BILL ANALYSIS                                                                                                                                                                                                    Ó



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

          BILL NO:                    SB 1365             
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          |AUTHOR:        |Hernandez                                      |
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          |VERSION:       |February 19, 2016                              |
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          |HEARING DATE:  |April 20, 2016 |               |               |
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          |CONSULTANT:    |Vince Marchand                                 |
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           SUBJECT  :  Hospitals

           SUMMARY  :  Prohibits an outpatient setting that is operated or controlled  
          by a hospital from charging a fee or imposing costs on a patient  
          or payer for hospital care unless the care is provided in a  
          hospital building, as defined. 
          
          Existing law:
          1)Licenses and regulates health facilities through the  
            Department of Public Health (DPH), including general acute  
            care hospitals, acute psychiatric hospitals, and special  
            hospitals.

          2)Permits DPH to issue a consolidated license to a general acute  
            care hospital that includes more than one physical plant  
            maintained and operated on separate premises, under certain  
            conditions, including that the physical plants maintained and  
            operated under the consolidated license are located not more  
            than 15 miles apart, unless one or more of the physical plants  
            is located in a rural area or only provides outpatient  
            services, among other specified exceptions.

          3)Requires a general acute care hospital and an acute  
            psychiatric hospital, if supplies or services are provided on  
            an outpatient basis by an ancillary health services provider  
            which is not on the same site as, or is not on a site which is  
            within a 400-yard radius of the boundaries of, the general  
            acute care hospital, to disclose in writing to the customers  
            if they have a significant beneficial interest in the  
            ancillary health service provider, and that they may choose to  
            have another ancillary health service provider provide any  
            supplies or services ordered by a member of the medical staff  
            of the hospital. "Ancillary health services provider" is  







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            defined, for these purposes, as including, but not limited to,  
            providers of pharmaceutical, laboratory, optometry,  
            prosthetic, or orthopedic supplies or services, among others.

          4)Establishes the Alfred E. Alquist Hospital Facilities Seismic  
            Act (Hospital Seismic Act), and defines "hospital building"  
            for purposes of this Act as any building used, or designed to  
            be used, for a health facility of a type required to be  
            licensed, except any building where outpatient clinical  
            services are provided that is separated from a building in  
            which hospital services are provided, and other specified  
            exceptions.

          5)Requires DPH to establish minimum licensed nurse-to-patient  
            ratios for all general acute, acute psychiatric, and special  
            hospitals, in the following hospital units: critical care  
            unit; burn unit; labor and delivery room; post-anesthesia  
            service area; emergency department; operating room; pediatric  
            unit; step-down/intermediate care unit; specialty care unit;  
            telemetry unit; general medical care unit; subacute care unit;  
            and transitional inpatient care unit.

          This bill:
          1)Requires an entity that operates or controls a general acute  
            care, acute psychiatric, or special hospital, as defined, and  
            that also operates, controls, or leases real property for use  
            as an outpatient treatment setting, to ensure that the  
            outpatient facility does not charge a fee to, or impose costs  
            on, a patient or other payer for inpatient care or hospital  
            care unless the care is provided in the portion of the  
            facility that is either:

                  a)        Subject to nurse-to-patient staffing ratios;  
                    or,
                  b)        A hospital building as defined for purposes of  
                    the Hospital Seismic Act, as specified. 

           FISCAL  
          EFFECT :  This bill has not been analyzed by a fiscal committee.
           
          COMMENTS  :
          1)Author's statement.  According to the author, this bill is  
            intended to prohibit a hospital from charging a hospital  
            facility fee for care provided in an outpatient setting when the  
            outpatient setting is not a part of the actual hospital campus.  








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            In many of these instances, these hospital-affiliated clinics  
            are simply providing primary care services that could easily be  
            performed in a physician's office. Worse, patients often have no  
            idea that the clinic where they are receiving care is part of a  
            hospital, since it is miles away from the actual hospital  
            campus, and are therefore getting care at a more expensive  
            setting. This has two significant consequences: 1) consumers may  
            have higher out-of-pocket costs, particularly those patients  
            served by a PPO; and, 2) health insurance premiums will be  
            driven up as a result of patients unwittingly, and  
            unnecessarily, receiving care at more expensive settings. With  
            the passage of the Affordable Care Act, we are now requiring  
            everyone to purchase health insurance. It is incumbent upon  
            policymakers to contain costs to keep insurance rates as  
            affordable as possible. This bill will ensure these facility  
            fees stay where they belong -- at the hospital. 

          2)Background on facility fees. Medicare rules have historically  
            established the payment structure that that is used throughout  
            the insurance industry. Under Medicare's payment policies, when  
            a service is provided in a physician office, Medicare makes a  
            single payment to the physician at Medicare's physician fee  
            schedule "non-facility rate." When the service is provided in a  
            hospital outpatient department (HOPD), however, Medicare makes  
            two payments: one payment at the physician fee schedule  
            "facility rate," and a second payment to the hospital at the  
            hospital outpatient prospective payment system rate, often  
            referred to as the facility fee. While the facility rate payment  
            for physician services at an HOPD is a little lower compared to  
            the non-facility rate payed at a doctor's office, when the two  
            separate charges for services at an HOPD are combined, the total  
            charge is higher for the same service. The argument for the  
            higher payment rates for services in HOPDs is that these higher  
            reimbursements are necessary to compensate for the additional  
            costs associated with maintaining a hospital - costs such as  
            maintaining an emergency room, more extensive equipment,  
            increased staffing, etc. However, this facility fee can be added  
            to bills even when the service is provided in a setting up to 35  
            miles away from the actual hospital, if the outpatient setting  
            is on the hospital's license. In many of these cases, the  
            hospital's outpatient clinics look nearly indistinguishable from  
            a physician practice that is not associated with a hospital (and  
            are not permitted to charge a facility fee). This has created a  
            situation in which patients go to what they believe is simply a  
            medical doctors office, but are billed a much higher fee than  








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            expected.  
           
           3)GAO report and Medicare's new "site neutral" payment reform. The  
            United States Government Accountability Office (GAO) issued a  
            report in December of 2015 titled "Increasing Hospital-Physician  
            Consolidation Highlights Need for Payment Reform." According to  
            this GAO report, Medicare expenditures for hospital outpatient  
            department (HOPD) services have grown rapidly, and there have  
            been questions raised about the extent to which this growth in  
            spending can be attributed to services that were previously  
            performed in physician offices shifting to HOPDs. The GAO report  
            stated that "regardless of what has driven hospitals and  
            physicians to vertically consolidate, paying substantially more  
            for the same service when performed in an HOPD rather than a  
            physician office provides an incentive to shift services." The  
            GAO concluded that in order to prevent a shift toward HOPDs from  
            increasing costs, Congress should consider equalizing payment  
            rates between settings for evaluation and management offices  
            visits.

          Even prior to the publication of the GAO report, Congress included  
            a Medicare "site neutral" payment reform provision as part of  
            the budget deal approved in October of 2015. Beginning on  
            January 1, 2017, Medicare will no longer pay a facility fee to  
            HOPDs that are located more than 250 yards from the main campus  
            of the hospital. However, this new law grandfathered in all  
            existing HOPDs, and only applies to new outpatient departments  
            going forward.  The hospital industry is seeking to allow  
            locations in the planning or construction phase to be  
            grandfathered in as well.

          4)Corporate Practice of Medicine.  Across the nation, the drive  
            for "site neutral" payment reform has been driven, in large  
            part, by an escalation in hospital-physician consolidation, with  
            hospitals acquiring physician practices, and then increasing  
            charges due to the ability to charge HOPD rates. In California,  
            however, this is mitigated by the ban on the corporate practice  
            of medicine, which prevents corporations from practicing  
            medicine, including the employment of physicians. However, there  
            are a number of exceptions to the ban on hospital employment of  
            physicians, established over the years through both statutory  
            exemptions as well as case law. All teaching hospital systems  
            are allowed to employ physicians, which includes the five  
            University of California medical schools, as well as the three  
            private medical schools at Stanford University, Loma Linda  








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            University, and the University of Southern California.   
            Additionally, all 12 county-owned hospital systems are allowed  
            to employ physicians. Other exemptions from the ban include  
            nonprofit community clinics, health maintenance organizations,  
            state agencies, and certain charitable institutions.

          5)Regulations pertaining to HOPDs. As hospitals argue in  
            opposition to this bill, outpatient services operated by  
            hospitals are subject to certain requirements that do not apply  
            to physician offices not affiliated with a hospital. For  
            example, regulations for outpatient services of a hospital  
            require a registered nurse to be responsible for the nursing  
            service in the outpatient setting. Additionally, HOPDs are  
            subject to more stringent building code requirements than  
            physician offices, as HOPDS are required to meet the same "OSHPD  
            3" building code requirements as primary care clinics, which  
            specify minimum size of examination rooms, and specific plumbing  
            and mechanical requirements, among other building code  
            requirements.
          
          6)Related legislation. SB 932 (Hernandez) would ban seven  
            specified provisions from contracts between health care  
            providers and payors and requires prior approval from the  
            Department of Managed Health Care for mergers and other  
            transactions between health care service plans, risk-based and  
            other organizations. SB 932 is set for hearing on April 20,  
            2016, in this Committee.
                 
          7)Support.  This bill is sponsored by the California Teamsters  
            Public Affairs Council (Teamsters), which states that  
            increasingly, hospitals that own outpatient clinics providing  
            routine treatment are charging consumers exorbitant "facility  
            fees" as if they were being treated in an acute care facility.  
            The Teamsters state that this is fundamentally unfair to  
            health care consumers who seek treatment in outpatient  
            facilities precisely because they are supposed to be less  
            expensive than hospitals. America's Health Insurance Plans  
            (AHIP) states in support that this bill directly addresses one  
            of the cost-drivers that is occurring under provider  
            consolidation. According to AHIP, when a hospital purchases a  
            physician practice and re-categorizes it under the hospital  
            organization, nothing has changed for the physician's office,  
            yet they are now allowed to bill under a differed code,  
            because it is now considered an "outpatient facility" for  
            billing purposes. AHIP states that when a change of ownership  








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            is all that allows for physician offices to bill for higher  
            reimbursement, without any corresponding change in service,  
            the patient pays more through either higher copayments or  
            higher premiums. Health Access California states in support  
            that this bill simply says that a provider cannot charge for  
            hospital services unless those services are provided in a  
            hospital. According to Health Access, charging for hospital  
            services when care is provided outside a hospital appears to  
            misrepresent the level of care provided and the costs  
            associated with that care. The California Labor Federation  
            (CLF) states in support that the shift toward outpatient care  
            has meant that more patients are receiving care outside of  
            acute care hospitals. However, CLF states that the facility  
            fee has followed patients out of hospitals and into outpatient  
            care, which is designed to be less expensive and intensive  
            than inpatient care. CLF states that patients who go to their  
            doctor's office for a minor procedure find themselves on the  
            hook for unexpected facility fees simply because the  
            physician's office is owned by a hospital. The US Oncology  
            Network states in support that it is all too familiar with the  
            higher rates for outpatient oncology services that hospitals  
            command, and that this bill is an important step to ensure  
            patients do not pay more for medical treatment, regardless of  
            whether they receive treatment in a hospital or outpatient  
            facility. The Alliance for Site Neutral Payment Reform states  
            that it believes payment policies that support higher  
            reimbursement in the HOPD setting encourages the acquisition  
            of office-based physician practices, which results in higher  
            costs to patients, payers and employers. The Consumer  
            Federation of California states that by prohibiting hospitals  
            from charging facility fees for services provided in an  
            outpatient setting that is not a part of the actual hospital  
            campus, this bill will protect consumers and control health  
            insurance premiums by averting unnecessary costs.

          8)Opposition.  The California Hospital Association (CHA) states  
            in opposition that this bill fails to recognize the critical  
            role hospitals play in our health care system and would only  
            exacerbate the access issues that proliferate across  
            California. According to CHA, off-campus facilities are part  
            of a hospital's license and must comply with applicable laws  
            and regulations. Hospital outpatient settings operate with  
            higher cost structures due to greater regulatory requirements  
            compared to physician offices or ambulatory surgery centers.  
            According to CHA, hospital outpatient departments must adhere  








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            to rigorous standards for patient care, facility  
            infrastructure and operational procedures as if they were  
            directly on a hospital campus. This increases the cost of  
            care, and CHA states that the Medicare program accordingly  
            supports payment rates inclusive of a facility fee and a  
            professional fee. The California Children's Hospital  
            Association (CCHA) states in opposition that it is extremely  
            concerned by the public health and financial impacts of this  
            bill, which could destabilize the state's network of  
            hospital-based outpatient clinics and reduce access to  
            critically needed specialty care for children with complex  
            medical needs. According to CCHA, California's children's  
            hospitals experienced more than one million outpatient clinic  
            visits in 2014, including neurosurgery, speech, prenatal  
            diagnostic centers, audiology, genetics, and high risk infant  
            follow-up clinics, and that 65% of the visits were Medi-Cal  
            insured. CCHA states that facility fees are utilized to  
            reimburse hospitals for the level and intensity of the nursing  
            services and hospital resources used in an outpatient clinic  
            setting. CCHA states that by prohibiting hospitals from  
            charging for these additional costs of providing care unless  
            it is provided in an inpatient setting, this bill would create  
            an unsustainable financial burden for children's hospitals.  
            Without the ability to cover these expenses, CCHA states it  
            would be forced to reevaluate the outpatient clinics they  
            offer and possibly close clinics, moving patients to the more  
            expensive and unnecessary inpatient setting, or attempt to  
            manage patients through the emergency room. This bill is also  
            opposed by the Association of California Healthcare Districts  
            (ACHD), which states in many instances, healthcare districts  
            are the sole source of health care in the community, and that  
            outpatient clinics provide needed health care services to  
            Medi-Cal patients. According to ACHD, this bill does not take  
            into account the cost structure inherent in hospitals that are  
            meeting community needs and addressing access to care.
           
          SUPPORT AND OPPOSITION  :
          Support:  California Teamsters Public Affairs Council (sponsor)
                    Alliance for Site Neutral Payment Reform
                    America's Health Insurance Plans
                    California Labor Federation
                    Consumer Federation of California
                    Health Access
                    SEIU California
                    US Oncology Network








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          Oppose:Association of California Healthcare Districts
                    California Children's Hospital Association
                    California Hospital Association

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