BILL ANALYSIS                                                                                                                                                                                                    

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          Date of Hearing:  August 20, 2013

                            ASSEMBLY COMMITTEE ON HEALTH
                                 Richard Pan, Chair
            SB 239 (Ed Hernandez and Steinberg) - As Amended:  August 14,  
          SUBJECT  :  Medi-Cal: hospitals:  quality assurance fee.

           SUMMARY  :  Enacts the Medi-Cal Hospital Reimbursement Improvement  
          Act of 2013 to provide supplemental Medi-Cal payments to private  
          hospitals; increased payments to Medi-Cal managed care plans  
          (MCPs) for hospital services to Medi-Cal managed care (MCMC)  
          enrollees; direct grants to designated public hospitals (DPHs)  
          [hospitals owned or operated by counties or the University of  
          California (UC)]; direct grants to nondesignated public  
          hospitals (NDPHs) (hospitals owned or operated by hospital  
          districts); and, funding for children's health care coverage.   
          Enacts the Private Hospital Quality Assurance Fee (QAF) Act of  
          2013 requiring all private acute care hospitals to pay a  
          specified fee.  Provides for matching the fee with federal funds  
          to make supplemental payments.  Specifically,  this bill  :  


          1)Establishes a per diem fee assessed on every private acute  
            care hospital for every acute, psychiatric, and rehabilitation  
            inpatient day as follows:
             a)   A rate of $140 per day for calendar year 2014 and $165  
               per day for calendar year 2015 for in-patient managed care  
               days that are acute care, psychiatric care, or  
               rehabilitation care and the payer is Medicare managed care,  
               county indigent programs-managed care, or other third party  
               managed care;
             b)   A rate of $474.64 per fee-for-service (FFS) Medi-Cal  
               in-patient day for calendar year 2014 and $542.36 per day  
               for calendar year 2015;
             c)   A rate of $78.40 per prepaid health plan hospital  
               non-MCMC day for calendar year 2014 and $92.40 per day for  
               calendar year 2015;
             d)   A rate of $265.80 per prepaid health plan hospital MCMC  
               day for calendar year 2014 and $303.72 per day for calendar  
               year 2015;
             e)   A rate of $401.41 per day for calendar year 2014 and  


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               $452.73 per day for calendar year 2015 for FFS inpatient  
               days that are acute care, psychiatric care, or  
               rehabilitative care and the payer is Medicare, county  
               indigent programs-traditional, other third  
               party-traditional, other indigent, or other payers. 

          2)Imposes the requirement to pay the fee on all private general  
            acute care hospitals from January 1, 2014 to December 31,  
            2015, exempts DPHs, NDPHs, any hospital that has been  
            converted from a private hospital to a public hospital on or  
            after January 1, 2014, long term care hospitals, specified  
            specialty hospitals, and small and rural hospitals.

          3)Requires the Department of Health Care Services (DHCS), within  
            10 business days of receipt of federal approval, to send  
            notice to each hospital and to post on its Internet Website,  
            the date that the state received notice of federal approval,  
            the applicable percentage of fee that will be due for each  
            fiscal year, the aggregate fee amount, the amount due from the  
            particular hospital, and the payment due date. 
          4)Requires hospitals to pay the fee in eight installments, as  
            specified, and requires all fees to be paid by December 15,  

          5)Authorizes DHCS to deduct fee payments owed by a hospital from  
            other payments due to the hospital, to assess interest and  
            penalties, and to waive the penalties, as specified, and  
            provides that such determination is not subject to judicial  

          6)Prohibits the fee from being considered as an allowable cost  
            for Medi-Cal cost reporting.

          7)Requires the Director of DHCS to determine the amount of each  
            fee installment for each hospital each year, the aggregate QAF  
            amount, and to perform other calculations as necessary for the  
            collection of the fee and distribution of the proceeds and  
            payments.  Authorizes interim determinations pending federal  
            approvals, as necessary, and requires notice to hospitals of  
            these amounts, with final notice required within 15 days of  
            the final determination.  Requires refunds of any  

          8)Prohibits the fee from exceeding the maximum aggregate net  
            patient revenue percentage that is allowed under federal law,  


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            as necessary, to preclude a finding of an indirect guarantee.

          9)Requires QAF payments, remittances, interest and dividends,  
            but not penalties, or the amount allocated to DHCS, to be for  
            deposit in the Hospital Quality Assurance Revenue Fund  
            (HQARF).  Allows for fees remitted after expiration of this  
            bill to be deposited in the Distressed Hospital Fund. 

          10)Provides that the fee is inoperative if the federal Centers  
            for Medicare and Medicaid Services (CMS) denies approval  
            before July 1, 2016, and that the provisions cannot be  
            modified as provided for, in consultation with the hospital  
            community, in order to meet federal requirements.

          11)Creates a contractually enforceable promise on behalf of the  
            state to use the proceeds of the fee and the HQARF only for  
            the purposes and in the amounts authorized by this bill, to  
            limit the proceeds to be used to pay for health care coverage  
            of children up to the amounts specified, to limit any payments  
            to DHCS for administrative costs to the amounts specified, and  
            to comply with all obligations imposed pursuant to this bill.

          12)Establishes a timeline for disbursements and requires all  
            proceeds of the fee to be used, upon appropriation by the  
            Legislature, exclusively to enhance federal financial  
            participation (FFP) for hospital services under the Medi-Cal  
            program, to provide additional reimbursement to, and to  
            support quality improvement efforts of, hospitals and to  
            minimize uncompensated care provided by hospitals to uninsured  
            patients, as well as to pay for the state's administrative  
            costs and to provide funding for children's health coverage,  
            as specified, in the following order of priority:

             a)   To pay for staffing and administrative costs of DHCS in  
               administering the QAF and payments, up to $2 million;
             b)   To pay for health care coverage for children in the  
               amount of $155 million quarterly, for calendar years 2014  
               and 2015;
             c)   To make increased capitation payments to Medi-Cal MCPs;
             d)   To make increased payments or direct grants to DPHs and  
             e)   Amounts in excess of those paid out for a), b), and c)  
               above are to be refunded pro rata to general acute care  
               hospitals, if allowed by federal law, otherwise to the  
               Distressed Hospital Fund.


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          13)Requires private hospitals to be paid a supplemental payment  
            for Medi-Cal outpatient services based on the hospital's  
            percentage of all Medi-Cal FFS outpatient services up to a  
            total amount equal to the maximum amount allowable under  
            federal upper payment limits (UPL) for the period between  
            January 1, 2014 and January 1, 2016. 

          14)Requires DHCS to make supplemental payments to private  
            hospitals for Medi-Cal FFS inpatient services from the  
            proceeds of the fees, other funds established by this bill,  
            plus matching federal funds, in addition to payments otherwise  
            payable to these hospitals, up to the maximum amount allowed  
            under federal UPL and other law, as follows:

             a)   For each general acute care day, $896.48 for calendar  
               year 2014; and $1,081.84 for calendar year 2015;
             b)   For each acute psychiatric day directly reimbursed by  
               DHCS, $965 for calendar year 2014; and $975 for calendar  
               year 2015; 
             c)   For calendar years 2014 and 2015, $2,500 for each high  
               acuity day, as defined, if at least 5% of the hospital's  
               general acute care days are high acuity days and the  
               hospital's Medi-Cal inpatient utilization rate is between  
               5% and 43%;
             d)   For calendar years 2014 and 2015, an additional $2,500  
               for each high acuity day for qualifying hospitals with  
               specified designated trauma centers;
             e)   For calendar years 2014 and 2015, an additional $2,500  
               for each transplant day if the hospital's Medi-Cal  
               inpatient utilization rate is between 5% and 43%; and, 
             f)   If a hospital provided Medi-Cal sub-acute services  
               during the 2010 calendar year and had a Medi-Cal inpatient  
               utilization rate between 5% and 43%; for calendar year  
               2014, an amount equal to 50% of the amount of Medi-Cal  
               sub-acute payments made to the hospitals in 2010; and for  
               calendar year 2015, an amount equal to 60% of the amount of  
               Medi-Cal sub-acute payments made to the hospitals in  
               calendar year 2010.

          15)Defines acute psychiatric days as the total number of  
            Medi-Cal specialty mental health service administrative days,  
            Medi-Cal specialty mental health service acute care days,  


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            acute psychiatric administrative days, and acute psychiatric  
            acute days identified from the Final Medi-Cal Utilization  
            Statistics for 2012-13.  

          16)Defines general acute care days as the number of Medi- Cal  
            general acute care days paid by DHCS on a FFS basis for  
            service provided in the 2010 calendar year. 

          17)Defines high acuity days as Medi-Cal coronary care unit days,  
            pediatric intensive care unit days, intensive care unit days,  
            neonatal intensive care unit days, and burn unit days paid by  
            the DHCS during the 2010 calendar year, as reflected in the  
            state paid claims file prepared by the DHCS on April 26, 2013.

          18)Excludes any new or converted hospitals, as defined from  
            receipt of payments. 

          19)Requires DHCS to increase monthly capitation payments to  
            Medi-Cal mental health MCPs for supplemental payments to  
            private hospitals for acute psychiatric inpatient days at the  
            same rate as for days that are reimbursed directly by DHCS,  
            and authorizes direct payment by DHCS for days that were the  
            financial responsibility of the mental health plan as an  
            alternative, as permitted by federal law.

          20)Requires DHCS to increase monthly capitation payments to  
            Med-Cal MCPs to the maximum total amount allowable under  
            federal law; to determine the amount for each Medi-Cal MCP by  
            considering the composition of Medi-Cal enrollees in each  
            Medi-Cal MCP, anticipated hospital utilization, and other  
            factors related to ensuring access to high-quality hospital  
            services, but in no event to exceed an amount certified by the  
            state's actuary as meeting federal requirements, taking into  
            account the requirement that all of the increased capitation  
            payments are to be paid to hospitals for hospital services to  
            Medi-Cal MCP enrollees.  Authorizes DHCS to set aside fee  
            revenue, as specified, in order to accumulate the required  
            amounts and issue change orders or amend contracts as needed.

          21)Requires the increased capitation payments to be for the  
            purpose of supporting the availability of hospital services  
            and ensuring access for Medi-Cal enrollees; requires each plan  
            to expend 100% of the increased capitation on hospital  
            services; requires that payments are to commence within 90  
            days of the receipt of federal approval; and provides that  


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            payments made to Medi-Cal MCPs in the absence of these  
            payments are not to be reduced as a consequences of these  

          22)Requires the Medi-Cal MCPs receiving the increased capitation  
            payments under this bill to make payments to hospitals  
            consistent with actuarial certification, enrollment and  
            hospital utilization within 30 days of receipt in a total  
            amount that equals the increased capitation amount, to  
            document the payments, and specifies that these provisions are  
            not intended to create a private right of action by a  

          23)Authorizes direct grants in support of health care  
            expenditures to DPHs and NDPHS, and specifies that these  
            payments are not to constitute Medi-Cal payments.

          24)Ensures that payments made to hospitals or reimbursement  
            rates set pursuant to other provisions of existing law are not  
            affected or reduced as a result of the supplemental payments  
            established by this bill.

          25)Provides that supplemental payments under this bill are in  
            addition to Disproportionate Share Hospital (DSH) replacement  
            supplemental payments, do not impact eligibility for DSH  
            payments, DSH replacement payments, or stabilization payments  
            under the 2005 hospital waiver or the 2010 Medi-Cal Bridge to  
            Reform waiver, and are not to be considered in the  
            determination of adequacy of any rate under federal law.

          26)Prohibits payment rates for hospital outpatient services  
            furnished before December 31, 2015, by private, NDPH, or DPH  
            hospitals from being reduced below those in effect on January  
            1, 2014.

          27)Prohibits payment rates for hospital inpatient services  
            furnished before December 31, 2015, under contracts negotiated  
            under the Selective Provider Contracting Program (SPCP) from  
            being reduced below those in effect on January 1, 2014, allows  
            changes to supplemental payments, as long as the aggregate is  
            not reduced, as specified, and establishes a methodology to  
            measure this requirement if new diagnosis-related groups (DRG)  
            hospital reimbursement methodology is implemented.

          28)Prohibits payments to private hospitals for inpatient  


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            services furnished before January 1, 2014, that are not under  
            contracts negotiated under the SPCP from being reduced below  
            the amount that would have been made under the methodology in  
            effect on the effective date of this bill, and establishes a  
            methodology to measure this requirement if new DRG hospital  
            reimbursement methodology is implemented.

          29)Provides that no payments are to be made until all necessary  
            federal approvals have been obtained and the fee has been  
            imposed and collected.  Provides that payments are to be made  
            only to the extent the fee is collected and available to cover  
            the nonfederal share.  Requires that all payments to  
            hospitals, Medi-Cal MCPs, and mental health plans be solely  
            from the QAF authorized by this bill and the federal matching  

          30)Conditions a hospital's receipt of payments on continued  
            participation in the Medi-Cal program.

          31)Upon receipt of federal approval or a letter indicating  
            likely federal approval, as specified, requires DHCs to make  
            all payments, with the exception of increased capitation  
            payments until federal approval is received. 

          32)Provides for a process in the event there are insufficient  
            funds after December 15, 2015, and requires DHCS to develop a  
            plan for making additional payments if FFP is available. 

          33)Provides that no hospital is to be required to pay the QAF  
            unless, and until the state receives and maintains federal  
            approval, and only as long as all of the following conditions  
            are met:

             a)   CMS allows the use of the QAF as set forth in this bill;
             b)   The payment provisions are enacted and remain in effect,  
               and hospitals are reimbursed the increased rates for  
               services during the program period; and, 
             c)   The full amount of the QAF assessed and collected  
               remains available only for the purposes specified in this  


          34)Provides methodologies for proportionate reductions or  
            recalculations of all fees, hospital payments, and increased  


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            capitation payments:  if FFP is different than estimated under  
            this bill; if amounts allowable as payments for specified  
            categories must be adjusted due to the application of the UPL  
            under federal law; if a hospital is closed for part of a year;  
            or, if any supplemental payment would result in the reduction  
            of other amounts payable to a hospital or MCP.  

          35)Provides that effective January 1, 2016, rates payable to  
            hospitals and MCPs are to be the rates payable without the  
            supplemental and increased capitation payments under this  

          36)Provides that supplemental payments made pursuant to this  
            bill are not to affect a determination of rate adequacy under  
            federal law.

          37)Authorizes DHCS to make modifications to the QAF, payment  
            methodologies, and other adjustments as necessary, in  
            consultation with the hospital community, to the extent  
            necessary to obtain federal approval.

          38)Requires DHCS to make available all public documentation used  
            to administer and audit the QAF and supplemental payment  
            program, and upon request assist hospitals in reconciling  
            payments due and received from MCPs.  Requires DHCS to post on  
            its Website, within 10 days of federal approval, the QAF model  
            and the UPL calculations, quarterly updates on payments, fee  
            schedules and model updates, and information on managed care  
            rate approvals.   

          39)Requires the Director of DHCS to promptly submit any state  
            plan amendment (SPA) or waiver request and seek any other  
            federal approval for implementation as necessary, including  
            approval to exempt specific providers, to seek to amend  
            contracts with Medi-Cal MCPs without waiting for federal  
            approval, and requires the amendments to set forth an  
            agreement to increase capitation payments and payments to  
            hospitals relating back to January 1, 2014.  

          40)Allows for implementation based on receipt of a letter from  
            CMS indicating likely federal approval, if it is determined to  
            be sufficient, as specified; authorizes the Director of DHCS,  
            to the extent FFP is not jeopardized, to have broad collection  
            authority pending final approval, specifies that payments made  
            prior to final approval are conditional, and provides for  


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            refunds if final approval is denied.  Authorizes the DHCS  
            Director to modify timelines if a letter of approval or likely  
            approval is not secured by December 15, 2015.  

          41)Makes this bill inoperative if a court of appellate  
            jurisdiction or CMS determines that any element cannot be  
            implemented and the provisions cannot be modified consistent  
            with the terms of this bill, or if it is not approved by CMS  
            before January 1, 2016, and the provisions cannot be modified  
            to meet the requirements of federal law.  

          42)Authorizes the Director of DHCS to recoup funds in the event  
            of inoperability, pursuant to court order, unavailability of  
            FFP, or as necessary to prevent General Fund (GF) cost; to  
            refund fees in the event of recoupment; and to withhold  
            payment to any hospital that sues to enjoin implementation.   
            Requires notice to the Legislature of this occurrence. 

          43)Make this bill inoperative and retroactively invalidated, on  
            the first day of the month of the calendar quarter following  
            notification to the Joint Legislative Budget Committee by the  
            Department of Finance that one of the following conditions has  

             a)   A final determination of a court that the fee proceeds  
               are GF revenue or local proceeds of taxes;
             b)   Federal financial approval has been sought, but not  
             c)   A lawsuit related to this bill has been filed and a  
               court order has been issued that results in financial  
               disadvantage to the state; or,
             d)   The Director of DHCS determines that implementation  
               would result in a financial disadvantage to the state, as  
          44)Authorizes the Director of DHCS not to implement or  
            discontinue implementation of supplemental payments pursuant  
            to 42) above.  Requires the DHCS Director to execute a  
            declaration, as specified, if a determination of inoperability  
            is made.  

          45)Deletes the January 1, 2015 sunset on the existing HQARF and  
            extends the HQARF, as modified by this bill, to January 1,  

          46)Sunsets all provisions on January 1, 2017, or the date of the  


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            last payment, whichever is later. 
          47)Authorizes DHCS to implement this bill by means of policy  
            letters, provider bulletins, or all plan letters in lieu of  
            regulatory action under the Administrative Procedures Act, and  
            requires notice to the appropriate committees of the  

          48)Specifies legislative intent to consider legislation  
            requiring the Director of DHCS to seek approval for an  
            increase in the fees and increased payments if there is a  
            determination that additional FFP is available within the UPL  
            or the limits on managed care payments and specifies that  
            these increases have priority over any other purposes, and  
            requires consultation with the hospital community.

          49)Authorizes DHCS to maximize FFP in order to provide access to  
            services provided by hospitals that are not reimbursed by  
            certified public expenditures (CPEs) by means of  
            Intergovernmental transfers (IGTs).  

          50)Authorizes DHCS to continue to administer and distribute  
            payments for the Construction Renovation Reimbursement  
            Program, which was previously administered by the California  
            Medical Assistance Commission under the SPCP, and eliminates  
            the requirement that a hospital have a selective provider  
            contract in order to participate.  

          51)Establishes legislative findings, declarations, and intent  
                                                         recognizing the role hospitals play in serving Medi-Cal  
            enrollees, that funding provided to hospitals through a  
            hospital QAF be explored with the goal of increasing access to  
            care and improving hospital reimbursement through supplemental  
            Medi-Cal payments to hospitals; that it is the intent to  
            impose a QAF to be paid by hospitals, which would be used to  
            increase FFP in order to make supplemental Medi-Cal payments  
            to hospitals for the period of January 1, 2014 through  
            December 31, 2015, and to help pay for health care coverage  
            for low-income children; that the QAF is deposited into  
            segregated funds apart from the GF and used exclusively for  
            supplemental Medi-Cal payments to hospitals, direct grants to  
            public hospitals, health care coverage for low-income  
            children, and for the direct costs of administering the  
            program by DHCS.


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          52)Contains an urgency clause so as to become effective  
            immediately upon enactment. 

           EXISTING LAW  :  

          1)Establishes, under federal law, the Medicaid program (Medi-Cal  
            in California, administered by DHCS) to provide comprehensive  
            health care services and long-term care to low-income  
            populations such as pregnant women, children, and seniors and  
            people with disabilities (SPDs).

          2)Effective January 1, 2014, adopts the Patient Protections and  
            Affordable Care Act (ACA) state option to expand Medi-Cal to  
            provide coverage to childless adults, between ages 19 and 65  
            who are not otherwise eligible for Medi-Cal; conforms to the  
            ACA by expanding coverage for parents and caretaker relatives  
            with family income up to 138% of the federal poverty level and  
            eliminates assets and resources limits.

          3)Establishes a schedule of benefits under the Medi-Cal program,  
            which includes hospital inpatient and outpatient services,  
            subject to utilization controls, and establishes Medi-Cal  
            hospital reimbursement requirements.

          4)Defines, under federal law, the UPL for hospital reimbursement  
            as the reasonable estimate of what Medicare would pay to all  
            hospitals within a class. 

          5)Authorizes DHCS to contract with qualified individuals,  
            entities, or organizations to provide services to, arrange  
            for, or case manage, the care of Medi-Cal beneficiaries,  
            including hospital inpatient services.  

          6)Defines a Medi-Cal MCP as any entity that enters into one of  
            several types of contracts with DHCS including county  
            organized health systems, geographic managed care plans, and  
            local initiatives.  

          7)Requires, under federal law, payments to Medi-Cal MCPs to be  
            set at a capitation rate that is actuarially sound. 

           FISCAL EFFECT  :  According to the Senate Appropriations  
          Committee, based on a prior version, the fiscal effect is not  
          fully known.  DHCS is working with the California Hospital  
          Association (CHA) to determine the maximum amount of federal  


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          funding that can be drawn down with QAF revenues.  The following  
          fiscal estimates are based on the current hospital QAF (set to  
          sunset on December 31, 2013): 

          1)Annual QAF revenue of $2.8 billion per year for two years  

          2)Annual payments to private hospitals of $3.1 billion per year  
            for two years. (HQARF and federal funds).

          3)Annual payments to Medi-Cal MCPs of $1.4 billion per year for  
            two years. (HQARF and federal funds).  

          4)Annual expenditures of $475 million per year for two years to  
            support children's health care coverage (HQARF and federal  
            funds).  By using QAF revenues, this bill would allow the  
            state to reduce GF expenditure by a similar amount. 

          5)Annual administrative costs of $2 million for two years for  
            oversight by DHCS (HQARF and federal funds).

           COMMENTS  :

           1)PURPOSE OF THIS BILL  .  According to the author, this bill is  
            needed to enact the Private Hospital Quality Assurance Fee Act  
            of 2013, to continue to impose, subject to federal approval, a  
            QAF, on certain general acute care hospitals from January 1,  
            2014, through December 30, 2015, with the resulting revenue to  
            be deposited into the HQARF.  The current QAF sunsets.  The  
            author states, that in addition, this bill enacts the Medi-Cal  
            Hospital Reimbursement Improvement Act of 2013, which  
            requires, subject to federal approval, supplemental payments  
            to be made to private hospitals and increased capitation  
            payments to be made to Medi-Cal MCPs for hospital services.   
            The author further points out that this bill would enact a  
            hospital QAF for the two additional years to draw down  
            increased federal funds for hospital services, and to provide  
            millions of dollars in additional revenue for children's  
            health coverage.  It also provides grants to public county and  
            district hospitals.  Federal law authorizes states to levy  
            fees on health care providers if the fees meet federal  
            requirements.  This bill provides increased federal funding to  
            hospitals without using state 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  .  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.  To prevent states from levying an  
            assessment on only Medicaid providers, federal law requires  
            provider fees to be "broad based" and uniformly applied to all  
            providers within specified classes of provider, and states are  
            prohibited from having a provision that would ensure providers  
            are "held harmless" from the impact of the fee.  Health care  
            related provider fees may only be imposed on 19 particular  
            classes of health care items or services.  Federal approval  
            through CMS is required.  First enacted in 2009, this bill is  
            the third extension of a hospital-specific QAF.  

          This bill and the predecessors enact a methodology to increase  
            funding for hospitals serving Medi-Cal patients through  
            supplemental payments.  The payments are calculated based on  
            hospital outpatient, inpatient days, sub-acute, high-acute,  
            and acute psychiatric days.  Hospitals that provide a moderate  
            level of Medi-Cal services receive a supplement for Medi-Cal  
            high acuity days, sub-acute services, and trauma care days.   
            This bill adds a supplemental payment for hospitals for  
            transplant patient days.  There is also an increase in the  
            capitation rate that is paid to Medi-Cal MCPs that is to be  
            passed on to hospitals for hospital services to Medi-Cal  
            enrollees.  It is anticipated that hospitals will receive  
            increased payments from Medi-Cal MCPs for both inpatient and  
            outpatient services from this bill.  

          Details of the QAF and the payment distribution are still being  
            negotiated between the sponsor and DHCS; however the current  
            estimate is that this bill will raise nearly $8 billion in  
            Medi-Cal fee dollars over a two year period.  Of that, it is  
            estimated that $1.3 billion will be allocated to children's  
            coverage, $101 million will be paid as grants to DPHs, and $10  
            million will be paid in grants to NDPHs.  Of the remainder,  
            $6.5 billion is matched with federal funds at a 50% matching  
            rate and distributed as supplemental payments.  This yields an  
            estimated $5.8 billion in supplemental Medi-Cal payments to  
            private hospitals for FFS inpatient services, $2.3 for FFS  
            outpatient services, $5.3 billion for private hospital  
            Medi-Cal managed care services, and $170 million for public  


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            hospital managed care services.  The net benefit to the  
            hospital industry is calculated as $5.7 billion. 

          Under federal law, there are various limits on the payment rate  
            to Medi-Cal providers.  The supplemental payments and the  
            formulas specified in this bill are consistent with those  
            limits. For instance, the federal UPL for private hospitals is  
            based on the rate paid by Medicare for similar services.  The  
            total supplemental payments in this bill are calculated to  
            stay within these limits.  This bill includes authority for  
            DHCS to make adjustments within hospital categories in order  
            to assure compliance with federal requirements.  DPHs and  
            NDPHs are currently at the federal UPL under the terms of the  
            current federal hospital waiver and not eligible for federally  
            matched supplemental payments, except through managed care.   
            For this reason, the payments to DPHs and NDPHs are in the  
            form of direct grants or managed care payments.

          The distribution methodology also provides for supplemental  
            payments to hospitals that contract with Medi-Cal MCPs.   
            Payments made to hospitals through a MCMC contract are not  
            subject to the UPL, but the payment to the plan must be  
            actuarially sound.  An actuarially sound rate is established  
            as a rate range.  If DHCS reimburses at the lower level of the  
            rate range, supplemental payments are permissible as long as  
            the total does not exceed the upper level of the rate range.   
            This is referred to as room in the rate range.  Payments to  
            MCPs from the fee must be within this rate range. 

           3)PRIOR LEGISLATION  .  AB 1383 (Jones), Chapter 627, Statutes of  
            2009, and AB 188 (Jones), Chapter 645, Statutes of 2009,  
            enacted the original framework for a Medi-Cal hospital  
            provider fee; established fee payment amounts; a methodology  
            for calculating and paying supplemental payments to private  
            and district hospitals; supplemental payments to Medi-Cal MCPs  
            for hospital services; allocated funds for children's health  
            care coverage; DHCS administrative costs; and grants to public  
            hospitals from the funds collected by the fee.  AB 1383 was to  
            become effective upon receipt of CMS approval and become  
            inoperative on January 1, 2011.  This was timed to take  
            advantage of the increase in federal matching funds available  
            under the American Recovery and Reinvestment Act of 2009  
            (ARRA).  ARRA increased California's Federal Medicare  
            Assistance Percentages (FMAP) by 11.59% from a base of 50% to  
            61.59% from October 1, 2008 thru December 31, 2010.  In other  


                                                                  SB 239
                                                                  Page  15

            words, the revenue derived from a hospital provider fee could  
            be matched by federal funds at a two to one ratio for this  
            limited period of time.  Implementation of AB 1383 was  
            dependent on CMS approval through a SPA.  After significant  
            discussions between the Administration and CMS, CMS sent DHCS  
            a letter on June 16, 2010, stating that CMS did not believe  
            the fee and payments proposed in AB 1383 met federal  
            requirements.  CMS made extensive comments, requested  
            additional information, and suggested modifications to address  
            the specific concerns raised, as well as suggestions as to how  
            to develop a fee that met federal law.  AB 1653 (Jones),  
            Chapter 218, Statutes of 2010, reflected the CMS requested  
            modifications necessary to obtain federal approval.  The delay  
            in obtaining federal approval necessitated a revision of the  
            collection and payment timeframes.  Additional modifications  
            were enacted in SB 208 (Steinberg), Chapter 714, Statutes of  
            2010.  This first fee generated $3.1 billion in revenue from  
            hospitals paying the QAF.  The QAF drew down an additional  
            $3.2 billion in federal funds, and provided an overall benefit  
            to the hospital industry of $2.6 billion.  In addition, over  
            the 21 month period in which AB 1383, AB 188, and AB 1653  
            applied, the QAF provided $560 million for children's health  
            coverage and $513 million in unmatched direct grants to DPHs. 

          The Federal Education, Jobs, and Medicaid Assistance Act  
            extended the availability of increased FMAP but phased it out  
            over the additional six months by providing an increased FMAP  
            of 8.77% for January thru April 2011 and an increased FMAP of  
            5.66% for April thru June 2011.  In order to benefit from the  
            increase in federal matching funds, payments had to actually  
            be made during the specified period, regardless of when the  
            services were provided.  The hospital industry was not able to  
            agree on a fee mechanism in time to take advantage of the  
            January to April 2011 increase.  However, agreement was  
            reached within the industry and with DHCS in time to enact  
            legislation to benefit from the increase for the April to June  
            2011 period [SB 90 (Steinberg), Chapter 19, Statutes of 2011,  
            and AB 113 (Monning), Chapter 20, Statutes of 2011].  AB 113  
            was a companion bill that enacted an IGT program for NDPHs. 

          The QAF enacted by SB 90 and the hospital supplemental payment  
            program, for the period between January 1, 2011 and June 30,  
            2011, was similar to the previous fee and supplemental payment  
            program.  The most significant changes made to the funding  
            distribution in SB 90 as compared to the funding distribution  


                                                                  SB 239
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            in previous legislation was the elimination of supplemental  
            payments to the 48 NDPHs, grants to the 21 DPHs, and an  
            increase in the amount for children's coverage (from $80  
            million per quarter to $110 million per quarter).  In  
            addition, SB 90 established an IGT program that allows the 48  
            NDPHs and 21 DPHs to use IGTs to increase the Medi-Cal  
            capitation rate to Medi-Cal MCPs with which they contract.   
            According to the CHA, of the 357 licensed general acute care  
            hospitals in the state, 237 paid the QAF under SB 90.  Of the  
            237 hospitals paying the QAF, 15 independent hospitals and  
            four hospital systems pay more in QAF than they receive back  
            in supplemental payments.  Across all private hospitals, SB 90  
            was estimated to provide $858 million in payments to private  
            hospitals above the amounts paid in QAF by these hospitals.  

          SB 335, Chapter 286, Statutes of 2011, extended a fee similar in  
            structure to that enacted by SB 90 and AB 1383 (as revised by  
            AB 1653).  Modifications and additions were made due to  
            changed circumstances, such as the elimination of the enhanced  
            FMAP and implementation of the 2010 Medicaid Section 1115  
            waiver.  This new fee was effective retroactively, to coincide  
            with the expiration of the SB 90 six-month fee on July 1,  
            2011.  SB 335 is estimated to raise almost $7 billion in fee  
            revenue with a net benefit to hospitals of $4.6 billion and 17  
            independent hospitals and two hospital systems paid more in  
            QAF than they received back in supplemental payments,  
            amounting to approximately $100 million.  SB 335 continued the  
            exclusion of DPHs and NDPHs from the category of hospitals  
            eligible for per diem supplemental payments; however funding  
            was restored for supplemental payments to DPHs and NDPHs that  
            contract with Medi-Cal MCPs.  The original fee had provided  
            $513 million in unmatched grants to DPHs; however this was  
            eliminated in SB 90.  SB 335 again provided unmatched grants  
            to DPHs and added NDPHs.  However, the agreement to reinstate  
            these grants was not reached in time to develop a distribution  

            This bill also excludes DPHs and NDPHs from supplemental  
            payments, because as a group they have reached their UPL and  
            no additional matched FFS payments are allowed under federal  
            law.  They are eligible for increased payments financed by the  
            QAF through this bill as Medi-Cal MCP payments, plus this bill  
            authorizes direct grants to both categories.  This bill also  
            provides for the public entities that own or operate these  
            hospitals, such as counties or hospital districts to transfer  


                                                                  SB 239
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            funds by means of IGTs that will be used to fund supplemental  
            payments to hospitals that are not funded by means of CPEs.  

           4)HOSPITAL FINANCING  .  The Medi-Cal hospital inpatient payment  
            system in California is a complex amalgamation of mechanisms,  
            methodologies, funding sources, and rules.  Generally payment  
            varies depending on whether a hospital is a private hospital,  
            one of the 21-county or UC operated DPHs, or a district owned  
            or operated NDPH, whether they contract with an MCP, contract  
            with the state, or receive payments on a FFS basis.   
            Additional funding is also provided if hospitals are  
            classified as DSH based on the amount of Medi-Cal and  
            unreimbursed or indigent care they provide.  Most hospitals  
            that contract with a Medi-Cal MCP are paid by the plan on a  
            negotiated rate basis or a set rate if out-of-network.  As of  
            July 1, 2013, FFS payments to private hospitals were converted  
            from a per diem rate to a DRG-based system similar to  
            Medicare.  Further complicating the picture is that since 2005  
            there have been a number of major changes to the reimbursement  
            mechanisms for every type of hospital.  This bill has a number  
            of provisions that are necessary because of this ever-altering  
            landscape.  For instance, some of the data that are used to  
            assess fees or make payments may be three or four years old.   
            There are also a number of contingency sections that provide  
            for adjustments if necessary to account for payment system  
            changes.  A description of the primary payment sources is as  

              a)   Private Medi-Cal Inpatient Hospital Payments  .  Until  
               July 1, 2013, private Medi-Cal inpatient hospital services  
               that were not covered by an MCP were reimbursed on a per  
               diem basis.  If the hospital participated in the SPCP, the  
               rate was a negotiated contract rate.  Otherwise the rates  
               were based on actual costs.  SB 853 (Committee on Budget  
               and Fiscal Review), Chapter 717, Statutes of 2010, the 2010  
               health budget trailer bill required DHCS to implement a new  
               payment methodology for inpatient hospital care in the  
               Medi-Cal program based upon DRGs.  The DRG method assigns a  
               numeric value to an acute care inpatient hospital episode  
               of care, which serves as a relative weighting factor  
               intended to represent the resource intensity of hospital  
               care of the clinical group that is classified to that  
               specific DRG.  As a reimbursement system the DRG assignment  
               determines the payment level the hospital will receive.   
               According to DHCS, payment by DRGs will simplify the  


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               payment process; encourage administrative efficiency, and  
               base payments on patient acuity and hospital resource needs  
               rather than length of stay.  Effective July 1, 2013, this  
               new DRG payment methodology will replace the previous  
               payment methods of negotiated rates for private contracted  
               hospitals and also replaces the cost-based reimbursement  
               methodology of non-contract hospitals; both of which  
               utilize a per diem type of payment methodology.  In the  
               interim, contract negotiations are handled by the Office of  
               the SPCP housed within DHCS [previously negotiated by the  
               California Medical Assistance Commission (CMAC)]. 

              b)   Public Hospitals  .  In 2005, California received federal  
               approval for a five year Section 1115(a) Medi-Cal Hospital  
               Financing/Uninsured Waiver.  One of the most significant  
               revisions under the 2005 hospital waiver was to make  
               fundamental changes in Medi-Cal hospital financing for  
               public hospitals.  Reimbursement for Medi-Cal per diem for  
               DPHs was based on CPEs, rather than GF.  The inpatient  
               reimbursement rate was no longer negotiated by CMAC and is  
               instead cost-based.  In November 2010, California received  
               federal approval for a new five year Section 1115(a)  
               Medi-Cal Demonstration/Pilot Project Waiver, entitled "A  
               Bridge to Reform" which, among other provisions, continued  
               the use of CPEs.  This waiver includes a continuation of  
               the hospital financing provisions from the 2005 waiver but  
               with modifications to the allocation of DSH funds and  
               Safety Net Care Pool (SNCP) funds.  The 2010 waiver also  
               included a new Delivery System Reform Incentive Pool  
               (DSRIP) fund that is tied to achievement of specific  

             NDPHs continued to be reimbursed in the same fashion as  
               private hospitals and were also part of the SPCP program  
               under the 2005 waiver and the new 2010 Bridge to Reform  
               waiver.  The 2005 waiver also created the SNCP which  
               provides a fixed amount of federal funds to cover  
               uncompensated care, matched by CPEs.  The distribution  
               criteria were revised in the 2010 Section 1115 waiver and  
               are based on unreimbursed expenses.
             Just over $1 billion in federal funding is available to DPHs  
               in the DSH Fund during each year of the waiver to provide  
               care to Medi-Cal and uninsured patients.  DSH is a federal  
               designation and funding mechanism available in the Medicaid  
               program to provide supplemental funding to hospitals caring  


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               for a significant proportion of indigent patients.  The  
               waiver DSH Fund is at a fixed level in a specific year, but  
               may change over time and contains no state GF.  Hospitals  
               submit CPEs and IGTs to draw down federal funds.  IGTs may  
               only be used to fund the nonfederal share of DSH payments  
               between 100-175% of the uncompensated costs.

             AB 1467 (Budget Committee), Chapter 23, Statutes of 2012, the  
               Health Omnibus Budget Trailer Bill, revised the  
               reimbursement methodology for NDPHs, effective July 1,  
               2012, by converting their Medi-Cal inpatient reimbursement  
                                           methodology to the CPE system used by DPHs.  The  
               reimbursement changes are contingent upon DHCS receiving  
               federal approval via an amendment to the "Bridge to Reform"  
               waiver which requests an increase in the SNCP and the DSRIP  
               for the supplemental funding, as well as approval of a SPA.  
                Approval of the waiver amendment and SPA has not been  
               obtained.  The additional funds were to be made available  
               to NDPHs to offset their uncompensated care costs and to  
               support their efforts to enhance the quality of care and  
               the health of the patients and families they serve.  NDPHs  
               are not otherwise eligible for these funds.  However, in  
               the absence of federal approval, NDPHs will be transitioned  
               to DRGs on January 1, 2014. 

              c)   IGTs  .  The 2005 hospital waiver was also a response to  
               the increasing federal scrutiny by CMS of IGTs.  IGTs are  
               transfers of public funds from one level of government to  
               another.  California relied on IGTs as the nonfederal share  
               for various supplemental payment programs such as the  
               Private Supplemental Payment Program and DSH payments and  
               to backfill GF in the Medi-Cal program.  Under the terms of  
               the 2005 hospital waiver, the use of IGTs as the  
               non-federal share for these payments was severely  
               restricted.  However SB 208, SB 90, AB 113, and the 2010  
               Medi-Cal Bridge to Reform waiver expanded use of IGTs.  For  
               instance, SB 90 authorized the use of IGTs for supplemental  
               payments through MCMC plans for both NDPH and DPH.  AB 113  
               implemented an IGT program for NDPHs regardless of whether  
               they contracted through the SPCP program.  IGTs are also  
               used as the nonfederal share of payments made to DPHs for  
               SPDs who are enrolled into Medi-Cal MCPs.  The agreement  
               among the hospital industry reflected in this bill includes  
               use of QAF revenues for IGTs that will be used to increase  
               payments to MCPs for private and NDPH hospital services to  


                                                                  SB 239
                                                                  Page  20

               Medi-Cal enrollees.  

           5)CMAC.   The SPCP was established by the Legislature in 1982 (AB  
            3480 (Robinson), Chapter 329, Statutes of 1982) under a  
            1915(b) waiver and allowed CMAC to selectively contract as  
            long as there was adequate access to hospital beds to serve  
            the Medi-Cal population in a Health Facility Planning Area.   
            Except for emergencies, most FFS Medi-Cal beneficiaries in a  
            closed area were required to receive in-patient care at a  
            contracting hospital.  Selective contracting allowed CMAC to  
            negotiate a competitive rate in place of the traditional  
            "cost-based" reimbursement system used by most states.  Since  
            its inception CMAC has saved the state $12.7 billion in state  
            GF savings.  Non-contract hospitals continued to be reimbursed  
            on a cost-based system.  As stated above, reimbursement for  
            DPHs was transitioned back to cost-based in the 2005 waiver.   
            On July 1, 2012, CMAC was eliminated and the SPCP was  
            transferred to DHCS for negotiation and administration until  
            the SPCP was replaced by the implementation of the new DRG  
            hospital inpatient payment methodology scheduled for July 1,  
            2013.  NDPHs are scheduled to transition to DRGs on January 1,  
            2014, and until then will continue to be reimbursed as  
            contracting or non-contracting hospitals.  This bill includes  
            clean-up provisions to transfer remaining authority to DHCS in  
            order to allow it to administer an IGT and supplemental  
            payment program previously administered by CMAC. 

           6)SUPPORT  .  CHA, sponsor of this bill, writes in support that  
            the creation and implementation of the hospital fee program in  
            California has been extremely successful.  According to CHA,  
            the program has been critical for hospitals to bolster their  
            ability to preserve health care services for the state's most  
            vulnerable patients.  CHA reports that the first two hospital  
            fee programs are essentially completed and have reached their  
            goals of providing nearly $3.5 billion in critical funding to  
            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.  CHA states that this  
            bill reflects a work-in-progress for a final proposal that  
            will be completed soon.  According to CHA, they are working  
            with DHCS to resolve these open issues.  Due to 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 UPL  


                                                                  SB 239
                                                                  Page  21

            and determining the actuarially certified rate room in the  
            managed care program.  

          Other supporters such as Adventist Health, Loma Linda University  
            Medical Center, the Alliance of Catholic Health Care, and  
            Private Essential Access Community Hospitals write that the  
            hospital fee program is crucial to the preservation of  
            California's entire safety net and that it has been the only  
            way for community safety net hospitals to survive billions of  
            dollars in Medi-Cal payment shortfalls; ongoing multi-million  
            dollar Medi-Cal DSH cuts to safety net hospitals; and  
            compensate for the current Medi-Cal waiver that provides no  
            support to help transform their hospital delivery systems.   
            These supporters further state that as California prepares for  
            1.4 million new Medi-Cal enrollees in 2014 under the ACA,  
            Medi-Cal rates to hospitals must continue to be  
            stabilized-especially for community safety net hospitals which  
            will have an integral role in serving the 3 to 4 million  
            remaining uninsured in 2014.  

           7)OPPOSITION  .  Michelle Steel, Vice Chair of the State Board of  
            Equalization, writes in opposition that the cost of healthcare  
            is continually rising year after year, and there is  
            considerable concern that costs are going to get even higher  
            with the new federal rules coming into place.  According to  
            this opposition, adding more fees and taxes on healthcare  
            providers has the end effect of raising these rates even more,  
            as these additional costs will be passed on to the consumers.   
            Ms. Steel also asserts in opposition that this bill opens the  
            door to insolvency of the fund for which it is intended by  
            allowing the State Controller to divert money away to the  
            General Fund. 

           8)PREVIOUS LEGISLATION  .  SB 208 implements provisions of the  
            2010 "Bridge to Reform" waiver including establishing the  
            DSRIP, authorizes DHCS to require the mandatory enrollment of  
            SPDs in an MCPs commencing the later of either June 1, 2011,  
            or upon obtaining federal approval.

           9)POLICY COMMENTS  .  As previously stated, DHCS and the sponsors  
            of this bill are still negotiating final details.  For this  
            reason, this bill may need additional amendments.  Among the  
            outstanding issues are:
              a)   Direct Grants  .  The current language authorizes direct  
               grants but does not specify amounts or a methodology for  


                                                                  SB 239
                                                                  Page  22

               providing direct grants to DPHs and NDPHs.  The current  
               estimate is that DPHs will receive direct grants of $90  
               million in 2014 and $96 million in 2015.  The DPHs are  
               proposing to transfer a total of $85 million as IGTs which  
               will be matched with federal funds and paid to private  
               hospitals as supplemental payments.  NDPHs will receive a  
               total of $50 million in direct grants and will retain $10  
               million.  The remaining $40 million will be transferred as  
               IGTs and matched with federal funds for a total of $80  
               million which will also be paid to private hospitals.   
               Additional amendments may be needed for a portion of this  
             b)   Data Sources  .  This bill specifies that the data source  
               for all hospitals except one named hospital is to be from  
               the fiscal year ending 2010, as filed with the Office of  
               Statewide Health Planning and Development on June 6, 2013.   
               According to the sponsor, the data from 2010 is not  
               accurate for that hospital.  This provision may be revised  
               to be a more general description and therefore could apply  
               to more than one single named hospital.
              c)   Unspecified Amounts  .  This bill does not yet include an  
               appropriation.  It also includes a formula that authorizes  
               DHCS to make adjustments by calculating a fee percentage;  
               however the definition currently includes a blank amount.   
               Amendments may also be required to fill in these omissions.
             d)   Dollar Amounts  .  According to the sponsors additional  
               revisions may also need to be made to the fee and payment  
               amounts after a final approval from DHCS which also may  
               include a change in the amount allocated for children's  
               health coverage. 


          California Hospital Association (sponsor)
          Adventist Health
          Alliance of Catholic Health Care
          California Black Health Network
          California Children's Hospital Association
          California Coverage & Health Initiatives 
          Children Now
          Children's Defense Fund-California
          Children's Partnership
          Loma Linda University Medical Center


                                                                  SB 239
                                                                  Page  23

          PICO California
          Private Essential Access Community Hospitals
          Tenet Healthcare Corporation

          Michelle Steel, Vice Chair of the State Board of Equalization

           Analysis Prepared by  :    Marjorie Swartz / HEALTH / (916)