BILL ANALYSIS                                                                                                                                                                                                    ”

                                                                  SB 239
                                                                  Page  1

          Date of Hearing:   August 30, 2013

                                  Mike Gatto, Chair

           SB 239 (Hernandez and Steinberg) - As Amended:  August 27, 2013  

          Policy Committee:                             HealthVote:19-0

          Urgency:     Yes                  State Mandated Local Program:  
          No     Reimbursable:              No


          This bill, subject to federal approval, modifies and extends a  
          hospital quality assurance fee (QAF) program for two additional  
          calendar years, through the end of 2015. Specifically, key  
          provisions of this bill:

          1)Establish, for the period from January 1, 2014 to December 31,  
            2015, a framework for collection of fees from private  
            hospitals and distribution of an estimated $13.9 billion in  
            supplemental Medi-Cal payments to private hospitals (directly  
            and via managed care plans), as well as grant funding to  
            public hospitals. Specifies that monies are deposited into the  
            Hospital Quality Assurance Revenue Fund for purposes of this  

          2)Provide funding to the state for children's health care  
            coverage and for administrative costs.

          3)Provide grant funding to designated and non-designated public  
            hospitals, of which a portion is retained by the state in  
            order to maximize federal funding.  Specifies that the  
            distribution methodology for grant funding shall be determined  
            by the director in consultation with the hospitals.

          4)Prohibit 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.

          5)Authorize DHCS to implement this bill by means of policy  
            letters, provider bulletins, or all plan letters in lieu of  


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            regulatory action under the Administrative Procedures Act, and  
            requires notice to the appropriate committees of the  

          6)Authorize DHCS to continue to administer and distribute  
            payments for the Construction Renovation Reimbursement  
            Program, which was previously administered by the California  
            Medical Assistance Commission, and makes conforming changes.  

          7)Contain numerous provisions that further specify mechanics of  
            the program, including calculations and timing of fee  
            collection and supplemental payments, as well as requirements,  
            flexibility, and contingencies with respect to federal  
            approval, legal action, or specified court rulings. 

           FISCAL EFFECT 

          1)An increase of $13.9 billion total (hospital QAF/ federal  
            funds) paid to private hospitals through December 2015 in the  
            form of supplemental Medi-Cal payments for hospital services.  
            This estimate assumes hospitals subject to the QAF will  
            contribute $7.6 billion; that this funding is matched with FFP  
            at the rate of 50% and paid as supplemental payments, except  
            for those funds set aside to the state and for other purposes  
            as explained below; and that the portion related to the  
            Medi-Cal expansion population is paid at 100% FFP. 

          2)Estimated administrative costs to the Department of Health  
            Care Services (DHCS) of approximately $2 million annually  
            (offset by hospital QAF revenue in this amount) for calendar  
            years 2014 and 2015.

          3)Total estimated net GF savings of $1.24 billion over two  
            years, associated with $155 million in QAF revenue per quarter  
            allocated to the state for children's coverage.  QAF revenue  
            to the state for children's coverage can directly offset GF  
            for this purpose. 

            The 2013-14 Budget assumes $310 million in savings associated  
            with the QAF extension, as the funds are to be used in lieu of  
            General Fund for children's health coverage.  This bill  
            provides $310 million for the 2013-14 fiscal year, consistent  
            with the budget assumption. Failure to extend the QAF program  


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            would result in $310 million in additional General Fund costs  
            in the current fiscal year.

          4)Direct grants to designated public hospitals in the aggregate  
            net amount of $24.5 million in 2013-14, $50.5 million in  
            2014-15, and $26 million in 2015-16.  

          5)Direct grants to non-designated public hospitals in the  
            aggregate net amount of $2.5 million in 2013-14, $5 million in  
            2014-15, and $2.5 million in 2015-16.

          6)Upon the expiration of this program in 2014, GF cost pressure  
            is created to maintain the higher level of payments to  
            hospitals and the children's health care coverage programs  
            funded by the QAF.  


           1)Rationale  .  The California Hospital Association (CHA), the  
            sponsor of SB 239, states that the hospital provider fee  
            program remains crucial to the preservation of Medi-Cal  
            services provided by California's hospitals.  CHA notes that  
            this program will provide an estimated net benefit of $6.3  
            billion to California's hospitals over two years. In addition,  
            CHA points out the program will provide significant fiscal  
            benefit to the state.

           2)Background  . Federal law authorizes states to fund a portion of  
            Medicaid programs through provider fees that meet federal  
            requirements and are matched with FFP to pay providers without  
            state funds. State QAF must be broad-based, uniform, and  
            cannot hold a group of providers harmless with respect to fees  
            paid and payments received. In California, three prior  
            hospital QAF programs have been enacted (see Prior  
            Legislation, below). QAF have also been used to generate  
            revenues for Medi-Cal managed care plans, skilled nursing  
            facilities (SNF, nursing homes), and intermediate care  
            facilities for the developmentally disabled (ICF-DD).  

            Federal law establishes a provider class-specific Upper  
            Payment Limit (UPL), which is the maximum amount a state  
            Medicaid program may pay to certain classes of providers in  
            the aggregate, statewide, based on what Medicare would have  
            paid for the same services. State Medicaid programs cannot  
            claim federal matching dollars for provider payments in excess  


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            of the applicable UPL.  This program is designed to maximize  
            payments to hospitals while staying within the  
            hospital-specific UPL.

           3)Hospital QAF Program  . This program provides a mechanism for  
            increasing payments to hospitals that serve Medi-Cal patients,  
            with no impact on the state's General Fund. Some of these  
            payments will be made directly by the state, while others will  
            be made by Medi-Cal managed care plans that will receive  
            increased capitation rates from the state in amounts equal to  
            the supplemental payments. 

              a)   Fees  . Fees are collected from hospitals based on their  
               total number of inpatient days, and range from $78 to $542  
               per inpatient day, depending on the payer for each patient  
               day.  The fee revenue is allocated to certain activities as  
               explained above, and remaining fee revenue is matched with  
               federal funds and paid to hospitals (directly by the state,  
               or through managed care plans) pursuant to the supplemental  
               payment provisions of this bill. 

             b)   Payments  . The program makes supplemental inpatient and  
               outpatient Medi-Cal payments to private hospitals.  On a  
               fee-for-service basis, supplemental payments to private  
               hospitals are calculated based on the number of inpatient  
               days, with higher payment rates for high-acuity days such  
               as transplant services, acute psychiatric care, and other  
               high-acuity care.  Outpatient payments are calculated based  
               on the hospital's percentage of all Medi-Cal  
               fee-for-service outpatient visits.  Increased capitation  
               rates to managed care plans are calculated in a similar  
               manner, but paid to managed care plans instead of directly  
               to hospitals.   

              c)   Grants  . Designated public hospitals (DPHs; county and  
               University of California hospitals) and non-designated  
               public hospitals (NDPHs; hospitals owned by hospital  
               districts or municipal entities) do not receive  
               supplemental payments because they are currently already at  
               the UPL under the terms of the current federal hospital  
               waiver.  These entities receive grant funds as outlined  

           1)Changes from Prior QAF Program  . The structure of the fee and  
            the supplemental payment methodologies are largely similar to  


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            that of the prior three QAF programs.  This bill includes the  
            following key changes: 

             a)   Managed care plans will allocate funds to hospitals  
               based on a mix of inpatient (70%) and outpatient (30%)  
               services, in order to reward hospitals who reduce inpatient  
               days by providing appropriate outpatient care.  The prior  
               scheme awarded funds based on inpatient days only.  
             b)   A new supplemental payment is created for transplant  
               days, in order to offset low Medi-Cal reimbursement to the  
               few transplant centers in the state for these costly and  
               complex procedures.  
             c)   This QAF program continues direct grants to DPHs and  
               NDPHs.  In this program, however, some of this grant money  
               will be used to match federal funding to the extent  
               hospitals have "rate range room" (meaning the rate paid to  
               hospitals has not exceeded the maximum rate for which  
               federal financial participation is available, and thus some  
               grant funding can be used to draw down additional federal  
               funds, creating additional funding for the program).  In  
               the prior program, grant funding to public hospitals was  
               not matched with federal dollars.

           4)Recent Amendments  . Substantive amendments to the bill on  
            August 27 retain the structure of the program while clarifying  
            and cleaning up numerous sections.  In addition, amendments:

             a)   Allow DHCS flexibility to correct egregious errors  
               (defined as over $1,000,000) in payments or fees.
             b)   Specify the amounts of grant funding to DPHs and NDPHs,  
               and a methodology by which the department withholds a  
               portion of those grants to make "rate range room" payments  
               to managed care plans. 
             c)   Clarify how payments are to be calculated if a change in  
               hospital ownership occurs. 
             d)   Provide an opt-in mechanism, subject to federal  
               approval, for out-of-state hospitals that wish to  
               participate in the fee program.
             e)   Recast the methodology for calculating the fees owed.
             f)   Allow the Hospital Quality Assurance Revenue Fund to be  
               continuously appropriated.  
           1)Construction Renovation Reimbursement Program  . This program  
            provides supplemental reimbursement for the debt service  
            incurred on the revenue bonds for construction, renovation, or  


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            replacement of facilities or fixed equipment for hospitals  
            meeting specified criteria.  The program was administered by  
            the California Medical Assistance Commission (CMAC), whose  
            functions and staff were absorbed by DHCS. The provision  
            related to this program is clean-up from the dissolution of  
            CMAC and the transition to a DRG payment methodology (as  
            explained below).  The provision allows DHCS to administer the  
            program and removes a reference to a soon-to-be-defunct  
            payment methodology as a condition of participation in the  

           2)Medi-Cal Hospital Financing  .  Supplemental payments from the  
            QAF provide a large proportion of Medi-Cal spending on  
            hospital services.  Federal funding generated by the QAF  
            itself comprises more than 20% of total Medi-Cal hospital  

            Outside of the QAF payments, Medi-Cal payments to hospitals  
            differ based on whether a hospital is reimbursed by a managed  
            care plan or directly by the state, whether they qualify as a  
            disproportionate share hospital (DSH), and whether they are a  
            private hospital, a designated public hospital, or a  
            non-designated public hospital.  Most hospitals that contract  
            with a Medi-Cal managed care plan are paid by the plan on a  
            negotiated rate basis or a set rate if out-of-network.  DSH  
            payments are additional payments made to hospitals that  
            provide a certain amount of Medi-Cal services or uncompensated  

            Effective July 1, 2013, FFS Medi-Cal implemented a "diagnosis  
            related groups" (DRGs) payment methodology for private  
            hospital inpatient services.  The DRG methodology is based on  
            resource intensity associated with a particular diagnosis, and  
            replaces the previous payment scheme of negotiated per-day  
            rates for contract hospitals and cost-based reimbursement for  
            non-contract hospitals.  A 2012 health trailer bill proposed  
            to move the NDPHs to a state to a CPE-based payment  
            methodology, but as this proposal is not likely to gain  
            federal approval, AB 498 (Chavez) repeals that proposal.   
            Instead, DRG payments will be implemented for NDPHs effective  
            January 1, 2014.  

            Designated public hospitals use Certified Public Expenditures  
            (CPEs; local funds), rather than GF, to draw down FFP for  
            hospital services, so they are not subject to a DRG payment.  


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            In addition, the 2010 hospital waiver provides additional  
            funding sources, with their own criteria, for DPHs.

           3)Prior Legislation  . 

             a)   AB 1467 (Budget Committee), Chapter 23, Statutes of 2012  
               proposed to change the reimbursement methodology and fund  
               source for reimbursement to NDPHs, as described above.  
             b)   SB 335 (HernŠndez and Steinberg), Chapter 286, Statutes  
               of 2011, extended the QAF program for an additional 30  
               months, to December 31, 2013. 

             c)   SB 90 (Steinberg), Chapter 19, Statutes of 2011  
               established a 6-month QAF program that ended June 30, 2011.  

             d)   AB 113 (Monning), Chapter 20, Statutes of 2011  
               established a Medi-Cal intergovernmental transfer program  
               for NDPHs.

             e)   AB 1653 (Jones), Chapter 218, Statutes of 2010 made  
               necessary changes to the methodology, timing, and frequency  
               of the supplemental payments made with QAF revenue in order  
               to gain federal approval of the QAF.

             f)   AB 188 (Jones), Chapter 645, Statutes of 2009  
               appropriated funds to DHCS to implement the QAF.   

             g)   AB 1383 (Jones), Chapter 627, Statutes of 2009  
               established a QAF program that ended December 31, 2010 and  
               provided funding to the state for children's health care  

           1)Related Legislation  . AB 498 (Chavez) repeals modifies  
            provisions of AB 1467 related to NDPHs, striking the  
            conversion to CPEs and allowing NDPHs to access certain  
            hospital waiver funds. 

           Analysis Prepared by  :    Lisa Murawski / APPR. / (916) 319-2081