BILL ANALYSIS                                                                                                                                                                                                    Ó

                                                                  SB 239
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          SB 239 (Ed Hernandez and Steinberg)
          As Amended September 11, 2013
          2/3 vote. Urgency

           SENATE VOTE  :36-0  
           HEALTH              16-0                                        
          |Ayes:|Pan, Logue, Ammiano,      |
          |     |Atkins, Bonilla, Bonta,   |
          |     |Roger Hernández,          |
          |     |Maienschein, Mansoor,     |
          |     |Mitchell, Nazarian,       |
          |     |Nestande,                 |
          |     |V. Manuel Pérez, Wagner,  |
          |     |Wieckowski, Wilk          |
          |     |                          |
           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; directs grants to designated public hospitals (DPHs)  
          (hospitals owned or operated by counties or the University of  
          California); directs grants to nondesignated public hospitals  
          (NDPHs) (hospitals owned or operated by hospital districts);  
          and, provides 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 from  
            January 1, 2014, to December 31, 2016, as specified.  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  


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            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).  
          3)Requires DHCS to compute the quarterly QAF for subsequent  
            program periods pursuant to a specified methodology based on  
            specified data and requires the rate to be specified in the  
            provisions of the annual Budget Act.  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)Requires, for the first program period, 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.  


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          7)Specifies, for the program period beginning January 1, 2014,  
            and ending December 31, 2016, that:

             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.


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          8)Establishes timelines and a methodology for rebasing each base  
            year and updating and revising the data, recalculating the net  
            benefit and other dollar amounts necessary to subsequent  
            program years.  Provides that these calculations for  
            subsequent program periods are to be specified in the annual  
            Budget Act.

          9)Requires, after the first program period, 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.

          10)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.

          11)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  

          12)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 and specifies the distribution of excess funds.

          13)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. 

          14)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.  

          15)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.


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          16)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.  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.

          17)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. 

          18)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  

          19)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:


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          20)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  
            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.
           21)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.  

          22)Requires, 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. 

          23)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.

          24)Provides that supplemental payments under this bill are in  
            addition to DSH replacement supplemental payments, do not  


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            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.

          25)Prohibits the QAF from:

             a)   Exceeding the maximum aggregate net patient revenue  
               percentage that is allowed under federal law, as necessary,  
               to preclude a finding of an indirect guarantee;

             b)   Considered an allowable cost for Medi-Cal cost  

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

          27)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.

          28)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.  

          29)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.  


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          30)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  
            agreement to increase capitation payments and payments to  
            hospitals relating back to the beginning of each program  

          31)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.  

          32)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. 

          33)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  


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          34)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  
            Procedures Act, and requires notice to the appropriate  
            committees of the Legislature.

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

          36)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 Web site, 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.

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

          38)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. 

          39)Provides that beginning with the proposed budget for 2014-15,  
            and each year thereafter, the Department of Finance shall  


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

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

          41)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.   

          42)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. 

          43)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. 

          44)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 in order to participate.

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

          46)Contains an urgency clause so as to become effective  


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            immediately upon enactment.

           FISCAL EFFECT  :  According to the Assembly Appropriations  
          Committee, assuming federal approval is granted, the fiscal  
          impact of the three-year QAF program period from January 1, 2014  
          to December 31, 2016 is as follows:

          1)An estimated increase of $23.2 billion total (hospital  
            QAF/federal funds) paid to private hospitals through December  
            2016 in the form of supplemental Medi-Cal payments for  
            hospital services. This estimate assumes hospitals subject to  
            the QAF will contribute $13.2 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.  The net benefit to the hospital industry is expected to  
            be $10 billion over three years.

          2)Administrative costs to DHCS of $1 million per year, $3  
            million total, through December 2016 (hospital QAF funds).  

          3)Total estimated GF savings of $2.4 billion over three years,  
            associated with QAF revenue 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  
            GF 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 would  
            result in $310 million in additional GF costs in the current  
            fiscal year.  

            For the period from July 1, 2014 through December 1, 2017, the  
            bill establishes funding for children's coverage as 24% of the  
            net benefit to the hospital industry, accounting for the other  
            estimated $2.1 billion in savings.  Current estimates for GF  
            savings associated with funding for children's coverage are  
            $682 million total in the 2014 calendar year ($310 in fiscal  
            year 2013-14 plus an additional $372 million), $803 million  
            for 2015, and $891 million for 2016.


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          4)Increased GF costs of up to $73.8 million annually associated  
            with the prospective repeal of a current-law rate reduction  
            and rate freeze for DP-NFs, effective October 1, 2013.  The  
            actual increase may be lower than this amount, given DHCS has  
            already exempted certain facilities from these lower rates in  
            order to preserve access to services.

          5)Direct grants to DPHs in the aggregate net amount of $170  
            million, and to NDPHs in the aggregate net amount of $17  
            million, over the three years of this QAF program.  

          6)Upon the expiration of this program in 2017, 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  :  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  
          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  


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          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, contains 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 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 
          A significant difference from prior bills 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 Act.  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.  

          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  


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          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. 

          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 Budget  
          Act.  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.  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.  The Medi-Cal rate reductions are  
          retroactive, meaning the amounts DP-NFs that have been paid  
          since June 1, 2011, above the rates contained in the SPA (which  
          contains the 10% reduction) are going to have to be recouped by  
          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  


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          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.

          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  

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

                                                                FN: 0002798