BILL ANALYSIS �
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Ed Hernandez, O.D., Chair
BILL NO: SB 42
S
AUTHOR: Alquist
B
AMENDED: April 27, 2011
HEARING DATE: May 4, 2011
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CONSULTANT:
2
Bain
SUBJECT
Medi-Cal: contracts
SUMMARY
Prohibits the Department of Health Care Services (DHCS), if
it or another state entity determines that an organization
that received state funds to coordinate services for
patients eligible for both Medicare and Medi-Cal, from
entering into a new contract, or extending an existing
contract, if the organization was overpaid inconsistent
with what was authorized under the contract or state law,
or if the organization profited from capitated payments
from the state in excess of what was authorized under the
contract or state law. In addition, this bill permits DHCS
to enter into or extend a contract if the organization has
repaid the amount of the overpayment and any penalties that
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have been assessed.
CHANGES TO EXISTING LAW
Existing law:
Existing law establishes the Medi-Cal program, which is
administered by DHCS, under which qualified low-income
individuals receive health care services. Existing law
authorizes DHCS to enter into various types of contracts
for the provision of services to beneficiaries, including
contracts with managed care systems and prepaid health
plans.
Requires DHCS to pay capitation rates to health plans
participating in the Medi-Cal managed care program using
actuarial methods. Requires, for the purposes of
developing capitation rates through implementation of its
rate-setting methodology, Medi-Cal managed care plans to
provide DHCS with financial and utilization data in a form
and substance as deemed necessary by DHCS to establish
rates.
This bill:
Prohibits DHCS, if it or another state entity determines
that an organization that received state funds to
coordinate services for patients eligible for both Medicare
and Medi-Cal, from entering into a new contract, or
extending an existing contract with that organization if:
� The organization was overpaid inconsistent with what was
authorized under the contract or state law; or,
� The organization profited from capitated payments from
the state in excess of what was authorized under the
contract or state law.
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Authorizes DHCS to enter into a contract, or extend an
existing contract, with an organization described above
if the organization has repaid the amount of the
overpayment and any penalties that have been assessed.
FISCAL IMPACT
This bill has not been analyzed by a fiscal committee.
BACKGROUND AND DISCUSSION
According to the author, this bill will require
overpayments or unjust enrichment from state contracts for
services provided to dual-eligible patients to be recouped
by the state. Given the fiscal situation of the state and
the cuts to senior services, it is important to ensure that
the state pays only for services rendered, and that any
overpayment or unjust enrichment is returned to the state.
If an audit determines a contracting organization received
overpayments or was unjustly enriched, and resulting
penalties and overpayments are not repaid to the state, the
contracting organization would be unable to enter into
future contracts with DHCS under SB 42.
Scope of bill
This bill applies to an organization that received state
funds to coordinate services for patients dually eligible
for both Medicare and Medi-Cal pursuant to a contract that
was either overpaid inconsistent with the contract or state
law, or that allowed the organization to profit from
capitated payments from the state, in excess of what was
authorized under the contract or state law.
One entity that may meet the criteria in this bill is the
Senior Care Action Network (SCAN) Health Plan. SCAN is a
Medicare Advantage Special Needs Plan that contracts with
DHCS to provide services for individuals dually eligible
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for Medicare and Medi-Cal residing in certain parts of Los
Angeles, San Bernardino, and Riverside counties. To be
eligible to receive services through SCAN, a member must be
at least 65 years of age, be enrolled in Medicare A and B,
have full scope Medi-Cal with no share of cost, and live in
SCAN's approved service areas.
Special Evaluation of SCAN Health Plan
On May 13, 2010, DHCS provided to Senators Alquist and
Lowenthal a Special Financial Evaluation of SCAN Health
Plan to address an allegation made to Senator Lowenthal' s
office by a former SCAN employee that SCAN had excessively
profited in the amount of "approximately $200 to $300
million" since the inception of its contract with DHCS.
The objective of this special financial evaluation was to
determine the reasonableness of the contracted rates paid
to SCAN for the period of January 1, 2007, through August
31, 2008. To determine the reasonableness of the contract
rates paid, DHCS isolated the medical and administrative
expenses incurred by SCAN exclusively for Medi-Cal, and
calculated a net profit margin. A benchmark of 4 percent
net profit was used as the basis to determine
reasonableness of the profit margin, which is considered
the industry standard for government sponsored programs and
what is paid at the upper bound of the actuarially
certifiable rate range in the major managed care programs
administered by DHCS.
DHCS estimates that SCAN's profit margin for the Medi-Cal
line of business was 83 percent for 2007 and 82 percent for
the first 8 months of 2008. In addition, DHCS made the
following three findings:
� Data files showing capitation payments and
fee-for-service paid claims submitted to SCAN by
providers within SCAN's provider network included
payments by SCAN to providers for services rendered to
individuals that DHCS was unable to validate as being
Medi-Cal eligible;
� After extracting claims for individuals which could not
be confirmed as Medi-Cal eligible, a comparison to
reported medical costs resulted in additional
adjustments; and,
� SCAN's estimated Medi-Cal net profit margin from January
2007 to August 2008 is well above the industry standard
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for a government sponsored program.
DHCS also indicated in its evaluation a major issue
concerning SCAN had been its inability to segregate both
medical and administrative expenses pertaining to its
Medicare and Medi-Cal lines of business for SCAN
beneficiaries. DHCS states that while SCAN's contract with
DHCS has required the ability to separately report these
costs, until July 2008, SCAN had asserted that it was cost
prohibitive and time consuming to complete the computer
programming related to separating the two distinct lines of
business.
In its Special Financial Evaluation, DHCS indicates it took
corrective action through a revised rate methodology.
Prior to 2009, the rate methodology was based on the
assumption that all long-term care (LTC) certified
beneficiaries enrolled in SCAN would reside in LTC
facilities. As such, fee-for-service (FFS) costs of the
beneficiaries residing in LTC facilities were used as the
foundation for SCAN's LTC rates. However, further
examination of SCAN's utilization data showed that only
approximately 10 percent of SCAN's Medi-Cal enrollment was
LTC certified and resided in LTC facilities. As a result,
the new methodology considered the Multipurpose Senior
Services Program (MSSP) population, a comparable home and
community-based population, as a proxy for rate
development. Additionally, administrative and profit
ranges were applied to the rates in order to calculate
actuarially sound rate ranges, which in turn were used as a
basis for negotiation with SCAN officials and CMS. The
administrative expense factor in the development of rates
was based upon a percentage of the overall premium paid.
The overall impact of these changes in methodology was a 70
percent rate reduction from the prior rate year of 2008.
DHCS' evaluation concluded that, while the monthly
capitation rates paid to SCAN during the identified periods
may be considered above the industry standard for a
government-run program, and were not identified earlier by
DHCS because of the failure of SCAN to report their
Medi-Cal line of costs, they: 1) Were actuarially
certified; 2) Required CMS review and approval prior to
implementation; and 3) Were derived from a long-standing
methodology that is similar to that used for home and
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community-based programs across the country, which had not
been subject to previous scrutiny because of the lack of
cost data. In its letter to Senators Alquist and Lowenthal
forwarding the Special Financial Evaluation of SCAN, DHCS
stated that, as a result of the above-mentioned factors,
the excess profit realized by SCAN may not conclusively
meet the definition of "erroneous or improper payment"
required in SCAN's contract with DHCS for recovery of
overpayment of capitation payments.
Controller's letter
On August 11, 2010, State Controller John Chiang wrote to
SCAN Health Plan's CEO indicating that his office had
completed a review of the May 14, 2010 report DHCS sent to
Senators Alquist and Lowenthal regarding the Special
Financial Evaluation of the monthly capitation rates
provided to SCAN for the period January 1, 2007, to August
31, 2008.
In the letter, Controller Chiang indicated that his office
conducted an investigation in 2008 into these rates because
of complaints referred to him by Senator Lowenthal. Based on
this inquiry, the Controller sent a letter to former DHCS
Director Sandra Shewry, in which he indicated the capitation
rates DHCS agreed to in its contract with SCAN were
excessive, and resulted in the expenditure of hundreds of
millions of dollars for no legitimate purpose. The
Controller recommended that DHCS take action to determine the
reasonableness of the rates.
In his letter, the Controller noted that the DHCS report
concludes that the capitation rates for the period of
January 1, 2007, through August 31, 2008 resulted in DHCS
paying SCAN a profit margin of 82-83 percent, well above
the normal industry standard of 4 percent. The Controller
also stated in his letter that, while the DHCS report does
not mention the period of July 1, 2001, through December
31, 2006, it appeared relatively clear to him that SCAN
received excessive profit margins during this earlier
period.
The Controller's letter also noted that the DHCS report
indicates that rates were cut in 2009 in order to eliminate
the excessive profits paid to SCAN and to make other
modifications. The Controller's Office estimates these
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changes will save the state Medi-Cal program approximately
$88 million per year over the remaining four years of its
contract with SCAN. However, the Controller stated that,
while the rate adjustment is serving to curb SCAN's ability
to line its pockets with disproportionately large and
grossly unfair profits at taxpayer expense from January
2009 and on, it fails to address the overpayments made to
SCAN during the period of July 1, 2001, to December 31,
2008. The Controller's letter also states that, assuming
the 70 percent rate reduction is appropriate and should
have been in place during this prior period, his auditors
estimate SCAN was unjustly enriched by approximately $339
million, of which roughly one-half would have been paid
from the state's General Fund.
Finally, the Controller's letter concludes by stating that
while he is deeply concerned that DHCS conducted no
analysis of SCAN's effectiveness before renewing a $1.44
billion contract for five years, he was even more troubled
by the fact that SCAN failed to meet its
contractually-obligated reporting requirements, which
denied California the ability to determine SCAN's true
health care costs. The Controller urged the CEO of SCAN to
work with the Attorney General's Office and DHCS to return
any excess profits made from payments to SCAN by DHCS prior
to January 1, 2009.
Arguments in opposition
The California Association of Health Plans (CAHP) writes
that, by allowing any state entity to block a contract
renewal with DHCS, this bill would make it extremely
difficult to settle any dispute with the state on issues
resulting from a possible overpayment. CAHP states that
even if the parties to the contract reached a settlement of
the dispute, "another state entity or entities" would have
the power to dispute the settlement and require termination
of a contract, and that this bill removes discretion from
DHCS on any such matter. CAHP continues that any plan
serving the dual eligible population that is nearing the
end of its contract would have no right of due process or
the ability to challenge an unfair or improper
determination by "another state entity or entities." The
only option would be to pay the disputed overpayment and
penalties assessed, no matter how large or unjustified, in
order to avoid contract termination and disruption of their
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member's health care services. CAHP argues this bill could
have a chilling effect on health plans' willingness to
participate in dual eligible contracts, which is
counterproductive as future contracts are expected to cover
large numbers of dually eligible enrollees that would
benefit from coordinated care and that would save both
state and federal dollars. Finally, CAHP concludes that
terminating a health plan contract without good cause would
create a major disruption of health care services for frail
elderly citizens who are highly dependent on their
relationships with providers and caregivers.
SCAN Health Plan writes in opposition that this bill is
ill-conceived and not in the best interests of the more
than 100,000 SCAN beneficiaries or the citizens of the
State of California. SCAN argues this bill will create
unnecessary litigation and uncertainty at a time when the
health care delivery system in California faces severe
challenges. SCAN writes that it remains committed to
working with the State and it urges the members of the
Senate Committee to oppose SB 42 or, at a minimum, to delay
consideration of this bill until it has an adequate
opportunity to confer with the staff and the members of the
Committee to explain the myriad ways that this legislation
will harm senior citizens in the State of California.
COMMENTS
1. Application of bill to overpayments and profits. This
bill applies when DHCS or another state entity determines
that an organization was "overpaid inconsistent with, or
profited from capitated payments from the state in excess
of what was authorized under the contract or state law."
There does not appear to be an existing state law standard
that sets a profit level for capitated payments, and this
bill does not propose a profit standard. To implement the
requirement in this bill, DHCS would need to establish a
contractual dollar amount or percentage threshold that
would be used to determine when an organization profited
from capitated payments. In its Special Financial
Evaluation to determine the reasonableness of the contract
rates paid to SCAN, DHCS used a benchmark of 4 percent net
profit as the basis to determine reasonableness. DHCS
stated this is considered the industry standard for a
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government-sponsored program and what is paid at the upper
bound of the actuarially certifiable range in the major
managed care programs administered by DHCS.
2. Appeals process may be needed. Under a capitated
contract, a health plan receives a fixed per member per
month (PMPM) amount for health care services, and the
health plan is financially responsible for the health care
services agreed to be covered under the contract. A health
plan is at risk for services (and costs) that exceed the
monthly PMPM payment amount, and profits if health care
costs are below the PMPM amount. Because health care
costs, utilization and profits may vary over the course of
a contract, if this bill were implemented, there would
likely be disputes between DHCS and its contracting
entities over whether capitated payments result in excess
profits, or if overpayments have occurred. It is unclear
under this bill how entities that dispute a state entity's
decision on overpayments or excess profits could appeal
such a decision if an organization's contract was not
renewed. Current Medi-Cal contracts with Medi-Cal managed
care plans include a "Notice of Dispute" (NOD) process,
which plans can use as a means of seeking resolution of
disputes on contractual issues. This NOD process could be
used as a model for this bill.
3. What should be the sanction for overpayments? This
bill prohibits DHCS from entering into a contract, or
extending an existing contract, with an organization that
was overpaid or profited from capitation payments in excess
of what was authorized under the contract or state law.
DHCS is authorized to enter into a contract, or extend an
existing contract, if the organization has repaid the
amount of the overpayment and any penalties that have been
assessed.
If a contract with an organization were not renewed,
current Medi-Cal beneficiaries enrolled in a plan would
have to switch to another plan and potentially another
health care provider. This could disrupt patient-provider
relationships and continuity of care, and would require
DHCS to rebid the Medi-Cal contract. In addition, this
provision may prevent the state and the organization from
agreeing to "settle" an overpayment dispute at amounts less
than the overpayment amount because the organization would
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still be precluded from contracting with DHCS.
4. Entities subject to the scope of this bill. This bill
applies to "an organization that received state funds to
coordinate services for patients eligible for both Medicare
and Medi-Cal pursuant to a contract." While the author's
background does not mention SCAN as the focus of this bill,
the payments to SCAN far exceeded the cost of providing
health care services to Medi-Cal beneficiaries enrolled
SCAN's contract to serve dully eligible beneficiaries. As
drafted, the scope of this bill may include other
organizations, such as medical groups, other Medi-Cal
managed care plans, and hospitals that may not be the
intended focus of this measure.
5. How can the Legislature ensure an 82-83 percent profit
margin does not occur in the future? In its Special
Financial Evaluation of SCAN, DHCS indicates it took
corrective action through a revised rate methodology. The
previous rate methodology assumed that all LTC-certified
Medi-Cal beneficiaries enrolled in SCAN would reside in LTC
facilities, when actual utilization showed that
approximately 10 percent of SCAN's Medi-Cal enrollment was
LTC-certified and resided in LTC facilities. DHCS
indicates it established a new rate methodology that
resulted in a 70 percent rate reduction from the 2008 rate
year. Existing law requires DHCS to pay capitation rates
to health plans participating in the Medi-Cal managed care
program using actuarial methods. In addition, current law
requires Medi-Cal managed care plans to provide DHCS with
financial and utilization data in a form and substance as
deemed necessary by DHCS to establish rates. Given these
factors, it is not clear the problem involving DHCS'
contract with SCAN is a lack of statutory authority.
6. Settlement discussions. SCAN indicates it has entered
into settlement discussions with the state Attorney
General's office and the United States Attorney's office,
and that it expects a response to a proposal it has made in
June 2011.
POSITIONS
Support: None received.
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Oppose: California Association of Health Plans
SCAN Health Plan
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