BILL ANALYSIS �
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Date of Hearing: April 30, 2014
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 1952 (Pan) - As Amended: April 2, 2014
Policy Committee: HealthVote:11-7
Urgency: No State Mandated Local Program:
No Reimbursable: No
SUMMARY
This bill requires nonprofit hospitals to provide a level of
charity care equal to at least 5 % of the nonprofit hospital's
net patient revenue, starting January 1, 2015. Additionally, this
bill:
1)Requires provisions be administered and enforced by the State
Department of Public Health (DPH).
2)Allows DPH to excuse compliance for current or future years if
a hospital's operating margin is less than 1% in a given fiscal
year.
3)Creates the Nonprofit Hospital Charity Care Penalty Fund
(Fund), makes funds available for expenditure upon
appropriation for the support of the Medi-Cal program and for
indigent care and safety net programs, and states legislative
intent that the fund be used to supplement, and not displace,
existing funding for Medi-Cal, indigent care, and safety net
programs.
4)Requires the director to assess an unspecified penalty to a
nonprofit hospital that does not meet the minimum charity care
requirement in a given fiscal year or a subsequent fiscal year,
and specifies what factors must be considered in determining
the amount of the penalty.
5)Allows DPH or DOJ to bring or intervene in a civil action to
collect fines and to recover the state's enforcement costs.
6)Requires any fine revenue to first be used to offset
administrative expenses, and requires fine revenue beyond those
necessary to offset expenses to be deposited in the Fund.
7)Requires DPH to adopt necessary regulations to govern the
reporting and collection of data and to ensure the
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confidentiality of any patient-specific data, and allows DPH,
Office of Statewide Health Planning and Development (OSHPD),
and the Attorney General (AG) to adopt regulations necessary to
implement the bill.
8)Requires DPH to inform the AG of hospital non-compliance.
9)Exempts children's hospitals, public hospitals, and nonprofit
hospitals affiliated with integrated health systems from the
charity care requirement.
10)Requires OSHPD to, by January 1, 2016, recommend a methodology
for applying the charity care requirement to nonprofit
hospitals affiliated with integrated health systems.
11)Allows DPH and the AG to assess fees in amounts designed to
cover the costs of administering and enforcing the bill's
provisions.
12)Defines charity care to include:
a) Provision of or financial support for specified
community-based programs demonstrated to reduce health care
costs.
b) Provision of or financial support for inpatient and
outpatient care.
c) Unreimbursed difference between the Medi-Cal
reimbursement a hospital receives, and Medicare
reimbursement levels.
FISCAL EFFECT
1)One-time costs to OSHPD/DPH of $1 million (Health Data Planning
Fund/GF) to issue regulations clarifying reporting and other
compliance processes, to modify the hospital reporting system,
and to ensure data integrity.
2)One-time costs to OSHPD in the range of several hundred
thousand dollars (Health Data Planning Fund) to study and
provide recommendations on a methodology for applying the
charity care requirement to nonprofit hospitals affiliated with
integrated health systems.
3)Fee-supported costs to OSHPD/DPH, likely in the hundreds of
thousands of dollars annually, for staff costs to oversee
reporting and compliance with new requirements (Nonprofit
Hospital Charity Care Penalty Fund). The bill provides DPH the
authority to assess fees in an amount adequate to cover
expenses, and also provides that penalty revenues can be used
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to reimburse state administrative costs.
4)Unknown penalty revenues, based on whether and how many
hospitals fail to meet charity care requirements. The bill
does not specify penalty amounts. Any penalty revenue
generated by this bill would first be used to pay state
administrative costs. The remaining revenues would likely be
used to offset GF costs for Medi-Cal services, resulting in
unknown GF savings.
5)This bill may result in indirect cost impacts on state and
local government that are beyond the scope of this analysis.
For example, if hospitals provide significantly more charity
care as a result of this bill, there may be a reduction in
demand for charity care funded by counties pursuant to their
obligations under Welfare and Institutions Code section 17000,
potentially leading to county and state GF savings. If
hospitals see compliance with this requirement as a significant
additional cost, they may attempt to increase prices to offset
these costs, leading to hospital price inflation that would
impact the state as a purchaser of health care. Indirect
impacts will vary greatly depending on local circumstances.
COMMENTS
1)Purpose . Existing law states "Public recognition of their
unique status has led to favorable tax treatment [of nonprofit
hospitals] by the government. In exchange, nonprofit hospitals
assume a social obligation to provide community benefits in the
public interest." Consistent with this finding, this bill
intends to ensure the state is getting adequate value in terms
of social benefit to justify nonprofit hospitals' tax-exempt
status. The author states this bill will accomplish that goal
by requiring nonprofit hospitals to provide charity care
calculated as 5% of net patient revenues and granting DPH the
authority to fine non-compliant hospitals.
2)Background . Hospital care is provided by public, nonprofit,
and for-profit hospitals. About 250 of Californias 390 private
hospitals, as well as a majority nationwide, are organized as
nonprofit, meaning they are exempt from most federal, state,
and local taxes. As described in more detail below, state law
requires non-profit hospitals to periodically perform community
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needs assessments and produce community benefit plans. It also
requires hospitals to have written charity care policies, and
to report a variety of financial information to OSHPD,
including the cost of charity care provided by the hospital.
The 2010 federal Patient Protection and Accountable Care Act
(ACA) imposed largely parallel federal requirements for
hospitals organized as 501(c)(3) nonprofits, requiring
hospitals to file a new section as part of their tax reporting
that describes hospital policies and activities related to
compliance with these requirements.
This bill modifies current legal concepts of charity care and
community benefit provided by nonprofit hospitals, and imposes
a minimum standard for the amount of benefits a hospital must
provide. In general, current law allows hospitals significant
flexibility as long as minimum qualitative standards are met
(such as having a written charity care policy, producing a
community benefits plan, and reporting to OSHPD). Hospitals are
generally complying with current law, regulation, and
accounting practices governing the provision and reporting of
these benefits.
a) Community benefit . Community benefit plans are developed
in consultation with their communities through a needs
assessment process. State law requires plans to be filed
with OSHPD, and they are available on the OSHPD web site.
However, it does not specify a standard format for community
benefit plans. Current law also prohibits community benefits
from being used to justify the tax-exempt status of a
hospital under state law.
Additionally, state law defines community benefit as a
hospital's activities that are intended to address community
needs and priorities primarily through disease prevention
and improvement of health status. It also includes charity
care as one of a number of possible community benefit
activities.
b) Charity care . Under current law and OSHPD guidance, what
constitutes charity care is clearly specified, and the total
cost of charity care is reported to OSHPD by each hospital.
State law requires hospitals, both for-profit and
non-profit, to have written charity care and discount
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payment policies. It allows specified individuals, generally
those in households below 350% of poverty, to apply to
hospitals for assistance pursuant to these policies. (It is
silent on what income levels must qualify for charity care
or discount payments). The term charity care only refers to
care provided pursuant to the written charity care policy,
meaning it only includes care to individuals unable to pay
who qualify for documented charity care discounts. Other
unreimbursed care, such as care provided to individuals able
but unwilling to pay, or care provided to individuals who do
not furnish adequate documentation to be eligible for
charity care pursuant to the written policy and for which
hospitals cannot collect payment, is considered bad debt and
is separately reported.
3)Nonprofit Status . Several entities are involved in assessing
nonprofit status. The Franchise Tax Board grants exemptions
from the state's corporate tax. Hospitals can apply through an
abbreviated process if they are exempt from federal taxes as a
501(c)(3). County assessors and the state Board of
Equalization grant general property tax exemptions. State law
specifies a property is eligible for a property tax exemption
if it is a hospital, is owned and operated for hospital
purposes, and is not operated for profit. Finally, the
Attorney General must consent in order for the sale of a
nonprofit hospital to go forward, after assessing a number of
factors. There are no specific requirements in current law
related to minimum amounts of charitable activity required to
meet nonprofit status-the assessment of nonprofit versus
for-profit tends to focus on the activities of the
organization, and whether the distribution of net earnings are
distributed to shareholders as occurs in for-profit hospitals
versus reinvested in the system.
A report by the Senate Office of Research notes that
historically, hospitals relied on charitable contributions and
government funding to support their mission. Today,
hospitals-including those that are nonprofit-are more business
oriented and are funded primarily by private health insurance
payments and government-funded coverage programs.
4)Scrutiny of Nonprofit Status . Given the benefits available to
tax-exempt hospitals, policymakers have been interested in
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determining the extent to which hospitals share the burden of
caring for uninsured individuals. Numerous watchdog agencies
have examined the tax-exempt status of nonprofit hospitals over
the past decade. In 2005, the federal Government
Accountability Office wrote, "current tax policy lacks specific
criteria with respect to tax exemptions for charitable entities
and detail on how that tax exemption is conferred. If these
criteria are articulated in accordance with desired goals,
standards could be established that would allow nonprofit
hospitals to be held accountable for providing services and
benefits to the public commensurate with their favored tax
status." The GAO found that nonprofit hospitals devoted only
slightly more of their patient operating expenses to
uncompensated care, on average, than their for-profit
counterparts. They also found the burden of uncompensated care
was not evenly distributed among nonprofit hospitals-a small
number of nonprofit hospitals provided substantially more
uncompensated care than other hospitals receiving the same tax
preference.
The California State Auditor (Auditor) conducted two audits on
the topic of tax exemption and nonprofit hospitals: one in
December of 2007 and another in August of 2012. Similar to the
GAO's findings, the Auditor concluded uncompensated care costs
provided by nonprofit and for-profit hospitals were not
significantly different, both including and excluding Medi-Cal
costs. The Auditor also found the associated economic value of
community benefits is not consistently reported. The 2007
audit recommended if the Legislature expects community benefit
plans to contain comparable data, it should require a
standardized reporting format. It also recommended, if the
Legislature intends tax exemptions to be granted based on
provision of a certain level of community benefit, it should
prescribe such standards. These recommendations have not been
adopted.
The 2012 audit echoed the 2007 recommendations, and also
recommended allowing OSHPD to assess penalties on hospitals
that do not submit required community benefits plans.
5)Support . Service Employees International Union/United
Healthcare Workers (SEIU-UHW), the sponsor of this bill,
believes public hospitals paid for by taxpayers cannot bear all
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of the costs of caring for the uninsured, and the public has a
right to expect a certain level of societal benefit in return
for the tax-exempt status given to nonprofit hospitals. This
bill is supported by the California Labor Federation for
similar reasons.
6)Opposition . The California Hospital Association and numerous
nonprofit hospitals oppose this bill, writing that it imposes a
one-size-fits-all charity care mandate across all diverse
communities in California. They argue hospitals need the
flexibility to design charity care and broader community
benefit programs that meet the unique needs and the populations
they serve. The California Chamber of Commerce and the
Alliance of Catholic Health Care also oppose this bill.
7)Staff Comments .
a) Hospital Finance Context and Impact of This Bill . This
bill redefines charity care to include other activities
previously excluded from this definition, and newly imposes
a minimum standard. Given the uniqueness of each hospital
and local community, the standards imposed by this bill will
have different effects on each nonprofit hospital,
potentially ranging from no impact to a significant impact.
It is clear some hospitals that provide significant charity
care would easily meet the standard. Other hospitals may
comply with the law by increasing spending on certain
programs, and others may project the standard is not
achievable and pay a penalty instead.
As a result of numerous recent changes to the health care
marketplace, such as the expansion of Medi-Cal to an
additional 2 million people and increased coverage of
individuals through Covered California plans, hospitals in
general are operating in an uncertain financial environment
as their "payer mix" changes. At the same time, hospital
pricing is under scrutiny and hospitals are under intense
pressure from purchasers, payers, and the public to
implement new technology, improve patient safety, enhance
operational efficiency, adopt new payment models, and reduce
costs.
Furthermore, recent changes related to the ACA and expansion
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of Medi-Cal eligibility, including an option hospitals can
use to deem individuals presumptively eligible for Medi-Cal,
are likely to have dramatic impacts on the demand for
charity care, making it difficult for some hospitals to plan
to provide a specific amount of charity care in a rapidly
changing health insurance marketplace. Finally, because the
bill creates new definitions of what constitutes charity
care and community benefit, even individual hospitals may
have difficulty projecting how this bill affects them and
whether they are compliant with the standard. For example,
there may be uncertainty about whether currently provided
community benefits meet the bill's new standards. This bill
does not specify penalty amounts for noncompliance, adding
to uncertainty about this bill's impact.
b) Definitions of Charity Care and Community Benefit . State
law defines community benefit as a hospital's activities
that are intended to address community needs and priorities,
primarily through disease prevention and improvement of
health status. It also includes charity care as one of a
number of possible community benefit activities. This bill
flips the current-law definition, and instead redefines
community benefit programs as one of a number of possible
charity care activities (while keeping existing definitions
in other parts of the Health and Safety Code intact).
Clarifying these definitions and/or harmonizing with current
law that defines these terms for other purposes could avoid
confusion and maintain the integrity of OSHPD data reporting
on what is currently considered charity care.
c) Definition of Unreimbursed Costs. There appears to be a
conflict between the definition of unreimbursed costs and
the definition of charity care, which is defined as
inclusive of specified unreimbursed costs, including the
unreimbursed portion of costs of providing services to
patients insured by Medi-Cal. The bill defines unreimbursed
costs to specifically exclude the provision of services for
which the nonprofit hospital receives reimbursement from any
source and for which the nonprofit hospital has an
expectation at the time the services or items are provided
that any third-party payer will pay in part or in whole.
Thus, according to the definition of unreimbursed costs, any
services for which payment was received by Medi-Cal or other
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payer should not be included as unreimbursed costs. If it
is the intent to include the unreimbursed portion of costs
of providing services to patients insured by Medi-Cal, the
definitions should be changed accordingly.
d) Expenditure of Penalty Funds . The bill states it is the
intent of the Legislature that moneys in the fund be used to
supplement, and not displace, existing funding for the
Medi-Cal program and for indigent care and safety net
programs. Practically speaking, this means any penalty
revenue generated by the bill would likely be available to
offset the state's growing GF costs for Medi-Cal. This
would provide a GF benefit as costs grow, but not
necessarily provide increased funding for Medi-Cal. If the
intent is to guarantee penalty funds are spent on certain
purposes, this would need to be clarified.
e) Requirement for Cost Savings . This bill's requirement
that community benefits programs must be "demonstrated to
reduce community health care costs," in order for
expenditures on these benefits to count towards the minimum
charity care threshold, sets a fairly high bar. It is
difficult to conclusively prove specific programs will
reduce community health care costs. Additionally, some of
the research and administrative costs to meet that burden of
proof would be borne by DPH, who would have to verify each
community benefits program met the standard for inclusion.
f) Aggressive Timeline . This bill's requirements are
effective January 1, 2015. This would require many
hospitals that not may currently be meeting standards to
reengineer financial plans for their current fiscal years or
risk unspecified penalties. As this bill appears to
encourage significant operational and policy changes at
certain hospitals the author believes should provide a
higher level of charity care, a delayed implementation date
of phase-in of these requirements may be more appropriate.
g) Application to Hospitals with Low Operating Margins . This
bill allows DPH to excuse compliance for current or future
years if a hospital's operating margin is less than 1% in a
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given fiscal year, but does not guarantee a hospital will be
excused from compliance even in a dire financial situation.
Given the importance of hospital financial viability, the
author may wish to consider providing more clarity and
certainty about the timeline, petition process, and
decision-making related to the application of the charity
care requirement to hospitals with low operating margins.
h) Application to Hospital Systems . Some hospital systems
offset costs for high levels of charity care in one hospital
with revenues from more profitable hospitals in the system.
While this bill would technically allow this transfer to
count towards a hospital's minimum charity care requirement,
if the intent is to allow such transfers, it should be
specifically authorized.
i) Standardized Reporting . As mentioned above, two separate
state audits recommended if the Legislature expects
community benefit plans to contain comparable data, it
should require a standardized reporting format. This bill
requires DPH to adopt regulations to govern the reporting
and collection of data, but does not explicitly require DPH
to standardize reporting. If the intent is to standardize a
methodology for estimating the economic value of community
benefits, this should be explicit.
8)Related Legislation .
a) AB 503 (Wieckowski and Bonta) specifies requirements for
community benefit and charity care, and requires OSPHD to
develop a standardized methodology for estimating the
economic value of community benefits. AB 503 is currently
pending in the Senate Health Committee.
b) AB 975 (Wieckowski and Bonta) of 2013 was similar to AB
503. AB 975 failed passage on the Assembly Floor.
c) SB 1276 (Hern�ndez), pending on the Senate floor, revises
eligibility for hospital charity care policies and defines
requirements for reasonable payment plans.
Analysis Prepared by : Lisa Murawski / APPR. / (916) 319-2081
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