Legislature(1999 - 2000)

04/06/1999 06:04 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 106(JUD)                                                                                                 
"An Act relating to actions of the Department of                                                                                
Health and Social Services regarding certain health                                                                             
facility payments."                                                                                                             
This was the first hearing on this bill.                                                                                        
Senator Robin Taylor, sponsor of the bill, testified. He                                                                        
told the committee SB 106 was an act relating to decisions                                                                      
regarding certain health care facility payments.  It was                                                                        
meant to correct a problem with the Medicaid rate setting                                                                       
and appeals process.  That problem was one of process                                                                           
He referred to a handout showing the Medicaid Rate Advisory                                                                     
Commission open appeal history. He drew the members'                                                                            
attention to a couple items. In 1991 the Wesley                                                                                 
Rehabilitation and Care Center appealed. They again                                                                             
appealed their rates for each year from 1992 through 1997                                                                       
and 1999. That gave an example of how far back these                                                                            
problems existed. This one finally got a court decision and                                                                     
the facility submitted a proposed summary of judgement                                                                          
order to the Kenai Superior Court. The administrative                                                                           
appeal was stayed in 1995.  These matters were still                                                                            
pending and the amounts had never been paid to this                                                                             
facility.  He thought the Department of Health and Social                                                                       
Services was waiting for a final court decision.                                                                                
He detailed additional administrative appeals filed from                                                                        
1990 through 1998. Another example was with North Star                                                                          
Hospital, which had filed bankruptcy since the multiple                                                                         
appeals were submitted.  He didn't know the relationship                                                                        
between the unpaid claims and the bankruptcy.                                                                                   
He gave a history of the process where the rates used to be                                                                     
set by a panel made up of gubernatorial appointees from                                                                         
hospitals across the state.  Under the Cowper                                                                                   
Administration, the process was returned to the department                                                                      
for rate determination.                                                                                                         
When the bill was heard in the Senate Judiciary Committee,                                                                      
Senator Robin Taylor questioned a witness on how the                                                                            
current procedure was working.  He found the response                                                                           
incredible.  It had taken seven years to adopt regulations                                                                      
to implement the program.  That was what the facilities                                                                         
were up against, he stressed. He anticipated the department                                                                     
would provide the committee with explanations for the                                                                           
delays and difficulties in resolving the appeals. What they                                                                     
were really doing was slow rolling and delaying the                                                                             
process, so they didn't have to pay the bill, he accessed.                                                                      
He originally thought the bill would have a $20 million                                                                         
fiscal note. Instead he was told it would be closer to $10                                                                      
million.  That was in claims that had not been paid to the                                                                      
hospitals that Alaskans and their families went to. Almost                                                                      
every hospital in the state had been involved in the                                                                            
appeals at one time or another.  The hospital had to carry                                                                      
its cost during the proceedings and they charged the                                                                            
patients because they were not receiving reimbursement from                                                                     
the state.                                                                                                                      
He stated that the department was not idly sitting back                                                                         
waiting for the Legislature to decide in this bill.  They                                                                       
heavily opposed the legislation. The department did not                                                                         
want the Legislature telling the department that there                                                                          
should be some finality in the process.                                                                                         
The bill proposed that once the appeal went through the                                                                         
hearing officer process, if the hearing officer rendered a                                                                      
decision then the commissioner had thirty days to either                                                                        
abide by the decision or take other action. The bill also                                                                       
provided that the appellant also had a right at that point                                                                      
after the thirty-days had elapsed to take the matter to                                                                         
court for a final decision.                                                                                                     
He referred to a letter from Financial Consultants of                                                                           
Alaska relating to the audits that were discussed in the                                                                        
Senate Judiciary Committee. According to the letter, it                                                                         
should be noted that the audit staff had conveniently timed                                                                     
the release of Ketchikan General Hospital's 1997 audit on                                                                       
February 19, 1999 - almost two years later.  That audit was                                                                     
commenced on April 30, 1998. Petersburg Medical Center's                                                                        
1997 audit was released March 17, 1999 and was commenced on                                                                     
June 17, 1998, almost a year before. Central Peninsula's                                                                        
and Cordova Hospital's 1997 audits were released on April                                                                       
2, 1999.  He did not believe staff had just finished the                                                                        
audits since none of the facilities had any correspondence                                                                      
for months in this regard. The letter went on to explain                                                                        
that the facilities had asked for the information, not had                                                                      
it provided, heard nothing and once the legislation started                                                                     
moving, the audits were released.  Senator Robin Taylor                                                                         
said the department was punishing the facilities by                                                                             
nonverbally saying, "if you mess around with us in the                                                                          
Legislature, we'll mess around with you too," and drop the                                                                      
audits. This was not an accident and it was not a                                                                               
coincidence, he emphasized.                                                                                                     
He spoke about Bartlett Regional Hospital's MRI machine                                                                         
reimbursement difficulties. The life span of the machine                                                                        
was spent and the hospital was purchasing another MRI. Yet,                                                                     
they never were reimbursed for the first machine purchased                                                                      
five years ago because the department continued to delay                                                                        
the process. When the hospitals complained, the department                                                                      
required audits. The patients had to pay the difference.                                                                        
He did not feel it should not take seven years to draft the                                                                     
Senator Pete Kelly spoke to a $10 million fiscal note and                                                                       
didn't see that in the packet.  Co-Chair John Torgerson                                                                         
clarified that there was $10 million in outstanding in                                                                          
claims although the fiscal notes totaled $507,200.  Senator                                                                     
Robin Taylor wanted the committee to be aware of the                                                                            
gravity of the problem. He realized the fiscal note was                                                                         
much smaller than what he anticipated the actual of the                                                                         
legislation would be. When the appeal reached the court and                                                                     
judged looked at the hearing officer's decision and if the                                                                      
judge determined the hearing officer was correct and the                                                                        
amounts should have been paid, the department would not                                                                         
only be required to pay the claim, but also interest. He                                                                        
felt those total claims gave a better idea of what the                                                                          
total fiscal impact would be. He hesitated to note that                                                                         
since it would be counterproductive to the passage of the                                                                       
bill. At the same time, he felt the system needed to be                                                                         
Senator Gary Wilken wanted to understand the structure.                                                                         
Who paid for the hearing examiner?  Senator Robin Taylor                                                                        
answered the hearing officer was a member of the department                                                                     
and that was another problem he was trying to address                                                                           
through other legislation. He quantified that he thought                                                                        
the hearing officers did a good job, but they were under                                                                        
pressures from within their own department to follow                                                                            
policy. Senator Gary Wilken asked who sat on the Medicaid                                                                       
Rate Advisory Commission. Senator Robin Taylor said the                                                                         
commissioner appointed them. He was unsure who the members                                                                      
were, but thought they were primarily in-house. They were                                                                       
present at this meeting.                                                                                                        
Senator Al Adams looked for a solution to the lengthily                                                                         
open appeals.                                                                                                                   
Tape: SFC - 99 #79, Side B    6:51 PM                                                                                           
Senator Al Adams noted the bill suggested hiring more                                                                           
hearing officers as one option.  He wondered if the sponsor                                                                     
had considered establishing a rate-setting process for all                                                                      
facilities in the state.                                                                                                        
Senator Robin Taylor replied that it was the department                                                                         
that claimed they would need more hearing officers. He felt                                                                     
they would actually need fewer, since the process would be                                                                      
Senator Robin Taylor commented on Senator Al Adams's                                                                            
proposed solution. He had been working with the co-chair on                                                                     
this and suggested Senator Gary Wilken might have                                                                               
experience to offer. He was willing to continue to work                                                                         
with members of the committee to find a solution. He saw                                                                        
this bill as a narrow, partial answer to the problems.  He                                                                      
was not attempting to solve the entire rate setting process                                                                     
because it was very complex.                                                                                                    
Co-Chair John Torgerson added that he supported the intent                                                                      
of the bill, but he wanted to get to the core of the                                                                            
problem.  He had not determined how much could be solved                                                                        
with this bill alone.  He wanted to see change in the way                                                                       
the rates were set. He detailed some of the potential                                                                           
conflicts that could arise ask this task was addressed.                                                                         
JAY LIVEY, Deputy Commissioner, Department of Health and                                                                        
Social Services, testified.  He agreed with the base of the                                                                     
legislation stating that the rate setting process and the                                                                       
appeals process needed to be improved. He knew there were                                                                       
many frustrations by administrators, Legislators and                                                                            
himself. The system was too complicated. The system                                                                             
generated many appeals simply by the nature of the process.                                                                     
Appeals took much too long to work through the system as                                                                        
shown in the material provided to the committee. The system                                                                     
also became too expensive to operate for both the                                                                               
facilities and the state.                                                                                                       
He wanted to point out the importance of the rate-setting                                                                       
and appeals system. Forty-percent of the current Medicaid                                                                       
budget went to Medicaid facilities, the hospitals and                                                                           
nursing homes. That was almost $140 million out of a $340                                                                       
million budget.  To the department, the integrity of the                                                                        
appeals and rates system obviously was a critical issue in                                                                      
controlling the cost for the Medicaid program                                                                                   
He explained the relationship between the rate setting                                                                          
system and the appeals process. The department established                                                                      
a reimbursement rate for hospital or nursing home every                                                                         
year.  That rate essentially defined and established how                                                                        
much the department paid that hospital or nursing home on                                                                       
behalf of Medicaid patients. The rate varied considerably                                                                       
across hospitals and across nursing homes between a low                                                                         
rate of $187 per day at one nursing home and high rate of                                                                       
approximately $600 per day in another nursing home.   That                                                                      
was because the department set an individual rate for each                                                                      
facility. That rate was based on that particular facility's                                                                     
cost structure. The facility would send the department a                                                                        
cost report that defined and clarified what their costs                                                                         
The department audited those cost reports because they                                                                          
wanted to make sure that all the costs listed in the report                                                                     
were legitimate. For example, a hospital may have 15-                                                                           
percent of its patients as Medicaid eligible. The                                                                               
department wanted to make sure that in the cost report, the                                                                     
facility only charged the state 15-percent of their total                                                                       
cost, in proportion to the Medicaid patients.                                                                                   
Those cost reports then became the basis for the Medicaid                                                                       
rate. If the department could not do a good job of auditing                                                                     
those cost reports, they would not have control over the                                                                        
expenditures to the facilities.                                                                                                 
Many of the appeals happened because the facilities                                                                             
questioned the audit of the cost report. The audits                                                                             
approved or disallowed each line item. By doing that for                                                                        
each facility every year, many appeals were generated. He                                                                       
spoke to the multiple appeals submitted by the same                                                                             
facilities.  He clarified that the appeals were for                                                                             
different issues.  A new cost basis was set each year and                                                                       
the facilities appealed that basis.                                                                                             
Co-Chair John Torgerson asked for an example of the                                                                             
different audits.  If the department was looking at                                                                             
different things every year, how many things were there to                                                                      
look at, personnel costs, building costs, operating costs,                                                                      
etc.? Jay Lively added some facilities were part of chains                                                                      
and had home office costs and he detailed.                                                                                      
Co-Chair John Torgerson asked if it was a federal                                                                               
requirement to audit.  Jay Lively said it had been under                                                                        
the Warren Amendment.  Co-Chair John Torgerson said that                                                                        
since that provision was gone he wanted to know why                                                                             
certified private accountants weren't used.  Jay Lively                                                                         
explained that there was a specific cost structure that was                                                                     
based on Medicare costs. That provided for the audit                                                                            
structure that the department used and prevented the state                                                                      
from needing to define all the facility did and eliminated                                                                      
the need for separate books for Medicare and Medicaid.                                                                          
Co-Chair John Torgerson asked how many auditors were                                                                            
employed in the department.  An unknown speaker answered                                                                        
approximately 12. Jay Lively added that the department also                                                                     
contracted auditing firms to do some of the audits.                                                                             
Co-Chair John Torgerson restated that a certified public                                                                        
accountant should be doing the audits.                                                                                          
Co-Chair John Torgerson asked the total number of claims                                                                        
this bill would address.  Jay Lively referred to a Summary                                                                      
of Appeals Activity handout showing 40 appeals outstanding                                                                      
with a total of $10 - 12 million in claims.                                                                                     
Co-Chair John Torgerson wanted to know if once the rates                                                                        
were set if this would be a yearly cost.  Jay Lively                                                                            
answered yes because this would go into the base cost of                                                                        
the facility and therefore would be paid every year.  Co-                                                                       
Chair John Torgerson then asked how much of that would be                                                                       
federally funded. Jay Lively replied that for these                                                                             
facilities it would be 60-percent federal, 40-percent state                                                                     
on average.                                                                                                                     
Co-Chair John Torgerson asked for comment to Senator Robin                                                                      
Taylor's allegations that the department did excessive                                                                          
audits in retaliation to the appeals. Jay Lively responded                                                                      
that within the department's auditing regulations, was a                                                                        
calendar, which set out the process for setting the rates.                                                                      
As part of that calendar, there was a date of June 30 by                                                                        
which the department had to release all the audits that                                                                         
would apply to the rates that were set for the next fiscal                                                                      
year. The date for the release of those audits had just                                                                         
past so they were released as part of the normal rate                                                                           
setting process. It happened during this time in the Spring                                                                     
and again in November for the rates that were set in                                                                            
Jay Lively also noted that on the Summary of Appeals                                                                            
Activity sheet, there were 15 facilities that currently had                                                                     
no appeals and so the system was working for them.  Out of                                                                      
the 40 appeals, 21 were stayed at the request of the                                                                            
facilities.  They were generally appeals that were awaiting                                                                     
some kind of court action. There was a similar issue before                                                                     
the court and these appeals would wait until that decision                                                                      
was written. The court decisions generally addressed the                                                                        
use of audits to set rates. Two years ago, the Legislature                                                                      
adopted legislation that clarified the department could use                                                                     
audits to set rates. That had previously been in question                                                                       
because of the way the statutes were written. The court                                                                         
cases were a result of appeals of audits performed prior to                                                                     
the statute change.  That was a multimillion-dollar issue                                                                       
and Jay Lively assumed it would go on to the Supreme Court.                                                                     
The pending appeals would be stayed until after that                                                                            
Supreme Court decision was made.                                                                                                
Co-Chair John Torgerson wanted to know if when a decision                                                                       
was stayed, if the department paid a portion of the cost or                                                                     
waited until they lost the court case and pay                                                                                   
retroactively.  Jay Lively explained that when the                                                                              
department set the rates, they set the reimbursement rate                                                                       
based on the allowable cost. Co-Chair John Torgerson asked                                                                      
if that was the amount the department allowed through the                                                                       
audit. Jay Lively confirmed and continued that those costs                                                                      
that were not included in the allowable costs and                                                                               
subsequently challenged were not included in the facilities                                                                     
base and not paid. If the department lost the appeal, they                                                                      
would have to go back and pay the claims. In that sense,                                                                        
the $10 million was a potential liability to the state. On                                                                      
the other hand, had the department conceded on all the                                                                          
points at the time they came up, the department would be                                                                        
paying that money year after year in the base without ever                                                                      
having the possibility of having them excluded.                                                                                 
Co-Chair John Torgerson did not consider this a liability                                                                       
if the state lost the court case.  He felt the department                                                                       
went through the process.                                                                                                       
Senator Al Adams also asked about the audit procedure.  If                                                                      
the department disagreed with the rate, set by the                                                                              
facility.  For example, if there was a $10 discrepancy on a                                                                     
$500 per day hospital bill, did the department hold payment                                                                     
on the entire amount or just the $10 discrepancy?  Jay                                                                          
Lively answered the latter. The department paid the                                                                             
allowable amount as determined by the audit.                                                                                    
Senator Al Adams then wanted to know if most of the appeals                                                                     
were for the amounts that fell out of that reimbursement                                                                        
rate schedule.  Jay Lively replied that was correct.                                                                            
Jay Lively returned to the topic of the appeals process.                                                                        
There had been some information that the appeals were being                                                                     
remanded multiple times. He disagreed and explained the                                                                         
remand process. When a hearing officer wrote a decision, it                                                                     
was submitted to the commissioner who had two choices. The                                                                      
commissioner could either accept the decision as written,                                                                       
which gave the facility the opportunity to challenge the                                                                        
decision in Superior Court, or the commissioner could                                                                           
remand the decision back to the hearing officer.                                                                                
When a decision was remanded to the hearing officer it                                                                          
could be for several reasons.  One reason could be that the                                                                     
decision went against department policy. Another reason                                                                         
would be that the department believed that more evidence                                                                        
was needed. He noted that the commissioner had not remanded                                                                     
the same decision more than once.                                                                                               
He wanted to clear up misinformation regarding a Valley                                                                         
Hospital appeal remanded multiple times. He explained that                                                                      
the appeal was still at the hearing officer level and there                                                                     
had not been a decision issued to the department for the                                                                        
commissioner to review.                                                                                                         
He concluded by commenting on the issue raised about the                                                                        
multiple year rates. The facility had the ability to appeal                                                                     
each year's rate or any of the audit adjustments associated                                                                     
with that rate. Concluding one appeal did not necessarily                                                                       
have anything to do with the next year's appeal.  Each year                                                                     
stood alone based on that year's audit.                                                                                         
Co-Chair John Torgerson understood but knew there was a                                                                         
problem or this legislation would not be before the                                                                             
committee. He was committed to trying to fix the problems.                                                                      
He realized major changes could not be immediately                                                                              
Senator Al Adams asked what was the Wesley litigation and                                                                       
how did it trigger the other appeals.  Jay Lively explained                                                                     
it was the case that dealt with the matter of using audits                                                                      
to set rates. Many other appeals were stayed pending the                                                                        
outcome of the court determination. If the Superior Court                                                                       
ruled that the department could not use audits to set                                                                           
rates, that would affect the other appeals.                                                                                     
Senator Al Adams asked for further clarification. Jay                                                                           
Lively explained that the department audited the facility's                                                                     
cost report, which became the basis for the reimbursement                                                                       
rate. The Wesley Rehabilitation and Care Center and several                                                                     
other facilities were claiming that the department did not                                                                      
have the statutory authority to audit those cost reports.                                                                       
The department claimed it did have the authority and came                                                                       
to the Legislature two years ago with clarifying                                                                                
legislation to support and clarify that. The court case and                                                                     
related pending appeals were for audits done prior to the                                                                       
adoption of the legislation.                                                                                                    
Senator Gary Wilken repeated his question of the                                                                                
composition of the Medicaid Rate Advisory Commission, how                                                                       
they were appointed and the length of terms. Jay Lively                                                                         
answered the commission had five members appointed by the                                                                       
Governor. One member was a hospital administrator, one                                                                          
member was a physician, one was a CPA, one was a consumer                                                                       
representative and one was a representative of either the                                                                       
Department of Administration or the Department of Health                                                                        
and Social Services. He believed their terms of office were                                                                     
three years, but was not positive.                                                                                              
Senator Dave Donley noted the earlier testimony that the                                                                        
timing of the audit's release was coincidental. He asked                                                                        
why the South Peninsula Hospital independent audit report                                                                       
was dated July 31, 1998 and only released by the department                                                                     
recently. Why did the department hold onto the report 236                                                                       
days after it was completed? Jay Lively was unsure of the                                                                       
specific instance but said the normal process of the audit                                                                      
system was to send a draft to the facility for comment two                                                                      
months prior to setting the rate. Senator Dave Donley                                                                           
wanted to know why the audit wasn't given to the facility                                                                       
earlier to allow them additional time to comment.  Jay                                                                          
Lively said the audits were normally released as soon as                                                                        
they were complete. He would look into the matter of the                                                                        
long delays.                                                                                                                    
Co-Chair John Torgerson directed him to supply that                                                                             
information to the committee.                                                                                                   
GARTH HAMMOND, Chief Financial Officer, Bartlett Regional                                                                       
Hospital, testified.  He reviewed information with the                                                                          
committee regarding the MRI equipment situation.  He listed                                                                     
the dates of installation (December 1993), the Department                                                                       
of Health and Social Services audit for the fiscal year                                                                         
ending June 30, 1994 (issued June 1995), denial for                                                                             
reimbursement and the appeal. The hearing officer decision                                                                      
ruled partly in the hospital's favor (issued January 1997),                                                                     
remand back to the hearing officer by the commissioner                                                                          
(December 1997), the second hearing officer decision in the                                                                     
hospital's favor (August 1998). The appeal was in a current                                                                     
stalemate with the hospital understanding that the                                                                              
department planned another, more formal appeal.                                                                                 
He told the committee that the delay cost the hospital time                                                                     
and therefore, money. The MRI issue was looked at a number                                                                      
of times in a number of different ways.  He spoke to his                                                                        
large box containing the files related to this appeal.                                                                          
Since there was an open appeal on the 1996 rates based on                                                                       
the 1994 audit, the staff had continued to make adjustments                                                                     
each year to disallow appreciation and interest expenses on                                                                     
the MRI.  These adjustments resulted in the appeal of                                                                           
subsequent year's rates. He anticipated the hospital would                                                                      
also appeal the 1999 rates.                                                                                                     
He spoke about the issue that the hearing officer was an                                                                        
employee of the Department.  That could be a concern that                                                                       
it may create a situation for a bias against the facility.                                                                      
He noted that the hospital financed the purchase of the                                                                         
MRI, which had outlived its useful life. July 1998, the                                                                         
hospital made the final payment on the machine without                                                                          
having received any compensation from Medicaid. The                                                                             
hospital provided the MRI service to anyone who needed it                                                                       
including Medicaid patients. They were in the process of                                                                        
purchasing a new machine.                                                                                                       
Co-Chair John Torgerson asked for suggestions to                                                                                
structurally change the statutes to improve the rate-                                                                           
setting process. Garth Hammond did not have any on hand.                                                                        
Co-Chair John Torgerson requested he give it some thought.                                                                      
Senator Al Adams asked if when the department released the                                                                      
rate schedule did the hospital notice the omission of the                                                                       
MRI.  Garth Hammond said they had noticed and said it was                                                                       
obvious the department did not agree the costs of the MRI                                                                       
should be included.  Senator Al Adams asked if the                                                                              
department stated it would be disallowed before the                                                                             
hospital had incurred the cost of the MRI. Garth Hammond                                                                        
answered no.                                                                                                                    
Senator Robin Taylor returned to the table to rebut the                                                                         
department's testimony. He challenged the $10 million                                                                           
annual figure.  He did not think the amount would increase                                                                      
by $10 million for each year. Instead he speculated the                                                                         
total would be spread out over no more than five or six                                                                         
years in accumulated claims. Co-Chair John Torgerson                                                                            
Senator Robin Taylor noted another letter he just received                                                                      
that he wished to be distributed to the committee.  He                                                                          
granted that he was probably speaking off the cuff on the                                                                       
issue related to the Valley Hospital.  However, it was                                                                          
interesting to him that of the 13 decisions issued since                                                                        
1994, 12 were in the facilities favor and every one was                                                                         
remanded.  Only one decision was not remanded and that was                                                                      
against the facility.                                                                                                           
He had spoken to a hearing officer.  He read her statement                                                                      
from the report regarding the Valley Hospital appeal into                                                                       
the record. "Affidavit lacks credibility (referring to the                                                                      
state's affidavit.) Affidavit established a pattern by the                                                                      
agency of preparation and filing of inaccurate and                                                                              
incorrect exhibits illustrating a lack of candor and                                                                            
apparent inability to competently perform the calculation.                                                                      
Exhibits submitted by the state has been shown to be                                                                            
inaccurate, unreliable and to contain unsupported changes                                                                       
in the treatment of source data. The state made                                                                                 
misrepresentations about exhibits in its opposition to                                                                          
Valley's motion. Representations made were untrue." These                                                                       
were damning comments especially coming from an employee of                                                                     
the department he stressed. There was a serious problem                                                                         
that needed to be resolved. He felt Valley Hospital was                                                                         
treated poorly.                                                                                                                 
He continued saying the audits were not released simply                                                                         
because of the time of year.  The auditing process was                                                                          
completed in July and the department was supposed to send                                                                       
the reports to the hospitals. Instead, the department held                                                                      
the audits until the end of the year, dropped them on the                                                                       
facilities allowing forty days for comment while they were                                                                      
faced with the current year's deadlines to meet. This                                                                           
process resulted in further appeals since the facilities                                                                        
had to appeal the rate for the following year because it                                                                        
couldn't be resolved the previous year.                                                                                         
Co-Chair John Torgerson ordered the bill held in committee.                                                                     

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