BILL ANALYSIS                                                                                                                                                                                                    






                           SENATE COMMITTEE ON HEALTH
                       Senator Ed Hernandez, O.D., Chair

          BILL NO:       SB 239
          AUTHOR:        Hernandez and Steinberg
          AMENDED:       September 11, 2013
          HEARING DATE:  September 12, 2013
          CONSULTANT:    Bain

          PURSUANT TO SENATE RULE 29.10.

           SUBJECT  :  Medi-Cal:  hospital quality assurance fee:  
          distinct part skilled nursing facilities. (Urgency)

           SUMMARY  : Enacts the Medi-Cal Hospital Reimbursement  
          Improvement Act of 2013 (the Act), which imposes a hospital  
          quality assurance fee, as specified, on certain general  
          acute care hospitals from January 1, 2014, through December  
          30, 2016, and which requires supplemental payments to be  
          made to private hospitals for certain services, direct  
          grants to public hospitals, increased capitation payments  
          to Medi-Cal managed care plans for hospital services, and  
          for children's health coverage and Department of Health  
          Care Services administration. Sunsets the Act on January 1,  
          2017. Requires Medi-Cal reimbursement for nursing  
          facilities that are a distinct part of a general acute care  
          hospital to be determined without the Medi-Cal rate  
          reduction and rate roll-back required under existing law  
          for dates of services on and after October 1, 2013.  
          Establishes Intergovernmental Transfer programs. Takes  
          effect immediately as an urgency statute.

          Existing law:
          1.Establishes the Medi-Cal program, administered by  
            Department of Health Care Services (DHCS), under which  
            health care services are provided to qualified low-income  
            persons. Establishes a schedule of benefits for Medi-Cal  
            beneficiaries, which includes inpatient and outpatient  
            hospital services and nursing facility services. Defines,  
            in the Medi-Cal state plan, a distinct part nursing  
            facility (DP-NF) as any nursing facility which is  
            licensed together with an acute care hospital.

          2.Enacts the Medi-Cal Hospital Provider Rate Improvement  
            Act of 2011 (Prior Rate Act) to provide supplemental  
            payments from July 1, 2011, to December 31, 2013 to  
                                                         Continued---



                                                       SB 239 | Page  
          2


          

            private hospitals for inpatient and outpatient services  
            in Medi-Cal fee-for-service (FFS), managed care and acute  
            psychiatric days, and to make direct grants to designated  
            public hospitals in support of health care expenditures.

          3.Establishes the Private Hospital Quality Assurance Fee  
            Act of 2011 (Prior Fee Act), which levies a hospital  
            quality assurance fee (QAF), from July 1, 2011 to January  
            1, 2014, on each hospital that is not an exempt hospital,  
            with varying fee amounts by payor source and type of  
            payment.

          4.Requires all funds from the QAF to be used exclusively to  
            enhance federal financial participation (FFP) for  
            hospital services under Medi-Cal, to provide additional  
            reimbursement to hospitals, to pay DHCS staffing and  
            administrative costs, to make increased payments to  
            managed care health plans, and to fund children's health  
            coverage, in a specified order of priority.

          5.Requires Medi-Cal FFS provider payments to DP-NFs to be  
            reduced by 5 percent for dates of service on and after  
            March 1, 2009. Requires payments to Medi-Cal managed care  
            plans to be reduced by the actuarially equivalent amount  
            of the 5 percent payment reduction.

          6.Requires Medi-Cal FFS provider payments to DP-NFs to not  
            exceed the reimbursement rates to DP-NFs in the 2008-09  
            rate year, reduced by 10 percent for dates of service on  
            and after June 1, 2011. Requires payments to be reduced  
            by 10 percent for Medi-Cal FFS benefits for dates of  
            service on and after June 1, 2011. Requires payments to  
            Medi-Cal managed care plans to be reduced by the  
            actuarial equivalent amount of the 10 percent payment  
            reduction.

          7.Requires the payment reductions in 5) above to cease to  
            be implemented for the same services provided by the same  
            class of providers when federal approval is obtained for  
            the payment reductions in 6) above. Requires the payment  
            reductions in 6) to be implemented retroactively to June  
            1, 2011, or on any other date or dates as may be  
            applicable when federal approval is obtained.

          This bill:




                                                       SB 239 | Page  
          3


          

           Medi-Cal Hospital Reimbursement Improvement Act of 2013
           1.Enacts the Medi-Cal Hospital Reimbursement Improvement  
            Act of 2013, which imposes a QAF on each general acute  
            care hospital that is not an exempt facility or a  
            converted hospital, computed starting on January 1, 2014,  
            and continuing through and including December 31, 2016,  
            for deposit in the Hospital Quality Assurance Revenue  
            Fund (Fund).

          2.Imposes on hospitals that are not exempt a QAF. Exempts  
            DPHs, non-designated public hospitals (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.

          3.Establishes an order of priority for funds from the  
            proceeds of the QAF of paying for DHCS' staffing and  
            administrative costs, to pay for health coverage of  
            children, to make increased capitation payments to  
            managed health plans, and to make increased payments to  
            and direct grants to hospitals.

          4.Continuously appropriates money in the Fund for the  
            purposes of this bill for the first program period (for  
            the first 3 years, until December 31, 2016).

          5.Establishes under this bill a contractually enforceable  
            promise on behalf of the state to use the proceeds of the  
            QAF, including any federal matching funds, solely and  
            exclusively for the purposes in this bill, to limit the  
            amount of the proceeds of the QAF to be used to pay for  
            the health care coverage of children as provided in this  
            bill, to limit any payments for DHCS' costs of  
            administration to the amounts set forth in this bill on  
            the effective date of this bill, to maintain and continue  
            prior reimbursement levels, and to otherwise comply with  
            all its obligations set forth in this bill, except that  
            amendments that arise from, or have as a basis for, a  
            decision, advice, or determination by the federal Centers  
            for Medicare and Medicaid Services (CMS) relating to  
            federal approval of the QAF or the payments set forth in  
            this bill are required to control.





                                                       SB 239 | Page  
          4


          

          6.Permits DHCS to modify any methodology or other provision  
            in the hospital fee related provisions of this bill to  
            meet the requirements of federal law or regulations, to  
            obtain federal approval, or to enhance the probability of  
            federal approval, provided the modifications do not  
            violate the spirit, purposes, and intent of this bill and  
            are not inconsistent with the conditions of  
            implementation.

          7.Requires, after July 1, 2014, the amount of funding for  
            children's health coverage to equal 24 percent of the net  
            benefit to hospitals from the fee (aggregate payments for  
            a net benefit period minus aggregate fees for that  
            period).

          8.Requires private hospitals to be paid supplemental  
            amounts from the QAF that result in payments equal to the  
            statewide aggregate upper payment limit (UPL) for private  
            hospitals for each year of the fee.

          9.Requires private hospitals to be paid supplemental  
            amounts for inpatient services that result in payments to  
            hospitals that equal the applicable federal UPL. Requires  
            hospitals to be paid additional amounts for general acute  
            care days, acute psychiatric days, high acuity days, high  
            acuity trauma days, transplant days, and for subacute  
            supplemental services.

          10.  Requires DHCS to increase capitation payments to  
            Medi-Cal managed care plans, requires the aggregate  
            amount of increased capitation payments to be the maximum  
            amount for which FFP is available on an aggregate basis.  
            Requires DHCS to determine the amount of the increased  
            capitation payments for each plan for each year, taking  
            into account specified factors, and requires the  
            increased capitation payment under this bill to be paid  
            by the plans to hospitals for hospital services to  
            Medi-Cal enrollees of the plan, and requires plans to  
            expend 100 percent of any increased capitation payments  
            it receives on hospital services.

          11.  Requires designated public hospitals DPHs and NDPH to  
            be paid direct grants of specified amounts for the first  
            3 years, sets aside a portion of the direct grant is set  
            aside to draw down FFP to make increased payments to  




                                                       SB 239 | Page  
          5


          

            managed care plans for rate range room increases for  
            managed care payments. Authorizes, for subsequent  
            programs, DPH and NDPHs to be paid direct grants upon  
            appropriation in the annual Budget Act. Requires the  
            director to determine the direct grant amounts, if any,  
            and allocation methodology after the first three years,  
            and requires these amounts to be specified in provisional  
            language in the Budget Act.

          12.  Requires, for the first program period (January 1,  
            2014 to December 31, 2016), specific QAF rates, payment  
            amounts and data sources. Requires, for program years  
            after January 1, 2017, provisions for rebasing the fee,  
            including requiring DHCS to retrieve data, determine rate  
            amounts, requires the rates to meet the requirements of  
            federal law, to require DHCS to consult with the hospital  
            community in determining the rates, and to require  
            payment rates to equal as close as possible the  
            applicable federal upper payment limit, and to require  
            payment to Medi-Cal managed care plans to result in the  
            maximum payments to plans permitted by federal law.  
            Requires rates to be specified in provisional language in  
            the Budget Act.

          13.  Requires DHCS to provide a clear narrative description  
            along with fiscal detail in the Medi-Cal estimate package  
            of all the calculations made by DHCS for the second and  
            subsequent program periods.

          14.  Grants the director of DHCS the discretion to revise  
            specified fee rates, upon federal approval, based on the  
            funds required to make payments, in consultation with the  
            hospital community. Permits the director of DHCS to  
            correct any identified material and egregious errors in  
            data. Permits the director to modify and the timeline  
            related to the assessment of the QAF or Medi-Cal payments  
            if it is impossible to implement a timeline.

          15.  Prohibits payments for the period of time a hospital  
            qualifies as a new hospital 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. Makes, notwithstanding the aforementioned  




                                                       SB 239 | Page  
          6


          

            exclusion, the private non-profit replacement hospital  
            for Los Angeles County Martin Luther King, Jr.-Harbor  
            Hospital eligible for funding from the QAF, and requires  
            DHCS to use the best available and reasonable data in  
            determining supplemental payments and the QAF for this  
            facility.

          16.  Establishes a funding maintenance of effort in order  
            to ensure that the proceeds of the QAF and federal  
            matching funds are used to supplement existing funding  
            for hospital services provided to Medi-Cal patients, and  
            not supplant such funding.

          17.  Requires the director of DHCS to take specified  
            actions to obtain federal approval for and implement the  
            QAF-related provisions. Makes the QAF-related provisions  
            inoperative if specified actions occur, such as specified  
            court actions, failure to receive federal approval, and  
            FFP not being available, among other requirements.

          18.  Requires the Department of Finance, in the Governor's  
            Budget and May Revision, to report the difference in  
            General Fund benefit for the upcoming fiscal year  
            resulting from this bill and what was anticipated at the  
            time the Budget Act of 2013 was enacted. States  
            legislative intent that additional General Fund (GF)  
            benefit be appropriated to supplement and not supplant  
            funding for health and human services programs, which may  
            include the cost of medical interpreters.

          19.  Requires DHCS to make available all public  
            documentation it uses to administer and audit the fee  
            program, and requires DHCS to require Medi-Cal managed  
            care plans to furnish hospitals with the amounts the plan  
            intends to pay to the hospital, upon request of a  
            hospital. Requires DHCS to post specified QAF related  
            information on DHCS' web site, including the fee model,  
            payments, fee schedules and information on managed care  
            rate approvals.

          20.  Makes legislative findings and declarations regarding  
            the roles of hospitals, the QAF, and the purpose of the  
            fee.

          21.  Sunsets the Medi-Cal Hospital Reimbursement  




                                                       SB 239 | Page  
          7


          

            Improvement Act of 2013 on January 1, 2017.
           
          Medi-Cal Rates for Distinct Part-Nursing Facilities  
          22.  Requires Medi-Cal reimbursement for nursing facilities  
            that are a distinct part of a general acute care hospital  
            to be determined without the Medi-Cal rate reduction and  
            rate roll-back required under existing law, for dates of  
            service on and after October 1, 2013.  

          Intergovernmental Transfers  
          23.  Permits DHCS to maximize available FFP to provide  
            access to services provided by hospitals that are not  
            reimbursed by certified public expenditures by  
            authorizing the use of intergovernmental transfers (IGTs)  
            to fund the non-federal share of supplemental payments to  
            private hospitals. IGTs are where governmental entities  
            transfer funds to another governmental entity to serve as  
            the state match to draw down additional federal Medicaid  
            matching funds.

          24.  Requires DHCS to design and implement, in consultation  
            with NDPH an IGT program for NDPHs related to Medi-Cal  
            managed care services provided by NDPHs in order to  
            increase capitation payments for the purpose of  
            increasing NDPH reimbursement.

          25.  Requires DHCS to develop proposed modifications to the  
            QAF established by this bill to collect additional fees  
            to pay Medi-Cal managed care plans rate range increases  
            for the purpose of increasing payments to private  
            hospitals and NDPHs in counties that do not have DPHs.  
            Requires DHCS to consult with the hospital community to  
            enable IGTs from NDPHs solely for use for this purpose.  
            Requires NDPH to be given priority relative to accessing  
            rate range funds in counties where a NDPH is the only  
            public hospital. Conditions payments to Medi-Cal managed  
            care plans on the managed care plan paying all of the  
            rate range increases as additional payments to private  
            hospitals and NDPH for providing and making available  
            services to Medi-Cal enrollees of the plans, and limits  
            the amount of increases to Medi-Cal managed care plans to  
            the total amount of payments possible, including federal  
            financial participation, based on the amount of fees  
            actually collected and IGTs actually provided.
           




                                                       SB 239 | Page  
          8


          

          Out-of-state hospitals  
          26.  Requires the director of DHCS to develop and prescribe  
            in provider bulletins and on DHCS' web site a process by  
            which a private general acute care hospital located  
            outside of the state that services Medi-Cal beneficiaries  
            may opt in to pay the QAF on all applicable categories of  
            patient days, and receive supplemental payments for the  
            Medi-Cal program under this bill in the same manner that  
            the hospital could participate if it were located in the  
            state, to the extent permitted by federal law and federal  
            requirements. Requires DHCS to rely on reliable data to  
            make reasonable estimates or projections to calculate the  
            fees due and the supplemental payments.

           Construction Renovation Reimbursement Program  
          27.  Permits DHCS to administer and distribute payments for  
            the Construction Renovation Reimbursement Program (known  
            as the SB 1732 program or CRRP), but eliminates the  
            requirement that a hospital maintain or negotiate a  
            selective provider contract or a contract with a county  
            organized health system in order for the hospital to  
            participate in the CRRP.

           Hospital Quality Assurance Revenue Fund  
          28.  Extends the sunset date of the Fund from January 1,  
            2015 to January 1, 2018, and extends the authority of the  
            Controller to use the Fund for cash flow loans to the GF  
            until that date.
          
           FISCAL IMPACT  :  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 percent 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 percent FFP.  The net benefit to the hospital  




                                                       SB 239 | Page  
          9


          

            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 percent 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.

          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 designated public hospitals in the  
            aggregate net amount of $170 million, and to  
            non-designated public hospitals 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  




                                                       SB 239 | Page  
          10


          

            pressure is created to maintain the higher level of  
            payments to hospitals and the children's health care  
            coverage programs funded by the QAF.  

           COMMENTS  :

          1.Author's statement. This bill would enact a hospital QAF  
            for three additional years to provide a net benefit to  
            hospitals over of three years of nearly $10 billion in  
            funds for hospital services, and to provide over $2  
            billion dollars in additional revenue for children's  
            health coverage. Federal law authorizes states to levy  
            fees on health care providers if the fees meet federal  
            requirements. The author argues this bill provide  
            increased federal funding to hospitals without using  
            state GF dollars, and would enable the state to achieve  
            GF savings by using revenue from the QAF to help fund  
            children's health coverage. In addition, this bill would  
            prospectively eliminate the DP-NF rate freeze and rate  
            rollback, which has threatened the financial viability of  
            many of these facilities.

          2.Assembly amendments. Major changes made in amendments  
            taken in the Assembly a) extend the duration of the fee  
            and related provisions by an additional year (from 2 to 3  
            years) and sunset the fee January 1, 2017; b) require,  
            instead of authorize, direct grants to DPHs and NDPHs and  
            specify the amounts of the grants; c) require children's  
            health coverage to receive 24 percent of the net benefit  
            to the hospital industry of the fee, beginning July 1,  
            2014; d) establish new IGT provisions to fund hospital  
            services; e) allow DHCS to administer and distribute  
            payments for the CRRP, and eliminate the requirement that  
            a hospital maintain or negotiate a selective provider  
            contract or a contract with a county organized health  
            system in order for the hospital to participate in the  
            CRRP; f) establish a new structure for the fee and  
            payments by placing these provisions in one article of  
            law (rather than two as in prior fee bills), and require  
            subsequent fee amounts be determined by DHCS, in  
            consultation with the hospital community, and included in  
            provisional language in the annual Budget Act (this  
            provision would apply if the sunset date in the bill is  
                                                                                    extended).
               




                                                       SB 239 | Page  
          11


          

          3.Background. Federal Medicaid law authorizes states to  
            levy fees on health care providers if the fees meet  
            federal requirements. Many states (including California)  
            fund a portion of their share of Medicaid program costs  
            through a fee on health care providers. Under these  
            funding methods, states collect funds (through fees,  
            taxes, or other means) from providers, which are then  
            matched to allow increased Medicaid reimbursement to  
            providers. The Legislature enacted a series of bills  
            establishing a time-limited hospital QAF in 2009, and an  
            additional six-month QAF for the first six months of  
            2011. The current QAF sunsets at the end of this calendar  
            year. In addition to the hospital QAF, California  
            currently has a QAF for intermediate care facilities for  
            the developmentally disabled, and a separate QAF for  
            skilled nursing facilities.
               
          4.Benefit to hospital industry from hospital fee. As part  
            of the establishment of the fee and related payment  
            provisions, the California Hospital Association (CHA, the  
            bill's sponsor) developed a model that estimates the  
            revenue generated by the fee, payments made to hospitals,  
            payments made to the state for program administration and  
            children's health coverage, and the net benefit to the  
            hospital industry. CHA's model uses 2010 data to  
            determine the payment amounts each hospital will receive  
            under the bill. CHA estimates that over the three year  
            period the bill is in effect (January 1, 2014 through  
            December 31, 2016), $13.1 billion dollars in revenue  
            would be raised from the fee, which would provide total  
            payments to hospitals (after federal matching funds are  
            drawn down) of $23.1 billion. The state would receive  
            nearly $2.4 billion for children's coverage and  
            administration, and the fee would provide a net benefit  
            to the hospital industry of $9.9 billion (total payments  
            to hospitals minus fees paid). 

          The primary beneficiaries of the fee program are private  
            hospitals (which pay the fee to draw down federal funds)  
            as they receive $22.6 billion from the fee (this is a  
            gross amount and does not deduct the amounts paid in fees  
            by these facilities). Public and district hospitals are  
            exempt from paying the QAF. DPHs are reimbursed at the  
            maximum amount for which federal Medicaid matching funds  
            are available and are thus not able to draw down  




                                                       SB 239 | Page  
          12


          

            additional matching funds from the QAF. However, DPHs and  
            NDPHs do receive direct grants under this bill, and DPHs  
            receive $274 million in payments from Medi-Cal managed  
            care plans that are funded by the hospital fees paid by  
            private hospitals and federal funds.

          5.Funding for children's health coverage. In prior QAF  
            bills, the state has received a fixed amount per quarter  
            from the fee, which is used to offset GF spending on  
            children's health coverage. As part of this year's  
            budget, the state assumed it would $310 million for the  
            first two quarters of 2014. This bill contains funding  
            for this purpose for the first two fiscal quarters (till  
            June 30, 2014). 

          Under this bill, beginning July 1, 2014, the state would  
            receive 24 percent of the net benefit received by  
            hospitals from the fee (total payments to hospitals minus  
            fees paid by hospitals). This results in an increase in  
            funding to the state to offset GF spending on children's  
            health coverage. The amount of funding for children's  
            health coverage the state is estimated to receive is  
            nearly $2.4 billion over the three years the bill is in  
            effect. The policy rationale for having the state receive  
            a percentage of the net benefit (rather than a fixed  
            dollar amount) is both the state and the hospitals have  
            an interest in maximizing the net benefit to hospitals.  
            The hospitals' incentive is to receive more money back  
            above what they pay in fees (through federal matching  
            funds), thus maximizing their net benefit. The state  
            benefits because additional GF savings are generated when  
            a greater net benefit is provided to hospitals. 

          6.Medi-Cal reimbursement for DP-NFs. This bill repeals the  
            rate freeze and 10 percent rate reduction that apply to  
            DP-NFs for dates of service on and after October 1, 2013.  
            Existing law requires Medi-Cal FFS provider payments to  
            DP-NFs to not exceed the reimbursement rates to DP-NFs in  
            the 2008-09 rate year, reduced by 10 percent 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 percent for dates of service on and  
            after June 1, 2011. These rate reductions were blocked by  
            court action until recently.





                                                       SB 239 | Page  
          13


          

          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 State Plan Amendment (which  
            contains the 10 percent 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  
            State Plan Amendments (SPA) 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 percent  
            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 percent 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.

          7.Framework for future fees. The QAF enacted by this bill  
            sunsets January 1, 2017. However, this bill establishes a  
            framework for an ongoing fee if the sunset date in this  
            bill is extended or repealed. After January 1, 2017, this  
            bill requires DHCS to determine the rates based on data  
            retrieved by DHCS (rather than having those amount places  
            in policy legislation, as has been past practice with QAF  
            bills). To ensure legislative oversight and public  
            transparency, this bill requires that future  
            appropriations be made in the annual Budget Act (rather  
            than be continuously appropriated), that the amount of  
            the rates be contained in provisional language in the  
            annual Budget Act, and establishes a new requirement that  
            DHCS provide a clear narrative description along with  




                                                       SB 239 | Page  
          14


          

            fiscal detail in the Medi-Cal Estimate submitted to the  
            Legislature twice each year of all the calculations made  
            by DHCS. 

          8.Out-of-state hospital provisions. On August 27, 2010, 15  
            hospitals from outside California (Oregon, Arizona and  
            Nevada) filed a complaint seeking injunctive relief in  
            federal court against DHCS. The plaintiffs argued that  
            distribution of the fee money to hospitals only located  
            in California would violate the Commerce Clause, the  
            Fourteenth Amendment Equal Protection clause, and the  
            Supremacy Clause of the U.S. Constitution. The CHA  
            intervened in the case, a confidential settlement was  
            reached, and the plaintiffs dismissed the complaint  
            against DHCS. This bill establishes a process by which a  
            private general acute care hospital located outside of  
            the state that serves Medi-Cal beneficiaries may opt in  
            to pay the QAF on all applicable categories of patient  
            days, and receive supplemental payments for the Medi-Cal  
            program under this bill in the same manner that the  
            hospital could participate if it were located in the  
            state. This language is intended to address any potential  
            legal challenges to this bill.

          9.Ballot initiative filed. In July 2013, an attorney for  
            CHA filed a ballot initiative for title and summary with  
            the Attorney General's (AG) office. The proposed  
            initiative would amend the State Constitution to prohibit  
            the Legislature from imposing a new fee or continuing the  
            imposition of an existing fee on community hospitals for  
            the purpose of obtaining FFP in the Medicaid Program or  
            any other similar program unless a series of requirements  
            are met. The measure also dictates the use of the  
            proceeds from such a fee. That measure is awaiting title  
            and summary from the AG. CHA has indicated it will  
            re-file a different ballot initiative if this measure  
            becomes law.
          
          10.Prior legislation.  AB 1383 (Jones), Chapter 627,  
            Statutes of 2009 and AB 188 (Jones), Chapter 645,  
            Statutes of 2009, enacted the original Medi-Cal hospital  
            QAF and a methodology for making supplemental payments to  
            hospitals, and provided funds for children's health care  
            coverage and grants to public hospitals.  In response to  
            the state's request for federal approval, the CMS in June  




                                                       SB 239 | Page  
          15


          

            of 2010 sent a letter raising objections and concerns  
            about the methodology which concluded that the fee  
            enacted by AB 1383 did not meet federal standards. CMS  
            also suggested modifications, which were made by AB 1653  
            (Jones), Chapter 218, Statutes of 2010. AB 1653 also  
            established an alternative mechanism for funding  
            supplemental grants to public hospitals and allowed the  
            state to retain the funds that were previously allocated  
            to these hospitals.  

            SB 90 (Steinberg), Chapter 19, Statutes of 2010, repealed  
            specified Medi-Cal hospital rate freezes and rate  
            reductions enacted in health budget trailer bills in  
            2008, 2010 and 2011. SB 90 also imposed a QAF on  
            hospitals for six months (January 1, 2011, until June 30,  
            2011), and used the resulting revenue to draw down  
            federal funds to provide supplemental payments to private  
            hospitals in fee-for-service Medi-Cal, Medi-Cal managed  
            care, and for acute psychiatric days, to provide $210  
            million for children's health coverage, and to pay for  
            DHCS administrative costs in administering the hospital  
            fee and supplemental payment provisions of this bill.  SB  
            90 also reduced disproportionate share GF payments to  
            private hospitals by $105 million GF over two fiscal  
            years. SB 90 also required DHCS to design and implement  
            an inter-governmental transfer program for Medi-Cal  
            managed care services provided by designated public  
            hospitals (DPH) and NDPH for the purpose of increasing  
            reimbursement to NDPHs and DPHs.  

            In addition, SB 90 allows hospitals that have received  
            extensions to January 1, 2013, of the January 1, 2008,  
            seismic deadline, for their Structural Performance  
            Category 1 buildings, to request an additional extension  
            of up to seven years.  

            Last session, SB 335 (Hernandez) Chapter 286, Statutes  
            2011, imposed a QAF on hospitals for 30 months (from June  
            30, 2011, until December 31, 2013). SB 335 uses the  
            resulting revenue to draw down federal funds to provide  
            supplemental payments to private hospitals in  
            fee-for-service Medi-Cal, Medi-Cal managed care, and to  
            provide specified funding amounts from the QAF per  
            quarter for children's health coverage until December 31,  
            2013. In addition, SB 335 requires DPH to be paid direct  




                                                       SB 239 | Page  
          16


          

            grants (not Medi-Cal payments), funded from the QAF. SB  
            335 also reduced disproportionate share hospital  
            replacement payments and supplemental payments from the  
            Private Hospital Supplemental Fund to hospitals by  
            specified amounts in 2012-13 and 2013-14.  Finally, SB  
            335 appropriates $13.6 billion to DHCS for purposes of  
            that measure. SB 335 took effect as an urgency statute  
            upon signature by the Governor in September 2011.

          11.Support. This bill is sponsored by the CHA, which argues  
            the creation and implementation of the hospital fee  
            program in California has been extremely successful. CHA  
            states the program has been critical for hospitals to  
            bolster their ability to preserve health care services  
            for the state's most vulnerable patients. 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. The hospital provider fee program remains  
            crucial to the preservation of California's entire safety  
            net, and without this program the number of hospitals  
            forced to restrict or end services to Medi-Cal patients  
            will continue to increase. CHA concludes that the  
            provider fee will not solve the state's Medi-Cal  
            shortfall, but it will continue to be the largest  
            programmatic action taken since the founding of the  
            program to mitigate the lack of sufficient funding, and  
            it is vital to California hospitals that the provider fee  
            be approved and implemented.  

          12.Opposition. Michelle Steel, Vice Chair of the State  
            Board of Equalization, wrote in opposition to a prior  
            version of this bill that the cost of healthcare is  
            continually rising year after year, and there is  
            considerable concern that costs are going to get even  
            higher with the new federal rules coming into place. Ms.  
            Steel argues adding more fees and taxes on healthcare  
            providers has the end effect of raising these rates even  
            more, as these additional costs will be passed on to the  
            consumers.  Ms. Steel also asserts in opposition that  
            this bill opens the door to insolvency of the fund for  
            which it is intended by allowing the State Controller to  




                                                       SB 239 | Page  
          17


          

            divert money away to the General Fund. 

          13.Related legislation. SB 646 (Nielsen), an urgency bill,  
            would exempt all DP-SNFs from the Medi-Cal rate  
            reduction. SB 646 was held on the Senate Appropriations  
            suspense file.

            SB 640 (Lara) would exempt from the Medi-Cal payment  
            reduction Medi-Cal FFS providers, pharmacy providers,  
            DP-SNFs 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 Medi-Cal managed care plans.  
            SB 640 would take effect immediately as an urgency  
            statute. SB 640 was held on the Senate Appropriations  
            suspense file.

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


           SUPPORT AND OPPOSITION  :
          Support:  California Hospital Association (sponsor)
                    Adventist Health
                    Alliance of Catholic Health Care
                    Dignity Health
                    Private Essential Access Community Hospitals
          
          Support (prior version):
                    The Children's Partnership 
                    Children Now
                    Children's Defense Fund-California
                    California Coverage & Health Initiatives 
                    PICO California
          
          Oppose:Michelle Steel, Member of the Board of Equalization



                                   -- END --
          






                                                       SB 239 | Page  
          18