BILL ANALYSIS Ó SB 239 Page 1 Date of Hearing: August 20, 2013 ASSEMBLY COMMITTEE ON HEALTH Richard Pan, Chair SB 239 (Ed Hernandez and Steinberg) - As Amended: August 14, 2013 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 : PRIVATE HOSPITAL QAF PROVISIONS 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 SB 239 Page 2 $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, 2015. 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 review. 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 overpayments. 8)Prohibits the fee from exceeding the maximum aggregate net patient revenue percentage that is allowed under federal law, SB 239 Page 3 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 NDPHs; 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. SB 239 Page 4 SUPPLEMENTAL PAYMENT PROVISIONS 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, SB 239 Page 5 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 SB 239 Page 6 payments made to Medi-Cal MCPs in the absence of these payments are not to be reduced as a consequences of these payments. 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 hospital. 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 SB 239 Page 7 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 reimbursement. 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 bill. MISCELLANEOUS AND GENERAL PROVISIONS 34)Provides methodologies for proportionate reductions or recalculations of all fees, hospital payments, and increased SB 239 Page 8 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 bill. 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 SB 239 Page 9 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 occurred: 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 received; 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 specified. 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, 2017. 46)Sunsets all provisions on January 1, 2017, or the date of the SB 239 Page 10 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 Legislature. 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. SB 239 Page 11 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 SB 239 Page 12 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 (HQARF). 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. SB 239 Page 13 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 SB 239 Page 14 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 Page 16 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 formula. 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 Page 17 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 follows: 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 SB 239 Page 18 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 milestones. 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 SB 239 Page 19 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 transaction. 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. REGISTERED SUPPORT / OPPOSITION : Support 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 Opposition Michelle Steel, Vice Chair of the State Board of Equalization Analysis Prepared by : Marjorie Swartz / HEALTH / (916) 319-2097