BILL ANALYSIS Ó SB 239 Page 1 Date of Hearing: August 30, 2013 ASSEMBLY COMMITTEE ON APPROPRIATIONS 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 SUMMARY 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 program. 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 SB 239 Page 2 regulatory action under the Administrative Procedures Act, and requires notice to the appropriate committees of the Legislature. 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 SB 239 Page 3 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. COMMENTS 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 SB 239 Page 4 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 above. 1)Changes from Prior QAF Program . The structure of the fee and the supplemental payment methodologies are largely similar to SB 239 Page 5 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 SB 239 Page 6 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 program. 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 spending. 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 care. 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. SB 239 Page 7 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 (Hernández 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 coverage. 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