Under existing law, the State Department of Public Health licenses and regulates laboratories performing substance abuse testing for narcotic treatment programs. The State Public Health Officer may suspend, revoke, or take other disciplinary action against a licensee who, among other things, violates any of the regulations promulgated by the department.

This bill would make technical, nonsubstantive changes to those provisions by replacing obsolete statutory references to the former State Department of Health Services and State Director of Health Services with the State Department of Public Health and the State Public Health Officer, respectively.

Date of Hearing: July 19, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

SBPCA Bill Id:SB 608

Author:(Hernandez) – As Amended Ver:March 28, 2017

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

SUMMARY:

This bill allocates direct grant funding of about $155 million to designated public hospitals and about $112 million to non-designated public hospitals from the existing hospital quality assurance fee (QAF), over the last two quarters of the 2016-17 fiscal year, as well as the 2017-18 and 2018-19 fiscal years.

FISCAL EFFECT:

1. Direct grants to designated public hospitals of $25 million in 2016-17, $61 million in 2017-18, and $69 million in 2018-19 from the existing hospital QAF (Hospital Quality Assurance Revenue Fund).
2. Direct grants to non-designated public hospitals of $21 million in 2016-17, $44 million in 2017-18, and $47 million in 2018-19 from the existing hospital QAF (Hospital Quality Assurance Revenue Fund).

COMMENTS:

1. Purpose. This bill provides for a statutory allocation of grant funds to public hospitals, consistent with current estimates of fund availability for these purposes through the state's existing hospital QAF. This bill is sponsored by the California Hospital Association and has no opposition.
2. Background. Subject to restrictions, federal law allows states to use provider fees to fund a portion of their state share of Medicaid funding. Under these funding methods, states collect funds (through fees, taxes, or other means) from providers, which are then matched to allow increased Medicaid reimbursement to providers. Beginning in 2009, the Legislature enacted a hospital QAF, which has been reauthorized through various bills. The hospital QAF is a major Medi-Cal funding stream. One component of the QAF program is direct grants to both designated public hospitals (county-run and University of California hospitals) and non-designated public hospitals.
3. Recent changes. Proposition 52 of 2016 made several changes to the existing hospital QAF program, such as making the program permanent, increasing the vote threshold for the Legislature to amend the program by requiring a 2/3 vote, and exempting hospital quality assurance fee revenues from the requirements of Proposition 98. In addition, federal Medi-Cal managed care regulations finalized in 2016 and early 2017 restrict California's ability to "direct" payments from managed care plans to hospitals through funding streams such as the QAF. This bill relates only to direct grant payments to hospitals from the QAF, which at this time do not appear to be affected by the federal regulation.
4. Related Legislation.

SB 523 (Hernandez), currently pending in this committee, imposes a quality assurance fee for emergency medical transportation in the Medi-Cal program.

SB 171 (Hernández), currently pending in this committee, and AB 205 (Wood), pending in the Senate Appropriations Committee, implement federal Medi-Cal managed care regulations.

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

Date of Hearing: June 27, 2017

ASSEMBLY COMMITTEE ON HEALTH

Jim Wood, Chair

SBPCA Bill Id:SB 608

Author:(Hernandez) – As Amended Ver:March 28, 2017

SENATE VOTE: 39-0

SUBJECT: Medi-Cal: Hospital Quality Assurance Revenue Fund: direct grants.

SUMMARY: Requires direct grants of a total of $154.7 million to designated public hospitals (DPH) and a total of $112.2 million to nondesignated public hospitals (NDPHs) from the hospital Quality Assurance Fee (QAF) over the two subject fiscal quarters of the 2016-17 fiscal year (FY) through 2018-19 FY. Specifically, this bill:

1. Requires, for the second program period, direct grants in support of health care expenditures to be paid to DPHs and NDPHs as follows:

* For two subject fiscal quarters in 2016-17

1. Requires the above direct grant payments to be funded by the QAF, and prohibits these payments from constituting Medi-Cal payments.

EXISTING LAW:

1. Establishes the Medi-Cal program, administered by Department of Health Care Services (DHCS) to provide health care services to qualified low-income persons. Establishes a schedule of benefits for Medi-Cal beneficiaries, including inpatient and outpatient hospital services.
2. Establishes the Medi-Cal Hospital Reimbursement Improvement Act of 2013 (the Act), which imposes a hospital QAF, as specified, on certain general acute care hospitals and which requires supplemental payments to be made to private hospitals for certain hospital services, and increased capitation payments to Medi-Cal managed care plans (MCPs) for hospital services.
3. Requires, under the Act, direct grants of specified amounts to be paid from the QAF to DPHs and NDPHs for the period January 1, 2014 to December 31, 2016 (referred to as the “first program period”) in support of health care expenditures. Provides that direct grants do not constitute Medi-Cal payments.
4. Defines a DPH as one of 22 government-operated hospitals reimbursed on a certified public expenditure basis that is operated by either a county or the University of California (UC).
5. Defines a NDPH as one of California’s 37 hospitals that are either:
   1. A public hospital that is not a DPH and is not designated as a specialty hospital; or,
   2. A tax-exempt nonprofit hospital that is not designated as a specialty hospital, that is operating a hospital owned by a local health care district, and is affiliated with the health care district hospital owner by means of the district’s status as the nonprofit corporation’s sole corporate member.
6. Authorizes DPHs and NDPHs to be paid direct grants upon appropriation in the annual Budget Act. Requires the Director of DHCS to determine the amounts and allocation methodology, if any, of direct grants to DPHs and NDPHs for each subject fiscal year in a program period, in consultation with the hospital community, during a rebase calculation year. Permits the amounts and allocation methodology to include a withhold of direct grants to be used as the non-federal share for rate range increases. Requires these amounts to be specified in a provisional language in the annual Budget Act.

FISCAL EFFECT: According to the Senate Appropriations Committee:

1. Direct grants to DPHs of $25 million in 2016-17; $61 million in 2017-18; and, $69 million in 2018-19 from the existing hospital QAF (Hospital Quality Assurance Revenue Fund).
2. Direct grants to NDPHs of $21 million in 2016-17; $44 million in 2017-18; and, $47 million in 2018-19 from the existing hospital QAF (Hospital Quality Assurance Revenue Fund).

COMMENTS:

1. PURPOSE OF THIS BILL. According to the author, this bill would continue to provide direct grants to counties, the UCs and NDPHs from the hospital QAF. Since the inception of legislation establishing the QAF in 2009, direct grants have been provided to county and UC public hospitals, and since 2011, direct grants have been provided to NDPHs. The 2013 legislation that extended the QAF until December 31, 2016 required direct grants to DPHs and NDHPs but authorized them for subsequent years. Although DHCS has the administrative authority to continue providing direct grants, this bill would ensure direct grants continue to be provided over the last six months of 2016-17 and for the 2017-18 and 2018-19 FYs.
   
   DPHs and NDPHs are often essential providers of emergency services in their communities, which means they have to “take all comers” who need hospital emergency services, including the uninsured. The recently enacted Medi-Cal 2020 Section 1115 waiver required two evaluations of uncompensated hospital care which demonstrate the need for continued direct grants to DPHs. The first report on DPHs found these providers had total uncompensated care costs of $225 million, and $2.8 billion when taking into account that DPHs contribute a significant portion of the non-federal share of Medi-Cal reimbursement. The report found that net payments to DPHs covered only 71% of their costs after taking into account the matching contributions to the Medi-Cal program made by DPHs and their local government entities. A second waiver-required evaluation of uncompensated care, provider payments, and financing across all hospital providers that is due July 1, 2017.
2. BACKGROUND.
   1. Hospital QAF. Federal Medicaid law authorizes states to levy fees on health care providers if the fees meet federal requirements. Many states (including California) fund a portion of their share of Medicaid program costs through a fee on health care providers. Under these funding methods, states collect funds (through fees, taxes, or other means) from providers, which are then matched to allow increased Medicaid reimbursement to providers. In addition to the hospital QAF, California currently has a QAF for intermediate care facilities for the developmentally disabled, and a separate QAF for skilled nursing facilities. Beginning in 2009, the Legislature enacted a series of bills establishing a time-limited hospital QAF. The QAF enacted in 2013 sunset at the end of 2016, and the Health Budget Trailer Bill of 2016-17 extended the QAF until January 1, 2018.
   2. Proposition 52. On November 8, 2016, California voters approved Proposition 52 (the Act) which made the QAF, that is scheduled to end on January 1, 2018, permanent. Other provisions of Proposition 52 are as follows:
      1. Increased the vote threshold for the Legislature to end the QAF to a 2/3 vote instead of a majority;
      2. Made it harder to change the QAF by requiring voter approval, except for legislative changes that further the purpose of the Act. The authority to make changes is defined as changes necessary to obtain or maintain federal approval of the QAF; and,
      3. Excluded the QAF in the annual calculation of school funding (Proposition 98).

Passage of Proposition 52 also prohibited the state from increasing the amount it receives in revenue for children’s health coverage (a General Fund [GF] offset) from the QAF above the existing 24% of the net benefit of the QAF established from 2014 to 2016.

In addition, Proposition 52 effectively granted DHCS broad authority going forward to determine the payment rates from the QAF, and to modify any methodology or other provision specified to the extent necessary to meet the requirements of federal law or regulations to obtain federal approval or to enhance the probability that federal approval can be obtained, provided that the modifications do not violate the spirit, purposes, and intent of the law relating to QAF and are not inconsistent with the conditions of implementation of those provisions.

Hospitals and the state GF benefit from the QAF, as revenue from the QAF is used for two primary purposes: i) to fund the state share of increased Medi-Cal payments for hospitals and direct grants to DPHs and NDPHs; and, ii) to generate state GF savings ($850 million in FY 2015-16). The QAF revenue used for increased Medi-Cal payments was matched with $4.4 billion in federal Medi-Cal funding, resulting in $8.1 billion in total Medi-Cal payments and grants to hospitals in FY 2015-16. The hospital industry received in FY 2015-16 a net benefit of $3.5 billion as a result of the QAF because the hospitals received $8.1 billion in payments and paid $4.6 billion in QAF fees.

• 1. Direct grants from the QAF. Since the enactment of the original QAF, funds from the QAF have been used to make direct grants to DPHs or NDPHs or both. The direct grants come “off the top” of revenue from the QAF and are not considered Medicaid payments as DPHs and NDPHs (after inter-governmental transfers) are paid by fee-for-service (FFS) Medi-Cal at their upper payment level, which is the maximum amount the DPHs and NDPHs are allowed to be paid under federal law. The amount of direct grants are as follows:
     

1. SUPPORT. The California Hospital Association (CHA), the sponsor of this bill, indicates that the creation and implementation of the QAF in California has been extremely successful in preserving access for all the state’s residents. CHA points out that this bill continues to provide grants to our public hospitals, which is a very important component of the hospital fee program. The first program period enacted by SB 239 (Hernandez and Steinberg), Chapter 657, Statutes of 2013, is well on its way to delivering on the goal of bringing $10 billion in new Medi-Cal funding to California hospitals. In addition, the first program period is expected to provide the state with nearly $2.4 billion in GF savings for children’s health care coverage. Early modeling shows that the second program period will also bring about $10 billion in federal funding to California and will provide the state GF with an estimated $2.4 billion in savings. Although the provider fee has not solved California’s Medi-Cal shortfall, it will continue to be the largest programmatic action taken since the founding of the program to mitigate the lack of sufficient funding. It is vital to California’s hospitals that the program is approved and implemented. The QAF will increase Medi-Cal payments at a time when there is simply no alternative way to do so.
   
   The District Hospital Leadership Forum, the Association of California Healthcare Districts and the Private Essential Access Community Hospitals state that the QAF has proven to be important to all of California’s hospitals, and the supplemental funding provided through the QAF ensures access to critical hospital services are not compromised.
2. PREVIOUS LEGISLATION.
   
   1. AB 1607 (Committee on Budget), Chapter 27, Statutes of 2016, extends the sunset date of the Act by one year, from January 1, 2017 to January 1, 2018, and requires moneys in the Hospital Quality Assurance Revenue Fund to be continuously appropriated, instead of appropriated by the Legislature in the annual Budget Act.
      
   2. SB 239 enacted the Act, which imposes a hospital QAF, as specified, on certain general acute care hospitals from January 1, 2014, through December 30, 2016, and which requires supplemental payments to be made to private hospitals for certain services, direct grants to DPHs and NDPHs, increases capitation payments to Medi-Cal MCPs for hospital services, and for children’s health coverage and DHCS administration. Sunsets the Act on January 1, 2017. Requires Medi-Cal reimbursement for nursing facilities that are a distinct part of a general acute care hospital to be determined without the Medi-Cal rate reduction and rate roll-back required under existing law for dates of services on and after October 1, 2013. Establishes Intergovernmental Transfer programs.
      
   3. AB 1383 (Jones), Chapter 627, Statutes of 2009, and AB 188 (Jones), Chapter 645, Statutes of 2009, enacts the original Medi-Cal hospital QAF and a methodology for making supplemental payments to hospitals, and provided funds for children's health care coverage and grants to public hospitals. In response to the state’s request for federal approval, the Centers for Medicare and Medicaid Services (CMS) in June of 2010 sent a letter raising objections and concerns about the methodology which concluded that the fee enacted by AB 1383 did not meet federal standards. CMS also suggested modifications, which were made by AB 1653 (Jones), Chapter 218, Statutes of 2010. AB 1653 also establishes an alternative mechanism for funding supplemental grants to public hospitals, and allows the state to retain the funds that were previously allocated to these hospitals.
      
   4. SB 335 (Hernandez), Chapter 286, Statutes 2011, an urgency statute, imposes a QAF on hospitals for 30 months (from June 30, 2011, until December 31, 2013); and uses the resulting revenue to draw down federal funds to provide supplemental payments to private hospitals in FFS Medi-Cal, Medi-Cal managed care, and to provide specified funding amounts from the QAF per quarter for children’s health coverage until December 31, 2013. Requires DPH to be paid direct grants, funded from the QAF; reduces disproportionate share hospital replacement payments and supplemental payments from the Private Hospital Supplemental Fund to hospitals by specified amounts in 2012-13 and 2013-14; and, appropriated $13.6 billion to DHCS for purposes of that measure.
      
   5. SB 90 (Steinberg), Chapter 19, Statutes of 2010, repeals specified Medi-Cal hospital rate freezes and rate reductions enacted in Health Budget Trailer Bills in 2008, 2010 and 2011, and uses the resulting revenue to draw down federal funds to provide supplemental payments to private hospitals in FFS Medi-Cal, Medi-Cal managed care, and for acute psychiatric days, to provide $210 million for children’s health coverage, and to pay for DHCS administrative costs in administering the hospital fee and supplemental payment provisions of this bill. Reduces disproportionate share GF payments to private hospitals by $105 million GF over two FYs. Requires DHCS to design and implement an inter-governmental transfer program for Medi-Cal managed care services provided by DPHs and NDPHs for the purpose of increasing reimbursement to NDPHs and DPHs. Allows hospitals that have received extensions to January 1, 2013, of the January 1, 2008, seismic deadline, for their Structural Performance Category 1 buildings, to request an additional extension of up to seven years.
      

REGISTERED SUPPORT / OPPOSITION:

Support

California Hospital Association (sponsor)

Association of California Healthcare Districts

California Association of Public Hospitals and Health Systems

California Children’s Hospital Association

District Hospital Leadership Forum

Private Essential Access Community Hospitals

Opposition

None on file.

Analysis Prepared by: Rosielyn Pulmano / HEALTH / (916) 319-2097

 THIRD READING  

Bill No: SB 608

Author:

:

Vote:

SENATE HEALTH COMMITTEE: 9-0, 4/19/17

AYES: Hernandez, Nguyen, Atkins, Leyva, Mitchell, Monning, Newman, Nielsen, Roth

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/25/17

AYES: Lara, Bates, Beall, Bradford, Hill, Nielsen, Wiener

SUBJECT:

SOURCE: California Hospital Association

DIGEST:

This bill requires direct grants of a total of $154.7 million to designated public hospitals and a total of $112.2 million to non-designated public hospitals from the hospital quality assurance fee over the two quarters of the 2016-17 fiscal year through the 2018-19 fiscal year.

ANALYSIS:

Existing law:

1. Establishes the Medi-Cal program, administered by Department of Health Care Services (DHCS), under which health care services are provided to qualified low-income persons. Establishes a schedule of benefits for Medi-Cal beneficiaries, which includes inpatient and outpatient hospital services.
   
2. Establishes the Medi-Cal Hospital Reimbursement Improvement Act of 2013 (the Act), which imposes a hospital quality assurance fee (QAF), as specified, on certain general acute care hospitals and which requires supplemental payments to be made to private hospitals for certain hospital services, and increased capitation payments to Medi-Cal managed care plans for hospital services.
   
3. Requires, under the Act, direct grants of specified amounts to be paid from the QAF to designated public hospitals (DPHs) and non-designated public hospitals (NDPHs) for the period January 1, 2014 to December 31, 2016 (referred to as the “first program period”) in support of health care expenditures. Direct grants do not constitute Medi-Cal payments.
   
4. Defines a DPH as one of 22 government-operated hospitals reimbursed on a certified public expenditure basis that is operated by either a county or the University of California.
   
5. Defines a NDPH as either:
   1. A public hospital that is not a DPH and is not designated as a specialty hospital; or,
   2. A tax-exempt non-profit hospital that is not designated as a specialty hospital, and that is operating a hospital owned by a local health care district, and is affiliated with the health care district hospital owner by means of the district’s status as the nonprofit corporation’s sole corporate member. (There are 39 NDPH in California.)
      
6. Authorizes DPHs and NDPHs to be paid direct grants upon appropriation in the annual Budget Act. Requires the director of DHCS to determine the amounts and allocation methodology, if any, of direct grants to DPHs and NDPHs for each subject fiscal year in a program period, in consultation with the hospital community, during a rebase calculation year. Permits the amounts and allocation methodology to include a withhold of direct grants to be used as the non-federal share for rate range increases. Requires these amounts to be specified in provisional language in the annual Budget Act.

This bill:

1. Requires direct grants in support of health care expenditures to be paid to DPH and NDPH, as follows:
   

Fiscal Year DPH NDPH

2016-17* $25,250,000 $21,000,000

• 1. $60,500,000 $44,400,000
  2. $69,000,000 $46,800,000

* For two subject fiscal quarters in 2016-17

1. Requires the above direct grant payments to be funded by the QAF, and prohibits these payments from constituting Medi-Cal payments.

Comments

1. Author’s statement. According to the author, this bill would continue to provide direct grants to county, UC and non-designated public hospitals from the hospital QAF. Since the inception of legislation establishing the QAF in 2009, direct grants have been provided to county and UC public hospitals, and since 2011, direct grants have been provided to non-designated public hospitals. The 2013 legislation that extended the QAF until December 31, 2016 required direct grants to DPHs and NDHPs but authorized them for subsequent years. Although DHCS has the administrative authority to continue providing direct grants, this bill would ensure direct grants continue to be provided over the last six months of 2016-17 and for the 2017-18 and 2018-19 fiscal years.
   
   DPHs and NDPHs are often essential providers of emergency services in their communities, which means they have to “take all comers” who need hospital emergency services, including the uninsured. The recently enacted Medi-Cal 2020 Section 1115 waiver required two evaluations of uncompensated hospital care which demonstrate the need for continued direct grants to DPHs. The first report on DPHs found these providers had total uncompensated care costs of $225 million, and $2.8 billion when taking into account that DPHs contribute a significant portion of the non-federal share of Medi-Cal reimbursement. The report found that net payments to DPHs covered only 71% of their costs after taking into account the matching contributions to the Medi-Cal program made by DPHs and their local government entities. A second waiver-required evaluation of uncompensated care, provider payments and financing across all hospital providers is due July 1, 2017.
   
2. Hospital QAF. Federal Medicaid law authorizes states to levy fees on health care providers if the fees meet federal requirements. Many states (including California) fund a portion of their share of Medicaid program costs through a fee on health care providers. Under these funding methods, states collect funds (through fees, taxes, or other means) from providers, which are then matched to allow increased Medicaid reimbursement to providers. In addition to the hospital QAF, California currently has a QAF for intermediate care facilities for the developmentally disabled, and a separate QAF for skilled nursing facilities.

Beginning in 2009, the Legislature enacted a series of bills establishing a time-limited hospital QAF. The QAF enacted in 2013 sunset at the end of 2016, and the health budget trailer bill of 2016-17 extended the QAF one additional calendar year (until January 1, 2018).

Proposition 52 of the November 2016 General Election made several changes to the hospital QAF, including:

1. Made the hospital QAF permanent (prior to Proposition 52, the QAF sunset January 1, 2018);
2. Increased the vote threshold for the Legislature to end the hospital QAF by requiring a 2/3 vote of the Legislature (instead of a majority);
3. Made it more difficult to change the hospital QAF by requiring voter approval, except for legislative changes that further the purpose of the Act. The authority to make changes is defined as changes necessary to obtain or maintain federal approval (including the fee imposed and related QAF payments to hospitals), and changes to the methodology used for development of the QAF and QAF payments to hospitals;
4. Prohibited the revenue from the QAF from being considered revenues or General Fund (GF) revenues for purposes of Proposition 98, the school funding initiative from 1988.

Voter approval of Proposition 52 had the effect of prohibiting the state from increasing the amount it receives in revenue for children’s health coverage (in effect a GF offset) from the QAF above the existing 24% of the net benefit of the QAF established in effect from 2014-16.

In addition, Proposition 52 effectively granted DHCS broad authority going forward to determine the payment rates from the QAF, and to modify any methodology or other provision specified in the QAF law to the extent necessary to meet the requirements of federal law or regulations to obtain federal approval or to enhance the probability that federal approval can be obtained, provided the modifications do not violate the spirit, purposes, and intent of this QAF-related body of law article and are not inconsistent with the conditions of implementation of that body of law.

Hospitals and the state GF benefit from the QAF, as revenue from the QAF is used for two primary purposes: (1) to fund the state share of increased Medi-Cal payments for hospitals and direct grants to DPHs and NDPHs; and (2) to generate state GF savings ($850 million in 2015–16). The hospital fee revenue used for increased Medi-Cal payments was matched with $4.4 billion in federal Medi-Cal funding, resulting in $8.1 billion in total Medi-Cal payments and grants to hospitals in 2015–16. The hospital industry received in 2015–16 a net benefit of $3.5 billion as a result of the QAF because the hospitals received $8.1 billion in payments and paid $4.6 billion in QAF fees.

Since the enactment of the original QAF, funds from the QAF have been used to make direct grants to DPHs or NDPHs or both. The direct grants come “off the top” of revenue from the QAF and are not considered Medicaid payments as DPHs and NDPHs (after inter-governmental transfers) are paid by fee-for-service Medi-Cal at their upper payment level, which is the maximum amount the DPHs and NDPHs are allowed to be paid under federal law.

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

According to the Senate Appropriations Committee:

• Direct grants to DPHs of $25 million in 2016-17, $61 million in 2017-18, and $69 million in 2018-19 from the existing hospital quality assurance fee (Hospital Quality Assurance Revenue Fund).
• Direct grants to NDPHs of $21 million in 2016-17, $44 million in 2017-18, and $47 million in 2018-19 from the existing hospital quality assurance fee (Hospital Quality Assurance Revenue Fund).

SUPPORT: (Verified 5/22/17)

California Hospital Association (source)

Association of California Healthcare Districts

California Association of Public Hospitals

District Hospital Leadership Forum

Private Essential Access Community Hospitals

OPPOSITION: (Verified 5/22/17)

None received

ARGUMENTS IN SUPPORT: This bill is sponsored by the California Hospital Association (CHA), which argues the QAF remains crucial to the preservation of California’s entire safety net. CHA argues certain changes are required for each of the hospital fee program periods, and this bill includes the identified changes necessary to implement program period two, January 1, 2017 through June 30, 2019. CHA states the creation and implementation of the hospital fee program in California has been extremely successful in preserving access for all the state’s residents. The program period enacted by SB 239 is well on its way to delivering on the goal of bringing $10 billion in new Medi-Cal funding to California hospitals. In addition, the first program period is expected to provide the state with nearly $2.4 billion in GF savings for children’s health care coverage. Early modeling shows that the second program period will also bring about $10 billion in federal funding to California and will provide the state GF with an estimated $2.4 billion in savings. CHA concludes that the provider fee has not solved California’s Medi-Cal shortfall, but it will continue to be the largest programmatic action taken since the founding of the program to mitigate the lack of sufficient funding. CHA concludes that it is vital to California hospitals that the program is approved and implemented, and the hospital fee program will increase Medi-Cal payments at a time when there is simply no alternative way to do so.

Prepared by:

5/27/17 16:39:17

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 608 (Hernandez) - Medi-Cal: Hospital Quality Assurance Revenue Fund: direct grants

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

Bill Summary:

SB 608 would require direct grants of $155 million to be paid to designated public hospitals and direct grants of $112 million to be paid to nondesignated public hospitals from the existing hospital quality assurance fee for the fiscal years of 2016-17, 2017-18, and 2018-19.

Fiscal Impact:

• Direct grants to designated public hospitals of $25 million in 2016-17, $61 million in 2017-18, and $69 million in 2018-19 from the existing hospital quality assurance fee (Hospital Quality Assurance Revenue Fund).
• Direct grants to nondesignated public hospitals of $21 million in 2016-17, $44 million in 2017-18, and $47 million in 2018-19 from the existing hospital quality assurance fee (Hospital Quality Assurance Revenue Fund).

Background:

Under state and federal law, the Department of Health Care Services operates the Medi-Cal program, which provides health care coverage to low income individuals, families, and children. Medi-Cal provides coverage to childless adults and parents with household incomes up to 138% of the federal poverty level and to children with household incomes up to 266% of the federal poverty level. The federal government provides matching funds that vary from 50% to 90% of expenditures depending on the category of beneficiary.

Federal law allows states to impose quality assurance fees on providers in state Medicaid programs. States are allowed to impose such fees or taxes on providers, use the resulting revenues to draw down additional federal Medicaid funding, and use the combined revenues to pay increased reimbursement rates to providers. The state currently imposes quality assurance fees on hospitals, managed care plans, skilled nursing facilities, and intermediate care facilities for the developmentally disabled.

Beginning in 2009, the Legislature has enacted a series of bills to impose a quality assurance fee on hospitals, to generate revenues to increase federal funding for the Medi-Cal program, which increases revenues to private hospitals and reduces state spending on the Medi-Cal program. Under the hospital quality assurance fee, the state increases payments to private hospitals (either through managed care rates or through increased fee-for-service payments). In addition, the current hospital quality assurance fee authorizes direct grants to be paid to both designated public hospitals (county or University of California operated hospitals) and nondesignated public hospitals (39 other publicly owned hospitals in the state). Under current law, direct grants to public hospitals are subject to appropriation in the annual Budget Act.

Proposition 52 (2016) made several changes to the existing hospital quality assurance fee program, such as making the program permanent, increasing the vote threshold for the Legislature to amend the program by requiring a 2/3 vote, and exempting hospital quality assurance fee revenues from the requirements of Proposition 98.

Under the current quality assurance fee, the state receives 24% of the net benefit of the fee, to reduce state General Fund spending on the Medi-Cal program. In 2015-16 this created General Fund savings of $850 million. In 2015-16 the hospital industry received a net benefit of $3.5 billion (reflecting payments received less fees paid).

In 2016 and 2017, the federal Centers for Medicare and Medicaid Services finalized a series regulations governing the use of managed care by state Medicaid programs. These new regulations will require significant changes to the way in which the state oversees the Medi-Cal managed care system, which currently serves 80% of Medi-Cal beneficiaries. The new managed care rule puts in place limitations on states ability to make “pass through” payments to providers through managed care plans and the use of other directed payments. This will require significant changes in how the state uses the hospital quality assurance fee to provide funding to hospitals through the Medi-Cal managed care system.

Proposed Law:

SB 608 would require direct grants of $155 million to be paid to designated public hospitals and direct grants of $112 million to be paid to nondesignated public hospitals from the existing hospital quality assurance fee for the fiscal years of 2016-17, 2017-18, and 2018-19.

Related Legislation:

SB 523 (Hernandez) would impose a quality assurance fee for emergency medical transportation in the Medi-Cal program. That bill will be heard in this committee.

Staff Comments:

By expanding the use of moneys in the Hospital Quality Assurance Revenue Fund for additional direct grants, the bill makes an appropriation. Because the bill amends provisions of law codified in Proposition 56, the bill would require a 2/3 vote of the Legislature.

-- END --

SENATE COMMITTEE ON HEALTH

Senator Ed Hernandez, O.D., Chair

BILL NO: SB 608

SUBJECT: Medi-Cal: Hospital Quality Assurance Revenue Fund: direct grants

SUMMARY:

Requires direct grants of a total of $154.7 million to designated public hospitals and a total of $112.2 million to non-designated public hospitals from the hospital quality assurance fee over the two quarters of the 2016-17 fiscal year through the 2018-19 fiscal year.

Existing law:

1. Establishes the Medi-Cal program, administered by Department of Health Care Services (DHCS), under which health care services are provided to qualified low-income persons. Establishes a schedule of benefits for Medi-Cal beneficiaries, which includes inpatient and outpatient hospital services.
   
2. Establishes the Medi-Cal Hospital Reimbursement Improvement Act of 2013 (the Act), which imposes a hospital quality assurance fee (QAF), as specified, on certain general acute care hospitals and which requires supplemental payments to be made to private hospitals for certain hospital services, and increased capitation payments to Medi-Cal managed care plans for hospital services.
   
3. Requires, under the Act, direct grants of specified amounts to be paid from the QAF to designated public hospitals (DPHs) and non-designated public hospitals (NDPHs) for the period January 1, 2014 to December 31, 2016 (referred to as the “first program period”) in support of health care expenditures. Direct grants do not constitute Medi-Cal payments.
   
4. Defines a DPH as one of 22 government-operated hospitals reimbursed on a certified public expenditure basis that is operated by either a county or the University of California.
   
5. Defines a NDPH as either:
6. A public hospital that is not a DPH and is not designated as a specialty hospital; or,
7. A tax-exempt non-profit hospital that is not designated as a specialty hospital, and that is operating a hospital owned by a local health care district, and is affiliated with the health care district hospital owner by means of the district’s status as the nonprofit corporation’s sole corporate member. (There are 39 NDPH in California.)
   
8. Authorizes DPHs and NDPHs to be paid direct grants upon appropriation in the annual Budget Act. Requires the director of DHCS to determine the amounts and allocation methodology, if any, of direct grants to DPHs and NDPHs for each subject fiscal year in a program period, in consultation with the hospital community, during a rebase calculation year. Permits the amounts and allocation methodology to include a withhold of direct grants to be used as the non-federal share for rate range increases. Requires these amounts to be specified in provisional language in the annual Budget Act.

This bill:

1. Requires direct grants in support of health care expenditures to be paid to DPH and NDPH, as follows:
   

Fiscal Year DPH NDPH

2016-17* $25,250,000 $21,000,000

• 1. $60,500,000 $44,400,000
  2. $69,000,000 $46,800,000

* For two subject fiscal quarters in 2016-17

1. Requires the above direct grant payments to be funded by the QAF, and prohibits these payments from constituting Medi-Cal payments.

FISCAL EFFECT:

This bill has not been analyzed by a fiscal committee.

COMMENTS:

1. Author’s statement. According to the author, this bill would continue to provide direct grants to county, UC and non-designated public hospitals from the hospital QAF. Since the inception of legislation establishing the QAF in 2009, direct grants have been provided to county and UC public hospitals, and since 2011, direct grants have been provided to non-designated public hospitals. The 2013 legislation that extended the QAF until December 31, 2016 required direct grants to DPHs and NDHPs but authorized them for subsequent years. Although DHCS has the administrative authority to continue providing direct grants, this bill would ensure direct grants continue to be provided over the last six months of 2016-17 and for the 2017-18 and 2018-19 fiscal years.
   
   DPHs and NDPHs are often essential providers of emergency services in their communities, which means they have to “take all comers” who need hospital emergency services, including the uninsured. The recently enacted Medi-Cal 2020 Section 1115 waiver required two evaluations of uncompensated hospital care which demonstrate the need for continued direct grants to DPHs. The first report on DPHs found these providers had total uncompensated care costs of $225 million, and $2.8 billion when taking into account that DPHs contribute a significant portion of the non-federal share of Medi-Cal reimbursement. The report found that net payments to DPHs covered only 71% of their costs after taking into account the matching contributions to the Medi-Cal program made by DPHs and their local government entities. A second waiver-required evaluation of uncompensated care, provider payments and financing across all hospital providers is due July 1, 2017.
   
2. Background on hospital QAF. Federal Medicaid law authorizes states to levy fees on health care providers if the fees meet federal requirements. Many states (including California) fund a portion of their share of Medicaid program costs through a fee on health care providers. Under these funding methods, states collect funds (through fees, taxes, or other means) from providers, which are then matched to allow increased Medicaid reimbursement to providers. In addition to the hospital QAF, California currently has a QAF for intermediate care facilities for the developmentally disabled, and a separate QAF for skilled nursing facilities.

Beginning in 2009, the Legislature enacted a series of bills establishing a time-limited hospital QAF. The QAF enacted in 2013 sunset at the end of 2016, and the health budget trailer bill of 2016-17 extended the QAF one additional calendar year (until January 1, 2018).

Proposition 52 of the November 2016 General Election made several changes to the hospital QAF, including:

1. Made the hospital QAF permanent (prior to Proposition 52, the QAF sunset January 1, 2018);
2. Increased the vote threshold for the Legislature to end the hospital QAF by requiring a 2/3 vote of the Legislature (instead of a majority);
3. Made it more difficult to change the hospital QAF by requiring voter approval, except for legislative changes that further the purpose of the Act. The authority to make changes is defined as changes necessary to obtain or maintain federal approval (including the fee imposed and related QAF payments to hospitals), and changes to the methodology used for development of the QAF and QAF payments to hospitals;
4. Prohibited the revenue from the QAF from being considered revenues or General Fund (GF) revenues for purposes of Proposition 98, the school funding initiative from 1988.

Voter approval of Proposition 52 had the effect of prohibiting the state from increasing the amount it receives in revenue for children’s health coverage (in effect a GF offset) from the QAF above the existing 24% of the net benefit of the QAF established in effect from 2014-16.

In addition, Proposition 52 effectively granted DHCS broad authority going forward to determine the payment rates from the QAF, and to modify any methodology or other provision specified in the QAF law to the extent necessary to meet the requirements of federal law or regulations to obtain federal approval or to enhance the probability that federal approval can be obtained, provided the modifications do not violate the spirit, purposes, and intent of this QAF-related body of law article and are not inconsistent with the conditions of implementation of that body of law.

Hospitals and the state GF benefit from the QAF, as revenue from the QAF is used for two primary purposes: (1) to fund the state share of increased Medi-Cal payments for hospitals and direct grants to DPHs and NDPHs; and (2) to generate state GF savings ($850 million in 2015–16). The hospital fee revenue used for increased Medi-Cal payments was matched with $4.4 billion in federal Medi-Cal funding, resulting in $8.1 billion in total Medi-Cal payments and grants to hospitals in 2015–16. The hospital industry received in 2015–16 a net benefit of $3.5 billion as a result of the QAF because the hospitals received $8.1 billion in payments and paid $4.6 billion in QAF fees.

1. Direct payments from the hospital QAF. Since the enactment of the original QAF, funds from the QAF have been used to make direct grants to DPHs or NDPHs or both. The direct grants come “off the top” of revenue from the QAF and are not considered Medicaid payments as DPHs and NDPHs (after inter-governmental transfers) are paid by fee-for-service Medi-Cal at their upper payment level, which is the maximum amount the DPHs and NDPHs are allowed to be paid under federal law. The amount of direct grants are as follows:
   

1. Medicaid managed care rule and the hospital QAF. In 2016 and early 2017, the federal Centers for Medicare and Medicaid Services (CMS) within the federal Department of Health and Human Services (DHHS) finalized two Medicaid and Children’s Health Insurance Program (CHIP) managed care regulations that have a significant impact on California’s Medi-Cal program in several areas, including how the state pays Medi-Cal managed care plans, and how the plans pay hospitals.
   

One of the most significant changes in the federal regulations is a prohibition (with
exceptions) against states directing Medicaid managed care plans’ expenditures under the contract with the state, and a phase out of “pass-through” payments from plans to hospitals over 10 years. Payments from plans to hospitals of funds from the QAF and associated federal matching funds are considered pass-through payments. The federal rule contains exceptions to the prohibition against directed payment by allowing directed payments in specified circumstances, such as through value-based purchasing models, or by adopting a minimum fee schedule or uniform dollar or percentage increase for network providers that provide a particular service under the contract.

The effect of the changes in the Medicaid federal rule is to require a change in how QAF payments from plans to public and (primarily) private hospitals are made. If the state is to shift QAF pass-through payments to federally permissible directed payments, the payment has to meet the federal requirements. Specifically, the directed payment must be made to “network providers” when existing managed care payments are made to non-contracting and contracting hospitals. In addition, the directed payments must be based on the utilization and delivery of service and the federal fee schedule/uniform dollar or percentage increase requirements, as compared to existing QAF payments, which are made based on historical utilization using a sophisticated financial model based on previous hospital utilization to maximize the benefit of the revenue generated by the QAF and provide certainty to payors of the QAF. The directed payment provisions apply to rating periods for contracts starting on or after July 1, 2017.

1. Prior legislation. AB 1607 (Committee on Budget, Chapter 27, Statutes of 2016) extended the sunset date of the Medi-Cal Hospital Reimbursement Improvement Act of 2013 by one year, from January 1, 2017 to January 1, 2018, and required moneys in the Hospital Quality Assurance Revenue Fund to be continuously appropriated, instead of appropriated by the Legislature in the annual Budget Act.

SB 239 (Hernandez and Steinberg, Chapter 657, Statutes of 2013) enacted the Medi-Cal Hospital Reimbursement Improvement Act of 2013 (the Act), which imposed a hospital quality assurance fee, as specified, on certain general acute care hospitals from January 1, 2014, through December 30, 2016, and which requires supplemental payments to be made to private hospitals for certain services, direct grants to DPHs and NDPHs, increased capitation payments to Medi-Cal managed care plans for hospital services, and for children’s health coverage and DHCS administration. Sunsets the Act on January 1, 2017. Requires Medi-Cal reimbursement for nursing facilities that are a distinct part of a general acute care hospital to be determined without the Medi-Cal rate reduction and rate roll-back required under existing law for dates of services on and after October 1, 2013. Establishes Intergovernmental Transfer programs.

AB 1383 (Jones, Chapter 627, Statutes of 2009) and AB 188 (Jones, Chapter 645, Statutes of 2009), enacted the original Medi-Cal hospital QAF and a methodology for making supplemental payments to hospitals, and provided funds for children's health care coverage and grants to public hospitals. In response to the state’s request for federal approval, the CMS in June of 2010 sent a letter raising objections and concerns about the methodology which concluded that the fee enacted by AB 1383 did not meet federal standards. CMS also suggested modifications, which were made by AB 1653 (Jones), Chapter 218, Statutes of 2010. AB 1653 also established an alternative mechanism for funding supplemental grants to public hospitals, and allowed the state to retain the funds that were previously allocated to these hospitals.

SB 90 (Steinberg, Chapter 19, Statutes of 2010) repealed specified Medi-Cal hospital rate freezes and rate reductions enacted in health budget trailer bills in 2008, 2010 and 2011. SB 90 also imposed a QAF on hospitals for six months (January 1, 2011, until June 30, 2011), and used the resulting revenue to draw down federal funds to provide supplemental payments to private hospitals in fee-for-service Medi-Cal, Medi-Cal managed care, and for acute psychiatric days, to provide $210 million for children’s health coverage, and to pay for DHCS administrative costs in administering the hospital fee and supplemental payment provisions of this bill. SB 90 also reduced disproportionate share GF payments to private hospitals by $105 million GF over two fiscal years. SB 90 also required DHCS to design and implement an inter-governmental transfer program for Medi-Cal managed care services provided by designated public hospitals (DPH) and NDPH for the purpose of increasing reimbursement to NDPHs and DPHs.

In addition, SB 90 allows hospitals that have received extensions to January 1, 2013, of the January 1, 2008, seismic deadline, for their Structural Performance Category 1 buildings, to request an additional extension of up to seven years.

In the 2011-12 session, SB 335 (Hernandez, Chapter 286, Statutes 2011) imposed a QAF on hospitals for 30 months (from June 30, 2011, until December 31, 2013). SB 335 used the resulting revenue to draw down federal funds to provide supplemental payments to private hospitals in fee-for-service Medi-Cal, Medi-Cal managed care, and to provide specified funding amounts from the QAF per quarter for children’s health coverage until December 31, 2013. In addition, SB 335 required DPH to be paid direct grants, funded from the QAF. SB 335 also reduced disproportionate share hospital replacement payments and supplemental payments from the Private Hospital Supplemental Fund to hospitals by specified amounts in 2012-13 and 2013-14. Finally, SB 335 appropriated $13.6 billion to DHCS for purposes of that measure. SB 335 took effect as an urgency statute upon signature by the Governor in September 2011.

1. Support. This bill is sponsored by the California Hospital Association (CHA), which argues the QAF remains crucial to the preservation of California’s entire safety net. CHA argues certain changes are required for each of the hospital fee program periods, and this bill includes the identified changes necessary to implement program period two, January 1, 2017 through June 30, 2019. CHA states the creation and implementation of the hospital fee program in California has been extremely successful in preserving access for all the state’s residents. The program period enacted by SB 239 is well on its way to delivering on the goal of bringing $10 billion in new Medi-Cal funding to California hospitals. In addition, the first program period is expected to provide the state with nearly $2.4 billion in GF savings for children’s health care coverage. Early modeling shows that the second program period will also bring about $10 billion in federal funding to California and will provide the state GF with an estimated $2.4 billion in savings. CHA concludes that the provider fee has not solved California’s Medi-Cal shortfall, but it will continue to be the largest programmatic action taken since the founding of the program to mitigate the lack of sufficient funding. CHA concludes that it is vital to California hospitals that the program is approved and implemented, and the hospital fee program will increase Medi-Cal payments at a time when there is simply no alternative way to do so.

SUPPORT AND OPPOSITION:

Support: California Hospital Association (sponsor)

Association of California Healthcare Districts

District Hospital Leadership Forum

Private Essential Access Community Hospitals

Oppose: None received

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