Report 2006-035 Summary - February 2007

Department of Health Services: It Has Not Yet Fully Implemented Legislation Intended to Improve the Quality of Care in Skilled Nursing Facilities


Our review of the Department of Health Services' (Health Services) progress in implementing the Skilled Nursing Facility Quality Assurance Fee and Medi-Cal Long-Term Care Reimbursement Act (Reimbursement Act) revealed:


Currently, about 1,300 skilled nursing facilities (facilities) in the State provide services to patients covered by the California Medical Assistance Program (Medi-Cal), the State's Medicaid program. Until the passage of the Skilled Nursing Facility Quality Assurance Fee and Medi-Cal Long-Term Care Reimbursement Act (Reimbursement Act) in September 2004, facilities received reimbursements for Medi-Cal services based on a flat rate. The Reimbursement Act required the Department of Health Services (Health Services) to implement a modified reimbursement rate methodology that reimburses each facility based on its costs. In passing the Reimbursement Act, the Legislature intended the cost-based reimbursement rate to expand individuals' access to long-term care, improve the quality of that care, and promote decent wages for facility workers. The Reimbursement Act also imposed a Quality Assurance Fee (fee) on each facility to provide a revenue stream that would enhance federal financial participation in the Medi Cal program, increase reimbursements to facilities, and support quality improvement efforts in facilities. This audit report discusses Health Services' progress in carrying out the provisions of the Reimbursement Act.

Health Services experienced delays in implementing the requirements outlined in the Reimbursement Act. Under the Reimbursement Act, Health Services must create a reimbursement rate system to calculate facility-specific, cost based reimbursements as well as a system to calculate the fee rates within specified time frames. Although Health Services promptly created and obtained federal approval for the reimbursement rate and fee systems, it was slow to calculate the new reimbursement rates for each facility and apply the rates to Medi-Cal claims submitted by facilities. This delay caused facilities to receive lower rates during the eight months it took Health Services to calculate the new rate. The cost to Health Services in employee expenses to reprocess those claims using the new rates was $7,000. However, the delay also had an impact on fee collections because the Reimbursement Act required facilities to pay the fee only after they started receiving the new, higher reimbursement rate.

Health Services has not yet met all the auditing requirements included in the Reimbursement Act, having reviewed only about two-thirds of the State's facilities. When a facility reports costs, Health Services has an obligation to perform an audit to ensure that those costs are reasonable. If an audit reveals a discrepancy, Health Services must make an audit adjustment, which becomes the amount Health Services uses to develop the facility's reimbursement rate. When it does not audit facilities' reported costs, Health Services cannot be certain it is developing accurate rates. In fact, Health Services calculated approximately one-third of all facilities' reimbursement rates using unaudited cost data. Health Services stated that it did not have enough staff to conduct the required audits. To remedy this, the Department of Finance approved Health Services' request for 22 new audit staff. As of January 2007, Health Services had filled 20 of the audit staff positions and plans to fill the remaining positions by the end of fiscal year 2006-07.

Unlike reimbursements, the fee rate all facilities must pay is based on the revenue they report. However, Health Services has not reconciled its fee receipts to its records of anticipated collections. Before it started collecting fee payments, Health Services estimated each facility's annual reported resident days—the total number of days patients reside in a facility—and recorded the estimate in a database. With its fee payment, each facility reports actual resident days for the period and the total fee due. On receiving this information, Health Services records it in the database next to its estimates. However, Health Services had not reviewed these records and as a result it may not have collected all the 2004 fees due, with a shortage estimated to be as much as $17 million, as of June 2006.

By reviewing its records of fee payments received alongside its estimates, Health Services could have promptly identified delinquent facilities. Instead, it waited several months to follow up on facilities that did not pay their fees. By August 2006, however, Health Services had taken steps to collect fee payments for 2004 by withholding Medi-Cal payments for delinquent facilities that submitted claims for Medi-Cal reimbursements or by blocking license renewals for facilities that were not participating in Medi-Cal.

Conducting a reconciliation would also help Health Services identify facilities that have incorrectly reported resident days. According to its policy, Health Services must investigate reported resident days that vary by more than 5 percent from its estimate. Health Services cited a lack of sufficient staff as the reason for not reconciling its records. However, although Health Services has known for several years that it would likely require more resources to manage the increased workload, it waited until it drafted the 2006-07 budget change proposal to request additional staff. Since we are unable to determine what collections should have been until facilities report their days and the variances are investigated, we cannot reach a conclusion on the accuracy of Health Services' fee estimate. This highlights the importance of this reconciliation and the need for Health Services to follow up with the 325 facilities that reported significantly more or fewer resident days than anticipated.

Health Services believes that the new reimbursement rate system will result in a substantial savings to the State's General Fund. Specifically, it anticipated that the significant increase in reimbursement rates, as offset by the revenue stream provided by the new fee, will generate a total three-year savings to the General Fund of approximately $176 million from August 1, 2005, through July 31, 2008, with the amount of savings decreasing in each year. However, when projecting these savings, Health Services did not consider several ongoing costs resulting from the implementation of the Reimbursement Act, such as an estimated $4.2 million per year for additional employees hired to maintain the new system and $1 million per year for contract costs. As a result, the projected General Fund savings may decrease even more sharply than expected each year.

To develop the new reimbursement rate system, Health Services contracted with a consultant. Although the Reimbursement Act allows contracting, we are concerned about Health Services' continued reliance on contracted services to maintain and update the new reimbursement rate model. Health Services anticipated taking over rate development but did not specify in the contract with its consultant a date for doing so. According to Health Services, high turnover in its rate development branch has impeded its ability to take over the system. As a result, Health Services continues to require the services of the contracted consultant.

Further, Health Services did not always follow sound contracting practices. The consultant it hired to provide advice and research related to reimbursement rate methodologies was responsible for developing the reimbursement rate system, even though development work was not included in the scope of the contract. Health Services should have included detailed expectations in the contract for the final product. Additionally, it should have required the consultant to document the process used to build the system. Because it failed to include these details in the contract, Health Services does not have a blueprint of the system, leaving it vulnerable in the event of a system failure and at greater risk should the system fall short of Health Services' needs. In fact, when we attempted to replicate the reimbursement rate system that produced the fiscal year 2005-06 rates, neither Health Services nor its consultant were able to provide a complete methodology used to develop the system. Consequently, we could not verify that the rates produced by the system the consultant developed are appropriate. As a result, we have asked Health Services to develop and test formal, accurate and detailed documentation that includes all of the complexities of the rate development methodology within 60 days of this report's publication. Once we obtain this formalized methodology, we will test the reimbursement rate system to determine if it appropriately develops rates. When complete, we will issue a separate public letter that summarizes the results of our testing.

Neither Health Services nor the two consultants responsible for applying reimbursement rates to Medi-Cal claims and authorizing them for payment and for developing and administering the rate reimbursement system formally document changes made to the final reimbursement rates applied or changes made to the reimbursement rate system, which may leave Health Services vulnerable if such changes are later challenged.

Before the Reimbursement Act sunsets on July 31, 2008, the Legislature plans to review its overall impact. In its review, the Legislature may consider possible federal changes and quality of care issues as reported by the licensing division. The 2006-07 federal budget outlines proposed changes to the fee that, if approved, would affect the State's General Fund. These changes involve reducing the amount of the fee states could collect from 6 percent to 3 percent of facilities' total revenue.

The Reimbursement Act also requires that the licensing division prepare two reports that focus on quality improvements in facilities since the implementation of the Reimbursement Act. However, it does not require the licensing division to include information demonstrating the impact of the Reimbursement Act on the General Fund in these reports. Nevertheless, we believe that including General Fund data in its reports would help the Legislature understand the full impact of the Reimbursement Act.

Finally, the Health Services' contractor responsible for receiving and authorizing payment of facility Medi-Cal claims, authorized paying some facilities more than once. Although this contractor was unaware that it was authorizing duplicate payments, we found more than 2,100 instances of such payments totaling over $3.3 million since October 2005. Because the scope of this audit included only long-term care Medi-Cal payments for the 2005-06 fiscal year, we were unable to reach a conclusion as to whether the duplicate payments extended beyond the population we examined. Further, we cannot determine the magnitude of duplicate payments that might have been made to recipients that are not subject to the new rates. Health Services is currently investigating this issue and has begun taking corrective action.


To reduce the risk of using flawed data to calculate reimbursement rates, Health Services should conduct all the audits of facilities called for in the Reimbursement Act.

To ensure that it collects the Quality Assurance Fees (fees) it is entitled to, Health Services should take the following steps:

To hold the consultant contracted by Health Services to the intended terms and conditions of the contract to develop and administer the reimbursement rate system, Health Services should take the following steps:

To develop a mechanism to formally document changes, Health Services should take the following steps:

To ensure that its contract consultant authorizes the disbursement of Medi-Cal funds only to facilities entitled to them, Health Services should take the following steps:


Health Services generally agreed with our recommendations and has already taken some actions to address them.