Existing law establishes the State Department of Public Health and sets forth its powers and duties, including, but not limited to, the licensure and regulation of primary care clinics and specialty clinics. Violation of these provisions is a crime.

Existing law, until the department adopts regulations relating to the provision of services by a chronic dialysis clinic, a surgical clinic, or a rehabilitation clinic, requires those clinics to comply with prescribed federal certification standards in effect immediately preceding January 1, 2013. These provisions become inoperative on January 1, 2018.

This bill would instead make those provisions inoperative on January 1, 2019. By extending the duration of a crime, the bill would impose a state-mandated local program.

Existing law requires the State Department of Public Health and the State Department of Developmental Services to jointly develop and implement licensing regulations appropriate for an intermediate care facility/developmentally disabled-nursing and an intermediate care facility/developmentally disabled-continuous nursing. Existing law, until the departments adopt those regulations, requires that the facilities comply with applicable federal certification standards for intermediate care facilities for individuals with intellectual disabilities in effect immediately preceding January 1, 2013. These provisions would become inoperative on January 1, 2018.

This bill would instead make those provisions inoperative on January 1, 2019. 2020. By extending the duration of a crime, this bill would impose a state-mandated local crime.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Existing law establishes the State Department of Public Health and sets forth its powers and duties, including, but not limited to, the licensure and regulation of primary care clinics and specialty clinics. Violation of these provisions is a crime.

Existing law, until the department adopts regulations relating to the provision of services by a chronic dialysis clinic, a surgical clinic, or a rehabilitation clinic, requires those clinics to comply with prescribed federal certification standards in effect immediately preceding January 1, 2013. These provisions become inoperative on January 1, 2018.

This bill would instead make those provisions inoperative on January 1, 2019. By extending the duration of a crime, the bill would impose a state-mandated local program.

Existing law requires the State Department of Public Health and the State Department of Developmental Services to jointly develop and implement licensing regulations appropriate for an intermediate care facility/developmentally disabled-nursing and an intermediate care facility/developmentally disabled-continuous nursing. Existing law, until the departments adopt those regulations, requires that the facilities comply with applicable federal certification standards for intermediate care facilities for individuals with intellectual disabilities in effect immediately preceding January 1, 2013. These provisions would become inoperative on January 1, 2018.

This bill would instead make those provisions inoperative on January 1, 2019. By extending the duration of a crime, this bill would impose a state-mandated local crime.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

 THIRD READING  

Bill No: AB 251

Author:

:

Vote:

SENATE HEALTH COMMITTEE: 6-1, 7/12/17

AYES: Hernandez, Atkins, Leyva, Mitchell, Monning, Newman

NOES: Nguyen

NO VOTE RECORDED: Nielsen, Roth

SENATE APPROPRIATIONS COMMITTEE: 5-2, 9/1/17

AYES: Lara, Beall, Bradford, Hill, Wiener

NOES: Bates, Nielsen

ASSEMBLY FLOOR: Not relevant

SUBJECT:

SOURCE: SEIU California

DIGEST:

This bill establishes a medical loss ratio for chronic dialysis clinics that would require these clinics to spend at least 85% of their revenue on direct patient care, health care quality improvement, and taxes and license fees, and if the clinics do not meet this ratio, to issue rebates to non-government payers in an amount sufficient to meet the minimum spending of 85%.

ANALYSIS:

Existing law:

1. Licenses and regulates various clinics by Department of Public Health (DPH), including primary care clinics and specialty clinics, which include: surgical clinics, chronic dialysis clinics (CDCs), and rehabilitation clinics. Requires DPH to adopt reasonable rules and regulations as may be necessary to enable DPH to carry out the purposes of provisions of law governing the various types of clinics licensed by DPH.
2. Requires every health care service plan and health insurer that issues, sells, renews, or offers health plan contracts or policies for health care coverage, including a grandfathered health plan or insurer, but not including specialized health plan contracts or policies, to provide an annual rebate to each enrollee under such coverage if certain conditions exist, relating to the following medical loss ratio (MLRs): 85% for a health plan or health insurer in the large group market; or, 80% for a health plan or health insurer in the small group or individual market.

This bill:

1. Requires a CDC, for each fiscal year starting on or after January 1, 2019, to submit to DPH a report concerning the total treatment revenue of the CDC for the fiscal year and the amounts and percentages of that total treatment revenue the CDC has expended on all of the following:
   1. Direct patient care services costs, as defined in this bill;
   2. Health care quality improvement costs, as defined in this bill;
   3. Federal and state taxes, and facility license fees; and,
   4. All other costs.
2. Requires a CDC to annually submit the report required in 1) above on a schedule, in a format, and on a form prescribed by DPH, provided that the CDC is required to submit the information no later than 150 days after the end of its fiscal year. Requires the chief executive officer or administrator of the CDC, as these positions are defined, to personally certify that he or she is satisfied, after review, that the submitted report is accurate and complete.
3. Requires a CDC, for each fiscal year starting on or after January 1, 2019, to calculate the costs of direct patient care services, health care quality improvement, and federal and state taxes and license fees, and to also calculate the total treatment revenue.
4. Requires a CDC, if the costs calculated in 3) above total less than 85% of treatment revenue, to issue a rebate and a reduction in billed amount to payers, other than Medicare or any other government payer, on a pro rata basis, in an amount that is sufficient to result in a ratio of at least 85% of costs to treatment revenue after subtracting rebates and reductions in billed amounts to payers issued in the same fiscal year, as follows:
   1. Requires the CDC to issue the rebate or reduction in billed amount together with interest of 10% per annum, which accrues from the last day of the fiscal year to which the rebate or reduction relates;
   2. Requires the CDC, where a rebate must be paid or an amount billed but not yet paid must be reduced, and more than one payer is responsible, to divide and distribute the total required rebate or reduction in billed amounts among the payers consistent with the payers’ relative obligations to pay for the treatment; and,
   3. Requires the CDC to issue the rebate or reduction in billed amount no later than 210 days after the end of the fiscal year to which the rebate or reduction relates.
5. Defines “direct patient care services costs,” for purposes of this bill, as costs claimed by a CDC in specified categories as described in a federal Centers for Medicare and Medicaid Services (CMS) cost report worksheet, which include the following:
   1. Capital-related costs on buildings and fixtures;
   2. Capital-related costs on moveable equipment such as office furniture (not dialysis machines or support equipment);
   3. Operation and maintenance of the plant and equipment;
   4. Housekeeping, and laundry and linen;
   5. Capital-related costs for moveable equipment other than those in b) above, such as dialysis machines and support equipment;
   6. Salaries of all personnel who furnish direct care to patients;
   7. Cost of employee health and wellness benefits for direct patient care;
   8. Cost of dialysis supplies;
   9. Cost of laboratory services;
   10. Cost of drugs used in furnishing dialysis services;
   11. Medical records;
   12. Cost of physician services;
   13. Cost of whole blood and red blood cells;
   14. Vaccine costs; and,
   15. Other costs related to any reimbursable cost center not otherwise specified above.
6. Defines “health care quality improvement costs,” for purposes of this bill, as costs required to maintain, access, or exchange electronic health information, support health information technologies, train nonmanagerial personnel engaged in direct patient care, and provide patient-centered education and counseling.
7. Permits DPH, upon request by a CDC, to deem other expenditures not specified in 6) above to have been made for health quality improvements if all of the following apply:
   1. The CDC shows that its expenditure was for activities or items designed to improve health quality and increase the likelihood of desired health outcomes in ways that are capable of being objectively measured and of producing verifiable results and achievements;
   2. The CDC actually paid the cost; and,
   3. The cost was spent on services offered at the CDC to chronic dialysis patients.
8. Permits DPH to allow the CDC to apply a health care quality improvement cost incurred in one year proportionally over a period not to exceed five years upon a finding that the CDC has demonstrated that the cost is reasonably expected to provide health care quality improvements for that period.
9. Defines “payer,” for purposes of this bill, as the person or persons who paid or are financially responsible for payments for a treatment provided to a particular patient, and includes the patient or other individuals, primary insurers, secondary insurers, and other entities, including Medicare and any other federal, state, county, city, or other local government payer.
10. Defines “treatment,” for purposes of this bill, as each instance when the CDC provides services to a patient for which costs are reported to DPH pursuant to this bill.
11. Defines “treatment revenue,” for purposes of this bill, as the total amount the CDC collects from payers for treatments.
12. Requires a CDC, for each fiscal year starting on or after January 1, 2019, to maintain and provide to DPH, on a form and schedule described by DPH, a report of all rebates and reductions it issue under the provisions of this bill, including a description of each instance when the rebate or reduction was not timely issued in full, and the reasons and circumstances. Requires the chief executive officer or administrator of the CDC to personally certify that he or she is satisfied, after review, that all submitted information is accurate and complete.
13. States the intent of the Legislature that California taxpayers not be financially responsible for implementation and enforcement of this bill, and in order to effectuate this intent, requires DPH to take into account all costs associated with this bill when calculating and assessing licensing fees.
14. Specifies that nothing in this bill is intended to affect licensed hospitals.
15. Specifies that the provisions of this bill are severable, and that if any provision of this bill is held invalid, that invalidity is prohibited from affecting other provisions that can be given effect without the invalid provision.

Comments

1. Author’s statement. According to the author, California’s dialysis clinics have little incentive to constrain prices or invest in quality care. Two multinational companies control more than 70% of California’s chronic hemodialysis market, and this lack of competition, combined with a steady stream of new patients who need dialysis in order survive, means that dialysis companies have the market power to demand outrageous prices. California has a long history of regulating uncompetitive markets, and it is time for California to act on behalf of dialysis patients and all consumers. This bill will improve the quality and reduce the cost of dialysis treatment by applying a MLR to dialysis clinics. This bill will require dialysis clinics to spend at least 85% of their treatment revenue on direct patient care, quality improvements, taxes, and licensure fees, which will encourage dialysis companies to invest in higher quality care while preventing outrageous markups.
2. Dialysis and CDCs. A CDC provides care for the treatment of patients with end-stage renal disease (ESRD), including renal dialysis services. ESRD, also known as end-stage kidney disease or kidney failure, is when the kidneys, which remove waste and excess water from the body, are no longer able to work at a level needed for day-to-day life. According to DPH, there are currently 542 licensed and CMS-certified CDCs in California. The two leading dialysis companies, German-based Fresenius Medical Care and Colorado-based DaVita Healthcare Partners, control about 70% of the U.S. market, and a slightly higher percentage in California (72%). According to the United States Renal Data System, these two for-profit companies continue to grow relative to other providers, and together contributed 81% of the new dialysis units added between 2011 and 2014. In addition, both of these large providers are vertically integrated, with both companies operating a dialysis-related laboratory, a pharmacy, and other related services and products.
3. Payer mixes and profit margins. In 1973, Congress expanded the Medicare program to include coverage for people requiring dialysis services. If a dialysis patient has private insurance, that payer is required to cover services for the first 30 months, at which point Medicare becomes the primary payer. A March 2016 article in Nephrology News and Issues puts the national average payer mix at 88% Medicare, 8% Medicaid, and 4% commercial. According to DaVita’s 2016 annual report, 88% of their patients were either on Medicare or Medicaid. According to the 2016 report of the Medicare Payment Advisory Commission, a nonpartisan legislative branch that provides Congress with policy advice on the Medicare program, it estimated the aggregate profit margin for Medicare patients at CDCs to be 2.1%, and projected a 0.8% margin in 2016. However, these profit margins varied significantly based on treatment volume, with facilities with the lowest volume having Medicare profit margins of -15.4% (negative margin), while facilities with the highest volume of patients having profit margins of 8.1% or greater. There was also a significant difference between rural and urban CDCs, but this is mainly attributable to lower patient volume in rural facilities. Specific payment rates from commercial plans are not publicly available, but they are reportedly several times as much as Medicare rates. According to DaVita’s 2016 annual report, while Medicare and Medicaid patients represented 88% of their patients, these governmental payers only accounted for 64% of their dialysis revenue. In contrast, approximately 12% of their patients have private commercial insurance, but these patients account for 36% of their dialysis revenue. According to DaVita’s report, nearly all of their net earnings from dialysis and related services are derived from commercial payers. With regard to overall profit margins, the author and sponsor used utilization data reported by CDCs to the Office of Statewide Health Planning and Development to calculate average profit margins. According to the calculations provided by the author, the dialysis industry had an operating margin of 19.0% in 2014, 19.3% in 2015, and 17.1% in 2016 (based on preliminary data). According to DaVita’s 2016 report, 67% of 2016 revenue went to “patient care costs,” with “general and administrative” at 8% of revenue and “depreciation and amortization” at 5% of revenue making up the remainder of operating expenses. According to DaVita’s report, its operating income was 19% of revenue for 2016.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

According to the Senate Appropriations Committee:

• Likely one-time costs of $150,000 to $300,000 for the development and adoption of regulations by DPH (Licensing and Certification Fund). This bill requires DPH to adopt implementing regulations within 180 days. DPH indicates that it may take up to three years to fully develop and adopt the regulations.
• Ongoing costs of $780,000 per year for DPH to review financial information submitted by CDCs to verify whether the clinic is meeting the required MLR or has paid out the appropriate rebates (Licensing and Certification Fund). DPH indicates that it will need five additional positions (plus accompanying management and support staff) to analyze the detailed financial data submitted by each CDC, to ensure compliance with the bill’s requirements.
• Uncertain impact on state and local health care spending through CalPERS health insurance. This bill has the potential to increase health care spending on dialysis services by commercial payers. To the extent that would happen, the state and local governments may face higher health care costs.

SUPPORT: (Verified 8/30/17)

SEIU California (source)

California Labor Federation

United Nurses Associations of California/Union of Health Care Professionals

OPPOSITION: (Verified 8/30/17)

California Dialysis Council

California Hospital Association

DaVita

Fresenius Medical Care North America

Satellite Healthcare

U.S. Renal Care

ARGUMENTS IN SUPPORT: This bill is sponsored by SEIU California, which states that it would incentivize quality care and rein in the price of dialysis treatment by requiring CDCs to spend at least 85% of their revenue on direct patient care expenses, quality improvements, taxes and licensure fees. According to SEIU, nationally and in California, the industry is controlled by two for-profit companies – Fresenius Medical Care and DaVita. SEIU California states that these two companies own or operate 72% of CDCs and account for 75% of revenue received by CDCs. As their market share has grown over the past several years, SEIU California states that these two companies have taken advantage of that market power to drive up dialysis prices, particularly for patients with private insurance. SEIU California states that California has recognized other failed markets and stepped in to protect consumers. According to SEIU California, the state regulates prices and markups for water, electricity, casualty insurance, payday lenders, and other industries where companies would otherwise be able to raise prices and reap outrageous profits. SEIU California states that this is a sensible and reasonable step toward ensuring that dialysis companies invest in patient care rather than using their monopolistic power to gouge consumers. The United Nurses Associations of California/Union of Health Care Professionals (UNAC/UHCP) states in support that dialysis is a critical, life-saving treatment that must continue to remain accessible to all, and that this bill will provide critical information about the percentage of CDC revenue that actually goes toward patient care. According to UNAC/UHCP, a 15% profit margin is still very profitable in the context of health care facilities. UNAC/UHCP states that hospitals, nursing homes and other health facilities often operate at a margin of only 4 to 5%, so CDC will remain very profitable under this bill.

ARGUMENTS IN OPPOSITION: Fresenius Medical Care North America (FMCNA) states in opposition that demand for dialysis has more than doubled since 1997, and this bill causes dialysis providers to put any plans of opening new facilities to meet this growing need on hold. According to FMCNA, this bill requires an MLR to be applied to CDCs, with rebates paid to non-government payers if the MLR is not met. FMCNA states that this bill has benefit only for the non-governmental payers, as the governmental payers are excluded from the rebates, so it saves taxpayers no money. FMCNA states that the private insurance industry is capable of looking out for its own interests through the contracts it negotiates. FMCNA also states that an MLR is not the right tool to address concerns about quality of care because it encourages arbitrary spending rather than investment in quality. According to FMCNA, the choice imposed by this bill – meet an 85% MLR or give back money – is likely to result in unintended consequences. For example, FMCNA states that a CDC could raise its MLR by paying bonuses to its physicians or purchasing new office space, even if it did not expect those expenditures to improve the quality of care. FMCNA states that while the application of an MLR to health plans is common, it has not identified any other situation in which an MLR provision has been applied to a provider. DaVita also opposes this bill, stating that 90% of patients treated at a CDC are Medicare or Medi-Cal beneficiaries, and that these program reimburse less than what it costs a clinic to provide treatment. According to DaVita, a very small percentage of a clinic’s patient mix, around 10%, provide reimbursement at levels that allow a clinic to balance out the underfunding that occurs on the government side, such that it can remain solvent. According to DaVita, if CDCs were forced to issue rebates to private insurers, many of California’s CDC would shut down, and the effect on patient care would be disastrous as more and more individuals with kidney failure would be forced to seek treatment in hospital emergency rooms. DaVita notes that this bill could result in the transfer of government reimbursement dollars received by a CDC to private insurance plans, since total treatment revenue derives from all payers but rebates would only be issued to non-governmental payers. Finally, DaVita states that if California would like to regulate the profit that healthcare providers make, it should be part of a broader discussion that includes all healthcare providers, using standardized expense categories. The California Dialysis Council states in opposition that the premise of this bill – that CDCs do not spend sufficient funds on ensuring quality patient care – is simply not true, and that proponents have not provided data to substantiate their claims that this bill is needed. According to the California Dialysis Council, many CDCs are not operating profitably, primarily due to a mix of patients that includes too few privately insured patients to offset the low reimbursement from government payers. The California Dialysis Council states that under the current structure, revenue from a company’s clinics that make money can be used to offset the losses of the underperforming clinics, many of which are in rural areas or in urban areas with disadvantaged populations. U.S. Renal Care states in opposition that it is unaware of any foundation for imposing this type of administrative cap on a direct provider of health care services. U.S. Renal Care states that an administrative cap would likely limit, at best, those dialysis providers that may be able to survive under this scenario, and negatively impact participation by providers and thus limit patient access to life-saving care. Satellite Healthcare, a not-for-profit dialysis provider, states in opposition that an MLR is a metric used in health insurance to measure medical costs as a percentage of premium revenues, and that this model is inappropriate and unfeasible for dialysis providers. According to Satellite Healthcare, the rigorous reporting requirements of this bill would significantly increase administrative costs for CDCs. The California Hospital Association (CHA) states in opposition that there are numerous concerns related to the implementation of this legislation, and that systems of healthcare are moving toward a whole person model. According to CHA, carving out a single piece to determine costs attributed to the provision of care would be burdensome and costly to the healthcare system at large, and would not improve care for the patient.

Prepared by:

9/4/17 13:02:52

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

AB 251 (Bonta) - Health and care facilities: dialysis clinics

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

AB 251 would establish a medical loss ratio for chronic dialysis clinics, requiring clinics to spend at least of 85% of revenue on direct patient care and related expenses.

Fiscal Impact:

• Likely one-time costs of $150,000 to $300,000 for the development and adoption of regulations by the Department of Public Health (Licensing and Certification Fund). The bill would require the Department to adopt implementing regulations within 180 days. The Department indicates that it may take up to three years to fully develop and adopt the regulations.
• Ongoing costs of $780,000 per year for the Department of Public Health to review financial information submitted by chronic dialysis clinics to verify whether the clinic is meeting the required medical loss ratio or has paid out the appropriate rebates (Licensing and Certification Fund). The Department indicates that it will need five additional positions (plus accompanying management and support staff) to analyze the detailed financial data submitted by each chronic dialysis clinic, to ensure compliance with the bill’s requirements.
• Uncertain impact on state and local health care spending through CalPERS health insurance. The bill has the potential to increase health care spending on dialysis services by commercial payers. To the extent that would happen, the state and local governments may face higher health care costs. See below.

Background:

Under current law, chronic dialysis clinics are licensed and regulated by the state Department of Public Health. In addition, in order for chronic dialysis clinics to provide services to Medicare and Medi-Cal patients, they must be certified by the federal Centers for Medicare and Medicaid Services. The federal government contracts with the Department to perform the certification inspections. Under current law, the Department is required to use the federal certification standards when regulating chronic dialysis clinics, until it adopts state regulations. The Department is in the process of developing those regulations.

Under current state and federal law, health plans and health insurers are required to meet certain “medical loss ratio” requirements. A medical loss ratio is the percentage of premium revenue that is spent on patient care (as opposed to health plan or insurer administrative costs, marketing, and profits). In the state’s large group market, health plans and health insurers are required to meet a medical loss ratio of 85%. In the small group and individual market, health plans and insurers are required to meet an 80% medical loss ratio. To staff’s knowledge, no health care provider (such as a hospital, clinic, or pharmacy) is required to meet a medical loss ratio.

Proposed Law:

AB 251 would establish a medical loss ratio for chronic dialysis clinics, requiring clinics to spend at least of 85% of revenue on direct patient care and related expenses.

Specific provisions of the bill would:

• Beginning on January 1, 2019, require a chronic dialysis clinic to submit a report to the Department of Public Health with information on treatment revenues and expenditures, by specified category;
• Require a chronic dialysis clinic to issue a rebate to commercial payers for services, if the expenditures by a chronic dialysis clinic for direct patient care services, health care quality improvement costs, and taxes and licensing fees total less than 85% of total revenues;
• Require a chronic dialysis clinic to provide specified information to the Department on rebates issued pursuant to the bill;
• Require the Department to adopt implementing regulations within 180 days of the effective date of the bill.

Related Legislation:

SB 349 (Lara) would require chronic dialysis clinics to have at least one nurse for every eight patients and at least one certified hemodialysis technician for every three patients. That bill is pending in the Assembly Appropriations Committee.

Staff Comments:

Chronic dialysis clinics provide treatment to individuals with end stage renal disease. Dialysis is used when a patient’s kidneys no longer effectively remove waste from the bloodstream. Typically, dialysis patients go to a chronic dialysis clinic three times per week and receive dialysis for around four hours. Some patients receive their dialysis overnight at dialysis clinics.

Most dialysis treatment is paid for by Medicare and/or Medi-Cal. Under current law, individuals with end stage renal disease are eligible for Medicare regardless of their age. Roughly 20 – 30% of dialysis patients in the state are enrolled in the Medi-Cal program (some of those individuals are dually enrolled in Medicare and so Medicare is the primary payer). According financial filings by DaVita Healthcare Partners (one of the two primary providers of dialysis services in the state), only about 10% of its patient population is paid for by commercial insurance.

Under current law, Medicare rates do not automatically increase as operational costs for chronic dialysis clinics increase and Medi-Cal fee-for-service rates are set based on Medicare rates. Thus the reimbursement rates paid for most dialysis patients are essentially fixed. According to financial filings by dialysis providers, a substantial part of their earnings are provided by commercial insurance companies, as commercial rates are substantially higher than rates paid by Medicare or Medi-Cal.

The sponsors of this bill have indicated that the intent is to drive down health care costs by requiring chronic dialysis clinics to ensure that they are spending 85% of their revenues on direct patient care. In theory, this could lead chronic dialysis clinics to reduce their administrative expenses to meet this requirement. In practice, however, it is probably more likely that chronic dialysis clinics will increase their commercial rates and spend more money on allowable expenses (which would include salaries for physicians and facility costs). By holding their existing administrative costs constant, an increase in overall revenues and expenditures would allow a chronic dialysis clinic to come into compliance with the requirements of the bill.

Given the very significant market concentration in this industry (the top two providers provide about 70% of dialysis services in the state) and the medical necessity of continued dialysis treatment for patients with end stage renal disease, chronic dialysis clinics are likely to have significant market power to increase rates paid by commercial insurers.

Because the state is a significant purchaser of health care services through health plans and insurers contracted with CalPERS, any cost increase to commercial payers would likely result in increased state health care costs. The size of this impact is unknown.

The only costs that may be incurred by a local agency relate to crimes and infractions. Under the California Constitution, such costs are not reimbursable by the state.

-- END --

SENATE COMMITTEE ON HEALTH

Senator Ed Hernandez, O.D., Chair

BILL NO: AB 251

SUBJECT: Health and care facilities: dialysis clinics

SUMMARY:

Establishes a medical loss ratio for chronic dialysis clinics that would require these clinics to spend at least 85% of their revenue on direct patient care, health care quality improvement, and taxes and license fees, and if the clinics do not meet this ratio, to issue rebates to non-government payers in an amount sufficient to meet the minimum spending of 85%.

Existing law:

1. Licenses and regulates various clinics by Department of Public Health (DPH), including primary care clinics and specialty clinics, which include: surgical clinics, chronic dialysis clinics (CDCs), and rehabilitation clinics.
2. Requires DPH to adopt reasonable rules and regulations as may be necessary to enable DPH to carry out the purposes of provisions of law governing the various types of clinics licensed by DPH.
3. Requires CDCs, until January 1, 2018, to comply with federal Centers for Medicare and Medicaid Services (CMS) certification standards for an end stage renal disease clinic, as specified, until DPH adopts regulations relating to the provision of services by a CDC. Requires DPH to conduct a public hearing and submit a report that describes the extent to which the federal certification standards are or are not sufficient as a basis for state licensing standards, and to make recommendations for any California-specific standard that may be necessary.
   
4. Establishes the Department of Managed Health Care (DMHC) to regulate health care service plans under the Knox-Keene Act and the California Department of Insurance (CDI) to regulate health insurers under the Insurance Code.
5. Requires every health care service plan and health insurer that issues, sells, renews, or offers health plan contracts or policies for health care coverage, including a grandfathered health plan or insurer, but not including specialized health plan contracts or policies, to provide an annual rebate to each enrollee under such coverage if certain conditions exist, relating to the following medical loss ratio (MLRs):
   1. 85% for a health plan or health insurer in the large group market; or,
   2. 80% for a health plan or health insurer in the small group or individual market.

This bill:

1. Requires a CDC, for each fiscal year starting on or after January 1, 2019, to submit to DPH a report concerning the total treatment revenue of the CDC for the fiscal year and the amounts and percentages of that total treatment revenue the CDC has expended on all of the following:
   1. Direct patient care services costs, as defined in this bill;
   2. Health care quality improvement costs, as defined in this bill;
   3. Federal and state taxes, and facility license fees; and,
   4. All other costs.
2. Requires a CDC to annually submit the report required in 1) above on a schedule, in a format, and on a form prescribed by DPH, provided that the CDC is required to submit the information no later than 150 days after the end of its fiscal year. Requires the chief executive officer or administrator of the CDC, as these positions are defined, to personally certify that he or she is satisfied, after review, that the submitted report is accurate and complete.
3. Requires a CDC, for each fiscal year starting on or after January 1, 2019, to calculate the costs of direct patient care services, health care quality improvement, and federal and state taxes and license fees, and to also calculate the total treatment revenue.
4. Requires a CDC, if the costs calculated in 3) above total less than 85% of treatment revenue, to issue a rebate and a reduction in billed amount to payers, other than Medicare or any other government payer, on a pro rata basis, in an amount that is sufficient to result in a ratio of at least 85% of costs to treatment revenue after subtracting rebates and reductions in billed amounts to payers issued in the same fiscal year, as follows:
   1. Requires the CDC to issue the rebate or reduction in billed amount together with interest of 10% per annum, which accrues from the last day of the fiscal year to which the rebate or reduction relates;
   2. Requires the CDC, where a rebate must be paid or an amount billed but not yet paid must be reduced, and more than one payer is responsible, to divide and distribute the total required rebate or reduction in billed amounts among the payers consistent with the payers’ relative obligations to pay for the treatment; and,
   3. Requires the CDC to issue the rebate or reduction in billed amount no later than 210 days after the end of the fiscal year to which the rebate or reduction relates.
5. Defines “direct patient care services costs,” for purposes of this bill, as costs claimed by a CDC in specified categories as described in a federal CMS cost report worksheet, which include the following:
   1. Capital-related costs on buildings and fixtures;
   2. Capital-related costs on moveable equipment such as office furniture (not dialysis machines or support equipment);
   3. Operation and maintenance of the plant and equipment;
   4. Housekeeping, and laundry and linen;
   5. Capital-related costs for moveable equipment other than those in b) above, such as dialysis machines and support equipment;
   6. Salaries of all personnel who furnish direct care to patients;
   7. Cost of employee health and wellness benefits for direct patient care;
   8. Cost of dialysis supplies;
   9. Cost of laboratory services;
   10. Cost of drugs used in furnishing dialysis services;
   11. Medical records;
   12. Cost of physician services;
   13. Cost of whole blood and red blood cells;
   14. Vaccine costs; and,
   15. Other costs related to any reimbursable cost center not otherwise specified above.
6. Defines “health care quality improvement costs,” for purposes of this bill, as costs required to maintain, access, or exchange electronic health information, support health information technologies, train nonmanagerial personnel engaged in direct patient care, and provide patient-centered education and counseling.
7. Permits DPH, upon request by a CDC, to deem other expenditures not specified in 6) above to have been made for health quality improvements if all of the following apply:
   1. The CDC shows that its expenditure was for activities or items designed to improve health quality and increase the likelihood of desired health outcomes in ways that are capable of being objectively measured and of producing verifiable results and achievements;
   2. The CDC actually paid the cost; and,
   3. The cost was spent on services offered at the CDC to chronic dialysis patients.
8. Permits DPH to allow the CDC to apply a health care quality improvement cost incurred in one year proportionally over a period not to exceed five years upon a finding that the CDC has demonstrated that the cost is reasonably expected to provide health care quality improvements for that period.
9. Defines “payer,” for purposes of this bill, as the person or persons who paid or are financially responsible for payments for a treatment provided to a particular patient, and includes the patient or other individuals, primary insurers, secondary insurers, and other entities, including Medicare and any other federal, state, county, city, or other local government payer.
10. Defines “treatment,” for purposes of this bill, as each instance when the CDC provides services to a patient for which costs are reported to DPH pursuant to this bill.
11. Defines “treatment revenue,” for purposes of this bill, as the total amount the CDC collects from payers for treatments.
12. Requires a CDC, for each fiscal year starting on or after January 1, 2019, to maintain and provide to DPH, on a form and schedule described by DPH, a report of all rebates and reductions it issue under the provisions of this bill, including a description of each instance when the rebate or reduction was not timely issued in full, and the reasons and circumstances. Requires the chief executive officer or administrator of the CDC to personally certify that he or she is satisfied, after review, that all submitted information is accurate and complete.
13. States the intent of the Legislature that California taxpayers not be financially responsible for implementation and enforcement of this bill, and in order to effectuate this intent, requires DPH to take into account all costs associated with this bill when calculating and assessing licensing fees.
14. Specifies that nothing in this bill is intended to affect licensed hospitals.
15. Requires DPH to issue regulations as necessary to implement this bill no later than 180 days following its effective date.
16. Specifies that the provisions of this bill are severable, and that if any provision of this bill is held invalid, that invalidity is prohibited from affecting other provisions that can be given effect without the invalid provision.
17. Makes various legislative findings and declarations, including the following:
    1. In recent years, considerable consolidation of the private dialysis clinic industry has prevented the marketplace from effectively ensuring that the clinics spend sufficient funds on quality patient care;
    2. Two multinational, for-profit companies operate or manage nearly three quarters of the CDCs in California and treat more than 70% of dialysis patients nationwide, and that these two companies can largely dictate the quality of patient care provided to the dialysis patients, as well as the pricing of such treatments; and,
    3. Regulation of the industry is necessary to protect all Californians, including those suffering from end-stage renal disease, and to ensure that the focus of these clinics is on providing quality patient care.

FISCAL EFFECT:

This bill has not been analyzed by a fiscal committee.

COMMENTS:

1. Author’s statement. According to the author, California’s dialysis clinics have little incentive to constrain prices or invest in quality care. Two multinational companies control more than 70% of California’s chronic hemodialysis market, and this lack of competition, combined with a steady stream of new patients who need dialysis in order survive, means that dialysis companies have the market power to demand outrageous prices. California has a long history of regulating uncompetitive markets, and it is time for California to act on behalf of dialysis patients and all consumers. This bill will improve the quality and reduce the cost of dialysis treatment by applying a medical loss ratio to dialysis clinics. This bill will require dialysis clinics to spend at least 85% of their treatment revenue on direct patient care, quality improvements, taxes, and licensure fees, which will encourage dialysis companies to invest in higher quality care while preventing outrageous markups.
2. Background on dialysis and CDCs. A CDC provides care for the treatment of patients with end-stage renal disease (ESRD), including renal dialysis services. ESRD, also known as end-stage kidney disease or kidney failure, is when the kidneys, which remove waste and excess water from the body, are no longer able to work at a level needed for day-to-day life. The most common causes of ESRD in the United States are diabetes and high blood pressure. Dialysis does some of the job of the kidneys when they stop working, including removing extra salt, water, and waste products so they do not build up in the body. A typical patient with ESRD will need to go to a CDC three times a week for dialysis treatment, with each treatment taking about four hours. According to data from the United States Renal Data System, there is wide variation in the prevalence of ESRD throughout the United States, with the lowest rates in New England, and the highest rates in the Ohio and Mississippi River valleys, the Southeast, Texas and California. According to DPH, there are currently 542 licensed and CMS-certified CDCs in California, with another 23 CDCs that are licensed only (most of these waiting in line for CMS certification).
   
   The two leading dialysis companies, German-based Fresenius Medical Care and Colorado-based DaVita Healthcare Partners, control about 70% of the U.S. market, and a slightly higher percentage in California (72%). According to the United States Renal Data System, these two for-profit companies continue to grow relative to other providers, and together contributed 81% of the new dialysis units added between 2011 and 2014. In addition, both of these large providers are vertically integrated, with both companies operating a dialysis-related laboratory, a pharmacy, and other related services and products.
3. Payer mixes and profit margins. In 1973, Congress expanded the Medicare program to include coverage for people requiring dialysis services. If a dialysis patient has private insurance, that payer is required to cover services for the first 30 months, at which point Medicare becomes the primary payer. A March 2016 article in Nephrology News and Issues puts the national average payer mix at 88% Medicare, 8% Medicaid, and 4% commercial. According to DaVita’s 2016 annual report, 88% of their patients were either on Medicare or Medicaid. Medicare uses a prospective payment system that bundles dialysis care payments, including certain drugs and laboratory tests, and generally pays for up to three treatments every week. The 2017 Medicare base rate is approximately $231 per dialysis treatment, but with adjustments, the average payment is above $240 per treatment. According to the 2016 report of the Medicare Payment Advisory Commission (MedPAC), a nonpartisan legislative branch that provides Congress with policy advice on the Medicare program, it estimated the aggregate profit margin for Medicare patients at CDCs to be 2.1%, and projected a 0.8% margin in 2016. However, these profit margins varied significantly based on treatment volume, with facilities with the lowest volume having Medicare profit margins of -15.4% (negative margin), while facilities with the highest volume of patients having profit margins of 8.1% or greater. There was also a significant difference between rural and urban CDCs, but this is mainly attributable to lower patient volume in rural facilities.
   

Specific payment rates from commercial plans are not publicly available, but they are reportedly several times as much as Medicare rates. According to DaVita’s 2016 annual report, while Medicare and Medicaid patients represented 88% of their patients, these governmental payers only accounted for 64% of their dialysis revenue. In contrast, approximately 12% of their patients have private commercial insurance, but these patients account for 36% of their dialysis revenue. According to DaVita’s report, nearly all of their net earnings from dialysis and related laboratory services are derived from commercial payers, some of which pay at established contract rates and others which pay negotiated payment rates based on their usual and customary fee schedule for out-of-network patients, which are typically higher than commercial contracted rates.

With regard to overall profit margins, the author and sponsor used utilization data reported by CDCs to the Office of Statewide Health Planning and Development to calculate average profit margins. According to the calculations provided by the author, the dialysis industry had an operating margin of 19.0% in 2014, 19.3% in 2015, and 17.1% in 2016 (based on preliminary data). According to DaVita’s 2016 report, 67% of 2016 revenue went to “patient care costs,” with “general and administrative” at 8% of revenue and “depreciation and amortization” at 5% of revenue making up the remainder of operating expenses. According to DaVita’s report, its operating income was 19% of revenue for 2016.

1. Complaint data. According to DPH, between July 1 2014 and February 15, 2017, it received 577 complaints about CDCs, and issued 370 deficiencies during this same time period as a result of all visits, including both periodic surveys and complaint investigations. Of these 577 complaints, 483 were received anonymously, patients or family members submitted 69 complaints, and facility staff or organizations submitted the remaining 25.
   
   Under contract with CMS, there are 18 End Stage Renal Disease Network Organizations (ESRD Networks), which are funded by CMS to carry out a range of activities to improve the quality of care for individuals with end stage renal disease. Among other responsibilities, ESRD Networks are responsible for collecting, validating, and analyzing patient registry data, supporting use of the most appropriate treatment modalities to maximize quality of care, and identifying providers that do not contribute to the achievement of Network goals. In California, there are two ESRD Networks: ESRD Network 17 covers the northern portion of California, but also includes Hawaii and the territories of Guam, American Samoa, and the Northern Marianas Islands); and ESRD Network 18, which covers central and southern California. To limit it to California-only data, according to ESRD Network 18’s 2015 Annual Report (most recent available), there are 372 CDCs within its service area, serving about 39,000 patients. In 2015, ESRD Network 18 opened 108 grievance cases, and referred 33 of these to DPH as the survey agency under contract with CMS. At least nine of these cases referred to DPH specifically cited inadequate staffing in the complaint, and many of the others related to infection control or cleanliness.
2. UC Report on federal standards as a basis for state licensure. Pursuant to SB 534 (Hernandez, Chapter 722, Statutes of 2013), DPH requested the UC Davis Institute for Population Health Improvement to conduct a study that “describes the extent to which federal certification standards are or are not sufficient as a basis for state licensing standards,” with regard to ambulatory surgery clinics, comprehensive outpatient rehabilitation facilities, and CDCs. As part of this report, this study looked at any known quality issues – defined broadly as concerns related to safety, effectiveness, patient-centeredness, timeliness, efficiency, and equity. The study concluded that California’s use of CMS certification standards as the basis for state licensure is consistent with standard practice across the nation, that better compliance with existing federal regulations would likely address many of the documented quality problems DPH has cited in these facilities, and that expanded state-specific regulations would be of uncertain marginal value.
   
   However, according to the study, the authors reviewed four journal articles focusing on efficiency, and three of the articles explored issues relating to staffing levels. According to UC Davis, the studies found large regional differences in patient-nurse staffing ratios, and staffing levels were significantly associated with clinical outcomes. High patient-to-nurse ratios were linked to an increased number of adverse events.
   
   This study also summarized the number and general types of deficiencies identified at dialysis clinics. DPH identified 9,591 discrete deficiencies in 537 CDCs between September 2005 and September 2015, an average of about 959 per year. The majority (98%) were federal deficiencies, and a small minority (2%) violated CMS conditions of participation. State deficiencies usually cited violations of the life safety code standards (e.g., building fire codes). Federal deficiencies were diverse, but commonly addressed infection control and prevention. Of the 792 deficiencies DPH identified in substantiated allegations (averaging about 79 per year), quality of care was the general type of allegation that surveyors cited most often. Among the potentially serious allegations were 14 general patient safety-related incidents, as well as two instances of sexual abuse, two patient falls, and one contaminated drug/device cases.
   
3. Medical loss ratio (MLR) in the insurance market. In general terms, an MLR is the percentage of each dollar a health plan or insurer receives in premiums that the plan spends on health care services, as defined, versus administration, sales, marketing and profit. The Affordable Care Act (ACA) required states to establish an MLR for health plans and insurers serving commercial populations. Dental plans are exempt from the ACA-required MLR. For plans in the large group market, the ACA-required MLR is 85% or a higher percentage determined by the state through regulation. For individual and small group plans, the MLR is 80% or a higher percentage determined by the state through regulation. The federal Department of Health and Human Services (DHHS) secretary can adjust small group and individual market MLR if he or she determines that the 80% requirement may destabilize the individual market in a state.

If a plan fails to meet the federal MLR requirements, rebates are required to be issued to the plans’ customers. California does not currently impose a MLR on full-service Medi-Cal managed care plans, except for a federally required MLR for the Medicaid optional expansion population. California has a contractually required dental “minimum” loss ratio for dental managed care plans of 70%.

Federal rebates from the ACA-required commercial MLR (reported to DMHC), indicates, from reporting year 2011 through 2015, 10 plans have issued rebates in the following dollar amounts:

1. Individual market: $64 million;
2. Small group market: total $138.2 million; and,
3. Large group market: total $3.3 million

In May of 2016, CMS issued a rule requiring states to ensure that each Medicaid managed care plan calculates and reports a MLR.  The MLR requirement applies to contracts starting on or after July 1, 2017. In addition to requiring plans to calculate and report an MLR, states must develop plan rates in a way that the plan would reasonably achieve a MLR standard of at least 85% for the rate year. CMS recently indicated in an informational bulletin this rate-setting requirement applies for plan rating periods on or after July 1, 2019. The federal rule permits states to require Medicaid managed care plans to meet a minimum MLR, provided the minimum MLR is equal to or higher than 85%. The MLR must be calculated and reported for each MLR reporting year by the Medicaid managed care plan consistent with this federal rule. In addition, the rule gives states the option of requiring a remittance if plans do not meet the MLR. DHCS provided self-reported data from 21 Medi-Cal managed care plans indicating plans’ MLR for 2015-16 ranged from 77.9% to 97.7% (excluding Kaiser) with an unweighted average of 86.47%.

1. Related legislation. SB 349 (Lara) requires CDCs, commencing January 1, 2020, to ensure that at least one nurse is providing direct care for every eight patients and that at least one certified hemodialysis technician is providing direct care for every three patients, and requires a minimum 45 minutes of transition time between dialysis patients at a treatment station.  Authorizes DPH to assess administrative penalties for violations of the staffing ratios, grants DPH the authority to provide waivers to the staffing ratios in rural counties, as defined, and requires DPH to issue regulations no later than two years after the effective date of this bill. SB 349 passed the Assembly Health Committee by a vote of 10-4 on June 27, 2017.
2. Prior legislation. SB 534 (Hernandez, Chapter 722, Statutes of 2013), among other provisions, required CDC’s to comply with applicable federal certification standards for end stage renal disease clinics until DPH adopts regulations relating to the provision of services by a CDC. Additionally, required DPH to submit a report on the extent to which federal certification standards are, or are not, sufficient as a basis for state licensing standards.
3. Support. This bill is sponsored by SEIU California, which states that it would incentivize quality care and rein in the price of dialysis treatment by requiring CDCs to spend at least 85% of their revenue on direct patient care expenses, quality improvements, taxes and licensure fees. According to SEIU, nationally and in California, the industry is controlled by two for-profit companies – Fresenius Medical Care and DaVita. SEIU California states that these two companies own or operate 72% of CDCs and account for 75% of revenue received by CDCs. As their market share has grown over the past several years, SEIU California states that these two companies have taken advantage of that market power to drive up dialysis prices, particularly for patients with private insurance. SEIU California states that California has recognized other failed markets and stepped in to protect consumers. According to SEIU California, the state regulates prices and markups for water, electricity, casualty insurance, payday lenders, and other industries where companies would otherwise be able to raise prices and reap outrageous profits. SEIU California states that this is a sensible and reasonable step toward ensuring that dialysis companies invest in patient care rather than using their monopolistic power to gouge consumers.
   
   The United Nurses Associations of California/Union of Health Care Professionals (UNAC/UHCP) states in support that dialysis is a critical, life-saving treatment that must continue to remain accessible to all, and that this bill will provide critical information about the percentage of CDC revenue that actually goes toward patient care. According to UNAC/UHCP, a 15% profit margin is still very profitable in the context of health care facilities. UNAC/UHCP states that hospitals, nursing homes and other health facilities often operate at a margin of only 4 to 5%, so CDC will remain very profitable under this bill.
4. Opposition. Fresenius Medical Care North America (FMCNA) states in opposition that demand for dialysis has more than doubled since 1997, and this bill would cause dialysis providers to put any plans of opening new facilities to meet this growing need on hold. According to FMCNA, this bill requires an MLR to be applied to CDCs, with rebates paid to non-government payers if the MLR is not met. FMCNA states that this bill has benefit only for the non-governmental payers, as the governmental payers are excluded from the rebates, so it saves taxpayers no money. FMCNA states that the private insurance industry is capable of looking out for its own interests through the contracts it negotiates. FMCNA also states that an MLR is not the right tool to address concerns about quality of care because it encourages arbitrary spending rather than investment in quality. According to FMCNA, the choice imposed by this bill – meet an 85% MLR or give back money – is likely to result in unintended consequences. For example, FMCNA states that a CDC could raise its MLR by paying bonuses to its physicians or purchasing new office space, even if it did not expect those expenditures to improve the quality of care. FMCNA states that while the application of an MLR to health plans is common, it has not identified any other situation in which an MLR provision has been applied to a provider. DaVita also opposes this bill, stating that 90% of patients treated at a CDC are Medicare or Medi-Cal beneficiaries, and that these program reimburse less than what it costs a clinic to provide treatment. According to DaVita, a very small percentage of a clinic’s patient mix, around 10%, provide reimbursement at levels that allow a clinic to balance out the underfunding that occurs on the government side, such that it can remain solvent. According to DaVita, if CDCs were forced to issue rebates to private insurers, many of California’s CDC would shut down, and the effect on patient care would be disastrous as more and more individuals with kidney failure would be forced to seek treatment in hospital emergency rooms. DaVita notes that this bill could result in the transfer of government reimbursement dollars received by a CDC to private insurance plans, since total treatment revenue derives from all payers but rebates would only be issued to non-governmental payers. Finally, DaVita states that if California would like to regulate the profit that healthcare providers make, it should be part of a broader discussion that includes all healthcare providers, using standardized expense categories. The California Dialysis Council states in opposition that the premise of this bill – that CDCs do not spend sufficient funds on ensuring quality patient care – is simply not true, and that proponents have not provided data to substantiate their claims that this bill is needed. According to the California Dialysis Council, many CDCs are not operating profitably, primarily due to a mix of patients that includes too few privately insured patients to offset the low reimbursement from government payers. The California Dialysis Council states that under the current structure, revenue from a company’s clinics that make money can be used to offset the losses of the underperforming clinics, many of which are in rural areas or in urban areas with disadvantaged populations. U.S. Renal Care states in opposition that it is unaware of any foundation for imposing this type of administrative cap on a direct provider of health care services. U.S. Renal Care states that an administrative cap would likely limit, at best, those dialysis providers that may be able to survive under this scenario, and negatively impact participation by providers and thus limit patient access to life-saving care. Satellite Healthcare, a not-for-profit dialysis provider, states in opposition that an MLR is a metric used in health insurance to measure medical costs as a percentage of premium revenues, and that this model is inappropriate and unfeasible for dialysis providers. According to Satellite Healthcare, the rigorous reporting requirements of this bill would significantly increase administrative costs for CDCs. The California Hospital Association (CHA) states in opposition that there are numerous concerns related to the implementation of this legislation, and that systems of healthcare are moving toward a whole person model. According to CHA, carving out a single piece to determine costs attributed to the provision of care would be burdensome and costly to the healthcare system at large, and would not improve care for the patient.
5. Policy comment. The goal of establishing an MLR for CDCs, according to the author and sponsors, is to both direct more of the overall revenue toward patient care, and to reduce the heavy mark-ups imposed on the private payers of dialysis treatment.  However, this approach could result in higher costs for consumers and payers in an already expensive health care delivery market.   The point of an MLR in the health insurance industry is to assign a certain amount of the premium dollars to patient care and allow a small remaining percentage left for administration and profit.  The author and proponents argue an MLR is a mechanism for controlling costs.  However, others point out that a company can continue to increase the amount available for profits and administration under an MLR by increasing costs in the category of medical care. In a competitive insurance market, a health insurer may be reluctant to increase premiums and risk losing market share.  However, in markets that are not competitive, such as in the dialysis treatment market, there appears to be little restraint in charging private payers high costs for dialysis treatment. This bill would not change these market dynamics, and could create an incentive for companies to charge private payers even higher prices for dialysis treatment.

SUPPORT AND OPPOSITION:

Support: SEIU California (sponsor)

United Nurses Associations of California/Union of Health Care Professionals

Oppose: California Dialysis Council

California Hospital Association

Da Vita

Fresenius Medical Care North America

Satellite Healthcare

U.S. Renal Care

-- END --

Date of Hearing: April 5, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 251

Author:(Bonta) – As Amended Ver:March 30, 2017

Urgency: No State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill extends the deadline for the California Department of Public Health (CDPH) to adopt various facility licensure regulations. Specifically, this bill:

1. Extends from January 1, 2018, to January 1, 2019, the requirement that chronic dialysis, surgical, and rehabilitation clinics comply with federal certification standards pending the adoption of regulations.
2. Extends from January 1, 2018, to January 1, 2020, CDPH's and the Department of Developmental Services’ (DDS) authority to use federal certification standards as the state licensure standard for intermediate care facilities serving developmentally disabled persons (ICF/DD-N), and to jointly adopt regulations relating to licensure of ICF/DD-N facilities.

FISCAL EFFECT:

Negligible state fiscal effect.

COMMENTS:

1. Purpose. This author-sponsored bill is intended to extend CDPH's authority to enforce federal facility standards until 2019 (2020 for ICF/DD-Ns), while the department adopts regulations. Absent this bill, CDPH's authority to enforce federal standards will expire on January 1, 2018.
2. Background. In 2013, CDPH sponsored SB 534 (Hernandez), Chapter 722, Statutes of 2013, which require the four types of health facility categories subject to this bill to comply with facility-specific federal certification requirements to meet state licensing requirements until CDPH adopted state regulations. At that time, DPH was in the process of promulgating regulations for the ICF/DD-N's, but still had not begun the process of promulgating regulations for the other facility types. According to CDPH, the ICF/DD-N regulations will go out for comment in January of 2018, and the department does not intend to promulgate regulations for the other facility types. Instead, based on a UC Davis study that found state-specific standards would have limited value, CDPH indicates it will propose to continue the use of federal certification standards.

Analysis Prepared by: Lisa Murawski / APPR. / (916) 319-2081

Date of Hearing: March 28, 2017

ASSEMBLY COMMITTEE ON HEALTH

Jim Wood, Chair

ABPCA Bill Id:AB 251

Author:(Bonta) – As Introduced Ver:January 30, 2017

SUBJECT: Health and care facilities.

SUMMARY: Extends from January 1, 2018 to January 1, 2019, the requirement that chronic dialysis, surgical, and rehabilitation clinics comply with federal certification standards pending the adoption of regulations by the Department of Public Health (DPH). Extends from January 1, 2018, to January 1, 2019, DPHs' and the Department of Developmental Services’ (DDS) authority to use federal certification standards as the state licensure standard for intermediate care facilities serving developmentally disabled persons (ICF/DD-N), and to jointly adopt regulations relating to licensure of ICF/DD-N facilities.

EXISTING LAW:

1. Establishes DPH to license health facilities and requires DPH to adopt, amend, or repeal, as specified, any reasonable rules and regulations as may be necessary or proper to carry out the exercise of its power. Establishes, under the Administrative Procedures Act (APA), a process for adopting, amending, or repealing regulations.
2. Prescribes through regulations the kinds of services which may be provided by clinics in each category of licensure and the minimum standards of adequacy, safety, and sanitation of the physical plant and equipment, minimum standards for staffing with duly qualified personnel, and minimum standards for providing the services offered. Requires these minimum standards to be based on the type of facility, the needs of the patients served, and the types and levels of services provided.
3. Requires chronic dialysis clinics, also known as end-stage renal disease facilities (ERSD), ambulatory surgical clinics (ASC), and comprehensive outpatient rehabilitation facilities (CORF) to comply with federal certification standards until DPH has adopted regulations for those facilities. Sunsets these provisions on January 1, 2018.
4. Requires DPH, by July 1, 2017, to conduct at least one public hearing and submit a report to the appropriate legislative committees that describes the extent to which the federal certification standards for the facilities in 3) above are or are not sufficient as a basis for state licensing standards, and requires the report to make recommendations for any California-specific standards that may be necessary.
5. Licenses and regulates various types of facilities by DPH, including ICF/DD-Ns, which are defined as facilities with a capacity of four to 15 beds that provide 24-hour personal care, developmental services, and nursing supervision for persons with developmental disabilities who have intermittent recurring needs for skilled nursing care but have been certified by a physician as not requiring continuous skilled nursing care.
6. Requires DPH and DDS to jointly develop and implement licensing regulations appropriate for ICF/DD-N and ICF/DD-continuous nursing (ICF/DD-CN) facilities by January 1, 2018.
7. Requires, among other things, that the regulations in 6) above ensure that residents of an ICF/DD-N and ICF/DD-CN receive appropriate medical and nursing services and developmental program services in a normalized, least restrictive physical and programmatic environment appropriate to individual resident need.
8. Requires, until DPH and DDS adopt the regulations in 6) above that these facilities comply with applicable federal certification standards for intermediate care facilities for individuals with intellectual disabilities.

FISCAL EFFECT: This bill has not yet been analyzed by a fiscal committee.

COMMENTS:

1. PURPOSE OF THIS BILL. According to the author, if the current authority to enforce the federal certification standards at the state level sunsets as planned, DPH and DDS will have less ability to ensure patient safety at these facilities. The author states that the sunset extension will ensure that the state can enforce basic standards of care for tens of thousands of California’s most vulnerable residents including, developmentally disabled individuals and patients who rely on dialysis treatment.
   
2. BACKGROUND. In 2013, DPH sponsored SB 534 (Hernandez), Chapter 722, Statutes of 2013, which require the four types of health facility categories subject to this bill to comply with facility-specific federal certification requirements to meet state licensing requirements until DPH adopted state regulations. At that time, DPH was in the process of promulgating regulations for the ICF/DD-N's, but still had not begun the process of promulgating regulations for ASCs, CORFs, or ESRDs.
   
   1. University of California, Davis review of state licensing standards. SB 534 requires DPH to submit a report to the Legislature by July 1, 2017, that "describes the extent to which federal certification standards are or are not sufficient as a basis for state licensing standards," and if not, what California-specific standards may be necessary. DPH commissioned a study from the University of California at Davis, "A Review of Regulatory Standards, Quality of Care Concerns, and Oversight of Ambulatory Surgery Clinics, Comprehensive Outpatient Rehabilitation Facilities, and End-Stage Renal Disease Facilities," (study) and on September 8, 2016, conducted a public hearing to discuss the recommendations from the study.
      
      The study found that California's use of federal certification standards as the basis for state licensure is consistent with standard practice across the nation. California differs from some other states in not requiring accreditation for some ASCs (i.e., California requires accreditation only for those that provide higher levels of sedation) or for CORFs, and in the requirements for specific types of facilities and services, such as adverse event reporting. The study concludes that expanded state-specific regulations for ASC, CORF, and ESRD facilities would be of uncertain marginal value, and that better compliance with existing federal regulations would address many of the documented quality problems that DPH has cited in these facilities. According to DPH they are on schedule to complete the required report to the Legislature.
      
   2. Federal certification standards. Federal regulatory standards set forth the various standards required at certain facilities in order to qualify for Medicare and Medicaid (Medi-Cal in California) participation by the Centers for Medicare and Medicaid Services (CMS). Depending on the facility in question, the regulations set requirements for the facilities management and governing body, what services may be offered, and safety and cleanliness standards. Standards also include, but are not limited to, requirements covering patient rights, the administration of anesthesia, if applicable, medical records, privacy, and infection control. DPH’s Licensing and Certification Program (L&C) licenses and regulates numerous categories of health facilities and agencies, including hospitals, skilled nursing facilities, and clinics. In addition, CMS contracts with L&C to evaluate facilities to certify that they meet federal requirements to become Medicare and Medi-Cal providers. L&C performs these functions directly, through various field offices, in most of the state, but contracts with Los Angeles County for the licensing and CMS certification function of health facilities located in Los Angeles County. 
   3. DPH efforts to update regulations. According to DPH it has developed a multi-year plan for completing a comprehensive update of the Title 22 regulations within its authority and has dedicated resources assigned to completing this task. Currently, DPH is working on 20 regulatory packages that are at different stages in the development process. Some of the regulations are for general acute care hospitals, other packages focus on other facility types or specific requirements based on statutory requirements. DPH provided no timeline for completion of the Title 22 update.
3. SUPPORT. The Health Officers Association of California (HOAC) supports this bill and states that it is needed to allow DPH and DDS to continue ensuring quality and accountability at surgical clinics, chronic dialysis clinics, outpatient rehabilitation clinics, and certain intermediate care facilities. HOAC continues that without this bill, separate state regulations would soon need to be developed and put in state statue to continue allowing DPH and DDS to use federal standards as state licensure standards. HOAC concludes that this bill is a more expedient means to ensure the continued protection of patients. The California Association of Health Underwriters notes that without a sunset extension or new state regulations, DPH would lose its authority to enforce many current requirements designed to improve patient safety.
4. RELATED LEGISLATION. AB 1225 (Patterson) requires DPH to report on its efforts to update or modernize regulations. AB 1225 is pending hearing in the Assembly Health Committee.
5. PREVIOUS LEGISLATION.
   1. AB 614 (Brown), Chapter 435, Statutes of 2015, authorizes DPH to use a streamlined administrative process to update regulatory references to health care standards of practice adopted by a state or national association when outdated standards are referenced in the California Code of Regulations.
   2. AB 1312 (Brown) of 2013 would have authorized DPH to, without taking regulatory action, update references in regulations to health care standards of practice adopted by a recognized state or national association. AB 1312 was held in Assembly Health Committee.
6. POLICY COMMENTS. While DPH will most likely provide the report required by SB 534 on time, the ICF/DD-N regulations still have not gone out for public comment, and according to DPH will not be out until early 2018. At that time, absent this bill (which is author-sponsored, not introduced at the request of DPH) DPH will have lost the ability to regulate ASCs, CORFs, and ESRDs through federal certification standards. The provisions requiring ICF/DD-Ns to comply with federal standards will have sunset as well, and their state regulations will still be unfinished. And, although the study concludes DPH should continue to use federal certification standards rather than promulgate state specific regulations for ASCs, CORFs and ESRDs, this bill does not do so, and according to DPH it does not have any plans at this time to introduce legislation on this issue.
   
   As this bill highlights, DPH has not adopted regulations for ICF/DD-Ns and three other types of clinics. While it is encouraging that DPH is currently engaged in an effort to update Title 22 regulations, DPH should also examine what the barriers have been to using the APA process in an effort to make that a more routine part of their role as a regulator. The question remains: Should DPH defer permanently to federal certification standards for some or all of the clinics that are the subject of this bill?
7. SUGGESTED AMENDMENT. Given the fact that DPH is significantly behind schedule on the promulgation of the ICF/DD-N regulations, the Committee may wish to amend the bill to extend the sunset of that requirement from January 1, 2019, to January 1, 2020.

REGISTERED SUPPORT / OPPOSITION:

Support

California Association of Health Underwriters
Health Officers Association of California

Opposition

None on file.

Analysis Prepared by: Lara Flynn / HEALTH /