BILL ANALYSIS �
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Ed Hernandez, O.D., Chair
BILL NO: SB 408
S
AUTHOR: Hernandez
B
AMENDED: As Introduced
HEARING DATE: April 6, 2011
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CONSULTANT:
0
Hansel
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SUBJECT
Health facilities: licensure
SUMMARY
Requires a new health facility license application to be
filed when the holder of an existing health facility
license changes ownership. Provides that a change of
ownership occurs when the holder of the license sells,
transfers, leases, exchanges, options, conveys, or
otherwise disposes of a material amount of its hospital
assets or operations to another individual or entity, as
defined, or when the license holder transfers control,
responsibility, or governance of a material amount of its
hospital assets or operations to another individual or
entity, as defined.
CHANGES TO EXISTING LAW
Existing law:
Provides for the licensing and regulation of health
facilities, including general acute care hospitals, acute
psychiatric hospitals, and special hospitals by the
Department of Public Health (DPH).
Requires any person desiring a license for a health
Continued---
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facility, or approval to manage a health facility, to file
an application with DPH, and to provide evidence that they
are of reputable and responsible character and have the
ability to comply with statutory and regulatory
requirements applicable to health facilities.
Requires, under DPH regulations, a new owner of a health
facility to submit a license application and pay an
application fee when a change of ownership occurs.
Although the term "change of ownership" is not defined in
regulations governing general acute care hospitals, it is
interpreted by DPH to mean when a new legal entity assumes
responsibility for the operation of the hospital.
Requires, under the Attorney General's administration of
charitable trust laws, a nonprofit corporation that
operates or controls a health facility to obtain the
consent of the Attorney General prior to entering into any
agreement or transaction to:
--Sell, transfer, lease, exchange, option, convey, or
otherwise dispose of, a material amount of its assets
to either a for-profit or nonprofit entity; or
--Transfer control, responsibility, or governance of a
material amount of the assets or operations of the
nonprofit corporation to a for-profit or non-profit
entity.
This bill:
Requires a new health facility license application to be
filed when the holder of an existing health facility
license changes ownership. Provides that a change of
ownership occurs when the holder of the license:
Sells, transfers, leases, exchanges, options,
conveys, or otherwise disposes of a material amount of
its assets or operations to another individual or
entity; or
Transfers control, responsibility, or governance of
a material amount of its assets or operations to
another individual or entity.
Provides that an agreement or transaction involves a
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"material amount of the
assets or operations" if the agreement or transaction
directly affects more than 10
percent of the value of the hospital facility, or
facilities that are operated by the license holder, or if
it involves the sale, transfer, exchange, or change in
control or governance of, any hospital facilities that are
controlled or operated by the facility that have a fair
market value exceeding $3 million.
Also provides that an agreement or transaction will
"transfer control, responsibility, or governance" if any of
the following occur:
10 percent or more of the membership interests or voting
rights of a limited liability company or partnership that
operates or manages a hospital is transferred, assigned
or disposed of to a new partner or member, as specified;
10 percent of the stock or voting rights of a corporation
which operates a hospital, or which is a member of a
limited liability company that operates a hospital, is
transferred to a new stockholder, as specified;
There is a substitution of a new corporate member or
members that transfers the control of, responsibility
for, or governance of, the current license holder;
There is a substitution of one or more members of the
governing body, or any arrangement that transfers voting
control of the members of the governing body.
FISCAL IMPACT
SB 408 has not been analyzed by a fiscal committee.
BACKGROUND AND DISCUSSION
According to the author, SB 408 closes a loophole in
hospital licensing laws to make sure that when a hospital
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changes ownership or when day to day operations of the
facility are handed over to a new individual or entity, the
new owner must obtain a license to operate the facility.
Although existing law requires the owner of a hospital to
obtain a license to operate the hospital, the law has been
interpreted to allow the new owner of a hospital to operate
the facility under the old owner's license. The author
states that this loophole became apparent with the recent
acquisition of control of Alvarado Hospital by Prime
Healthcare Services (Prime). Although DPH was
investigating high reported cases of septicemia (a severe
type of blood infection) at Prime-operated hospitals at the
time of the acquisition, it concluded that the acquisition
did not constitute a change of ownership of the hospital
that required a new license application. SB 408 is
intended to ensure that individuals or entities acquiring
hospitals must adhere to the state's transfer of ownership
laws regardless of the manner in which the hospital was
acquired.
Acquisition of Alvarado Hospital by Prime
In November 2010 Prime announced the acquisition of
Alvarado Hospital in San Diego from Plymouth Health, LLC
(Plymouth), a privately held company that had owned the
hospital since January 2007. Concurrent with the
announcement, Alvarado Hospital LLC, the entity that held
the license to operate the hospital, notified DPH that 100
percent of the membership interests of Alvarado Hospital,
LLC had been transferred from Plymouth to Prime.
At the time of the acquisition, Prime stated that because
it had acquired Alvarado Hospital by acquiring control of
Alvarado Hospital, LLC, the entity that was licensed to
operate the hospital, the transaction did not constitute a
change of ownership requiring approval from DPH.
In November 2010 Assemblymember Marty Block sent DPH a
letter asking it to deny approval to Prime to take control
of the hospital on the grounds that the acquisition
constituted a change of ownership and that the department
had not completed its investigation of Prime's reported
high septicemia rates. Legal counsel representing Service
Employees International Union-United Healthcare Workers
(SEIU-UHW) sent DPH a similar request, arguing that the
acquisition of Alvarado Hospital by Prime constituted a
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circumvention of hospital change of ownership requirements.
In December 2010 DPH replied in letters to Assemblymember
Block and SEIUs legal counsel that it lacked authority to
require a change of ownership application because, even
though 100 percent of the membership interests in Alvarado
had been transferred from Plymouth Health to Prime, the
named licensee, Alvarado Hospital, LLC would remain the
same as before the transfer.
DPH investigation of septicemia rates at Prime hospitals
In mid-2010 the SEIU-UHW released a report showing very
high rates of septicemia among patients treated at
hospitals operated by Prime. Septicemia is a serious form
of infection associated with the presence of bacteria in
the blood. Based on an analysis of Medicare claims data
from 2008, the report found that Prime operated five of the
six hospitals in the country with the highest reported
rates of septicemia. The report also found that 15.7
percent of Medicare patients treated at Prime hospitals had
septicemia, compared to a national rate of 4.8 percent
overall and a rate of 9.2 percent for larger health
systems.
A subsequent analysis of Medi-Cal admissions data from 2008
by SEIU-UHW found that Prime operated the four California
health facilities with the highest rates of reported
septicemia in Medi-Cal patients. The study found that
Prime hospitals had 2.4 times more septicemia cases among
Medi-Cal patients than the level that would be expected
based on average rates of reported septicemia at all
hospitals.
If substantiated, the reported high rates of septicemia
could be indications of quality of care problems in Prime
hospitals, or indications of inaccurate coding of diagnoses
or potential billing fraud.
Based on the reports, the federal Office of the Inspector
General and the California Attorney General began
investigations into Prime's billing practices related to
the high reported rates of septicemia.
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In August and September 2010, Senator Alquist, then chair
of the Senate Health Committee, and Assemblymember Monning,
chair of the Assembly Health Committee, sent letters to DPH
asking DPH to investigate and to withhold approval of any
additional applications by Prime to operate additional
health facilities.
In September 2010, DPH stated in letters to the chairs that
it was investigating the high reported cases of septicemia
and was coordinating its investigation with the Department
of Health Care Services' Audits and Investigations Unit.
DPH also stated that it was planning to conduct Patient
Safety Licensing Surveys of Prime hospitals in the fall
2010, and that it would cite Prime for any violations of
hospital infection control requirements and obtain
corrective action plans. DPH also pledged to refer its
reports and actions to the federal Office of the Inspector
General and to accreditation organizations. In a
follow-up letter to the chairs, DPH also stated that it
would not act on any change of ownership applications
submitted by Prime until all of the investigations were
concluded.
Prime has disputed the results of the SEIU analyses,
stating that the bulk of the septicemia cases represent
conditions present on admission to the hospital, that SEIUs
study failed to identify other hospitals with similar
septicemia rates, that Prime hospitals can be expected to
have higher septicemia rates because more of their Medicare
patients are admitted through the emergency department or
from long-term care facilities and that they are older on
average than at other hospitals, and that it strictly
complies with Medicare coding guidelines and no issues have
been identified with its coding practices.
A subsequent report in February 2011, prepared by
California Watch, found high rates of several forms of
malnutrition at Prime hospitals. Among the report's
findings were that in 2009, Prime reported that 25 percent
of its Medicare patients were malnourished, compared to a
state average of 7.5 percent.
In March 2011 Senator Hernandez, the Chair of the Senate
Health Committee, sent a letter to DPH asking it to
investigate the high reported rates of malnutrition in
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order to determine whether Prime hospitals have been
correctly identifying large numbers of extreme malnutrition
cases among Medicare patients, or whether the numbers
reflect overbilling of seniors and the Medicare program.
The letter asked that DPH not approve any additional
facility licenses for Prime-related facilities until
completing the investigation.
DPH hospital licensing requirements
Current statute and regulations require any person who
operates a health facility, including a general acute care
hospital, to obtain a license from DPH. Health facility
licenses are usually held by a sole proprietorship,
partnership, corporation, or limited liability company.
Under DPHs regulations, hospitals must submit a license
application and pay an application fee when there is a
change of ownership, although the regulations do not define
what constitutes a "change of ownership". As noted above,
DPH interprets a change of ownership that triggers a new
license application to be when a new legal entity assumes
control of the hospital, rather than when there is a
transfer of control of an existing entity that holds the
license.
Other hospital transfer of ownership programs and
requirements
DPHs regulations currently require hospital license holders
to report a change of ownership interest, defined as when a
change of stockholder owning 10 percent or more of the
non-public corporate stock occurs. This is a notice
requirement, which does not trigger a new license
application.
Under existing law, a nonprofit corporation that operates
or controls a health facility must obtain the approval of
the Attorney General prior to entering into any agreement
or transaction to sell, transfer, or otherwise dispose of a
material amount of its assets to a for-profit or nonprofit
entity; or to transfer control, responsibility, or
governance of a material amount of the assets or operations
of the nonprofit corporation to a for-profit or nonprofit
entity.
The Attorney General's regulations provide that a
transaction involves a "material amount of the assets" if
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it affects more than 20 percent of the value of the health
facilities operated by the nonprofit corporation, or if it
involves the sale, transfer, or other disposition of any
health facility that has a fair market value that exceeds
$3 million. The regulations also provide that a
transaction "transfers control, responsibility, or
governance" if there is a substitution of one or more
corporate members that transfers control, responsibility
for, or governance of the nonprofit corporation, or there
is a substitution of one or more members of the governing
body that transfers voting control of the governing body.
Some other states have laws that require prior approval of
changes in ownership of hospitals, including when a portion
of the voting rights or ownership interests is transferred
from one entity to another. For example, in New York, any
transfer or other disposition of 10 percent or more of the
interests or voting rights in a partnership or limited
liability company which is the operator of a hospital must
be approved by the Public Health and Planning Council.
Prior legislation
AB 330 (Gordon), Chapter 507, Statutes of 2005-06, requires
the Department of Health
Services to assess the character and operational history of
applicants seeking licensure for acute care and psychiatric
hospitals.
AB 3101 (Isenberg), Chapter 1105, Statutes of 1996),
requires a nonprofit corporation that operates or controls
a health facility to provide notice to and obtain the
consent of the Attorney General prior to entering into an
agreement to sell, transfer, or otherwise dispose of, a
material amount of its assets to a for-profit entity, or to
transfer control, responsibility, or governance of a
material amount of the assets or operations of the
nonprofit corporation to a for-profit entity.
AB 254 (Cedillo), Chapter 850, Statutes of 1999, imposes
similar requirements to AB 3101 for transfers of assets or
transfers of control of nonprofit hospitals to other
nonprofit entities.
Arguments in support
SEIU, the sponsor of SB 408, states that although existing
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law requires any prospective hospital operator to obtain a
new license prior to operating or managing a hospital, the
law has been interpreted to allow holding companies which
hold such licenses to be bought and sold without triggering
a change of ownership and new license application. SEIU
argues that this enables a company like Prime to acquire
and manage a new hospital even while it is under
investigation.
Health Access California writes that SB 408 closes a
loophole in the existing hospital licensure law that allows
hospital owners with track records of questionable quality
of care to buy more hospitals, using language similar to
that used by the Attorney General with respect to mergers
and acquisitions involving public hospitals.
Concerns
The California Hospital Association (CHA) expresses
concerns that SB 408 would require a new license
application almost any time an entity that holds a hospital
license engages in stock transactions, even when the legal
entity that holds the license does not change, and the
hospital operations do not change. CHA argues that this
requirement would duplicate the annual license renewal
process, and require hospitals that need to access capital
to wait a year or more for approval of these transactions
and incur significant new costs. CHA states that adding
another layer of duplicative regulatory review will make it
extremely difficult for hospitals to raise capital for
operations, invest in new technology, and comply with
seismic safety requirements, without providing any
improvement in patient safety or access to care.
COMMENTS
1. Author's amendments. Staff understand the author will
propose amendments in committee to clarify that the bill's
requirements apply only to entities that hold licenses to
operate general acute care, acute psychiatric, and special
hospitals.
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2. Threshold for defining change of ownership. As drafted
under SB 408, a change of ownership would be defined as
when an existing hospital license holder sells or transfers
assets that comprise 10 percent or more of the value of the
health facility or facilities that are operated or
controlled by the license holder, or when it sells or
transfers a health facility with a fair market value that
exceeds $3 million. Similarly, the bill would define a
change of ownership to occur when there is a transfer or
other disposition of 10 percent or more of the membership
interests or voting rights of a limited liability company
or partnership that operates or manages a health facility,
or when there is a transfer or other disposition of 10
percent or more the stock or voting rights of a corporation
which operates or manages a health facility. Various
alternative thresholds could be considered for defining
when a change of ownership occurs, including those used to
define when nonprofit hospitals have to report sales of
assets or governance changes to the Attorney General. A
key question is what level of threshold will ensure that a
new license application is filed when transactions result
in a change in the underlying control or operation of the
hospital, without affecting more routine transactions
involving hospital assets and governance.
POSITIONS
Support: Service Employees International Union (sponsor)
Congress of California Seniors
California Nurses Association
Health Access California
Oppose: None received
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