Legislature(1999 - 2000)
04/06/1999 06:04 PM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 itself. 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 regulations. 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 corrected. 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 shortened. 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 were. 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 December. 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 implemented. 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 understood. 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.