BILL ANALYSIS Ó AB 2024 Page 1 Date of Hearing: April 19, 2016 ASSEMBLY COMMITTEE ON HEALTH Jim Wood, Chair AB 2024 (Wood) - As Amended April 11, 2016 SUBJECT: Critical access hospitals: employment. SUMMARY: Authorizes, until January 1, 2024, a federally certified critical access hospital (CAH) to employ physicians and charge for professional services, notwithstanding the prohibition of the "Corporate Practice of Medicine" (CPM). Specifies that the CAH must not interfere with, control or otherwise direct the professional judgement of a physician, and that on or before July 1, 2023, the Legislative Analyst will provide a report to the Legislature containing data about the impact of CAH's employing physicians. EXISTING LAW: 1)Prohibits corporations and other artificial legal entities from having any professional rights, privileges, or powers (known as the "prohibition against CPM,") and further provides that the Medical Board of California (MBC) may, pursuant to regulations, grant approval for the employment of physicians on a salaried basis by a licensed charitable institution, foundation, or clinic if no charge for professional services rendered to patients is made by that institution, foundation, or clinic. AB 2024 Page 2 2)Exempts medical or podiatry professional corporations organized and practicing pursuant to the Moscone-Knox Professional Corporations Act from the CPM prohibition, providing that a majority of the owners or shareholders of the corporation are licensed physicians or podiatrists, respectively. 3)Provides additional exceptions to the prohibition against CPM, including: a) Clinics operated primarily for the purpose of medical education by a public or private nonprofit university medical school, to charge for professional services rendered to teaching patients by licensed physicians who hold academic appointments on the faculty of the university, if the charges are approved by the physician in whose name the charges are made; b) Certain nonprofit clinics organized and operated exclusively for scientific and charitable purposes, that have been conducting research since before 1982, and that meet other specified requirements, to employ physicians and charge for professional services. Prohibits, however, these clinics from interfering with, controlling, or otherwise directing a physician's professional judgment in a manner prohibited by the CPM prohibition or any other provision of law; c) A narcotic treatment program regulated by the Department of Alcohol and Drug Programs to employ physicians and charge for professional services rendered by those physicians. Prohibits, however, the narcotic clinic from interfering with, controlling, or otherwise directing a AB 2024 Page 3 physician's professional judgment in a manner that is prohibited by the CPM prohibition or any other provision of law; and, d) A hospital that is owned and operated by a licensed charitable organization that offers only pediatric subspecialty care, as specified. 4)Under the Knox-Keene Health Care Service Plan Act of 1975, authorizes licensed health care service plans to employ or contract with health care professionals, including physicians, to deliver professional services, and requires health plans to demonstrate that medical decisions are rendered by qualified medical providers unhindered by fiscal and administrative management. Provides in regulation that the organization of a health plan must include separation of medical services from fiscal and administrative management. 5)Permits, under the Medi-Cal program, hospitals that submit claims for hospital inpatient psychiatric services under contract with Medi-Cal managed care plans to receive reimbursement on a per diem basis for an array of services, including a mental health professional's daily visit fee. 6)Authorizes until January 1, 2011, a pilot project to allow qualified district hospitals, as defined, to employ a physician, if the hospital did not interfere with, control, or otherwise direct the professional judgment of the physician. To qualify for the project, a district hospital must have: been in a county with population of 750,000 or less; have reported net losses in 2000-01; and, have had at least 50% of combined patient days from Medicare, Medi-Cal, and uninsured patients. AB 2024 Page 4 FISCAL EFFECT: None. COMMENTS: 1)PURPOSE OF THIS BILL. The author states that as a health care provider he is sympathetic to the concerns about interference with the clinical judgment of any health care provider but, unfortunately, the CPM ban no longer provides the protections it was originally intended to provide. The author notes the number of exceptions allowed, combined with the growth of medical groups, independent practice associations and medical foundations, all represent the larger medical community's response to pressures within the delivery system to reduce costs, improve patient outcomes and increase access. The author continues, to maintain that the CPM ban protects a physician's professional judgment and autonomy is naïve and does not take into consideration the variety of pressures that are inherent in our health care delivery system regardless of practice structure. The author states, protecting a clinician's professional judgment is critical and something that we should fight to preserve but the CPM doctrine may no longer be the best way to assure this protection and other alternatives should be explored: the private practice of medicine is a valuable component in our communities and should be preserved but preserving it to the exclusion of other modes of practice seems shortsighted. If younger physicians are comfortable in an employment setting, we should not limit that option, because in limiting practice options, we may also be inadvertently limiting access in our rural communities just due to the basic economics of what is required to maintain a private practice. The author concludes, it may not work for all of them but at this point, if it helps just a couple of hospitals remain open he believes that qualifies as a success story. AB 2024 Page 5 2)BACKGROUND. a) CPM. The prohibition against CPM has historically prevented a corporation from practicing medicine, which includes the employment of physicians. California's ban on CPM was well established by 1928, but the clearest policy rationale was not established until 1932. That year, the state Supreme Court heard the case of Painless Parker. Born Edgar Randolph Parker, he was a licensed dentist and consummate marketer who had legally changed his first name to "Painless." His dental corporation hired dentists and opened practices across the United States and Canada. In considering Parker's commercial dental enterprise, the court argued that "the underlying theory upon which the whole system of dental is framed is that the state's licensee shall possess consciousness, learning, skill and good moral character, all of which are individual characteristics, and none of which is an attribute of an artificial entity." Over 65 years later, another court put it even more clearly: "The rationale behind the doctrine is that a corporation cannot be licensed to practice medicine because only a human being can sustain the education, training, and character-screening which are prerequisites to receiving a professional license." b) California Research Bureau (CRB) reports. In 2007, the CRB published a report examining the status of the ban on the CPM, and it argued that exemptions had created a doctrine whose "power and meaning are now inconsistent." The CRB also raised the idea that the many exemptions to the ban may "signal a change in public opinion." The CRB report notes that although the CPM doctrine is generally not believed to be extremely detrimental, its present utility seems limited, as the evolution and erosion of the CPM prohibition over many decades has resulted in a doctrine that is far removed from its origin and lacks coherence and relevance in today's health care landscape. AB 2024 Page 6 Because the policy concerns that the CPM prohibition was meant to address are still important and have been raised in other contexts, California's statutes and regulations now address these concerns more directly. The existence of these more focused safeguards, and the ability to enact others if needed, raise the question of whether maintaining the CPM doctrine still makes sense. As a result of these findings, the 2007 CRB report provided several policy options for the legislature to consider. These focused on clarifying which organizations were exempt and also on increasing the number of exemptions. The report also included an option to eliminate the ban entirely, provided some employment safeguards were in place. On April 12, 2016 the CRB released a new report, "The Corporate Practice of Medicine in a Changing Healthcare Environment," which reviews the current status of the ban in California and key policy issues associated with it, one of them being the effect of the ban on rural areas. As the 2016 CRB report notes, attempting to address the rural healthcare gap, Senate Bill 376 (Chesbro) Chapter 411, Statutes of 2003, established a pilot project to allow qualified hospital districts to directly employ physicians. The pilot allowed each hospital district to hire two physicians, for a total of 20 physicians throughout the state. To qualify for the pilot project, a hospital district was required to have: i) Been in a county with population of 750,000 or less; ii) Reported net losses in 2000-01; and, iii) Had at least 50% of combined patient days from Medicare, Medi-Cal, and uninsured patients. AB 2024 Page 7 SB 376 was sponsored by the Association of California Healthcare Districts, which argued that authorizing the employment of physicians could improve the ability of district hospitals to attract the physicians required to meet the needs of the communities and ensure the continued survival of district hospitals. Proponents hoped direct employment would provide the kind of economic security that might encourage physicians to choose a rural community, just as the State of California is able to offer when it directly hires physicians and staffs its rural prisons. During the pilot project, five participating hospital districts recruited and hired six physicians, whose employment contract periods ran three to four years. The MBC sent letters to participating physicians, participating administrators, and also administrators in nonparticipating hospital districts to get their views on the project. All six participating physicians were positive about the employment experience. Responding administrators acknowledged it would have been more difficult to recruit the physicians without the employment opportunity, and expressed support of the project. Responding nonparticipating administrators also generally supported the project as a means of recruiting physicians into rural areas. The MBC, in its assessment, stated there was not enough evidence to draw conclusions about the effectiveness of the program, but believed there might be justification to extend the pilot so a comprehensive analysis could be made. The MBC also noted that, "[f]rom the responses received to the Board's queries about the pilot, there seems to be a universal belief that many physicians hesitate settling in California, especially rural areas of the state, because of the disincentive created by the laws governing the corporate practice of medicine - most AB 2024 Page 8 physicians in California work as contractors, not employees. Hospital administrators view the prohibition of the corporate practice of medicine as complicating their ability to ensure adequate staffing." Though legislators initiated a number of bills to continue the pilot project or allow hospital districts to employ physicians, none became law and the pilot expired on January 1, 2011. The CRB's 2016 report notes that limited data makes it more difficult to assess how the CPM ban affects California's doctors because the state does not collect the specific numbers of doctors that are employed directly by nonprofit clinics, teaching hospitals, state governments, and some county governments and pediatric hospitals. The CRB could not find data for some county governments or pediatric hospitals and could not find any reliable data for professional medical corporations or medical foundations. CRB concludes that without a full understanding of how many physicians in the state are employed through an exemption, it is difficult to know whether the exemptions are, as the original CRB report argued, so broad as to dilute the meaning of the ban. The CRB's 2007 report notes that the Legislature has clearly and repeatedly stated its intent that physicians, and not corporations, be responsible for patient care decisions. However, the report also argued that the fragmented manner in which California had extended the ban resulted in a doctrine whose "power and meaning are now inconsistent." It also considered the idea that the many exemptions to the ban may have signaled a change in public opinion. c) Other states. As noted in the most recent CRB report, there is considerable variation in how states approach the ban with regard to the employment of physicians. Nearly all states allow for some type of employment of physicians by certain specified government, nonprofit or corporate entities. The one similarity across all states is that each allows physician employment by professional AB 2024 Page 9 corporations or similar entities as long as physicians own the corporation. However, unlike California: i) Twenty-eight states (55%) allow hospitals to employ physicians; ii) Thirty states (59%) allow physicians to operate a medical practice as a limited liability company; and, iii) Nine states (17%) allow physicians to operate a medical practice as a limited liability partnership. Three of the five states noted in the CRBs original report as maintaining the most robust laws and enforcement, California, Colorado, and Iowa, continue to do so. In the other two states, Ohio and Texas, state legislatures have made changes to the ban: Ohio's corporate practice of medicine ban now "appears to be all but extinct," and Texas modified its ban in 2011 to allow direct employment. d) Physician shortage. The Council on Graduate Medical Education (CGME) estimates that the number of primary care physicians actively practicing in California is far below the state's need. In 2008, there were 69,460 actively practicing primary care physicians in California, of which only 35% reported they actually practiced primary care. This equates to 63 active primary care physicians per 100,000 persons. However, according to the CGME, up to 80 primary care physicians are needed per 100,000 persons in order to adequately meet the needs of the population. When the same metric is applied regionally, only 16 of California's 58 counties fall within the needed supply range for primary care physicians. In other words, less than one third of Californians live in a community where they have access to adequate health care services. AB 2024 Page 10 In the 2015 Merritt Hawkins Survey of Final-Year Medical Residents, participants identified geographic location, personal time and lifestyle as their most important considerations when evaluating a medical practice opportunity. The great majority of residents (92%) would prefer employment with a salary in their first practice rather than an independent practice income guarantee or loan, and 93% would prefer to practice in communities of 50,000 people or more. Only 3% would prefer to practice in communities of 25,000 or less. e) CAHs. This bill authorizes CAHs to employ physicians and surgeons. The CAH program was created by Congress in 1997 in response to numerous rural hospitals closing across the nation in the 1980s and 1990s. It is a designation provided by the Centers for Medicare and Medicaid Services to ensure that individuals in isolated areas have access to health care services. The Medicare Rural Hospital Flexibility Program helps to reduce CAHs financial burdens through a cost-based Medicare reimbursement for services rendered. The primary eligibility requirements for CAHs are as follows: i) A CAH must have 25 or fewer acute care inpatient beds; ii) It must be located more than 35 miles from another hospital (or 15 miles across secondary roads to account for difficult terrain such as mountains, rivers or snow); iii) It must maintain an annual average length of stay of 96 hours or less for acute care patients; and, iv) It must provide 24/7 emergency care services. AB 2024 Page 11 3)SUPPORT. Health Access California (HAC) supports this bill and states California is one of a handful of states that has law banning CPM. HAC notes that existing state law allows teaching hospitals and public hospitals to employ physicians, but does not have and exceptions specific to rural hospitals. HAC concludes that this bill will help attract doctors to medically underserved areas of the state by allowing hospitals to attract, hire, and retain them. The Rural County Representatives of California (RCRC) note that rural communities throughout California suffer from a shortage of physicians, and these shortages have serious implication to public health, access to care, and threaten the operational stability of medical facilities in rural and underserved areas. RCRC concludes that they support the ability for hospitals to directly hire physicians, as step which will greatly improve and increase access to quality health care services in rural and underserved areas. The California Hospital Association (CHA) states that CAHs are the smallest, most remote rural hospitals and they face myriad challenges due to their inability to effectively recruit and retain physicians. CHA notes that all states allow employment of physicians, subject to certain conditions, however California continues to be the most restrictive state for employment of physicians by hospitals. CHA concludes that to remain competitive in an already challenging environment, CAHs should have the opportunity to offer physicians economic security and financial stability through employment, thereby ensuring that rural residents have access to medically necessary services. 4)PREVIOUS LEGISLATION. a) SB 1274 (Wolk) Chapter 793, Statutes of 2012, permits a hospital that is owned and operated by a charitable AB 2024 Page 12 organization and offers only pediatric subspecialty care to begin billing health carriers for physician services rendered, notwithstanding the prohibition in the CPM if specified conditions are met. b) AB 824 (Chesbro) of 2012 would have established a pilot project to permit certain rural hospitals to directly employ physicians and surgeons. AB 824 died in the Assembly Committee on Health. c) AB 648 (Swanson) of 2010 would have established a demonstration project to permit rural hospitals, as defined, whose service area includes a medically underserved or federally designated shortage area and which meet certain specified requirements, to directly employ physicians and surgeons, and required a report to be completed by MBC regarding the project and submitted to the Legislature by June 1, 2019. AB 648 failed passage in the Senate Committee on Business, Professions and Economic Development. d) AB 646 (Swanson) of 2009 would have permitted health care districts and certain public hospitals, independent community nonprofit hospitals, and clinics, as specified, to directly employ physicians and surgeons. AB 646 failed passage in the Senate Committee on Business, Professions and Economic Development. e) SB 726 (Ashburn) of 2009 would have revised and extended the MBC pilot project that allows qualified district hospitals, as defined, to employ a physician, if the hospital does not interfere with, control, or otherwise direct the professional judgment of the physician. SB 726 AB 2024 Page 13 failed passage in the Senate Committee on Business, Professions and Economic Development. f) AB 1944 (Swanson) of 2008 would have allowed health care districts to employ a physician. AB 1944 died in the Senate Committee on Health. g) SB 1294 (Ducheny) of 2008 would have expanded the pilot project enabling health care districts to directly employ physicians. SB 1294 failed passage in the Assembly Appropriations Committee. h) SB 1640 (Ashburn) of 2008 would have expanded the pilot project to enable general acute care hospitals to directly employ physicians. SB 1640 failed passage in the Assembly Committee on Business and Professions. i) SB 376 (Chesbro), Chapter 411, Statutes of 2003, authorized, until January 1, 2011, a hospital owned and operated by a health care district meeting specified criteria to employ a physician, and to charge for professional services rendered by the physician if the physician approves the charges. 5)DOUBLE REFERRAL. This bill has been double referred. It passed the Assembly Committee on Business and Professions with a vote of 15-0 on April 5, 2016. REGISTERED SUPPORT / OPPOSITION: AB 2024 Page 14 Support Banner Lassen Medical Center California Hospital Association Catalina Island Medical Center Fairchild Medical Center Healdsburg District Hospital Health Access California Rural County Representatives of California Jerold Phelps Community Hospital Last Frontier Healthcare District Modoc Medical Center Mayers Memorial Hospital District Plumas District Hospital San Bernardino Mountains Community Hospital Santa Ynez Valley Cottage Hospital St. Helena Hospital Clear Lake Sutter Health Trinity Hospital Opposition None on file. Analysis Prepared by:Lara Flynn / HEALTH / (916) 319-2097 AB 2024 Page 15