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--- AB 2546 | Page 2 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 AB 2546 | Page 3 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. AB 2546 | Page 5 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. AB 2546 | Page 7 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 AB 2546 | Page 8 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 AB 2546 | Page 9 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 AB 2546 | Page 10 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 AB 2546 | Page 11 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. AB 2546 | Page 12 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 AB 2546 | Page 13 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 AB 2546 | Page 14 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 AB 2546 | Page 15 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 AB 2546 | Page 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 --