BILL ANALYSIS �
------------------------------------------------------------
|SENATE RULES COMMITTEE | SB 408|
|Office of Senate Floor Analyses | |
|1020 N Street, Suite 524 | |
|(916) 445-6614 Fax: (916) | |
|327-4478 | |
------------------------------------------------------------
THIRD READING
Bill No: SB 408
Author: Hernandez (D)
Amended: 5/31/11
Vote: 21
SENATE HEALTH COMMITTEE : 6-3, 4/6/11
AYES: Hernandez, Alquist, De Le�n, DeSaulnier, Rubio, Wolk
NOES: Strickland, Anderson, Blakeslee
SENATE APPROPRIATIONS COMMITTEE : 6-2, 5/26/11
AYES: Kehoe, Alquist, Lieu, Pavley, Price, Steinberg
NOES: Walters, Runner
NO VOTE RECORDED: Emmerson
SUBJECT : Health facilities: licensure
SOURCE : Service Employees International Union
DIGEST : This bill requires the holder of an existing
license of a general acute care, acute psychiatric, and
special hospital, when it has a change of ownership to
notify and/or file a new license application, as specified
ANALYSIS :
Existing law:
1. Provides for the licensing and regulation of health
facilities, including general acute care hospitals,
acute psychiatric hospitals, and special hospitals by
CONTINUED
SB 408
Page
2
the Department of Public Health (DPH).
2. Requires any person desiring a license for a health
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.
3. 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.)
4. 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:
A. 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
B. 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:
1. Defines "change of ownership" to mean:
A. For a partnership, the removal, addition, or
substitution of a partner.
B. For an unincorporated sole proprietorship, the
transfer of title and property to another person.
C. For a corporation, the merger of the applicant's
or provider's corporation into another one, the
SB 408
Page
3
consolidation of two or more corporations; the
transfer of corporate stock or the merger of another
corporation into the applicant's or provider's
corporation does not constitute a change in
ownership.
D. For a lease, the lease of all or part of an
applicant's or provider's facility.
2. Defines "change in ownership" to mean a transaction
where there is a change of ownership in a general acute
care, acute psychiatric, or special hospital and any of
the following would occur:
A. A sale, transfer, lease, exchange, conveyance, or
other disposal of a limited partnership interest,
corporate shares, or limited liability company
interest representing at least 20 percent of all
ownership interests in the hospital or in the current
licenseholder.
B. The merger of an entity that owns a hospital that
does not result in a change in the taxpayer
identification number of the licenseholder.
C. A substitution of a new corporate member or member
of the governing body, or any arrangement, written or
oral, that would transfer voting control of, or
responsibility for, or governance of, a hospital.
3. Defines "change in control interest" to mean a
transaction where any of the following, except a change
of ownership, or change in ownership, occurs:
A. A sale, transfer, lease, exchange, conveyance, or
other disposal of a limited partnership interest,
corporate shares, or limited liability company
interest representing at least 10 percent of all
ownership interest in a general acute care, acute
psychiatric, or a special hospital, or in the license
holder, but that represents less than 20 percent of
the ownership interests in the health facility or
licenseholder.
SB 408
Page
4
B. A change in any member of the governing body or
principal officers of a hospital that does not
transfer voting control of, or responsibility for,
the health facility.
4. Requires that a new license application for a health
facility, including hospitals mentioned above, skilled
nursing facilities, and intermediate care facilities,
should be filed when there is a change of ownership, as
defined, in the health facility.
5. Requires that at least 45 days prior to a change of
ownership, change in ownership, or change in control
interest in a general acute care, acute psychiatric, or
a special hospital, a notice of change be filed with the
DPH:
A. If the transaction is a change in ownership, the
facility would be required to file a new application
with DPH.
B. If the transaction is a change of control
interest, a facility would be required to file a DPH
form HS 215A with the notice.
6. Permits DPH to implement these provisions by means of
all facility letters.
Background
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
SB 408
Page
5
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
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.
SB 408
Page
6
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.
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
SB 408
Page
7
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
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.
Comment
Effect on DPH:
Existing California regulations require hospitals to inform
DPH using a Form 215A of every change or corporate
reorganization including individual information on
administrators, owners, directors, board members, corporate
officers, LLC members/managers, a management company, a
parent organization, and individuals having 10 percent or
more interest in the licensee (for-profit) or parent
organization.
This bill causes a hospital to file a change of ownership
application for every Form 215A filing. DPH receives
approximately 500 annually. Additionally, a hospital would
have to file a change of ownership application for a
variety of everyday hospital operations, such as selling
radiology equipment or an out-sourcing of hospital billing
or dietary services, provided they exceed $3 million.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
SB 408
Page
8
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
DPH staff to process Unknown, potentially
significant, likely Special*
Additional applicationsin the hundreds of thousands to
millions of dollars
* Department of Public Health Licensing and Certification
Program Fund
SUPPORT : (Verified 5/27/11)
Service Employees International Union (source)
California Nurses Association
Congress of California Seniors
Health Access California
ARGUMENTS IN SUPPORT : SEIU, this bill's sponsor, states
that although existing 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 this bill 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.
CTW:kc 5/31/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
**** END ****
SB 408
Page
9