a local initiative, and a commercial  
            health plan provide services to Medi-Cal beneficiaries. Kern  
            County is a two-plan model county. The two-plan model serves  
            about 4.3 million beneficiaries in 14 counties: Alameda,  
            Contra Costa, Fresno, Kern, Kings, Los Angeles, Madera,  
            Riverside, San Bernardino, San Francisco, San Joaquin, Santa  
            Clara, Stanislaus and Tulare. The two plans in Kern County are  
            Health Net (the commercial plan) and Kern Family Health (the  
            local initiative), operated by KHS. 
          
          3.Background on Kern Health Systems. KHS, doing business as Kern  
            Family Health Care, is a public agency established to operate  
            the Local Initiative for Kern County under DHCS' Strategic  
            Plan for expanding Medi-Cal managed care under the two plan  
            model. Authority to establish KHS as a public entity is found  
            in the state Welfare and Institutions Code, which empowers a  
            county to establish an organized health care system,  
            administered by a special authority, to effectively deliver  
            publicly assisted medical care in the county, while promoting  
            quality of care and cost efficiency. KHS was established in  
            1993, and became a County Health Authority structure in  
            January of 1995. KHS received a Knox-Keene license from DMHC  




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            in May 1996, and Kern Family Health Care began operation July  
            1, 1996. According to DHCS data, as of May 2014, KHS has a  
            Medi-Cal enrollment of 152,309, and Health Net (the commercial  
            plan in Kern's two-plan model) has a Kern County Medi-Cal  
            enrollment of 61,490. According to its 2013 financial filing  
            with DMHC, KHS had revenue of $264,366,000, medical expenses  
            of $230,724,000, and net income of $5,507,000. KHS' medical  
            loss ratio was 94.27 percent.

          4.Background on KMC's financial position. On June 9, 2014, KMC  
            provided the County with an update on its financial position  
            for the ten-month period ending April 30, 2014. According to  
            the report, despite a County General Fund contribution of $13  
            million in October of 2013, KMC has continued to operate at a  
            loss each subsequent month yielding a further budgetary  
            deficit of $12.8 million through the end of April. According  
            to the report, the primary cause of the monthly operating  
            losses is lower than expected net patient revenue. The report  
            notes that while the indigent payer mix is assumed to improve  
            as a result of the Affordable Care Act (ACA), patients will  
            now have the ability to choose where they receive their care,  
            and that as a result, the number of patients who present at  
            KMC may diminish now that their insurance coverage is accepted  
                                                 at all hospitals in the community. Year-to-date, the hospital  
            is operating at a $25.8 million deficit. The report stated  
            that KMC management is implementing salary reduction plans to  
            meet its obligation to reduce costs by $6.5 million, a  
            reduction that equates to approximately five percent of the  
            current staffing cost, and the hospital is on target to meet  
            this reduction goal by the end of the fiscal year. 

          KMC has a new Chief Executive Officer, who started in December  
            of 2013. Under his leadership, monthly losses that had been  
            averaging $3 million per month have been reduced to $2.7  
            million in March and only $371,000 in April. The County states  
            that with the financial situation improving at KMC, it is  
            projected that a loan balance that KMC has with the County  
            will decrease from approximately $100 million in prior months  
            to $82 million by the end of this fiscal year.

          5.Public integrated delivery systems. According to the author,  
            the model of care in this bill builds upon other models of  
            publicly run integrated delivery systems such as those in  
            Contra Costa, Ventura and Santa Clara counties, and the  
            Alameda Hospital Authority.  The author states that forming an  
            integrated delivery system comprised of a health plan and a  




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            hospital allows the health authority to provide coordinated  
            patient care that aligns incentives across the health plan and  
            providers to improve the quality and value of services  
            delivered in the County.

          In Contra Costa County, to look at one of their examples, there  
            is a county-established local initiative managed care plan  
            known as Contra Costa Health Plan, and the County runs a  
            public hospital, Contra Costa Regional Medical Center. While  
            they have separate governance structures, they are integrated  
            in the sense that Contra Costa Regional Medical Center is the  
            hospital provider for Contra Costa Health Plan, and  
            non-hospital services are provided through one of eight  
            outpatient health centers run by Contra Costa County.

          What appears to be unique about this proposal, compared to  
            Contra Costa County and other counties with a local initiative  
            and a county hospital, is that this bill proposes a single  
            governing body, a single executive officer, and a merger of  
            assets and liabilities for the licensed health plan and the  
            licensed hospital.

          6.State Auditor report on local initiatives and discussion of  
            tangible net equity. In December 2011, the Bureau of State  
            Audits (BSA) published a report entitled Medi-Cal Managed Care  
            Program: The Departments of Managed Health Care and Health  
            Care Services Could Improve Their Oversight of Local  
            Initiatives Participating in the Medi-Cal Two-Plan Model. BSA  
            notes that DHCS and DMHC share oversight responsibility for  
            the local initiatives participating in the two-plan model.  
            Under the Knox-Keene Act, DMHC monitors the financial  
            viability of all managed care health plans, including the  
            local initiatives, by reviewing financial reports submitted by  
            the plans, as well as by other measures. DHCS, for its part,  
            contracts with the local initiatives to provide Medi-Cal  
            managed care services and oversees compliance with Medi-Cal  
            requirements. DHCS makes monthly payments to the local  
            initiatives based on the number of enrolled beneficiaries. The  
            audit report found that DMHC was chronically late in  
            completing its financial reviews, and in some cases failed to  
            detect that local initiatives were incorrectly categorizing  
            administrative expenses as medical expenses, including one  
            instance where KHS improperly categorized $5.3 million in  
            claims processing as a medical expense. 





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          The BSA report also looked at the tangible net equity (TNE) of  
            local initiatives. Under the Knox-Keene Act, the main measure  
            of a managed care plan's financial viability is TNE, and while  
            both DMHC and DHCS have established minimum required TNE  
            balances, there are no upper limits. While each local  
            initiative's TNE is different, DMHC will perform a financial  
            review if a plan is at risk of falling below 130 percent of  
            TNE, while DHCS' internal policy is to ensure that 200 percent  
            of TNE is maintained. BSA found that all eight of the local  
            initiatives it reviewed had TNE actual balances that exceeded  
            their required minimum balances. BSA reported that the  
            majority of local initiatives stated that the main reason for  
            maintaining TNE beyond the required minimum is to ensure  
            continuity of service to Medi-Cal beneficiaries, and to  
            maintain a strong provider network, especially during periods  
            when state funding is delayed. BSA found that each local  
            initiative appears to have valid reasons for the level it  
            sets, and that because all of the local initiatives met or  
            exceeded DHCS' minimum performance indicators, the local  
            initiatives have shown they generally provide a satisfactory  
            level of care to beneficiaries while maintaining varying TNE  
            balances. BSA reported that Alameda Alliance for Health, for  
            example, indicated that the required TNE balance is sufficient  
            to provide only one month's worth of expenses and adopted a  
            formal policy in 2006 setting a target of accumulating actual  
            TNE equal to 600 percent of the minimum balance, which it has  
            yet to achieve. According to BSA, KHS retained an independent  
            actuarial firm to perform a risk reserve analysis and in 2008  
            adopted the actuary's recommendation to maintain a TNE between  
            40 percent and 55 percent of annual revenue, which would work  
            out to about 600 percent of minimum required TNE. According to  
            DMHC, KHS finished 2013 with about 480 percent of minimum  
            required TNE.

          
          7.Double referral. This bill is double referred. Should this  
            bill pass out of this committee, it will be referred to Senate  
            Committee on Governance and Finance.

          8.Prior legislation. AB 1066 (Perez), Chapter, Statutes of 2011  
            made statutory changes to implement the Section 1115 Medi-Cal  
            Demonstration Project Waiver approved on November 2, 2010, for  
            funding for designated public hospitals (DPHs).  AB 1066  
            continued under the new waiver the fee-for-service cost-based  
            reimbursement for DPHs, with those hospitals providing the  
            required federal match using their own funds through certified  




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            public expenditures, and established under the waiver a new  
            distribution methodology for disproportionate share hospitals  
            (DSH) and Safety Net Care Pool funds to DPHs, as specified. AB  
            1066 also provided for a specific allocation of DSH funds to  
            KMC in the amount of $8 million in the first year of the 2010  
            Federal Waiver, $12 million in years two through four, $12  
            million for July 1, 2014 through June 30, 2015, and $4 million  
            for the period of July 1, 2015 through October 31, 2015.  

          AB 276 (Alejo), Chapter 686, Statutes of 2012, authorized the  
            Monterey County Board of Supervisors to establish the Central  
            Coast Hospital Authority (CCHA), as specified, and prohibited  
            the board of supervisors from establishing the CCHA until an  
            agreement to affiliate with at least one other health care  
            facility is reached.

          AB 2374 (Bates), Chapter 816, Statutes of 1996, authorized the  
            County of Alameda to establish a hospital authority to manage  
            the respective county hospitals and county programs of the  
            Alameda County Medical Center.

          9.Support.  Kern County Board of Supervisors supports this bill,  
            stating that it would unite the County-owned hospital with the  
            local initiative to create an integrated system that will  
            enhance the quality of care for the County's low-income and  
            indigent patients, help vulnerable populations to manage their  
            health, and position KHS and KMC to compete in the new  
            marketplace created by the ACA. This bill is also supported by  
            the California State Council of the Service Employees  
            International Union (SEIU), which states that it represents  
            more than 1,000 workers at KMC, and is deeply invested in the  
            hospital's future for the patients and the community it  
            serves. In addition to providing the County with additional  
            tools for ensuring its ability to successfully transform how  
            it delivers care, this bill will ensure crucial worker  
            protections through the creation of the Authority. The  
            California Association of Public Hospitals and Health Systems  
            states in support that California is better positioned to  
            fulfill the promise of health reform and accelerate  
            advancement towards the Triple Aim when public health care  
            systems and public plans work together in close collaboration,  
            on behalf of their shared patient populations. The California  
            State Association of Counties states in support that the  
            Authority positions the County to evolve with the changing  
            health care landscape and innovate to better serve its  




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            low-income residents.

          10.Opposition. Health Net, which is the commercial Medi-Cal plan  
            operating in Kern County, states that this bill could endanger  
            the state's two-plan model for Medi-Cal Managed Care. Health  
            Net states that legislation enacted last year requires that 75  
            percent of the newly Medi-Cal eligible adult population, who  
            do not select a primary care provider, must be assigned to  
            primary care providers affiliated with public hospitals in 12  
            counties, including Kern County. Therefore, Health Net states  
            it must seek to enroll 75 percent of its Medi-Cal expansion  
            population with these providers or suffer significant  
            reductions in default assignments, which could endanger a  
            plan's capacity to continue participating in the Medi-Cal  
            program. Health Net states that there is nothing in this bill  
            that would ensure that the Authority be required to contract  
            with Health Net, and that if this proposed merger were to  
            result in Kern County terminating its contracts with Health  
            Net, it would be in violation of the default requirements of  
            the legislation enacted last year. Health Net states that even  
            if this weren't a consideration, it is concerned that the  
            merger between these two entities could cut access to care for  
            beneficiaries. Dignity Health, which has several hospitals in  
            the County, opposes this bill, stating that the recent  
            addition of KHS to the Authority is deeply concerning, and has  
            not had the benefit of broad stakeholder input nor has there  
            been any analysis to review the potential significant impacts  
            to market dynamics, patient access and provider contracting  
            implications. Dignity states that creating an Authority to  
            govern both a medical center and a managed Medi-Cal plan does  
            not meet the intent of the legislature when it created the  
            two-plan model. Dignity states that to combine the management  
            of a medical center and a plan that is intended to provide  
            choice and not be a closed-model system seems to create an  
            almost natural monopoly which will significantly impact market  
            dynamics. Dignity notes that there are no protections in this  
            bill for the non-KMC providers in the community who currently  
            contract with KHS and serve a significant portion of KHS  
            members, and that there would be a significant disincentive  
            for the new Authority to reach contract agreement with non-KMC  
            providers as then any non-contracted volume would default to  
            KMC.
           
          11.Oppose unless amended.  The Local Health Plans of California  
            (LHPC) state that the process of making the change proposed by  
            this bill has not, to date, included the board or executive  




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            management of KHS. Furthermore, LHPC states that there are  
            significant issues related to the financial viability of the  
            public hospital and any future health authority that have not  
            been addressed or discussed in a public process with community  
            stakeholders. LHPC states that it is expressing concerns with  
            the lack of a local process and the fiscal and beneficiary  
            considerations of such a merger, and not with the ability of a  
            local community to make decisions about their health delivery  
            system. LHPC requests amendments to do the following:

               a.     Require that the governing boards or executive  
                 management of all three entities - the County, KMC and  
                 KHS - support the creation of any new authority prior to  
                 its creation;
               b.     Require the County, in partnership with KMC and KHS,  
                 engage in a public process with local stakeholders, and  
                 make the implementation of the Authority contingent upon  
                 adoption of a detailed county ordinance that reflects the  
                 stakeholder process;
               c.     Require that a long-term financial plan be developed  
                 and presented as part of the public process to  
                 demonstrate how the hospital and health system would be  
                 financially stable through a new integrated delivery  
                 system;
               d.     Requires that each of the board members of the  
                 Authority have a clear and direct fiduciary obligation to  
                 the Authority and the enrollees/beneficiaries receiving  
                 service from the Authority; and,
               e.     Protect the current fiscal reserves of KHS for its  
                 continued operation and regulatory requirements.
            
          12.Letter of concern.  The California Association of Physician  
            Groups (CAPG) states in a letter of concern that while CAPG  
            member groups are not directly involved in the delivery system  
            of KHS, it has serious concerns over the bad precedent that  
            this bill would establish. According to CAPG, if this bill  
            were to be signed into law, it would create a precedent that  
            at any time, in any county, a board of supervisors could  
            appropriate the reserves of a Knox-Keene licensed health plan  
            and use it for selective purposes. In this case, it would bail  
            out a county hospital from financial distress. What about  
            other elements of the provider community left without recourse  
            in such an event? CAPG states that capitated physician groups,  
            local emergency services medical groups, ancillary providers,  
            all have a significant stake in the financial viability and  




          AB 2546 | Page 16




            continued operation of the local health plans in the Medi-Cal  
            managed care system. CAPG notes that Medi-Cal has just  
            enrolled more than one million newly covered beneficiaries  
            since January 1, 2014, and that the system needs financially  
            solvent providers in the network to deliver affordable,  
            accountable care to the newly insured. CAPG states that this  
            bill is one more disincentive for providers to accept  
            financial risk in the Medi-Cal system.

          13.Policy concerns.
               a.     Ownership change deemed approved. On page 7, lines  
                 16-23, this bill requires the transfer of ownership of  
                 KHS to be "deemed approved by DMHC," which means DMHC has  
                 no discretion on whether to approve the ownership change  
                 or not. While the bill goes on to require any other  
                 changes in the operations, governance, or financial  
                 status to be made after the change of ownership and be  
                 subject to Knox-Keene requirements, it is unclear why it  
                 is necessary to require DMHC to approve an ownership  
                 change, rather than allow DMHC to have discretion, and  
                 proceed as it would with regard to any other proposed  
                 change with a Knox-Keene health plan.

               b.     No audit? On page 7, lines 30-33, this bill exempts  
                 certain procedures from applying to the termination of  
                 KHS that will occur if the Authority is created and takes  
                 over the managed care plan from KHS. One of the  
                 requirements that this bill exempts from this process is  
                 a requirement that DHCS conduct an audit of the local  
                 initiative's records to determine the liabilities and  
                 assets of the local initiative. Given that the Authority  
                 is taking over the ownership and management of the  
                 existing local initiative, shouldn't DHCS still conduct  
                 an audit in advance of this merger to inform the County  
                 and stakeholders of the health of KHS?

               c.     Assumption of debt and liabilities.  This bill  
                 includes provisions that would require the Authority to  
                 assume all debts and liabilities of KMC, and absolves the  
                 County of any debts or liabilities. However, there is  
                 language that permits the County to retain ownership of  
                 the actual physical plant of KMC and other facilities. It  
                 appears that under this bill, the County would be able to  
                 shift all debts and liabilities to the Authority, while  
                 retaining the principle asset - the actual hospital  
                 building itself. Further, by requiring the Authority to  




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                 assume all debts and liabilities, including a significant  
                 debt owed to the County by KMC, the effect would be to  
                 also burden the managed care plan with the debts and  
                 liabilities of KMC, even though KHS currently has a  
                 healthy reserve balance.

               d.     Raid on KHS' TNE reserves? On page 15, lines 20-23,  
                 this bill permits the Authority to repay its debts or  
                 other liabilities, using funds that are not otherwise  
                 encumbered and "do not cause the managed care plan's  
                 tangible net equity to drop below its required level." As  
                 discussed in comment 6) above, while DMHC and DHCS have  
                 established minimum required TNE balances, those  
                 regulators only take action when the level falls below  
                 200 percent of minimum TNE. However, when the BSA looked  
                 at this issue, it found that plans have justifiable  
                 reasons for having significantly higher TNE reserve  
                 balances. With respect to KHS, the BSA report noted that  
                 KHS contracted with an independent actuarial firm to look  
                 at what a healthy TNE reserve should be, and the  
                 independent actuary recommended a reserve of  
                 approximately 600 percent of minimum TNE. According to  
                 the most recent report, KHS has about 480 percent of  
                 required TNE. This bill would permit the Authority to  
                 take nearly two-thirds of their current TNE reserve  
                 balance to repay hospital debts, leaving the managed care  
                 plan with a potentially risky reserve balance.

               e.     Is 30 days notice enough time? On page 25, in lines  
                 19-21, this bill permits the County to terminate the  
                 Authority with 30 days notice to DHCS. While it permits  
                 this notice to include a statement of intent to have the  
                 managed care plan transferred to the County upon the  
                 effective date of the termination, the County could  
                 decide not to transfer the plan back to the County, and  
                 simply allow the termination of the Authority to also  
                 mean the termination of the health plan itself. Were this  
                 to happen, certain provisions of law would apply  
                 requiring beneficiaries to be assigned to other Medi-Cal  
                 managed care contractors or into a fee-for-service  
                 system. However, 30 days is a very short period of time  
                 to provide for a transition of this magnitude, and this  
                 notice requirement should be increased.
               
               f.     Is a new Authority need for an integrated delivery  




          AB 2546 | Page 18




                 system? The author states that the purposes of the  
                 Authority established by this bill is to allow for the  
                 formation of an integrated delivery system to align  
                 incentives and care delivery between the local initiative  
                 health plan and county run public hospital. Given the  
                 County's current role in appointing the governing body of  
                 KHS, what are the barriers to better integrated care  
                 under existing arrangements? Can the policy goal of this  
                 bill of better integrated care be met without a single  
                 Authority having management, administration, and control  
                 of both KMC and KHS?
               
               g.     Is this bill premature given the coverage expansions  
                 under the ACA? The ACA expands coverage to previously  
                 uninsured adults without minor children who were not  
                 previously Medi-Cal eligible, creates a new hospital  
                 Medi-Cal presumptive eligibility process whereby Medi-Cal  
                 income-eligible individuals can receive time-limited  
                 Medi-Cal coverage, and establishes federally tax  
                 subsidized coverage through Covered California up to 400  
                 percent of the federal poverty level. Given that (a) the  
                 expansion of coverage under the ACA, (b) the ACA-related  
                 coverage expansions have been in effect for only six  
                 months, (c) the likelihood that these changes will reduce  
                 hospital uncompensated care costs, and (d) KMC losses  
                 declined in April 2014, is it premature to make a  
                 decision on establishing an Authority as proposed by this  
                 bill? Should the Legislature allow for more time to  
                 evaluate the effect these major changes will have on the  
                 financial situation at KMC?

               h.     Protections for workers unclear. This bill contains  
                 provisions that prohibit this bill from being a cause for  
                 the modification of the level of KMC, County, or KHS  
                 employment benefits, and it requires employees to retain  
                 their existing or equivalent classifications, and at  
                 least their existing salaries and other benefits, for at  
                 least two years. However, on page 12, lines 6-10, this  
                 bill also states "notwithstanding anything contrary  
                 contained in this chapter, this chapter does not prohibit  
                 the authority from determining the number of employees,  
                 the number of full-time equivalent positions, job  
                 descriptions, the nature and extent of classified  
                 employment positions, and salaries of employees." This  
                 appears to subvert the previous provisions of law  
                 granting employees certain protections for at least two  




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                 years, at least in regards to salaries.
          
           SUPPORT AND OPPOSITION  :
          Support:  California Association of Public Hospitals and Health  
                    Systems
                    California State Association of Counties
                    California State Council of the Service Employees  
                              International Union
                    Kern County Board of Supervisors

          Oppose:   Dignity Health
                    Health Net
                    Local Health Plans of California (unless amended)

                                      -- END --