HB 297-CERTIFICATE OF NEED PROGRAM Number 0771 CHAIR JAMES announced the next order of business is HOUSE BILL NO. 297, "An Act relating to the certificate of need program; and providing for an effective date." CHAIR JAMES read the new sponsor statement as follows: The current version of HB 297 is quite different from the original, because after a great deal of discussion we have found a solution to the immediate problem without raising the $1,000,000 floor. This version allows relocation of a health care facility to a new site in the same community without a certificate of need (CON) as long as there is no increase in the services offered. It disallows use of the vacated site for another health care facility without a CON. All parties still admit that Alaska's CON process needs a thorough examination and possible changes, and I am committed to spending the next two years doing that. Number 0904 REPRESENTATIVE HUDSON made a motion to adopt the proposed committee substitute (CS) for HB 297, version 1-LS1303\M, Lauterbach, 3/15/00, as a work draft. There being no objection, proposed CSHB 297, Version M, was before the committee. Number 0929 CHAIR JAMES noted that the difference in the proposed CS from existing language is new subsection (c); it allows a facility to move to a new site in the same community without obtaining a CON as long as services are not expanded. No one can use the vacated site again for a health care facility without a CON because that would be increasing services. She understood that the CON determines whether or not there is a need for services so someone should be able to move their facility without a CON because they are not increasing services. The proposed CS precludes setting up another health care facility in the vacated building. REPRESENTATIVE WHITAKER quoted from the new sponsor statement as follows: "The current version of HB 297 is quite different from the original because, after a great deal of discussion, we have found a solution to the immediate problem..." and commented he is puzzled. He said he does not know what the immediate problem is. Number 1114 CHAIR JAMES explained that in Anchorage a [health care facility] wants to move because it needs parking space and doctors' offices, neither of which requires a CON. She commented that she has reviewed CON timeframes for the last five years from the beginning and end of a CON application; she has found that CON time frames are extensive. She mentioned that when a facility plan a move there are timelines and commitments; based on past experience, the CON could not be finished in the proper length of time. The idea that the proposed CS was drafted to fix someone's problem is not the issue with her; rather, she thinks it is good legislation. There may well be someone else who might want to move tomorrow, and it can be argued that a CON is needed, but she says a CON is not needed as long as services are not expanded. She acknowledged that the Anchorage situation would benefit from passage of the proposed CS. Number 1247 REPRESENTATIVE SMALLEY asked how doctors' offices could be increased at the new facility in Anchorage and not increase services, as precluded by the proposed CS. CHAIR JAMES replied that expansion of doctors' offices or parking lots is not included in health care services that require a CON. She acknowledged that a question arises as to greater size of the new facility to which the health care agency moved coming from a smaller facility. She said that if a health care agency had only one of something, they can only have one of something in their new facility. She stated that the new facility could be bigger, but it cannot add more services than it had before. ELMER LINDSTROM, Special Assistant to Commissioner Perdue, Department of Health and Social Services, confirmed Chair James' belief that the proposed CS is quite different from the original. He said in one sense it is more restrictive than the previous bill; in another sense, it is more expansive. He noted that under previous legislation, HB 297 spoke to a threshold of $7 million under which either a new entrant into the medical market could be exempt from a CON, or someone who had an existing facility could relocate or expand without a CON if they were under the $7 million threshold. He explained that the proposed CS no longer speaks to a changed financial threshold but rather is limited in its application to entities who are currently lawfully operating a health facility as described in statute. He commented that the proposed CS is limited to people who are already in business and would have no impact on people who wanted to enter a new market. MR. LINDSTROM mentioned that the proposed CS is more expansive in the sense that without the financial threshold, it applies to all acute care facilities under the CON law, large as well as small, free-standing outpatient facilities as well as hospitals. He indicated that the department has no objection in attempting to solve the problem as described by the sponsor in the situation of a facility wanting to relocate but not to increase capacity. MR. LINDSTROM informed the committee that to the department, capacity means things like additional surgery suites and magnetic resonance imaging (MRI) units. Capacity does not speak to a relocated facility that happens to have greater square footage, and he believes that everyone has a common understanding. He acknowledged that over time all terms used in the proposed CS would be subject to interpretation and discussion, for example, words like "community," "capacity" or "greater." He is comforted in that Chair James indicated she will continue to review the [CON] statute. MR. LINDSTROM said the first thing that occurred to him regarding expansion of the proposed CS is that his department is considering relocating the Alaska Psychiatric Institute (API), and API is now in negotiations with Charter North. He cited API as an example where the proposed CS language would come into play. He does not know what the ramifications would be but doubts that the proposed CS will affect negotiations. Number 1695 CHAIR JAMES said it seems the proposed CS rules would apply if the department wants to relocate API. If API is making a deal with Charter North, which results in expanded services, then API must obtain a CON. However, if API will not be bigger, no CON is required. MR. LINDSTROM said he understood that API would be downsized by relocating into the Charter North facility so perhaps API would not be required to obtain a CON. He noted that there is a letter of intent on file from Charter North to build a new facility but maybe they would not be required to obtain a CON because API would be backfilling the existing facility. He cited this situation as an opportunity where the proposed CS would come into play, but it clearly would not have under the previous version of HB 297. CHAIR JAMES explained that she does not think the proposed CS will change the [CON] situation much but will only limit change to expansion of services. She suspected that if API had wanted to move before the proposed CS was presented, it would have had to obtain a CON even if it is downsizing. Charter North also would have had to obtain a CON because it wants to move, and no health facility can move without a CON. She envisioned that if API downsized and moved into the Charter North facility, API would not have to obtain a CON under the proposed CS. Number 1859 MR. LINDSTROM agreed that if Charter North chose to build a new facility, it would have to obtain a CON, whereas API would not if it moved into Charter North's facility unless renovation exceeded $1 million. CHAIR JAMES said she felt the proposed CS is a benefit in that situation because it means one less CON. MR. LINDSTROM reiterated that he was not saying the proposed CS is a barrier to the department, just that the proposed CS will probably impact the department's plans for API. He noted that another issue that has been raised because of the proposed CS is the impact to those facilities subject to the Medicaid rate- setting system, in that the proposed CS may change the way facilities' capital expenditures flow through the rate-setting system as it exists today. He explained that he understood that a facility expanding or relocating a function obtains a CON and can then capitalize the costs immediately in the next rate- setting cycle whereas if the proposed CS were to become law, recapture of capitalized costs would be delayed. Number 1963 CHAIR JAMES stated that the Medicaid rate-setting argument does not sell with her. She reiterated that her belief is that the CON exists to ensure that health care services are needed. Therefore, she added, if services are needed and there is a problem with the way Medicaid rate setting is done, the legislature needs to fix that problem too, which is part of her two-year commitment to review the CON. She said she does not share the fear that Mr. Lindstrom has expressed. MR. LINDSTROM reiterated that he does not suggest that the proposed CS is a barrier, it is simply an imponderable because he does not understand all the possible implications. He said the indeterminate fiscal note will likely remain as is because of the imponderables and lack of knowledge about which facilities in which communities may or may not choose to use the proposed CS. Number 2065 REPRESENTATIVE KERTTULA noted that right now the proposed CS is written not requiring a CON for relocation or if bed capacity and health care categories do not increase. She explained that the language is a little bit different by definitely limiting bed capacity and health care categories. She commented that the [CON] statute now says "as long as there is no alteration of bed capacity" which means no addition or elimination of a category. She said that the proposed CS might be able to eliminate a category, and she does not know whether that is a real concern. MR. LINDSTROM replied that it was the department's suggestion that the proposed CS limit its application to situations where there would be increased capacity as the department is not concerned about less capacity. REPRESENTATIVE HUDSON recognized that a CON is a community assessment of services legitimately needed. He mentioned that the department may not want to diminish services in view of the assumption of why a CON exists. Maybe the current statute is correct in not allowing neither increase nor decrease. Number 2201 MR. LINDSTROM indicated that it is the department's preference to keep the language as is in the proposed CS because the department is not concerned about decrease in services. He reiterated that the imponderables are going to be driven by the situation in each individual community. Recently the federal government passed a new law creating a new type of hospital called a critical access hospital. He said that the new law was driven by circumstances in the Lower 48 where many small rural community hospitals were having a tough go and many were disappearing. MR. LINDSTROM noted that the federal government wanted to support those small rural facilities but also give them some flexibility where the facility did not have to have all the "bells and whistles" that a regular hospital would have. He commented that his department is pursuing that option here in Alaska through regulation to allow facilities to be licensed as critical access hospitals, and he believes some communities may be interested. When those communities do replace their existing facilities, they may very well downsize the number of beds and become critical access hospitals, thus removing the need for obtaining a CON. While community hospitals may downsize number of beds, they may want to expand into other services that they previously did not have, such as greater outpatient capacity, which would require a CON. He emphasized that the CON discussion is driven by the fact that the practice of medicine has changed dramatically since the CON law was originally drafted. He acknowledged that hospitals are moving to do more outpatient services, and many free-standing outpatient facilities are doing things that historically would have only been done in a hospital. He reiterated that changing dynamics of the industry and technology is really driving the [CON] discussion. Number 2342 CHAIR JAMES agreed that health care services are delivered today differently than 20 years ago. She emphasized that the committee must not forget who the patients are because giving the best service, and treating patients when they need treatment is the issue. She reiterated that it is not easy to think about patients without thinking about money, but public health needs must be met; that should be the driving force behind legislation. REPRESENTATIVE WHITAKER inquired as to where Mr. Lindstrom was in thought process regarding Medicaid capitalization and what is happening [in that area]. MR. LINDSTROM advised that the department has been discussing theories with the Alaska State Hospital & Nursing Home Association (ASHNHA) and both share a desire to review the rate- setting system with a goal of simplification. He said that part of the concern he feels about the proposed CS language relates to the rate-setting system because he fears it might create another issue that must be solved. Number 2448 CHAIR JAMES asked Mr. Lindstrom if it was true that all issues of the Medicaid rate setting ought to be addressed and if the proposed CS brings this issue to light, that is not bad. She said she understood that the department wanted to make the [CON] issue simpler, but she also suspects that it wanted to make it less, and her personal opinion is that less is not where the state needs to go. She explained that she wants [Medicaid] to be right and balanced with what other folks pay so that the cost of Medicaid is not balanced on the backs of people who have no insurance or who have private insurance. Number 2490 MR. LINDSTROM commented that it is the rule of the road, at least from the department's perspective, that a new system must be cost neutral. It is not the department's desire to use discussion results as a means to reduce reimbursement to hospitals. It is also the department's belief, in view of the financial environment, that rate-setting discussions should not be a tool to greatly increase expenses. He acknowledged that it is difficult to maintain a cost-neutral discussion when any system is reconfigured in the context of cost neutrality because there will inevitably be winners and losers. CHAIR JAMES reiterated that cost is not an issue with her, and she is not willing to say that discussions will be cost neutral or a reduction or an increase. MR. LINDSTROM replied that all discussions until now have been in the context of what can be done in a regulatory framework and by the time the committee finishes discussion today regarding the proposed CS, the committee will be looking at statutory changes. He stated that he hoped that everyone cooperates and comes back with something that makes the most sense but he does not underestimate the difficulty of reviewing the rate-setting system. Number 2595 LARAINE DERR, President/CEO, Alaska State Hospital and Nursing Home Association, testified in opposition to HB 297. She said she had received the proposed CS draft and spoken several times with Chair James, but she continues to oppose HB 297 and so states by a letter dated March 15, 2000 written to Representative James because ASHNHA feels that the whole [CON] process should be reviewed. She agreed with Mr. Lindstrom that doing anything in health care without the CON creates problems with the Medicaid rate-setting system. Number 2663 SHARON ANDERSON, Alaska State Hospital and Nursing Home Association, said she is pleased that the subcommittee is studying all the issues concerning the [CON] because it is an interrelated issue and complicated. She noted that one of the factors to be considered in the whole domino effect is the new proposed regulations that will impact the Medicaid rate-setting system. She explained that one of the proposals is that non-CON replacement items or capital issues will not be recoverable through the rate-setting process. She mentioned that the proposal is an indication that the state does use the CON process to contain costs, albeit not a perfect one. REPRESENTATIVE HUDSON asked Ms. Anderson to cite a few examples of replacement items that would not be recoverable. MS. ANDERSON replied that an example might be that a facility replacing an operating room which historically capitalized out at $200,000 for depreciation schedule purposes. She said that if the operating room was replaced without a CON at a cost of $700,000, the facility would be held at its historical cost [$200,000] rather than the new cost. She noted that the facility would not be able to depreciate at the higher rate without a CON and maybe some other costs would not be allowed at all because of perceived potential increased volume. Number 2806 REPRESENTATIVE HUDSON asked who would make that decision. MS. ANDERSON answered that the decision is part of the negotiation that goes on between the facility and the Medicaid rate-setting process made up of the Medicaid Advisory Commission and the Department of Health and Social Services wherein the department actually sets the rate. Number 2825 REPRESENTATIVE HUDSON inquired as to any federal law on Medicaid that would be instructive to the committee. MS. ANDERSON replied that is part of the negotiation that is on- going in the process that came about from last year's discussions through the legislature when the task force was formed, having all parties at the table. She said that there are federal guidelines for Medicaid but because each state handles their Medicaid system a little bit differently, there is leeway at the state level. REPRESENTATIVE HUDSON asked if state negotiations were subjective to the federal agencies. MS. ANDERSON answered in the affirmative. CHAIR JAMES said that the case Ms. Anderson is talking about does not apply to this bill, and if it does, Ms. Anderson can indicate why. Chair James noted that Ms. Anderson is talking about replacing things in a hospital, but the proposed CS is talking about relocating to some other facility. Chair James explained that hospitals are treated differently on the Medicaid rate than are free-standing ambulatory surgery centers. The hospital is paid a percentage of capital costs as well as other fixed and variable costs of Medicaid treatments are reimbursed to the hospital whereas free-standing ambulatory centers are reimbursed a percentage of fee for service. Therefore, she added, free-standing centers are not reimbursed directly for capital costs. CHAIR JAMES mentioned that under the proposed CS there might be some hospitals that would like to relocate. She indicated that Charter North might not have to obtain a CON, but she had forgotten to ask them if it did want a CON because it might want to apply for one in order to be in compliance with Medicaid. She informed the committee that she does not think there is anything in the proposed CS that precludes someone from applying for a CON since approval of a CON means approval of depreciating capital costs. She reiterated that the particular language in the proposed CS does not apply to things that a hospital would be doing because she does not see them physically moving their facility. She asked Ms. Anderson to give her an example where that did happen. TAPE 00-21, SIDE B Number 2906 MS. ANDERSON answered that HealthSouth is trying to interpret how the proposed CS will impact member facilities in the future when faces change and interpretations are different. Referring to the example of relocation of Charter North, the current plan is to relocate to another area in Anchorage servicing the same population and maintaining the same number of beds but designing the facility to care for the adolescent and child population. In going by the proposed CS, it is not clear to her whether or not the new facility will be in the Medicaid rate calculation. She explained that she does not know if Charter North will be considered a replacement facility or a relocation and how that might impact the whole reimbursement schedule. While Medicaid is a small portion of reimbursement (20 percent) for the state, the question might come to mind that if Charter North is not going to be able to recoup capital costs for relocation, or if the state determines that it is a replacement, what would be the reason for Charter North to want to do a deal with the state. MS. ANDERSON posed another question: "What would be the impact to insurers such as Aetna, Blue Cross, and the State of Alaska who self insures patients?" Under the Medicaid rate-setting system, sometimes costs are calculated in a three-year cycle and added to the base year. In those cases where the three-year cycle applies to recoup costs to Medicaid, it is a sure bet that in most instances the facilities will not be able to wait three years and as a consequence rates that go up in a hospital setting will be passed on to insurers and patients. She stated that she is not saying that is what is going to happen, she is just saying that it may be part of the domino effect. Number 2756 MS. ANDERSON asked if Bartlett [Regional] Hospital planned to relocate within its facility, would the proposed CS relocation definition work. She noted that the intent of the proposed CS may not be the above, but people in positions of authority may change so future intent has to be considered. CHAIR JAMES quoted from the proposed CS as follows: "... services of that facility to a new site in the same community ...." She suggested it is clear. Therefore, moving things around from one side of the hospital to the other does not qualify because the proposed CS is talking about moving to a new site. Number 2700 MS. ANDERSON indicated one of ASHNHA's concerns was the definition of "community." She asked if that meant that a facility in Anchorage could move from one community council to another community council. CHAIR JAMES replied that "community" means service area of the hospital. She remarked that the legislature would not allow someone to move from Anchorage to the Matanuska-Susitna Valley or vice versa. However, a facility already in Anchorage could move anywhere in the Anchorage area because it is still addressing the same community need, and she thinks the department could identify the area of need by the CON. MS. ANDERSON said she wanted the intent to be clear on each of these issues. REPRESENTATIVE HUDSON asked if everybody out there at the present time would have filed a CON and be operating under one. Number 2613 MS. ANDERSON answered that an issued CON allows a project to commence and once it is completed, the CON cannot be modified. REPRESENTATIVE HUDSON asked whether, if Bartlett [Regional] Hospital (BRH) decided to move out to the valley, it could do so under the proposed CS, assuming that BRH's CON had a specified client base. He explained that the original CON would have identified the area of need. If BRH decided to move into someone else's territory, he suggested it would affect that other CON; he said he understood that cannot be done without applying for a CON. MR. ANDERSON replied that under current law if BRH moved and expended more than $1 million, BRH would go through a CON to do that. Under the proposed CS, she interprets that the relocation would not require a CON regardless of the dollar amount as long as BRH was relocating and not using the vacated space as a licensed health care facility. She noted that ASHNHA does support the concept of studying the CON and is concerned about access for all Alaskans. Number 2458 CHAIR JAMES recognized that people do not accept change readily; in fact, people usually resist change as much as possible. It takes a broad perspective to see the benefits of change, and there will always be negatives to change; therefore, it is good to discuss the negatives, but the positives are extremely important as well. There is a big change in the way health care services are delivered today. Thus fixing the Medicaid rate- setting system becomes very important now because a system is needed that will move into the future to meet demand for services. Ultimately health care systems are here to provide the best services for the patient in the best way. She explained it takes an open mind and resistance to fear to make the necessary changes. MS. ANDERSON commented that change is a part of daily life of a hospital administrator because one regulation is implemented and another regulation is published right on the heels of the first one. She emphasized that ASHNHA's preference is that the fix be applicable and work for the entire system to benefit all Alaskans. Number 2284 BARBARA HUFF-TUCKNESS, Director of Legislative and Governmental Affairs, Teamsters Local 959, testified via teleconference from Anchorage. She said she had originally been on record not supporting HB 297 and now she wants to go on record as removing that objection after reviewing the current proposed CS. Since there is latitude to refrain from applying for a CON, she asked if there was also latitude to apply for CON if an entity so desired. CHAIR JAMES replied in the affirmative. She, in turn, asked if Ms. Huff-Tuckness was withdrawing her opposition to HB 297. MS. HUFF-TUCKNESS answered yes. CHAIR JAMES asked Mr. Lindstrom to answer Ms. Huff-Tuckness's question. Chair James had made the comment that if the CON does affect the Medicaid rate-setting, even though CON is no longer required for some things under the proposed CS, an entity can apply for a CON if they want to. She asked Mr. Lindstrom if the proposed CS would allow that. Number 2153 MR. LINDSTROM replied that he guesses the dynamic will be that the department will choose not to require a CON if it is not required under HB 297. He acknowledged that first he needs to check with the Department of Law. He further speculated that the Medicaid Advisory Rate Commission staff, who do depend upon [CON] information for some aspects of the rate-setting system, would think it a good idea if the department continued to require a CON. He said he needed to get more information and sort those things out. REPRESENTATIVE KERTTULA stated that she would like to hear the answer to Ms. Huff-Tuckness's question before the committee moves the proposed CS. The answer is important and she wants to hear from the Department of Law. She explained that the answer would go a long way to resolving her community's concern [regarding the CON]. CHAIR JAMES said she had promised the members of the HESS Committee that she would discuss the proposed CS with them before submitting the final product to the Chief Clerk's Office. She noted that if the House Health, Education and Social Services Standing Committee does answer the review and the proposed CS needs to be modified, this committee could rescind its action. Number 1998 REPRESENTATIVE HUDSON asked if Representative Kerttula could speak more specifically to the concern about the proposed CS. REPRESENTATIVE KERTTULA commented that what she has heard today is that there is latitude to come back and obtain a CON if it is needed for the Medicaid rate. It seems to her that the proposed CS goes further toward meeting community concern but she does not see it in the language. She agreed with the Department of Health and Social Services (DHSS) that someone really is not going to want to do this [a CON] if it is not in the proposed CS language. She suggested that the committee go to the Department of Law immediately and ask them whether there has to be language for the proposed CS to resolve that issue and bring it back for the committee to discuss. She remarked that it is cleaner to do it up front in this committee. Number 1932 REPRESENTATIVE HUDSON asked if Mr. Lindstrom was bringing information to the prime sponsor of the proposed CS. If there is a need to add language, the Chair has indicated she is willing to entertain added language. He said he felt comfortable enough to offer a motion to move the proposed CS. REPRESENTATIVE KERTTULA stated she was going to sign that the proposed CS needs an amendment and then she was not sure what she would do when it is heard by the entire House. RICK SOLEY, Director of Community Relations and Planning, Fairbanks Memorial Hospital and Denali Center, said that ASHNHA spoke clearly to what his view is as far as how to fix the CON since it needs additional study. He reminded the committee that when it started with HB 297 it suggested that it would find a fix that would be satisfactory for all Alaskans. He noted that the proposed CS is not satisfactory to all Alaskans or to Fairbanks Memorial Hospital (FMH) because it is a piecemeal approach to the CON program. He is concerned that the committee wants to move a bill that clearly has a myriad of problems. MR. SOLEY commented that under the definition of "community," FMH could move hospital beds to Delta because FMH calls its service area the entire northern half of Alaska. He suspected that DHSS would have very great concerns about FMH's ability to do that as far as the implications on Medicaid reimbursements but FMH has the bed capacity. He added that if the nuclear missile defense system went through that is not an absurd reading of the language of relocation and has great financial consequences to the state. MR. SOLEY mentioned FMH has an outpatient surgery center that operates in Fairbanks, meeting what he believes is the community's needs for outpatient surgery. He indicated that if FMH chose to relocate a portion of that outpatient surgery center across town, FMH could do so without a CON. He informed the committee that when the committee had started the proposed legislation, he had heard much about the need for competition in the marketplace and had heard much debate about what competition is and whether it truly exists in the health care environment. He emphasized that the committee should know that there is potential for this proposed CS to allow FMH to move across town to set up a surgery center without a CON, whereas the current law would require another individual who might want to build a surgery center to obtain a CON. It is a huge issue, and it is another reason why this committee should not pass the proposed CS out of committee. There are still many questions, and he is concerned that the other legislative committees will not have the time or interest to really look at serious issues to fix the proposed CS. Number 1684 MR. SOLEY said he thinks the committee needs to look at the proposed CS, as did the legislature when they set up the Long- Term Care Task Force. At that time, the legislature reviewed a host of issues with a broad array of public providers: [people from] medical care, the state and DHSS. He said the proposed CS does not address outstanding issues now but people have been told that the issues will be addressed in the future. Now is the opportunity to work on the issues and he prefers that the committee continue the diligent work it has started. He emphasized that HB 297 started out as a bad bill for his community, and he has a stack of letters that suggests it is a bad bill. The committee should not move the proposed CS forward; rather the committee should continue to work on it. He said that the Fairbanks Chamber of Commerce has been reviewing the CON issue because of the significance and has a resolution in the works to ask the committee to continue a rigorous, thorough study of HB 297 and present a recommendation within 18 months. He noted that there is much concern that if something is done with the CON, unintended consequences will result. Number 1515 CHAIR JAMES said she would have to ask DHSS if Delta would be considered the same community as Fairbanks. She noted that under Medicaid rate-setting she thinks FMH would rather obtain a CON for any move to Delta it might contemplate. She explained that as far as the surgery center is concerned, FMH can move it across town if it wants to, but she cannot believe that FMH would want to do that. She mentioned that there is an advantage concerning the way hospitals obtain payment for surgery centers as opposed to free-standing centers. Free-standing centers are paid fee for service, and she is still trying to figure which is the best way of obtaining payment. The Tanana Clinic folks would probably like to have an FMH surgery center closer to them. She emphasized that HB 297 is a good bill because it solves many problems for DHSS and for the public. The CON is here to make sure that new services are not added in excess of what is needed, and she is committed over the next two years to review all of the issues. REPRESENTATIVE HUDSON asked Mr. Soley to provide recommendations for the proposed CS to the chair; for example, perhaps the committee needs a definition of "community" or "area of responsibility." CHAIR JAMES announced that the meeting was recessed until 3 p.m. this afternoon, March 16, 2000.