Legislature(2017 - 2018)CAPITOL 106

02/07/2017 03:00 PM House HEALTH & SOCIAL SERVICES

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Audio Topic
03:02:47 PM Start
03:03:19 PM Presentation: Study Overview for Privatization of Psychiatric Institute
03:33:18 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: PCG Report Covering AK Psychiatric TELECONFERENCED
Institute Privatization by Dept. of Health &
Social Services
Presentation will end prior to State of DHSS
Finance Subcommittee Meeting
                    ALASKA STATE LEGISLATURE                                                                                  
      HOUSE HEALTH AND SOCIAL SERVICES STANDING COMMITTEE                                                                     
                        February 7, 2017                                                                                        
                           3:02 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Ivy Spohnholz, Chair                                                                                             
Representative Sam Kito                                                                                                         
Representative David Eastman                                                                                                    
Representative Jennifer Johnston                                                                                                
Representative Colleen Sullivan-Leonard                                                                                         
MEMBERS ABSENT                                                                                                                
Representative Bryce Edgmon, Vice Chair                                                                                         
Representative Geran Tarr                                                                                                       
Representative Matt Claman (alternate)                                                                                          
Representative Dan Saddler (alternate)                                                                                          
COMMITTEE CALENDAR                                                                                                            
PRESENTATION: STUDY OVERVIEW FOR PRIVATIZATION OF ALASKA                                                                        
PSYCHIATRIC INSTITUTE                                                                                                           
     - HEARD                                                                                                                    
PREVIOUS COMMITTEE ACTION                                                                                                     
No previous action to record                                                                                                    
WITNESS REGISTER                                                                                                              
COY JONES, Consultant                                                                                                           
Project Leader                                                                                                                  
Public Consulting Group (PCG)                                                                                                   
Austin, Texas                                                                                                                   
POSITION   STATEMENT:      Presented   the   PCG   findings   and                                                             
recommendations for privatization of API.                                                                                       
ACTION NARRATIVE                                                                                                              
3:02:47 PM                                                                                                                    
CHAIR IVY SPOHNHOLZ called the House Health and Social Services                                                               
Standing   Committee    meeting   to    order   at    3:02   p.m.                                                               
Representatives  Spohnholz, Sullivan-Leonard,  Johnston, Eastman,                                                               
and Kito were present at the call to order.                                                                                     
^Presentation:  Study Overview  for Privatization  of Psychiatric                                                             
    Presentation: Study Overview for Privatization of Alaska                                                                
                     Psychiatric Institute                                                                                  
3:03:19 PM                                                                                                                    
CHAIR SPOHNHOLZ announced  that the only order  of business would                                                               
be a  presentation by the  Public Consulting Group  regarding the                                                               
privatization of Alaska Psychiatric Institute.                                                                                  
3:04:32 PM                                                                                                                    
COY JONES,  Consultant, Project  Leader, Public  Consulting Group                                                               
(PCG), presented  a PowerPoint titled "Feasibility  Study for the                                                               
Privatization  of  Alaska  Psychiatric Institute."    He  relayed                                                               
that, although the report "drills  down [to] pretty deep levels,"                                                               
the  presentation would  be a  very high  level overview  for the                                                               
findings and recommendations.  He  directed attention to slide 4,                                                               
"Stakeholder Feedback," and  listed the areas and  the groups PCG                                                               
spoke with,  which included stakeholders  in both  government and                                                               
the private sector,  as well as former patients  and employees at                                                               
Alaska Psychiatric  Institute (API).   He relayed that  PCG spoke                                                               
with behavioral health providers in  both the communities and the                                                               
hospitals, who worked  closely with API.  He added  that they had                                                               
spoken with two  of the three labor unions, as  well as the trade                                                               
associations  in  Alaska.   He  explained  that there  were  also                                                               
extensive  studies  and   literature  reviews  detailing  lessons                                                               
learned and  best practices with  privatization efforts  in other                                                               
states  during the  past ten  years.   He  moved on  to slide  5,                                                               
"Privatization Options,"  and highlighted the  following options,                                                               
pointing out that  the State of Alaska would  retain ownership of                                                               
the property  and the facility:   (1) full privatization  for all                                                               
the  operational  aspects with  either  a  lease or  as  property                                                               
manager; (2)  a joint operating  agreement between the  state and                                                               
private partners,  possibly as a  hybrid public  corporation; (3)                                                               
continued  state management  with new  efficiencies and  improved                                                               
processes as an alternative to  privatization; and, (4) component                                                               
outsourcing which would  privatize pieces of the  operations.  He                                                               
stated that  although options  1 and 2  were not  that different,                                                               
there was  a different legal status.   He reported that  Option 3                                                               
was not  a real privatization,  while option 4  privatized pieces                                                               
of  API.   Discussing  Option 4,  he  listed various  outsourcing                                                               
options,  which  included:     the  communication  center,  which                                                               
include  reception  and  security  functions;  the  facility  and                                                               
materials   management;   the   physician   services,   including                                                               
psychiatrists and  the medical services;  and, the  nursing staff                                                               
and  their support  staff.   He  declared that  the final  option                                                               
would  be a  comprehensive outsourcing  of everything  except the                                                               
basic administration  and management.   He moved  on to  slide 6,                                                               
"Financial  Assumptions," which  addressed the  various financial                                                               
and service delivery assumptions for  the cost - benefit analysis                                                               
of the  privatization models.   He  addressed the  capital costs,                                                               
which  assumed  that  these  would  remain  the  same  under  any                                                               
privatization option.   He  shared the  assumption that  the for-                                                               
profit groups  would have an  expectation of an 8  percent profit                                                               
margin,  which  had been  determined  from  various Requests  for                                                               
Proposals  from   for-profit  entities  to   similar  operations;                                                               
whereas,  non-profit groups  would  have an  expectation  of a  4                                                               
percent profit  margin.   He spoke about  the salary  and benefit                                                               
benchmarks,  reporting that  "common  knowledge  is that  there's                                                               
savings  to be  gained from  privatization, it's  usually because                                                               
the compensation  looks significantly  different under  a private                                                               
entity than  it does a public  entity."  He shared  that although                                                               
employee  salaries would  increase  with  privatization about  by                                                               
13.7 percent, the benefits would  decrease from the current value                                                               
of 36 percent  of total compensation to about 22  percent under a                                                               
private  employer.   He  added  that  the  legal expenses  for  a                                                               
private  employer  would be  about  0.369  percent of  the  total                                                               
contract.     He  estimated  some  reduction   in  overtime  with                                                               
privatization, comparing the current 1950  annual work hours by a                                                               
full  time  state employee  with  2080  annual  work hours  by  a                                                               
private full time employee.                                                                                                     
3:17:40 PM                                                                                                                    
MR.  JONES  addressed  slide   7,  "Financial  Assumptions,"  and                                                               
explained that there would also  be some specific transition cost                                                               
assumptions, which  included a  necessary IT  upgrade of  the API                                                               
electronic  medical  records  system  as it  was  almost  out  of                                                               
compliance.   He estimated  that this IT  upgrade would  cost the                                                               
state  about  $2.1  million,  whereas  a  private  entity  should                                                               
already have  a system which  would not  require an upgrade.   He                                                               
reported that  there would  be some  additional liability  to the                                                               
retirement fund  with privatization  and, using  similar analysis                                                               
with other state  hospitals, the projection was for a  cost of $2                                                               
million  in termination  liability.   He added  that there  would                                                               
also  be some  contract  monitoring costs  to  ensure the  proper                                                               
delivery by a private entity.   He allowed that this amount could                                                               
be difficult to  quantify, although it was estimated  to be about                                                               
14 -  20 percent, and was  also listed as an  additional cost for                                                               
privatization.   He  discussed  the  revenue assumptions,  noting                                                               
that the  sources for revenue  to API included  private insurance                                                               
and Medicaid  claims, with the projected  five-year total revenue                                                               
being the same under private or public entity.                                                                                  
3:20:54 PM                                                                                                                    
MR.  JONES pointed  to slide  8, "Service  Delivery Assumptions,"                                                               
and  posed the  questions for  the number  of staff  necessary to                                                               
maintain decent  service delivery  and whether API  was currently                                                               
understaffed or overstaffed.  He  listed stakeholder comments and                                                               
recent clinical  reviews from outside  consultants as  sources of                                                               
information   to   determine   answers  to   the   aforementioned                                                               
questions.    He  stated  that  there  were  also  industry  best                                                               
practice  guidelines for  staff  ratios.   He  reported that  the                                                               
consulting  group  had  reviewed comparable  hospitals  in  other                                                               
states, and, although API did not  have any true peer, there were                                                               
some similarities.                                                                                                              
CHAIR SPOHNHOLZ  pointed out that  another meeting  was scheduled                                                               
to  begin  shortly  and  asked   that  any  remaining  slides  be                                                               
discussed at the  next House Health and  Social Services Standing                                                               
Committee meeting.                                                                                                              
3:23:46 PM                                                                                                                    
MR.   JONES   directed   attention    to   slide   9,   "Staffing                                                               
Requirements,"  and discussed  the various  staffing ratios.   He                                                               
directed attention to  the API baseline for  staffing, which more                                                               
closely reflected a  small peer group hospital than  a large peer                                                               
group hospital, although API had  a higher staff to patient ratio                                                               
in  almost all  the  categories.   He  suggested  that API  might                                                               
potentially be  over staffed  in some areas,  and that  cuts were                                                               
plausible.   He directed attention to  the recommended privatized                                                               
staffing which projected reductions to  API, and pointed out that                                                               
this more closely mirrored a small peer group hospital.                                                                         
3:26:15 PM                                                                                                                    
MR. JONES  moved on to  slide 10, "Staffing  Requirements," which                                                               
presented suggested  reductions.   Public Consulting  Group (PCG)                                                               
suggested  reductions under  a private  entity of  administrative                                                               
costs  in IT,  as a  corporate  enterprise would  absorb many  of                                                               
these costs, as  well as a reduction of  full time administrative                                                               
staffing to  the ratio of  other small  hospitals or lower.   PCG                                                               
suggested that  API operate with nursing  staff levels comparable                                                               
to small  peer hospitals,  although acknowledging  that different                                                               
parts of API required different  staffing levels dependent on the                                                               
severity  of the  patient diagnosis.    He reported  that it  was                                                               
possible to  review the  yearly API  data for  "close observation                                                               
status", and  then determine the  necessary extra  nursing staff.                                                               
He suggested  that, at any given  time, it was necessary  to have                                                               
18.1 nursing staff on the  floor, although the PCG recommendation                                                               
was for 21.2 nursing  staff to be on the floor at  all times.  He                                                               
pointed out  that this model  had been  tasked to predict  what a                                                               
contractor  would do,  not necessarily  what a  contractor should                                                               
do.    He  added  that   the  staffing  recommended  by  PCG  was                                                               
considered safe, although not  necessarily considered optimal, as                                                               
a  private  provider  may  only ensure  safe  staffing,  but  not                                                               
necessarily optimize staffing.                                                                                                  
3:28:44 PM                                                                                                                    
REPRESENTATIVE  JOHNSTON  asked  about  the  managed  competition                                                               
MR. JONES replied that he was not familiar with this model.                                                                     
REPRESENTATIVE  JOHNSTON  reflected  that the  PCG  scenario  for                                                               
efficiencies could be augmented by  a managed competition bid for                                                               
certain services.  She allowed  that this bid process would often                                                               
allow  the  current  service  to  become  more  efficient  as  it                                                               
prepared a bid.                                                                                                                 
3:29:53 PM                                                                                                                    
REPRESENTATIVE  SULLIVAN-LEONARD  asked  if there  was  a  dollar                                                               
savings to the state for privatization of API.                                                                                  
MR.  JONES replied  that  there  was a  detailed  cost -  benefit                                                               
analyses  for each  of the  option  models, although  it was  not                                                               
presented in the PowerPoint.                                                                                                    
CHAIR SPOHNHOLZ  relayed that the  full report had been  sent out                                                               
to all the members of the committee.                                                                                            
CHAIR SPOHNHOLZ asked  for more detail to  the difference between                                                               
large peer groups and small peer groups.                                                                                        
MR. JONES, in  response, explained that many  hospitals had about                                                               
200 beds,  while some had  800 beds.   He pointed out  that these                                                               
larger  hospitals allowed  a  much  smaller administrative  staff                                                               
ratio to  beds.  He  noted that, as the  IT system cost  the same                                                               
regardless of the number of beds,  it was a more significant cost                                                               
to a  smaller hospital.   He added  that there were  economies of                                                               
scale  with direct  care,  as well.   He  reported  that a  small                                                               
hospital had  a higher administrative  overhead, and  would often                                                               
focus on a very specialized  service or acute emergency services.                                                               
He stated  that a large hospital  would have a range  of services                                                               
for the care  of many patients, many of which  were not nearly as                                                               
intensive or  acute as API.   This was reflected in  the staffing                                                               
ratios,  hence  the  separation  of  small  hospitals  and  large                                                               
hospitals in the presentation.                                                                                                  
3:33:18 PM                                                                                                                    
There being no  further business before the  committee, the House                                                               
Health  and  Social  Services   Standing  Committee  meeting  was                                                               
adjourned at 3:33 p.m.                                                                                                          

Document Name Date/Time Subjects
API Privatization Presentation_02_07_2017_FINAL.pdf HHSS 2/7/2017 3:00:00 PM
API Privatization