BILL ANALYSIS                                                                                                                                                                                                    

                                                                  SB 239
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          Date of Hearing:  September 11, 2013

                            ASSEMBLY COMMITTEE ON HEALTH
                                 Richard Pan, Chair
           SB 239 (Ed Hernandez and Steinberg) - As Amended:  September 6,  
                        As Proposed to be Amended by RN:1326636
           SENATE VOTE  :  36-0
          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.   
          Requires private acute care hospitals to pay a quality assurance  
          fee (QAF), as specified, until December 31, 2016, in order to  
          provide funding for federal matching funds for supplemental  
          payments, children's coverage, and direct grants.  Establishes  
          Intergovernmental Transfer (IGT) programs.  Eliminates a  
          Medi-Cal rate reduction that applies to distinct part nursing  
          facilities (DP-NFs).  Specifically,  this bill  :  

          1)Imposes a requirement on all private general acute care  
            hospitals to pay a QAF for the first program period of from  
            January 1, 2014 to December 31, 2016.  Exempts DPHs, NDPHs,  
            long-term care hospitals, specified specialty hospitals, and  
            small and rural hospitals.  Exempts any hospital that has been  
            converted from a private hospital to a public hospital after  
            January 1, 2014, for the period the hospital is a public  
            hospital or qualifies as a new hospital.

          2)Specifies the first program period as from January 1, 2014 to  
            December 31, 2016, the second program period as January 1,  
            2017 to June 30, 2019 and each subsequent program period as  
            beginning on the last day of the prior program period and  
            ending on the last day of the state fiscal year, as determined  
            by the Department of Health Care Services (DHCS).  


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          3)Requires DHCS within 10 business days of receipt of federal  
            approval to compute the quarterly QAF amount for each program  
            period, are to notify each hospital.  Requires the hospitals  
            to pay the QAF, quarterly if possible, based on a schedule  
            established by DHCS and requires all fees to be paid no later  
            than the end of each program period. 

          4)Provides that the QAF is inoperative for the first program  
            period if the federal Centers for Medicare and Medicaid  
            Services (CMS) does not approve the program before December 1,  

          5)Creates a contractually enforceable promise on behalf of the  
            state to use the proceeds of the fee and the Hospital Quality  
            Assurance Revenue Fund (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, to continue  
            reimbursement levels that are not less than the aggregate  
            fee-for-service (FFS) amounts paid under rates and  
            methodologies in effect on December 31, 2013, and to comply  
            with all obligations imposed pursuant to this bill.

          6)For the first program period, requires private hospitals to be  
            paid supplemental payments for hospital outpatient services  
            that are based on the amount of Medi-Cal outpatient services  
            provided by that hospital up to the amount allowed under the  
            upper payment limit (UPL), except for the period of time a  
            hospital qualifies as new or has converted from a private to a  
            public hospital.  

          7)Requires DHCS to make the necessary determinations to  
            calculate and collect fees and 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 that is a sum of a rate that  
            is based on the following:
             a)   The amount of general acute care Medi-Cal days;
             b)   The amount of acute psychiatric Medi-Cal days;
             c)   The amount of high acuity Medi-Cal days if the  
               hospital's Medi-Cal inpatient utilization rate is between  
               5% and rate needed to qualify for DSH replacement funds;


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             d)   The amount of high acuity Medi-Cal trauma days, if the  
               hospital qualifies under 7) c) above, and has specified  
               designated trauma centers;
             e)   The amount of transplant Medi-Cal days if the hospital's  
               Medi-Cal inpatient utilization rate is between 5% and rate  
               needed to qualify for DSH replacement funds; and,
             f)   The amount of Medi-Cal sub-acute services provided in  
               the base calendar year.

          8)For the program period beginning January 1, 2014, and ending  
            December 31, 2016, specifies:
             a)   The quarterly dollar amount of the acute psychiatric per  
               diem supplemental Medi-Cal payments and the data source;
             b)   The specific dollar rate and data source for the FFS  
               inpatient per diem fee that on 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;
             c)   The quarterly dollar amount of the general acute care  
               per diem supplemental Medi-Cal payments and the data  
             d)   The specific dollar amount for the per diem supplemental  
               Medi-Cal payment rate for high acuity days and high acuity  
               trauma days for qualifying hospitals and the data source;
             e)   The specific dollar rate and data source of the managed  
               care per diem fee on inpatient 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;
             f)   The specific dollar rate and data source for the  
               Medi-Cal per diem fee;
             g)   The specific percentage of the outpatient supplemental  
               Medi-Cal payment rate and the data source;
             h)   The specific dollar rate of the prepaid health plan  
               hospital managed care per diem fee rate and the MCMC per  
               diem fee rate;
             i)   The sub-acute supplemental Medi-Cal payment percentage  
               based on payments to the hospital in 2010; and,
             j)   The specific dollar amount of the per diem supplemental  
               Medi-Cal payment rate for transplant inpatient days and the  
               data source.

          9)Establishes timelines and a methodology for rebasing each base  
            year and the data, updating the data sources, recalculating  
            the net benefit and other dollar amounts necessary to  


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            subsequent program years.  Provides that these calculations  
            for subsequent program periods are to be specified in the  
            annual Budget Act.

          10)After the first program period, requires DHCS to determine,  
            based on the rebased calculations, the new specific dollar  
            amounts for each supplemental payment and fee rate, in  
            consultation with the hospital community, as close as possible  
            to the UPL and in relative values as close to the first  
            program period as possible.  Requires these rates to be  
            specified in the annual Budget Act.  Requires, commencing  
            January 1, 2016, for the second program period and all  
            subsequent program periods that all calculations made by DHCS  
            in implementing fees, supplemental payments, net benefits, and  
            grants, if any, to be submitted to the Legislature in January  
            and May along with the Medi-Cal program fiscal detail.

          11)Authorizes the Director of DHCS, upon federal approval or  
            conditional federal approval, to have the discretion to revise  
            the FFS per diem QAF rate, the managed care per diem QAF rate,  
            the Medi-Cal per diem QAF rate, the prepaid health plan  
            hospital managed care and MCMC per diem QAF based on the funds  
            required to make the payments specified, in consultation with  
            the hospital community.

          12)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  

          13)Requires QAF payments, including payments from prior QAF  
            programs, remittances, interest and dividends, but not  
            penalties, or the amount allocated to DHCS, to be for deposit  
            in the HQARF.  Provides for excess funds to be refunded pro  
            rata.  Provides for excess funds remitted after the final date  
            to be refunded to hospitals on a pro rata basis, unless  
            federal rules allow the funds to be applied to the next  
            program period.  
          14)Establishes a timeline for disbursements, continuously  
            appropriates the HQARF for the first program period and   
             requires all proceeds of the fee to be used, exclusively to  
            enhance federal financial participation (FFP) for hospital  
            services under the Medi-Cal program, to provide additional  


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            reimbursement to, and to support quality improvement efforts  
            of, hospitals and 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)   Staffing and administrative costs of DHCS in  
               administering the QAF and payments, up to $250 million per  
             b)   Health care coverage for children in the amount of $155  
               million per quarter for the last two quarters of fiscal  
               year 2013-14 and in the amount of 24% of the net benefit  
             c)   Increased capitation payments to Medi-Cal MCPs,  
               including up to 10% the nonfederal share of payments to  
               hospitals for Medi-Cal enrollees considered newly eligible  
               under the federal Patient Protection and Affordable Care  
               Act (ACA); and, 
             d)   Increased payments to hospitals for Medi-Cal services,  
               including up to 10% of the nonfederal share of payments to  
               hospitals for Medi-Cal enrollees considered newly eligible  
               under the ACA and for direct grants to hospitals. 

          15)Requires DHCS to establish a preliminary and actual net  
            benefit based on the aggregate payments minus the aggregate  
            fees and establishes a process to reconcile upon a final  
            determination.  Provides that the amount of funding provided  
            to children's health coverage shall be equal to 24% of the net  
            benefit after July 1, 2014.  

          16)Provides methodologies for proportionate reductions or  
            recalculations of all fees, hospital payments, and increased  
            capitation payments in the event of the following:
             a)   If FFP is different than estimated under this bill; or,
             b)   If amounts allowable as payments for specified  
               categories must be adjusted due to the application of the  
               UPL under federal law.

          17)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  


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            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.  Limits the amount of payments if FFP  
            falls below 90% for the newly eligible childless adult  
            category.  Authorizes DHCS to set aside fee revenue, as  
            specified, in order to accumulate the required amounts.

          18)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  
            payments made to Medi-Cal MCPs in the absence of these  
            payments are not to be reduced as a consequences of these  
            payments.  Authorizes DHCS to issue change orders to amend  
            contracts and provides that the increase shall not be subject  
            to negotiation. 

          19)Requires 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  

          20)Provides direct grants in support of health care expenditures  
            to DPHs in the amount of $45 million in fiscal year (FY)  
            2013-14, $93 million in FY 2014-15, $110.5 million in FY  
            2015-16; and, $62.5 million in FY 2016-17.  Requires the  
            Director of DHCS to allocate a portion of the funds on a  
            quarterly basis in equal amounts among the DPHs pursuant to a  
            methodology developed in consultation with the DPHs in the  
            following amounts:
             a)   For FY 2013-14, $24.5 million;
             b)   For FY 2014-15, $50.5 million; 
             c)   For FY 2015-16, $60.5 million; and,
             d)   For FY 2016-17, $34.5 million.
          21)Provides that a portion of the grants are to be withheld and  
            used for the nonfederal share of rate range increases for  
            Medi-Cal MCPs that service counties with DPHs, further  
            provides that half of the portion that is distributed is to be  


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            conditioned on the distribution of the rate range increase  
            (the amount of increase in rate that is within the actuarially  
            sound rate range), in counties with a DPH and pursuant to a  
            methodology developed in consultation with the hospital  
            community.  Provides that the withheld funds are not to be  
            considered revenue for purposes of specified realignment  
            determinations.  Provides that the capitated rate range  
            increase is to be for enrollees other than those considered  
            "newly eligible" under the ACA for the purpose of enabling  
            plans to compensate hospitals for Medi-Cal services.  Requires  
            each plan to expend 100% on hospital services within 30 days.
           22)Provides direct grants in support of health care expenditures  
            to NDPHs in the amount of $12.5 million for two quarters in FY  
            2013-14; $25 million in FY 2014-15; $30 million in FY 2015-16;  
            and, $17.5 million for two quarters in FY 2016-17.  Requires  
            the Director of DHCS to allocate a portion of the funds among  
            the NDPHs pursuant to a methodology developed in consultation  
            with the NDPHs.  Requires the remainder to be withheld and  
            used as matching funds to increase MCMC capitated rates.   
            Provides that if the funds are not used for increase managed  
            care capitated rates that are within the actuarially sound  
            rate range, the funds shall be returned to the HQARF.  

          23)For subsequent program periods, requires the Director of DHCS  
            to determine the amounts, and if any, allocations methods of  
            direct grants and any withholds of direct grants to DPHs and  
            NDPHs.  Requires the amounts and allocations to be specified  
            in the annual Budget Act. 

          24)Authorizes DHCS to modify any methodology or other provision,  
            in consultation with the hospital community, to the extent  
            necessary to meet federal requirements, provided the  
            modifications are consistent with the provisions and do not  
            violate the spirit, intent, and purpose, and allows  
            adjustments as necessary to comply with federal law.

          25)Provides that supplemental payments under this bill are in  
            addition to DSH replacement supplemental payments, do not  
            impact eligibility for DSH payments, DSH replacement payments  
            made under the 2010 Medi-Cal Bridge to Reform Section 1115  
            waiver, and are not to be considered in the determination of  
            adequacy of any rate under federal law.

          26)Prohibits the QAF from exceeding the maximum aggregate net  


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            patient revenue percentage that is allowed under federal law,  
            as necessary, to preclude a finding of an indirect guarantee.

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

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

          29)Prohibits payments for the period of time a hospital  
            qualifies as new or has converted from a private to a public  
            hospital depending on the date of conversion, whether there is  
            a days data source, as defined, for the hospital, and whether  
            the new ownership assumes financial obligations to the  
            Medi-Cal program, as specified.  Allows the hospital that will  
            be opening on the site of the former Los Angeles County Martin  
            Luther King Jr.-Harbor Hospital to participate,  
            notwithstanding this exclusion and requires the use of the  
            best available data for this hospital.  Provides for payments  
            to converted hospitals, proportionate to the period in which  
            it was a qualifying private hospital.  Establishes a process  
            by which a hospital with a day's data source may assume  
            financial responsibility of outstanding obligations in the  
            Medi-Cal program and not be classified as a new hospital.

          30)Provides for data adjustments and supplemental payment  
            adjustments in the event of hospital consolidations, license  
            consolidations, or changes in ownership.  Provides that no  
            payments shall be made if a hospital is closed.  

          31)Authorizes the Director of DHCS to correct identified  
            egregious errors in data sources, as specified; to modify  
            timelines, upon consultation with the hospital community and  
            with notice to the Legislature, upon a determination of  
            operational impossibility.  

          32)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, approval for  
            supplemental payments for hospital services to all Medi-Cal  
            populations including optional expansion populations, to seek  
            to amend contracts with Medi-Cal MCPs without waiting for  
            federal approval, and requires the amendments to set forth an  


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            agreement to increase capitation payments and payments to  
            hospitals relating back to the beginning of each program  

          33)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  
            refunds if final approval is denied.  

          34)Authorizes the Director of DHCS to recoup and refund fees or  
            funds from hospitals 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 of denial by CMS, and to withhold payment to any  
            hospital that sues to enjoin implementation.  Requires notice  
            to the Legislature of this occurrence. 

          35)Provides that payments shall be made only to the extent the  
            QAF is established, collected, and available to cover the  
            nonfederal share of payments and provides that payments shall  
            only be made from the QAF proceeds, interest, and federal  

          36)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  
            the last day of a program period, and the provisions cannot be  
            modified to meet the requirements of federal law, or a lawsuit  
            or other order related to the QAF and payments is determined  
            to result in financial disadvantage to the state, except for a  
            case brought by a hospital located outside of the state.   
            Authorizes the Director of DHCS not to implement or  
            discontinue implementation of supplemental payments in the  
            event of inoperability.  Requires the DHCS Director to execute  
            a declaration, as specified, if a determination of  
            inoperability is made and implement a plan to wind down the  

          37)Authorizes DHCS to implement the QAF and payment program by  
            means of policy letters, provider bulletins, or all plan  
            letters in lieu of regulatory action under the Administrative  


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            Procedures Act, and requires notice to the appropriate  
            committees of the Legislature.

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

          39)Requires DHCS to make available all public documentation used  
            to administer and audit the QAF and supplemental payment  
            program, and upon request, requires Medi-Cal MCPs to furnish  
            hospitals the amount the plan intends to pay to the hospital.   
            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, model updates,  
            and information on managed care rate approvals.

          40)Defines hospital community as including, but not limited to,  
            the statewide hospital industry organization and systems  
            representing general acute care hospitals.

          41)Establishes legislative findings, declarations, and intent:   
            recognizing the role hospitals play in serving Medi-Cal  
            enrollees; that the intent is to impose a QAF to be paid by  
            hospitals to be used to increase FFP in order to make  
            supplemental Medi-Cal payments to hospitals with the goal of  
            increasing access to care and improving hospital reimbursement  
            and to help pay for health care coverage for low-income  
            children; to recognize the fundamental structure of the  
            components used to develop a successful QAF program; that the  
            QAF is to be 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; that no hospital be  
            required to pay the QAF unless federal approval is received  
            and that the full amount remains available only for the  
            purposes specified by the Legislature in these provisions. 

          42)Provides that beginning with the proposed budget for 2014-15,  
            and each year thereafter, the Department of Finance shall  
            report in the Governor's proposed budget and the May Revision  
            the difference in GF benefit for the upcoming fiscal year  
            resulting from the QAF program and what was anticipated at the  
            time the Budget Act of 2013 was enacted.  It is the intent of  
            the Legislature that additional GF benefit be appropriated to  


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            supplement, and not supplant, funding for health and human  
            service programs, which may include the cost of medical  

          43)Sunsets the provisions of the QAF and supplemental payment  
            provisions on January 1, 2017.

          44)Revises an IGT program authority to allow DHCS to authorize  
            the funds for use by hospitals that are not reimbursed by  
            means of certified public expenditures.   

          45)Requires DHCS to design and implement an IGT program to  
            increase capitation payments to MCMC plans for the purpose of  
            increasing reimbursement to NDPHs.  Requires implementation no  
            later than January 1, 2014, or when all federal approvals have  
            been received. 

          46)Requires DHCS to develop a proposed modification to the QAF  
            as established by this bill to collect additional fees to be  
            used for IGTs from NDPHs to be used for increased payments for  
            Medi-Cal MCPs for increased payment within the capitated rate  
            range for the purpose of increased payments to private  
            hospitals and NDPHs in counties that do not have a DPH. 
          47)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 Selective Provider  
            Contracting Program, and eliminates the requirement that a  
            hospital have a selective provider contract or a contract with  
            a county organized health system (COHS) in order to  

          48)Effective October 1, 2013, requires Medi-Cal payments to  
            skilled nursing facilities that are a distinct part of a  
            general acute care hospital (DP-SNFs) to be determined without  
            the Medi-Cal rate reductions and rate roll-back required under  
            existing law.

          49)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  


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            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 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 COHS,  
            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  :  This bill, as amended, has not been analyzed by  
          a fiscal committee.

           COMMENTS  :

           1)PURPOSE OF THIS BILL  .  As proposed to be amended, this bill  
            enacts the Medi-Cal Hospital Reimbursement Improvement Act of  
            2013.  It represents an agreement between the sponsors, the  
            California Hospital Association (CHA) and the Brown  
            Administration and (if passed by the Legislature), the  
            Legislature to enact a three-year continuation of the hospital  
            QAF that would expire on January 1, 2014, and to establish the  


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            framework for an ongoing and permanent fee.  The fee could be  
            made permanent by means of initiative that deletes the sunset  
            clause or by further act of the Legislature to delete the  
            sunset clause.  This is a significant departure from previous  
            bills in that it would not require reauthorization by the  
            Legislature, if accomplished by initiative.  This framework  
            also simplifies legislative reauthorization as specific dollar  
            amounts would not be specified for each period.  Instead, the  
            bill gives authority to DHCS to calculate the rates, payments  
            and other calculations necessary to operate an ongoing fee  
            program.  However, this bill does require that, in the event  
            there are subsequent program periods, the allocations,  
            calculations, and planned distributions are to be made through  
            the annual Budget Act. 

          With regard to the three year extension, from January 1, 2014 to  
            December 31, 2016, the fee provisions and payments are similar  
            to prior QAF periods.  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, 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.  This bill, as in  
            prior bills, there is 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.  

          The current estimate is that this bill will raise nearly $13  
            billion in Medi-Cal fee dollars over a three year period.  Of  
            that, it is estimated that $2.4 billion will be allocated to  
            children's coverage, $170 million will be paid as grants to  
            DPHs, and $17 million will be paid in grants to NDPHs.  Of the  
            remainder, $10.6 billion is matched with federal funds at a  
            50% matching rate and distributed as supplemental payments.   
            This yields an estimated $10 billion in supplemental Medi-Cal  
            payments to private hospitals for FFS inpatient services, $3.6  
            billion for FFS outpatient services, $9.2 billion for private  
            hospital MCMC services, and $274 million for public hospital  
            managed care services.  The net benefit to the hospital  


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            industry is calculated as $10 billion.  The net benefit is  
            based on the amount of proceeds of the fee revenue plus  
            federal matching funds, plus direct grants are paid to  
            hospitals minus the allocations to the state 

          Another significant difference is the concept of "net benefit"  
            instead of a fixed dollar amount for children's health care  
            coverage.  The first QAF set the amount as $80 million per  
            quarter which was equal to 21% of the net benefit to the  
            hospitals.  The second QAF provided a total of $372 million or  
            23% of the net benefit.  The current fee authorized $85  
            million per quarter in 2011-12 ($340 million or 19%) and $96.8  
            million per quarter for 2012-13 and 2013-14 (approximately  
            $390 million).  However the amount was increased to $538  
            million or (31%) for 2012-13 and 2013-14 in the 2012 budget.   
            This bill provides $155 million per quarter for the last two  
            quarters of FY 2013-14 and limits the amount to 24% of the net  
            benefit going forward.  This bill also requires that the  
            difference in GF benefit for the upcoming fiscal year  
            resulting from the QAF program and what was anticipated be  
            reported at the time the Budget Act of 2013 was enacted.  

          This bill also eliminates a Medi-Cal reimbursement rate freeze  
            as of October 1, 2013, as it applies to DP-NFs that was  
            contained in AB 97 (Budget Committee), Chapter 3, Statutes of  
            2011, the health services trailer bill to the 2011-12 State  
            Budget.  It does not prevent the retroactive recoupment of  
            payments in order to repay the federal share of the payments  
            made during the period of that an injunction was in effect. 
          2)BACKGROUND  .  The costs of the Medicaid (Medi-Cal in  
            California) program are generally shared between states and  
            the federal government based on a set formula.  The federal  
            government's contribution toward reimbursement for Medicaid  
            expenditures is known as FFP or federal matching funds.  The  
            specified percentage of Medicaid costs paid by the federal  
            government is known as the federal medical assistance  
            percentage (FMAP).  In general, the FMAP for Medi-Cal has been  
            set at 50%.  However, for certain populations and certain  
            administrative activities the state receives a higher FMAP.   
            Federal Medicaid law permits states to finance the nonfederal  
            share of Medicaid costs through the following sources:

             a)   State GF.  State GFs are revenues collected primarily  
               through personal income, sales, and corporate income taxes.


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             b)   Certified public expenditures (CPEs).  The CPEs are a  
               funding mechanism in which public agencies (in California,  
               primarily counties and the UC system) certify that they  
               have made expenditures eligible for FFP, and then are  
               reimbursed by the federal government for part of these  
               expenditures, generally at the state's FMAP rate.

             c)   IGTs.  The IGTs are transfers of public funds between  
               government entities, such as from counties to states.

             d)   Charges on Health Care Providers.  Certain charges  
               levied on health care providers generate revenue.  Federal  
               Medicaid law permits states to levy various types of  
               charges-including taxes, fees, or assessments-on health  
               care providers and use the proceeds to draw down federal  
               matching funds to support their Medicaid programs and/or  
               offset some state costs.  These charges must meet certain  
               requirements and be approved by CMS for revenues from these  
               charges to be eligible for FFP.  A number of different  
               types of providers can be subject to these charges,  
               including hospitals, certain skilled nursing facilities,  
               and certain intermediate care facilities for the  
               developmentally disabled. 

           3)QAF PROVISIONS  .  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  


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            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. 

           4)Medi-Cal reimbursement for DP-NFs  .  This bill repeals the rate  
            freeze and 10% rate reductions that apply to DP-NFs for dates  
            of service on and after October 1, 2013.  Existing law  
            requires Medi-Cal fee-FFS provider payments to DP-NFs to not  
            exceed the reimbursement rates to DP-NFs in the 2008-09 rate  
            year, reduced by 10% for dates of service on and after June 1,  
            2011.  Effectively, this means rates are frozen at the 2008-09  
            levels and then further reduced by 10% for dates of service on  
            and after June 1, 2011.  These rate reductions were blocked by  
            court action until recently.  These Medi-Cal rate reductions  
            are retroactive, meaning the amounts DP-NFs have been paid  
            since June 1, 2011 above the rates contained in the SPA (which  
            contains the 10% reduction) are going to have be returned to  
            the state (because they have been "overpaid" during the time  
            the rate reduction was blocked by court action).  The state  
            will recoup the overpayment by reducing providers' Medi-Cal  
            payments in the future to offset the overpayment amounts. 

          On August 14, 2013, DHCS announced its implementation plan for  
            the Medi-Cal provider payment reductions. DHCS also announced  
            that, in order to preserve and protect access to care for  
            Medi-Cal members, Medi-Cal provider payment reduction  
            exemptions, subject to federal approval of SPAs for DP-NF  
            facilities classified as rural or frontier, based upon the  
            California Medical Service Study Area's definitions, would be  
            exempted prospectively from the 10% payment reductions and  
            would not be subject to the rate freeze at the 2008-09 levels  
            on a prospective basis.  DHCS had previously announced that it  
            exempted from the AB 97 reductions and rate freeze any DP-NF  
            which has a census of at least 90% pediatric patients,  
            effective February 18, 2012.  The recently announced DHCS  
            exemption applies to 27 DP-NFs, but leaves 53 DP-NFs subject  
            to the rate reduction, and disproportionately affects DP-NFs  
            located in urban areas of the state, such as Los Angeles, San  
            Diego, Sacramento, San Francisco, and Alameda Counties.
           5)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,  


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            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.

           6)RELATED LEGISLATION  .  

             a)   AB 900 (Alejo), would have required Medi-Cal  
               reimbursement for DP-NFs to be determined without the  
               Medi-Cal rate reduction and rate roll-back required under  
               existing law, and would have taken effect immediately as an  
               urgency statute.  AB 900 was held on the Senate suspense  

             b)   SB 640 (Lara) would have exempted from the Medi-Cal  
               payment reduction Medi-Cal FFS providers, pharmacy  
               providers, DP-NFs and subacute care units that are a  
               distinct part of a general acute care hospital for dates of  
               service on or after June 1, 2011, and MCMC plans.  SB 640  
               would have taken effect immediately as an urgency statute.   
               SB 640 was held on the Senate Appropriations suspense file.

             c)   SB 646 (Nielsen) would have exempted all DP-SNFs from  
               the Medi-Cal rate reduction.  SB 646 was held on the Senate  
               Appropriations suspense file.

           7)PREVIOUS LEGISLATION  .  

             a)   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  


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               approval and become inoperative on January 1, 2011.  

             b)   AB 1653 (Jones), Chapter 218, Statutes of 2010, revised  
               the fee enacted in AB 1383 to reflect CMS requested  
               modifications necessary to obtain federal approval.  

             c)   SB 90 (Steinberg), Chapter 19, Statutes of 2011 and AB  
               113 (Monning), Chapter 20, Statutes of 2011, enacted a QAF  
               and supplemental Medi-Cal payments for private hospitals  
               for the April to June 2011 period and 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 and for supplemental payments.  

             d)   SB 335 (Ed Hernandez and Steinberg), 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).   


          California Hospital Association (sponsor)
          Adventist Health
          Alliance of Catholic Health Care
          Dignity Health
          District Hospital Leadership Forum
          Private Essential Access Community Hospitals
          Providence Health & Services Southern California
          Tenet Healthcare Corporation
          None on file.

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