BILL ANALYSIS �
SB 408
Page 1
Date of Hearing: July 5, 2011
ASSEMBLY COMMITTEE ON HEALTH
William W. Monning, Chair
SB 408 (Ed Hernandez) - As Amended: June 28, 2011
SENATE VOTE : 25-15
SUBJECT : Health facilities: licensure.
SUMMARY : Requires a new health facility license application to
be filed for a health facility, as defined, when there is a
change of ownership, as defined, or a change in ownership, as
defined. Requires a prescribed notice to be filed with the
Department of Public Health (DPH) prior to a change in
ownership, change of ownership, or change in control interest,
as defined, of certain health facilities. Specifically, this
bill :
1)Defines "change of ownership" to mean any of the following:
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 corporation, or the
consolidation of two or more corporations, resulting in the
creation of a new corporation. Specifies that 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; or,
d) For a lease, the lease of all or part of an applicant's
or provider's facility constitutes a change in ownership of
the leased portion.
2)Defines "change in ownership" to mean a transaction where any
of the following occurs:
a) A sale, transfer, lease, exchange, conveyance, or other
disposal of a limited partnership interest, corporate
shares, or limited liability company interest representing
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at least 20% of all ownership interests in a general acute
care hospital, acute psychiatric hospital, or special
hospital or in the current license holder;
b) The merger of an entity that owns or operates a general
acute care hospital, acute psychiatric hospital, or special
hospital that does not result in a change in the taxpayer
identification number of the license holder; or,
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 a general acute care
hospital, acute psychiatric hospital or special hospital.
Prohibits a substitution of a new corporate member or
member of the governing body from constituting a change in
ownership when the substitution occurs in the usual regular
course of the activities of a general acute care hospital,
acute psychiatric hospital or special 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% of all ownership interest in a general acute
care hospital, acute psychiatric hospital, or special
hospital, or in the license holder, but that represents
less than 20% of the ownership interests in the health
facility; or,
b) A change in any member of the governing body or
principal officers of a general acute care hospital,
psychiatric hospital, or special hospital that does not
transfer voting control of the health facility.
4)Requires a new license application for a general acute care
hospital, psychiatric hospital, skilled nursing facility,
intermediate care facility, or special hospital to be filed
when there is a change of ownership.
5)Requires a notice of change to be filed with DPH, at least 45
days prior to a change in ownership or change in control
interest in a general acute care hospital, psychiatric
hospital, or special hospital. Requires that a new license
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application be filed with the notice if the transaction is a
"change in ownership." Requires DPH form HS 215A to be filed
with the notice if the transaction is a change of control
interest.
EXISTING LAW :
1)Provides for the licensing and regulation of health
facilities, including general acute care hospitals, acute
psychiatric hospitals, and special hospitals by 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 (AG's) administration
of charitable trust laws, a nonprofit corporation that
operates or controls a health facility to obtain the consent
of the AG 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 nonprofit entity.
FISCAL EFFECT : According to the Senate Appropriations
Committee, this bill will result in unknown, potentially
significant costs, likely in the hundreds of thousands to
millions of dollars to the DPH Licensing and Certification
Program Fund for DPH staff to process additional applications.
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COMMENTS :
1)PURPOSE OF THIS BILL . According to the author, this bill
closes a loophole in hospital licensing laws to ensure that
when a hospital changes ownership or when day-to-day
operations of a health facility are handed over to a new
individual or entity, the new owner must obtain a license to
operate the facility. The author asserts that the licensing
process through DPH is designed to ensure that those operating
a health facility in the state are decent and have a history
of complying with the law. According to the author, a recent
example of where the loophole was employed to avoid the
licensing process was Prime's acquisition of Alvarado Hospital
from Plymouth Health, LLC (Plymouth) in November 2010. The
author is concerned that the acquisition of Alvarado Hospital
could serve as a blueprint for other operators to acquire
hospitals and avoid California's licensing process. The
author states this bill 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.
2)DPH 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 DPH's 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." 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.
3)PRIME'S ACQUISITION OF ALVARADO HOSPITAL . In November 2010,
Prime, the largest for-profit hospital system in California,
announced its acquisition of Alvarado Hospital, a general
acute care hospital in San Diego. While Alvarado Hospital had
been owned by Plymouth, a privately held company since January
2007, the entity that held the license to operate the hospital
was Alvarado Hospital, LLC. Even though Prime planned to be
the new owner and operator of Alvarado Hospital, the
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acquisition of the hospital was structured so that Prime
transferred 100% of the membership interests from Plymouth to
Prime retaining the name as the license holder as Alvarado
Hospital, LLC. At the time of the acquisition, Prime stated
that because it had acquired Alvarado Hospital by transfer of
control of Alvarado Hospital, LLC, without changing the name
of the license holder, the transaction did not constitute a
change of ownership requiring approval from DPH.
In November 2010, Assemblymember Marty Block sent a letter
asking DPH to deny approval to Prime to take control of the
hospital on the grounds that the acquisition constituted a
change of ownership. Legal counsel representing Service
Employees International Union (SEIU) 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 SEIU's legal counsel that it lacked authority to require a
change of ownership application because, even though 100% of
the membership interests in Alvarado Hospital had been
transferred from Plymouth to Prime, the named licensee,
Alvarado Hospital, LLC would remain the same as before the
transfer.
4)ACQUISITION OF NON-PROFIT HOSPITALS . Under California law,
nonprofit corporations are to be organized for charitable or
public purposes. Due to the federal and State tax-exempt
benefits that nonprofit corporations receive, there is another
layer of scrutiny when nonprofit hospitals are acquired by
for-profit entities. California law requires the AG's review
and consent to any sale or transfer of a health facility owned
or operated by a nonprofit corporation whose assets are held
in public trust. The AG's review process includes public
meetings and, when necessary, preparation of expert reports.
The AG's decision often requires the continuation of existing
levels of charity care, continued operation of emergency rooms
and other actions necessary to avoid adverse effects on health
care in the local community. Because both Prime and Plymouth
are for-profit entities, the Alvarado Hospital acquisition was
not subject to the AG's review.
5)SUPPORT . SEIU and the Congress of California Seniors (CCS),
the sponsors of this bill, write in support that although
existing law requires any prospective hospital operator to
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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 for the hospital
itself. As a result, SEIU and CCS maintain that, even though
DPH is tasked with ensuing that hospital operators are of
reputable and responsible character, the requirement for new
operators to obtain a new license can be circumvented. The
California Nurses Association, the United Nurses Associations
of California/Union of Health Care Professionals, and Health
Access California all write in support of this bill that it
closes a loophole in hospital licensing laws to make sure that
when a hospital changes ownership or when the 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. Supporters assert that this loophole was exploited
by Prime. All supporters maintain that this loophole
undermines California law designed to protect patients and
improve quality of care.
6)OPPOSITION . The California Hospital Association (CHA) writes
in opposition that this bill would change existing law to
require a new 800-page license application for a myriad of
transactions that occur in the normal course of business,
adding to the complex administrative burden on hospitals and
the regulators without any demonstrable purpose or gain. CHA
cites the following examples where a hospital would be
required to submit a full application containing detailed
information about the operations of the hospital: a) a
corporation that owns a hospital that has another entity merge
into it, without making changes whatsoever to an existing
hospital that it owns; b) a 1% nonprofit general member of a
corporation that owns a hospital changes, and the corporation
that owns the hospital stays exactly the same, and the
operations of the hospital stay exactly the same; c) the
election of new district board members despite the fact that
no additional changes are made to the district hospital; and,
d) changes made in the hospital board members that are
unanticipated or out of the routine board composition cycle.
CHA argues that in each of these instances, DPH would be
required to review and analyze hundreds of pages of
duplicative documentation and that the hospital license
application largely consists of information that has nothing
to do with the changes advanced by the transaction and will
trigger additional costs in licensing fees with every
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transaction.
CHA maintains that various state and federal agencies and
organizations responsible for the oversight of quality care
continue to survey hospitals regardless of the business
transactions that are taking place and the alleged concerns of
the sponsor can be addressed by the regulator during the
periodic license review processes and the unscheduled
complaint driven review processes. According to CHA, the
consequences of this bill to both hospitals and regulators are
it diverts scarce and limited resources and the burden
directly conflicts with efficient provision of high quality
care.
7)PREVIOUS LEGISLATION .
a) AB 330 (Gordon), Chapter 507, Statutes of 2005, requires
the Department of Health Services (now DPH) to assess the
character and operational history of applicants seeking
licensure for acute care and psychiatric hospitals.
b) 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 AG 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.
c) AB 254 (Cedillo), Chapter 850, Statutes of 1999, imposes
similar requirements as those in AB 3101 for transfers of
assets or transfers of control of nonprofit hospitals to
other nonprofit entities.
8)TECHNICAL AMENDMENT . On page 3, line 36 strike "change of
control interest" and insert "change in control interest."
REGISTERED SUPPORT / OPPOSITION :
Support
Service Employees International Union (co-sponsor)
Congress of California Seniors (co-sponsor)
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California Nurses Association
Consumer Federation of California
Health Access California
United Nurses Associations of California/Union of Health Care
Professionals
Opposition
California Hospital Association
Analysis Prepared by : Tanya Robinson-Taylor / HEALTH / (916)
319-2097