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,
AB 2546 | Page 4
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
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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
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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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17
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
AB 2546 | Page
19
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 --