BILL ANALYSIS Ó AB 2467 Page 1 ASSEMBLY THIRD READING AB 2467 (Gomez) As Amended May 31, 2016 Majority vote ------------------------------------------------------------------ |Committee |Votes|Ayes |Noes | | | | | | | | | | | | | | | | |----------------+-----+----------------------+--------------------| |Health |11-6 |Wood, Bonilla, Burke, |Maienschein, | | | |Campos, Chiu, |Lackey, Olsen, | | | |Dababneh, Gomez, |Patterson, | | | | |Steinorth, Waldron | | | | | | | | |Roger Hernández, | | | | |Nazarian, Rodriguez, | | | | |Santiago | | | | | | | |----------------+-----+----------------------+--------------------| |Appropriations |14-6 |Gonzalez, Bloom, |Bigelow, Chang, | | | |Bonilla, Bonta, |Gallagher, Jones, | | | |Calderon, Daly, |Obernolte, Wagner | | | |Eggman, Eduardo | | | | |Garcia, Roger | | | | |Hernández, Holden, | | | | |Quirk, Santiago, | | | | |Weber, Wood | | | | | | | | | | | | AB 2467 Page 2 ------------------------------------------------------------------ SUMMARY: Establishes the Hospital Executive Compensation Transparency Act of 2016 which requires covered hospitals or medical entities, as defined, to submit an annual hospital executive compensation report to the Office of Statewide Health Planning and Development (OSHPD) which provides specified information regarding executives earning over $300,000 per year; and, for covered hospitals or medical entities with 100 or more employees, requires the report to also include information regarding the pay bands of various employee classifications, as well as voluntarily self-reported information regarding employees' gender, ethnicity, race, sexual orientation, and gender identity, by job categories. Specifically, this bill: 1)Requires, on and after October 1, 2017, each covered hospital or medical entity to submit an annual hospital executive compensation report (annual report) to OSHPD for every hospital executive whose total annual compensation met or exceeded the executive compensation reporting threshold (EXCRT). 2)Requires the annual report to include all of the following information for the prior fiscal year: a) The names, positions, or titles of each hospital executive and the aggregate total annual compensation for each hospital executive at or exceeding the EXCRT, with a description of each entity that has contributed to the total annual compensation of each hospital executive, in any form, and the amount of such compensation; b) A detailed breakdown of all wage and nonwage compensation; AB 2467 Page 3 c) Identification of any benefit or remuneration excluded from the definition of total annual compensation; and, d) A detailed breakdown of board compensation, which shall include all of the following: i) The name of the publicly traded company, privately held company, or nonprofit organization that provided the board compensation; and, ii) The number of hours the hospital executive spent on matters related to their duties as a director of the publicly traded company, privately held company, or nonprofit organization for which the board compensation was received. 3)Requires, consistent with the federal annual equal employment opportunity and compensation report on employees' ethnicity, race, and sex by job category and compensation, on or after October 1, 2017, and annually thereafter each covered hospital or medical entity with 100 or more employees to submit to the Department of Public Health all of the following information for the prior fiscal year: a) The number of employees earning annual total compensation in 12 pay bands, as proposed by the federal Equal Employment Opportunity Commission (EEOC) in the Federal Register, Volume 81 Number 20, on February 1, 2016, on pages 5113 to 5121, inclusive, for each of the eight employee classifications defined in OSHPD's hospital annual financial data and by self-reported gender, ethnicity, and race, and voluntarily self-reported sexual orientation and AB 2467 Page 4 gender identity; and, b) The total number of hours worked by the employees included in each pay band. 4)Requires OSHPD, on and after January 1, 2018, to post the annual hospital executive compensation report for each covered hospital or medical entity on OSHPD's Internet Web site. Requires the report to be submitted on the form or in the format required by OSHPD. 5)Requires the board of directors (BOD) of any nonprofit or for-profit corporation that owns, operates, or controls, in whole or in part, a covered hospital or medical entity to approve the annual report before it is submitted to OSHPD, and requires each director to act in good faith and with reasonable care and inquiry in approving the annual report and in ensuring the corporation complies with the requirements of this bill. 6)Requires the annual report for each covered hospital or medical entity governed, owned, or controlled by a BOD, to state that it was approved by the BOD, the date it was approved, and contain an attestation under penalty of perjury by an authorized representative of the covered hospital or medical entity BOD, as specified. 7)Specifies that any scheme or artifice that has the purpose of avoiding the reporting requirements of this bill is a violation of this bill. 8)Specifies that payments, compensation, or remuneration by a separate entity that is purported not to be for work performed AB 2467 Page 5 or services provided at or for a covered hospital or medical entity, but that is disproportionate to its purported purpose so as to evade the annual hospital executive compensation reporting requirements is a violation of this bill. 9)Requires OSHPD to establish and assess reasonable fees, to be submitted with each annual report to cover only the reasonable costs of implementing and ensuring compliance with this bill. 10)Defines board compensation as the total annual compensation provided to each hospital executive by any publicly traded company, privately held company, or nonprofit organization on whose BOD hospital executive sits and from which the hospital executive received total annual compensation of more than $1,000. 11)Defines covered hospital or medical entity as any of the following: a) A private nonprofit general acute care hospital; b) An acute psychiatric hospital; c) Any private for-profit general acute care hospital; d) A hospital group, or any person, corporation, partnership, limited liability company, trust, or other entity that owns, operates or controls, in whole or in part, any such group; e) A hospital-affiliated medical foundation that is AB 2467 Page 6 directly or indirectly, including through one or more intermediaries, controlled or owned by, or controlled or owned by the same person or entity as, a hospital, hospital group, hospital-affiliated physicians group, or nonprofit corporation that owned, operates, or controls, in whole or in part, a hospital, hospital group, or hospital-affiliated physicians group. Specifies that a medical foundation will be deemed a hospital-affiliated medical foundation if either or both of the following are true: i) The medical foundation is a disregarded entity of, or would be required to be designated as a related organization on the Internal Revenue Service (IRS) form 900 (or its accompanying schedules or the successor of such forms or schedule) of, a hospital, hospital group, hospital-affiliated physicians group, or a nonprofit corporation that owns, operates, or controls, in whole or in part, a hospital, hospital group, or hospital-affiliated physicians group; and/or; ii) A majority of the medical foundation's assets are owned by a hospital, hospital group, or hospital-affiliated physicians group or by a nonprofit corporation that owns, operates, or controls, in whole or in part, a hospital, hospital group, or hospital-affiliated physicians group or of a nonprofit corporation that owns, operates, or controls, in whole or in part, a hospital, hospital group, or hospital-affiliated physicians group; f) A hospital-affiliated physicians group, is any physicians group or medical group that is directly or indirectly, including through one or more intermediaries, controlled or owned by, or controlled or owned by the same person or entity as, a hospital, hospital group, hospital-affiliated medical foundation, or a nonprofit AB 2467 Page 7 corporation that owns, operates, or controls, in whole or in part, a hospital, hospital group, or hospital-affiliated medical foundation. A physicians group shall be deemed a hospital-affiliated physicians group if either or both of the following are true: i) The physicians group is a disregarded entity of, or would be required to be designated as a related organization on IRS form 990 (or its accompanying schedules or the successor of such forms or schedules) of, a hospital, hospital group, or hospital-affiliated medical foundation or a nonprofit corporation that owns, operates, or controls, in whole or in part, a hospital, hospital group, or hospital-affiliated medical foundation; and/or, ii) A majority of the physicians group's assets are owned by a hospital, hospital group, or hospital-affiliated medical foundation or a nonprofit corporation that owns, operates, or controls, in whole or in part, a hospital, hospital group, or hospital-affiliated medical foundation. g) A health care district. 12)Exempts the following from the definition of a covered hospital or medical entity: a) Hospitals operated or licensed by the United States Department of Veterans Affairs or public hospitals, with the exception of hospitals owned or operated by a health care district; and, AB 2467 Page 8 b) Designated public hospitals, as defined. 13)Specifies that EXCRT means the total annual compensation from any source for work performed or services provided at or for the covered hospital or medical entity that is greater than three hundred thousand dollars ($300,000) in a year. 14)Specifies that hospital executive means all persons whose primary duties are executive, managerial, or administrative at or for the covered hospital or medical entity, even if that person also performs or performed other duties. 15)Specifies that hospital executive includes, but is not limited to, chief executive officers (CEOs), chief executive managers, chief executives, executive officers, executive directors, chief financial officers (CFOs), presidents, executive presidents, vice presidents, executive vice presidents, and other comparable positions. 16)Specifies that the definition of hospital executive applies irrespective of whether the person exercising executive, managerial, or administrative authority is or was an employee of a covered hospital or medical entity or a nonprofit corporation that owns, operates, or controls, in whole or in part, a covered hospital or medical entity. The definition shall also apply to any person who exercises or exercised such authority even if the arrangements for such authority or for compensation or both are pursuant to a contract or subcontract. 17)Specifies that the definition of hospital executive includes any person who held the duties described in these provisions during the period covered by the annual report, even if the person is postemployment or post-service. AB 2467 Page 9 18)Specifies that the definition of a hospital executive does not apply to medical or health care professionals whose primary duties are or were the provision of medical services, research, direct patient care, or other non-managerial, nonexecutive, and non-administrative services. 19)Specifies that total annual compensation means all remuneration paid, earned, or accrued in the course of a fiscal year for work performed or services provided, including the cash value of all remuneration (including benefits) in any medium other than cash, and including, but not limited to, all of the following: a) Wages; salary; paid time off; bonuses; incentive payments; lump-sum cash payments; the fair market value of below-market-rate loans or loan forgiveness; housing payments; payments for transportation, travel, meals, or other expenses in excess of actual documented expenses incurred in the performance of duties; payments or reimbursement for entertainment or social club memberships; the cash value of housing, automobiles, parking, or similar benefits; scholarships or fellowships; the cash value of dependent care or adoption assistance or personal legal or financial services; the cash value of stock options or awards; payments or contributions for insurance, except as exempted in 20) below, to a Section 125 cafeteria plan or equivalent arrangement, to a health savings account, or for severance or its equivalent; and deferred compensation earned or accrued, even if not yet vested nor paid; b) The total value in the aggregate of the compensation or payments authorized or paid under a severance or similar post-service or post-employment arrangement, to include the fair market value of all cash remuneration as well as the AB 2467 Page 10 fair market value of all remuneration (including benefits) paid in any medium other than cash; c) Payments, compensation, or remuneration for work performed or services provided at or for a covered hospital or medical entity even if made by a separate person or entity, including, but not limited to, any of the following: i) A for-profit or unincorporated entity; ii) A corporation, partnership, or limited liability company; iii) A trust or other entity that is controlled by the same person or persons who govern a covered hospital or medical entity; iv) A supporting or supported organization within the meaning of the Internal Revenue Code Sections 509(a)(3) and 509(f)(3); or, v) A disregarded entity of, or related organization as set forth within, the IRS form 990 of a covered hospital or medical entity or a nonprofit corporation that owns, operates, or controls, in whole or in part, a covered hospital or medical entity. d) Payment of compensation or remuneration by any person, corporation, partnership, limited liability company, trust, or other entity that a covered hospital or medical entity, or a nonprofit corporation that owns, operates, or AB 2467 Page 11 controls, in whole or in part, a covered hospital or medical entity, participates in, belongs to, is a member of, or pays into shall be presumed compensation for work performed or services provided at or for the covered hospital or medical entity. 20)Specifies that total annual compensation does not include the cost of health insurance or disability insurance or payments or contributions to a health reimbursement account. FISCAL EFFECT: According to the Assembly Appropriations Committee, staff and information technology costs to OSHPD of $390,000 in year one, $240,000 in year two, and ongoing costs of $110,000 to implement this bill (fee-supported by fee revenue authorized pursuant to this bill). One-time activities include development of regulations, preparation of system requirements and design documents, information technology system testing, Ongoing activities include reviewing reports, researching which unlicensed entities must report, contacting report entities with missing or delinquent reports and addressing questions from the public and policy makers. COMMENTS: According to the author, currently there is little transparency over whether for-profit or non-profit hospitals use taxpayer dollars to provide high-quality, affordable medical care, or if funds are being diverted to exorbitant executive compensation packages. The author states that this bill ensures more accountability and transparency in an otherwise opaque environment. Rising healthcare costs. The United States (U.S.) Census Bureau has published new estimates of health spending based on their Quarterly Services Survey, published on March 10, 2016. Analysis of the survey data shows that health spending was 7.3% higher in the first quarter of 2015 than in the first quarter of AB 2467 Page 12 last year. Hospital spending increased 9.2%. A Kaiser Family Foundation analysis of the data concludes that greater use of health services, as well as more people covered by the Patient Protection and Affordable Care Act appear to be responsible for most of the increase, noting that people are beginning to use more physician and outpatient services again as the economy improves and that the number of days people spent in hospitals also rose. Executive compensation. According to the proponents of this bill, little is known about what factors drive health care costs, however they point to the fact that hospital executive compensation has spiked in recent years. According to the healthcare industry publication "Payers & Providers," 66 executives at the state's three largest hospital systems (Sutter Health, Dignity Health, and Kaiser Permanente) earned more than $1 million each in 2013, up from 52 executives just two years before. Publicly available information. 1)Non-profit entities. The IRS 990, officially, the "Return of Organization Exempt from Income Tax" is an IRS form that provides the public with financial information about a non-profit organization. It is often the only source of such information. Non-profit hospitals are required to file the form 990 in order to maintain their non-profit/tax-exempt status. However, only the top 20 wage earners over $150,000 have to be identified on the forms, and due to differing corporate structures of hospitals and hospital systems, the data is not easily comparable. For example, Kaiser is one corporate entity with two branches, North and South. Their 990 covers their hospitals and health plan, however their medical group (the doctors) are a for profit entity, so their salaries are not included on the 990. Conversely, Dignity Health (Dignity) files a single 990 for the entire system. AB 2467 Page 13 The top 20 wage earners on Dignity's form are system-wide employees, so their 990 excludes many CEOs. According a June 30, 2015 article published in the Chronicle of Philanthropy, the IRS is working on a technology that should allow it to release electronic version of the form 990 by early this year, which would make it much easier for the public to search for information about non-profit finances and operations. 2)For-profit entities. Publicly traded companies report significant amounts of financial data to shareholders and the government in their annual U.S. Securities and Exchange Commission (SEC) filings. Several documents that companies are required to file include information about the company's executive compensation policies and practices including; the company's annual proxy statement; the company's annual report; and, registration statements filed by the company to register securities for sale to the public. The information is available on the SEC's searchable database, EDGAR. 3)Private for-profit entities. Privately owned for-profit hospitals are not required to report on their executive's salaries. Of the 105 for-profit hospitals in the state, approximately 50 are not publicly traded, and do not report salary information. Federal annual equal employment opportunity and compensation report (EEO-1 Report). The EEO-1 Report is a compliance survey mandated by federal statute and regulations. The survey requires company employment data to be categorized by race/ethnicity, gender and job category. On January 29, 2016, the EEOC announced proposed changes to its EEO-1 report, which requires employers to submit employee W-2 earnings and hours worked. Under the proposal, all employers with at least 100 employees (not just federal contractors) would be required to comply. In addition, the proposed changes will require the AB 2467 Page 14 submission of payroll data broken down by race/ethnicity, in addition to gender. The data would be made available to the EEOC and the Office of Federal Contract Compliance Programs for enforcement purposes. The proposed rule was published on February 1, 2016 and interested parties have 60 days to submit comments. The EEOC proposing to change the reporting requirements to include the data on employees' earnings and hours worked, beginning in 2017. The EEOC's proposed pay bands (which are included in the reporting provisions of this bill) are as follows: 1)$19, 239 and under; 2)$19,240 - $24, 439; 3)$24,440 - $30,679; 4)$30,680 - $38,999; 5)$39,000 - $49,919; 6)$49,920 - $62,919; 7)$62,920 - $80,079; 8)$80,080 - $101,919 AB 2467 Page 15 9)$128,960 - $163,799; 10)$163,800 - $207,999; and, 11)$208,000 and over. The EEOC is prohibited from making public the employment data derived from any of its compliance surveys. The EEOC uses EEO-1 data to support civil rights enforcement and to analyze employment patterns, such as the representation of female and minority workers within companies, industries or regions. The EEOC is not proposing to require an employer to begin collecting additional data on actual hours worked for salaried workers, to the extent that the employer does not currently maintain such information. Self-reported employee information. According to the Human Rights Campaign (HRC) unlike other diversity categories, such as race and gender, employers are not required to collect statistics on the number of lesbian, gay, bisexual, and transgender (LGBT) people they employ. Employers have sought to determine the number of their employees who identify as LGBT while balancing privacy concerns. Some employers use LGBT employee group membership numbers to generate estimates, but this method is limited by the scope of such voluntary groups over a highly dispersed workforce. More recently, employers have gathered statistics through anonymous employee engagement or satisfaction surveys, which can include upward of 100 questions, and through confidential and secure employee records. In both cases, whether an employee discloses their gender identity or sexual orientation is optional and voluntary and any reporting or direct access to the data is designed to ensure confidentiality of the employee. In the HRC Corporate Equality Index 2015 survey of 781 employers, 46% allow employees to voluntarily disclose their sexual orientation and gender AB 2467 Page 16 identity on anonymous surveys or confidential Human Resource records, compared with 141 of the 519 employers (27%) in the 2008 survey and just 17% in the 2006 survey. The California State Council of the Service Employees International Union (SEIU California) supports this bill, stating, while California public hospitals (city, county, or University of California) are already required to provide complete salary information for all employees through the Controller, which publicly reports these data, significant gaps and inconsistencies exist for our understanding of not-for-profit and for-profit hospitals. Hospitals which are publicly-traded must disclose executive compensation for their CEO, CFO, and the next three top paid employees company-wide to the SEC, which seldom capture their California executives if the firm is national. SEIU California continues, with nonprofits, the public makes a significant investment in the form of over a billion a year in tax exemptions in California, but nonprofit hospitals must only disclose their top five highest compensated employees, beyond their officers and directors, which often obfuscates individual hospital CEO compensation, particularly at large multi-facility nonprofit hospital chains. In each of these examples there has already been established a compelling policy reason to understand how top executives are being paid - for the sake of understanding public investments, and informing private investor decision-making - but the reporting requirements in each case are different in scope and detail and ultimately become of little use in very large nonprofit chains or national companies, especially for national systems not based in California. SEIU California notes that, at issue for non-profit operated hospitals is the need to better understand whether the state's investment through tax breaks and others subsidies leads hospitals to provide more charity care and community benefits, or whether it simply serves as a mechanism to provide hospital executives with more excessive pay. SEIU California points to a AB 2467 Page 17 2015 study published in Health Affairs that found that California's nonprofit hospitals spent the same amount on uncompensated care as for-profit hospitals, which suggests greater accountability is warranted. SEIU California concludes this bill will align hospital executive compensation reporting for all non-profit and for-profit hospitals, including investor owned hospitals, and consolidate that reporting within OSHPD, which already collects and reports a myriad of different hospital financial data. The California Labor Federations states that increasing transparency of CEO compensation at hospitals is a first step in examining all cost drivers in health care, starting at the top of the hospital chain, and given that the largest California hospitals are non-profits, taxpayers should have access to the compensation and other data about hospitals that they support with tax breaks. The California Hospital Association (CHA) opposes this bill and states that hospitals and health systems are not opposed to transparency; many hospitals currently report much of the information sought and it is available to the public, however this bill only increases hospital costs and discloses private compensation information without any justification. CHA also notes that the bill raises significant privacy concerns for a broad array of employees, extending to exempt employees, not just executives, thus nurse managers or information technology personnel whose total compensation meets for exceeds $250,000 annually would be reported. CHA notes that in many organizations, particularly in urban areas, this reporting threshold would reach deep into the organization. The Hospital Corporation of America states it is concerned about the unintended consequences of public reporting of salaries, noting that it could actually drive up labor costs where employees and applicants use the salary information as benchmarks for the myriad of hard to fill positions in health care. AB 2467 Page 18 The California Chamber of Commerce (the Chamber) states that this bill inappropriately assumes that hospital executive compensation is a major driver of overall health care spending. The Chamber notes that hospital executives play a critical role in ensuring that millions of Californians receive quality health care services, even as cost pressures and increasing demand for hospital services are making it harder and harder for many hospitals to keep their doors open. Analysis Prepared by: Lara Flynn / HEALTH / (916) 319-2097 FN: 0003260