BILL ANALYSIS                                                                                                                                                                                                    






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

          BILL NO:       SB 239
          AUTHOR:        Hernandez and Steinberg
          AMENDED:       April 17, 2013
          HEARING DATE:  May 8, 2013
          CONSULTANT:    Bain

           SUBJECT  :  Medi-Cal:  hospital quality assurance fee.  
          (Urgency)

           SUMMARY  : Enacts the Private Hospital Quality Assurance Fee  
          Act of 2014, which imposes, subject to federal approval, a  
          hospital quality assurance fee (QAF), as specified, on  
          certain general acute care hospitals from January 1, 2014,  
          through December 30, 2015, with the resulting revenue to be  
          deposited into the Hospital Quality Assurance Revenue Fund.  
          Enacts the Medi-Cal Hospital Reimbursement Improvement Act  
          of 2014, which requires, subject to federal approval,  
          supplemental payments to be made to private hospitals for  
          certain services and increased capitation payments to be  
          made to Medi-Cal managed care plans for hospital services,  
          as specified. Takes effect immediately as an urgency  
          statute.

          Existing law:
          1.Establishes the Medi-Cal program, administered by  
            Department of Health Care Services (DHCS), under which  
            health care services are provided to qualified low-income  
            persons. Inpatient and outpatient hospital services are a  
            covered benefit under the Medi-Cal program, subject to  
            utilization controls. 

          2.Enacts the Medi-Cal Hospital Provider Rate Improvement  
            Act of 2011 (Rate Act) to provide supplemental payments  
            from July 1, 2011, to December 31, 2013 to private  
            hospitals for inpatient and outpatient services in  
            Medi-Cal fee-for-service, managed care and acute  
            psychiatric days, and to make direct grants to designated  
            public hospitals in support of health care expenditures.

          3.Establishes the Private Hospital Quality Assurance Fee  
            Act of 2011 (Fee Act), which levies a hospital QAF, from  
            July 1, 2011 to January 1, 2014, on each hospital that is  
            not an exempt hospital, with varying fee amounts by payor  
                                                         Continued---



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            source and type of payment.

          4.Requires all funds from the QAF to be used exclusively to  
            enhance federal financial participation (FFP) for  
            hospital services under Medi-Cal, to provide additional  
            reimbursement to hospitals, to pay DHCS staffing and  
            administrative costs, to make increased payments to  
            managed care health plans and mental health plans, and to  
            fund children's health coverage, in a specified order of  
            priority.

          5.Sunsets the Rate Act on July 1, 2014, the date the last  
            payment of QAF, or the date of the last payment from  
            DHCS, whichever is latest.  Sunsets the Fee Act on  
            January 1, 2015, the date of the last payment of QAF  
            payments, or the date of the last payment from DHCS,  
            whichever is latest.

          This bill:
           Hospital Quality Assurance Revenue Fund
           
          1.Extends the sunset date of the Hospital Quality Assurance  
            Revenue Fund from January 1, 2015 to January 1, 2017, and  
            extends the authority of the Controller to use the Fund  
            for cash flow loans to the General Fund until that date.

           Private Hospital Quality Assurance Fee Act of 2014

           2.Enacts the Private Hospital Quality Assurance Fee Act of  
            2014 (Fee Act), which imposes a QAF on each general acute  
            care hospital that is not an exempt facility or a  
            converted hospital, computed starting on January 1, 2014,  
            and continuing through and including December 31, 2015,  
            for deposit in the Hospital Quality Assurance Revenue  
            Fund (Fund).

          3.Establishes under this bill a contractually enforceable  
            promise on behalf of the state to use the proceeds of the  
            QAF, including any federal matching funds, solely and  
            exclusively for the purposes in this bill as they existed  
            on the effective date of this bill, to limit the amount  
            of the proceeds of the QAF to be used to pay for the  
            health care coverage of children to the amounts specified  
            in this bill, to limit any payments for DHCS' costs of  
            administration to the amounts set forth in this bill on  




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            the effective date of this bill, to maintain and continue  
            prior reimbursement levels, and to otherwise comply with  
            all its obligations set forth in a specified provision of  
            existing law and this bill, except that amendments that  
            arise from, or have as a basis for, a decision, advice,  
            or determination by the federal Centers for Medicare and  
            Medicaid Services (CMS) relating to federal approval of  
            the QAF or the payments set forth in this bill are  
            required to control.

          4.Requires all funds from the proceeds of the QAF in the  
            Fund, together with any interest and dividends earned on  
            money in the fund, upon appropriation by the Legislature,  
            to continue to be used exclusively to enhance FFP for  
            hospital services under the Medi-Cal program, to provide  
            additional reimbursement to hospitals, to support quality  
            improvement efforts of hospitals, and to minimize  
            uncompensated care provided by hospitals to uninsured  
            patients.

          5.Implements the Fee Act only as long as all of the  
            following conditions are met:

              a.    The QAF is established in a manner that is  
                fundamentally consistent with the Fee Act;

              b.    The QAF, including any interest on the fee after  
                collection by DHCS, is deposited in a segregated fund  
                apart from the General Fund; and,

              c.    The proceeds of the QAF, including any interest  
                and related federal reimbursement, may only be used  
                for the purposes set forth in the Fee Act.

          6.Prohibits a hospital from being required to pay the QAF  
            to DHCS unless and until the state receives and maintains  
            federal approval.

          7.Requires hospitals to pay the QAF to DHCS as set forth in  
            the Fee Act only as long as all of the following  
            conditions are met:

              a.    CMS allows the use of the QAF as set forth in the  
                Fee Act in accordance with federal approval;





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              b.    The Medi-Cal Hospital Reimbursement Improvement  
                Act of 2014 is enacted and remains in effect and  
                hospitals are reimbursed the increased rates for  
                services during the program period (the program  
                period is January 1, 2014 through December 31, 2015);  
                and,

              c.    The full amount of the QAF assessed and collected  
                under the Fee Act remains available only for the  
                purposes specified in the Fee Act. 

           Medi-Cal Hospital Reimbursement Improvement Act of 2014
           
          8.Enacts the Medi-Cal Hospital Reimbursement Improvement  
            Act of 2014 (Reimbursement Improvement Act), which  
            requires private hospitals to be paid supplemental  
            amounts for the provision of hospital outpatient services  
            that are in addition to any other amounts payable to  
            hospitals with respect to those services and are  
            prohibited from affecting any other payments to  
            hospitals. Requires the supplemental amounts to result in  
            payments equal to the statewide aggregate upper payment  
            limit for private hospitals for each subject fiscal year.

          9.Requires private hospitals to be paid supplemental  
            amounts for the provision of hospital inpatient services  
            for the program period. Requires the supplemental amounts  
            to be in addition to any other amounts payable to  
            hospitals with respect to those services and prohibits  
            those payments from affecting any other payments to  
            hospitals. Requires the supplemental amounts to result in  
            payments equal to the statewide aggregate upper payment  
            limit (UPL) for private hospitals for each subject fiscal  
            year.

          10.  Requires DHCS to increase capitation payments to  
            Medi-Cal managed health care plans for each subject  
            fiscal year. Requires the increased capitation payments  
            to be made as part of the monthly capitated payments made  
            by DHCS to managed health care plans.

          11.  Requires the aggregate amount of increased capitation  
            payments to all Medi-Cal managed health care plans for  
            each subject fiscal year to be the maximum amount for  
            which federal financial participation is available on an  




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            aggregate statewide basis for the applicable subject  
            fiscal year.

          12.  Requires DHCS to determine the amount of the increased  
            capitation payments for each managed health care plan.  
            Requires DHCS to consider the composition of Medi-Cal  
            enrollees in the plan, the anticipated utilization of  
            hospital services by the plan's Medi-Cal enrollees, and  
            other factors that DHCS determines are reasonable and  
            appropriate to ensure access to high-quality hospital  
            services by the plan's enrollees.

          13.  Prohibits the amount of increased capitation payments  
            to each Medi-Cal managed health care plan from exceeding  
            an amount that results in capitation payments that are  
            certified by the state's actuary as meeting federal  
            requirements, taking into account the requirement that  
            all of the increased capitation payments under this bill  
            be paid by Medi-Cal managed health care plans to  
            hospitals for hospital services to Medi-Cal enrollees of  
            the plan.

          14.  Requires the increased capitation payments to managed  
            health care plans to be made to support the availability  
            of hospital services and ensure access to hospital  
            services for Medi-Cal beneficiaries. 

          15.  Requires the increased capitation payments to managed  
            health care plans to commence within 90 days of the date  
            on which all necessary federal approvals have been  
            received, and to include, but not be limited to, the sum  
            of the increased payments for all prior months for which  
            payments are due.

          16.  Permits DHCS, to secure the necessary funding for the  
            payment or payments made above, to accumulate funds in  
            the Fund for the purpose of funding managed health care  
            capitation payments, regardless of the date on which  
            capitation payments are scheduled to be paid in order to  
            secure the necessary total funding for managed health  
            care payments by December 31, 2015.

          17.  Prohibits payments to Medi-Cal managed health care  
            plans that would be paid consistent with actuarial  
            certification and enrollment in the absence of the  




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            payments made under the Reimbursement Improvement Act,  
            including, but not limited to, payments made through  
            intergovernmental transfers, from being reduced as a  
            consequence of payments under the Reimbursement  
            Improvement Act.

          18.  Requires each managed health care plan to expend 100  
            percent of any increased capitation payments it receives  
            under this bill on hospital services.

          19.  Requires the increased capitation payments to be  
            reduced proportionately to the amount for which FFP is  
            available in the event FFP is not available for all of  
            the increased capitation payments determined for a month  
            for any reason.

          20.  Requires each managed health care plan receiving  
            increased capitation payments under this bill to expend  
            the capitation rate increases in a manner consistent with  
            actuarial certification, enrollment, and utilization on  
            hospital services. Requires each Medi-Cal managed health  
            care plan to expend increased capitation payments on  
            hospital services within 30 days of receiving the  
            increased capitation payments to the extent they are made  
            for a subject month that is prior to the date on which  
            the payments are received by the managed health care  
            plan.

          21.  Requires the sum of all expenditures made by a managed  
            health care plan for hospital services to equal, or  
            approximately equal, all increased capitation payments  
            received by the managed health care plan, consistent with  
            actuarial certification, enrollment, and utilization,  
            from DHCS.

          22.  Prohibits any delegation or attempted delegation by a  
            Medi-Cal managed health care plan of its obligation to  
            expend the capitation rate increases under this bill from  
            relieving the plan from its obligation to expend those  
            capitation rate increases. Requires Medi-Cal managed  
            health care plans to submit the documentation that DHCS  
            may require to demonstrate compliance. Requires the  
            documentation to demonstrate actual expenditure of the  
            capitation rate increases for hospital services, and not  
            assignment to subcontractors of the managed health care  




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            plan's obligation of the duty to expend the capitation  
            rate increases.

          23.  Requires the supplemental hospital payments made by  
            managed health care plans pursuant to this bill to  
            reflect the overall purpose of Reimbursement Improvement  
            Act and the Fee Act. 

          24.  States the Reimbursement Improvement Act is not  
            intended to create a private right of action by a  
            hospital against a managed care plan, provided that the  
            managed health care plan expends all increased capitation  
            payments for hospital services.

          25.  Prohibits Medi-Cal payment rates for hospital  
            outpatient services furnished by private hospitals,  
            non-designated public hospitals, and designated public  
            hospitals before December 31, 2015, exclusive of amounts  
            payable under Reimbursement Improvement Act, from being  
            reduced below the rates in effect on January 1, 2014.

          26.  Prohibits rates payable to hospitals for hospital  
            inpatient services furnished before December 31, 2015,  
            under contracts negotiated pursuant to the selective  
            provider contracting program from being reduced below the  
            contract rates in effect on January 1, 2014. States that  
            this provision does not prohibit changes to the  
            supplemental payments paid to individual hospitals from  
            the Private Hospital Supplemental Fund, the  
            Non-designated Public Hospital Supplemental Fund, and  
            payments to distressed hospitals, provided that the  
            aggregate amount of the payments for each subject fiscal  
            year is not less than the minimum amount permitted under  
            a repealed provision of law.

          27.  Requires, notwithstanding the Medi-Cal inpatient rate  
            freeze in existing law, payments to private hospitals for  
            hospital inpatient services furnished before January 1,  
            2014, that are not reimbursed under a contract negotiated  
            pursuant to the selective provider contracting program,  
            exclusive of amounts payable under this bill, from being  
            less than the amount of payments that would have been  
            made under the payment methodology in effect on the  
            effective date of this bill.





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          28.  Requires, upon the implementation of the new Medi-Cal  
            inpatient hospital reimbursement methodology based on  
            diagnosis-related groups (DRGs), the requirements in 26)  
            and 27) above to be met if the DRG rates paid result in  
            an average payment per discharge to all hospitals subject  
            to DRGs that is not less than the average payment per  
            discharge to the hospitals, calculated on an aggregate  
            basis for the fiscal year ending June 30, 2012, adjusted,  
            in consultation with the hospital community, to reflect  
            the movement of seniors and persons with disabilities  
            into managed care. Excludes certain supplemental payments  
            to hospitals in making the above calculation.

          29.  Requires, solely for purposes of this bill, a Medi-Cal  
            rate reduction or a change in a rate methodology that is  
            enjoined by a court to be included in the determination  
            of a rate or a rate methodology until all appeals or  
            judicial reviews have been exhausted and the rate  
            reduction or change in rate methodology has been  
            permanently enjoined, denied by the federal government,  
            or otherwise permanently prevented from being  
            implemented.

          30.  Prohibits disproportionate share replacement payments  
            to private hospitals from being less than the amount  
            determined pursuant to existing law in effect on the  
            effective date of the act that added this subdivision. 

           FISCAL IMPACT  :  This bill has not been analyzed by a fiscal  
          committee.

           COMMENTS  :

          1.Author's statement. This bill is the legislative vehicle  
            to enact a hospital QAF for the two additional years to  
            draw down increased federal funds for hospital services,  
            and to provide millions in additional revenue for  
            children's health coverage. Federal law authorizes states  
            to levy fees on health care providers if the fees meet  
            federal requirements. The author argues this bill provide  
            increased federal funding to hospitals without using  
            state General Fund (GF) dollars, and would enable the  
            state to achieve GF savings by using revenue from the QAF  
            to help fund children's health coverage.





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          2.Background.  Federal Medicaid law authorizes states to  
            levy fees on health care providers if the fees meet  
            federal requirements.  Many states (including California)  
            fund a portion of their share of Medicaid program costs  
            through a fee on health care providers. Under these  
            funding methods, states collect funds (through fees,  
            taxes, or other means) from providers, which are then  
            matched to allow increased Medicaid reimbursement to  
            providers. The Legislature enacted a series of bills  
            establishing a time-limited hospital QAF in 2009, and an  
            additional six-month QAF for the first six months of  
            2011.  In addition to the hospital QAF, California  
            currently has a QAF for intermediate care facilities for  
            the developmentally disabled, and a separate QAF for  
            skilled nursing facilities.
            
            Last session, SB 335 (Hernandez) Chapter 286, Statutes  
            2011, imposed a QAF on hospitals for 30 months (from June  
            30, 2011, until December 31, 2013). SB 335 uses the  
            resulting revenue to draw down federal funds to provide  
            supplemental payments to private hospitals in  
            fee-for-service Medi-Cal, Medi-Cal managed care, and to  
            provide specified funding amounts from the QAF per  
            quarter for children's health coverage until December 31,  
            2013. In addition, SB 335 requires county and University  
            of California hospitals to be paid direct grants (not  
            Medi-Cal payments), funded from the QAF. SB 335 also  
            reduced disproportionate share hospital replacement  
            payments and supplemental payments from the Private  
            Hospital Supplemental Fund to hospitals by specified  
            amounts in 2012-13 and 2013-14.  Finally, SB 335  
            appropriates $13.6 billion to DHCS for purposes of that  
            measure. SB 335 took effect as an urgency statute upon  
            signature by the Governor in September 2011. The Medi-Cal  
            managed care payments to hospitals have not been  
            federally approved to date.

          3.Prior legislation.  AB 1383 (Jones), Chapter 627,  
            Statutes of 2009 and AB 188 (Jones), Chapter 645,  
            Statutes of 2009, enacted the original Medi-Cal hospital  
            QAF and a methodology for making supplemental payments to  
            hospitals, and provided funds for children's health care  
            coverage and grants to public hospitals.  In response to  
            the state's request for federal approval, the CMS in June  
            of 2010 sent a letter raising objections and concerns  




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            about the methodology which concluded that the fee  
            enacted by AB 1383 did not meet federal standards. CMS  
            also suggested modifications, which were made by AB 1653  
            (Jones), Chapter 218, Statutes of 2010. AB 1653 also  
            established an alternative mechanism for funding  
            supplemental grants to public hospitals and allowed the  
            state to retain the funds that were previously allocated  
            to these hospitals.  

            SB 90 (Steinberg), Chapter 19, Statutes of 2010, repealed  
            specified Medi-Cal hospital rate freezes and rate  
            reductions enacted in health budget trailer bills in  
            2008, 2010 and 2011. SB 90 also imposed a QAF on  
            specified hospitals for six months (January 1, 2011,  
            until June 30, 2011), and used the resulting revenue to  
            draw down federal funds to provide supplemental payments  
            to private hospitals in fee-for-service Medi-Cal,  
            Medi-Cal managed care, and for acute psychiatric days, to  
            provide $210 million for children's health coverage, and  
            to pay for DHCS administrative costs in administering the  
            hospital fee and supplemental payment provisions of this  
            bill.  SB 90 also reduced disproportionate share General  
            Fund (GF) payments to private hospitals by $105 million  
            GF over two fiscal years. SB 90 also required DHCS to  
            design and implement an inter-governmental transfer  
            program for Medi-Cal managed care services provided by  
            designated public hospitals (DPH) and non-designated  
            public hospitals (NDPH) for the purpose of increasing  
            reimbursement to NDPHs and DPHs.  

            In addition, SB 90 allows hospitals that have received  
            extensions to January 1, 2013, of the January 1, 2008,  
            seismic deadline, for their Structural Performance  
            Category 1 buildings, to request an additional extension  
            of up to seven years.  

          4.Support. This bill is sponsored by the California  
            Hospital Association (CHA), which argues the creation and  
            implementation of the hospital fee program in California  
            has been extremely successful. CHA states the program has  
            been critical for hospitals to bolster their ability to  
            preserve health care services for the state's most  
            vulnerable patients. The first two hospital fee programs  
            are essentially completed and have reached their goals of  
            providing nearly $3.5 billion in critical funding to  




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            California's hospitals that provide services to Medi-Cal  
            patients. In addition, the first two programs fulfilled a  
            commitment to provide the State with $770 million in  
            funding for children's health care coverage. The current  
                                                                                   fee program that runs through December 31, 2013 is still  
            waiting for several federal approvals before it can reach  
            its goals to help mitigate the severely low Medi-Cal  
            payments to hospitals. The hospital provider fee program  
            remains crucial to the preservation of California's  
            entire safety net, and without this program the number of  
            hospitals forced to restrict or end services to Medi-Cal  
            patients will continue to increase. CHA states that this  
            bill reflects a work-in-progress for a final proposal  
            that will be completed soon as with the added complexity  
            of an expanding, yet shifting population, several details  
            remain open.  Most of them technical in nature such as  
            calculating the maximum amount of room available in the  
            upper payment limit and actuarially certified rates are  
            included in the statewide program. CHA states it and DHCS  
            are working hard to resolve these critical open items.  
            CHA concludes that the provider fee will not solve the  
            state's Medi-Cal shortfall, but it will continue to be  
            the largest programmatic action taken since the founding  
            of the program to mitigate the lack of sufficient  
            funding, and it is vital to California hospitals that the  
            provider fee be approved and implemented.  

          5.Governor's Budget Proposal. The Governor's proposed  
            2013-14 budget assumes a savings of $310 million General  
            Fund in 2013-14, as a result of extending the hospital  
            fee, which will sunset on December 31, 2013 and a three  
            year extension of the QAF. 

           SUPPORT AND OPPOSITION  :
          Support:  California Hospital Association (sponsor)
                    Alliance of Catholic Health Care
                    The Children's Partnership 
                    Children Now
                    Children's Defense Fund-California
                    California Coverage & Health Initiatives 
                    PICO California
                    Private Essential Access Community Hospitals  
                    (PEACH)
          
          Oppose:None received.




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