AN ACT Relating to managed health care competition; providing exemptions for hospitals from the state certificate of need program; and providing for the study, monitoring, analysis, and development of competitive care; amending RCW 70.38.015, 70.38.025, 70.38.045, 70.38.065, 70.38.085, and 70.38.105; adding new sections to chapter 70.38 RCW; adding a new section to chapter 70.39 RCW; and repealing RCW 70.38.111.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

NEW SECTION. Sec. 1. The legislature recognizes the changes and transformations occurring in the health care delivery system today, including the greater intensity of competition among hospitals for patients and between managed health systems, such as health maintenance organizations, and the fee-for-service sector, which may have the potential for containing health care costs. The legislature finds however, that while competition is not new to the health care delivery system, price competition is relatively a weak force in a market in which substantial insurance is present, and where patients are isolated from the true costs of health care, resulting in a sure prescription for excessive utilization of health services and rapid health cost inflation.

The legislature also recognizes the steady decline in hospital occupancy and the demand for hospital services that is triggering intense competition among hospitals to fill empty beds. A recent federal study has shown that this nonprice competition substantially raises hospital costs. The hospital industry is capital intensive, and investments in plant, property, and equipment actually increased forty percent between 1982 and 1985. Capital costs, such as interest, depreciation, and leases, are the largest single growing component of the hospital rate structure and these costs increased eighty-eight percent during that time. The acquisition of equipment, including depreciation and financing, substantially affects the rate structure. There is no indication that capital acquisition of equipment will be subsiding in the state in the near future.

The question for policymakers is whether increased competition will alleviate the underlying conditions that lead to rapid increases in health care costs, or whether it actually increases the costs of health care to consumers.

The establishment of the state certificate of need program by the legislature was necessitated by the absence of natural incentives of the health care marketplace to contain the cost of health care. To the extent that changes in the marketplace are now occurring that have a potential for containing the utilization of services and the costs of health care, the need for the artificial constraints posed by the state regulatory program becomes less compelling. Exemptions from the state regulatory cost containment program should therefore be available to those hospitals and health facilities that can demonstrate the existence of a qualified pricing system that provides the internal incentives necessary to contain costs.

The legislature declares that there is a need for an analysis of health data on the nature, extent, and effects of price competition occurring in the health care delivery system, and a monitoring of its consequences on access of health care services to the public, especially the indigent population, and on hospital costs for the future. There is also a need for a strategic market analysis, and the establishment of permissible parameters for managed competition in health care delivery, that will promote the fundamental interests of the public in preserving access to quality health care.

This system of managed health care competition, relying on qualified marketplace incentives, when they can be demonstrated to exist, and supported by the state regulatory health cost containment program, provides the best hope for assuring the public of cost-effective and quality health care services at affordable prices.

Sec. 2. Section 1, chapter 161, Laws of 1979 ex. sess. as last amended by section 1, chapter 235, Laws of 1983 and RCW 70.38.015 are each amended to read as follows:

It is declared to be the public policy of this state:

(1) That health planning to promote, maintain, and assure the health of all citizens in the state, to provide accessible health services, health manpower, health facilities, and other resources while controlling excessive increases in costs, and to recognize prevention as a high priority in health programs, is essential to the health, safety, and welfare of the people of the state. Health planning should be fostered on both a state-wide and regional basis and must maintain responsiveness to changing health and social needs and conditions. Involvement in health planning from ((~~both~~)) consumers, purchasers, and providers throughout the state should be encouraged. Regional health planning under this chapter and in a manner consistent with RCW 36.70.015 is declared to be a proper public purpose for the expenditure of funds of counties or other public entities interested in local and regional health planning;

(2) That the development of health services and resources, including the construction, modernization, and conversion of health facilities, should be accomplished in a planned, orderly fashion, consistent with identified priorities and without unnecessary duplication or fragmentation;

(3) That the development ((~~and~~)), maintenance, and dissemination of adequate health care information, statistics and projections of need ((~~for health facilities and services~~)) is essential to effective health planning and resources development and the informed purchase of health care;

(4) That the development of nonregulatory approaches to health care cost containment should be considered, including the strengthening of price competition and encouraging market penetration of alternative delivery systems that have internal incentives to control costs and stimulate price competition in the marketplace;

(5) That health planning should be concerned with financing, access, and quality, recognizing the close interrelationship of the three and emphasizing cost control of health services, including cost-effectiveness and cost-benefit analysis;

(6) That this chapter should be construed to effectuate this policy and to be consistent with requirements of the federal health planning and resources development laws;

(7) That in order to foster the cooperation of business and labor as purchasers of health care services for employees, there is a need to compile and disseminate accurate and current data, including but not limited to price and utilization data, to improve the appropriate usage of health care services.

NEW SECTION. Sec. 3. A new section is added to chapter 70.39 RCW to read as follows:

(1) The state hospital commission, in consultation with the department of social and health services, the state health coordinating council, and the regional health councils, shall report to the legislature by January 1 of every biennium beginning January 1, 1987, on the nature, extent, and effects of price competition occurring in the health care delivery system, including its consequences on the costs of health care, the quality of health care services, and the access of the public, the uninsured, and the underinsured population to health care services. The commission shall collect data, monitor and conduct an analysis of the economic changes and system transformations, including an analysis of trends that identify, document, and measure:

(a) The impact of prospective pricing systems;

(b) Hospital negotiated rates;

(d) Fixed price hospital reimbursement based on diagnosis related groups; and

(e) Any apparent trends of health and hospital cost inflation.

(2) In conducting this strategic market analysis, the commission shall establish the "Washington hospital performance measurement system." The performance measurement system shall incorporate as appropriate the "market basket index" as that term is defined herein. The commission shall monitor the performance of hospitals' revenue per adjusted admission and utilization to determine the effectiveness of price competition among hospitals in the state.

Comparisons based on the performance measurement shall take into consideration differences among hospitals including, but not limited to, educational costs, charity care, interest and depreciation, case mix differences, inherent inefficiencies because of size and location of hospitals, and other external forces over which hospitals have no control.

The commission shall compare, to the extent possible, performance of hospitals in this and other states, including but not limited to, length of stay, admission rate per one thousand, patient days per one thousand, revenue per capita, and revenue per admission.

(3) For the purpose of this section:

(a) "Hospital performance measurement" means the maximum rate at which a hospital is expected to increase its average gross revenues per adjusted admission for a given period. The "hospital performance measurement" is composed of the market basket index plus other appropriate measures of hospital cost increases.

(b) "Market basket index" means the revised market basket index used to measure the inflation in hospital input prices as employed on January 1, 1985, by the secretary of the United States department of health and human services for medicare reimbursement. If the secretary of the United States department of health and human services employs a regional index to measure the inflation in hospital input prices for purposes of medicare reimbursement, the term means the index for the region including Washington. If the measure described in this paragraph ceases to be calculated in this manner, the inflation index shall be the index approved by rule adopted by the commission. The methodology used in determining the index approved by rule shall be substantially the same as the methodology employed on January 1, 1985, for determining the inflation in hospital input prices by the secretary of the United States department of health and human services for purposes of medicare reimbursement.

(4) In addition, the commission separately or in cooperation with the health data clearinghouse shall publish a comparative report and a brochure of hospital charges containing a simple and concise comparison of the charges by geographic areas, of average charges for the most common diagnoses. The report and brochure, distributable to the public, shall contain the explanations of differences among hospitals relating to charity care, cost of educational programs, case mix differences, and other factors as the commission believes appropriate.

Sec. 4. Section 4, chapter 161, Laws of 1979 ex. sess. as last amended by section 4, chapter 235, Laws of 1983 and RCW 70.38.045 are each amended to read as follows:

The department is authorized and empowered to:

(1) Exercise such duties and powers as are prescribed for state health planning and development agencies in federal law, consistent with the policy of this chapter;

(2) Assist the state health coordinating council in determining state-wide needs and conducting health planning activities, review the state health plan as developed by the council and submit the plans and recommendations as to approval or modification to the governor, and implement the state health plan as approved by the governor. In implementing the state health plan, the department shall be assisted by such other agencies of state government as the governor may designate;

(3) Consider recommendations from the council and assign, subject to the continuing approval of the council, an executive director, who shall be exempt from chapter 41.06 RCW, and provide such additional dedicated staffing assistance as necessary for the performance of its functions to work under the direction and supervision of the director;

(4) Serve as the designated planning agency of the state for the purposes of section 1122 of the Social Security Act, if the department maintains an agreement with the secretary, United States department of health and human services pursuant to section 1122 of Public Law 92-603, and administer a state certificate of need program as provided in RCW 70.38.105, 70.38.115, and 70.38.125;

(5) After consideration of recommendations, if any, submitted by the designated regional health councils respecting proposed undertakings which are subject to certificate of need review under the provisions of this chapter, making findings as to the need for such undertakings;

(6) Coordinate and consult in the conduct of its authorized activities with the Washington state hospital commission, the council, designated regional health councils, and other state agencies designated by the governor;

(7) Consider the recommendations of the council, designated regional health councils, and the state health plan in development of its biennial budget; ((~~and~~))

(8) Approve and deny applications for certificates of need; and

(9) Establish and maintain a state-wide health data clearinghouse for the acquisition, compilation, correlation, and dissemination of health data from health care providers, the state medical assistance program, third party payors, and other appropriate sources in furtherance of the purpose and intent of this chapter.

Sec. 5. Section 6, chapter 161, Laws of 1979 ex. sess. as last amended by section 5, chapter 235, Laws of 1983 and RCW 70.38.065 are each amended to read as follows:

The council is authorized and empowered to

(1) Exercise such duties and powers as are required for state-wide health coordinating councils in federal law.

(2) Establish, in consultation with the designated regional health councils, requirements for a uniform format and content for materials to be submitted by regional health councils to assist in development of the state health plan, and develop at least biennially the state health plan.

(3) Submit the council-adopted health plan to the secretary for review and comment and submission to the governor for adoption as the state health plan for the state. The governor may disapprove or modify the plan. The governor, in disapproving or modifying a state health plan, shall make public a written explanation of the actions taken. As approved by the governor, the plan shall be the state health plan.

(4) Coordinate and integrate health planning and policy advisory activities with the state board of health, state council on aging, state hospital commission, the departmental Title XIX advisory committee, and the departmental mental health advisory council.

(5) Act as the policymaking body for the health data clearinghouse established in the department for the acquisition, compilation, correlation, and dissemination of data from health care providers, the state medical assistance program, third party payors, and other appropriate sources in furtherance of the purpose and intent of this chapter.

Sec. 6. Section 8, chapter 161, Laws of 1979 ex. sess. as last amended by section 6, chapter 235, Laws of 1983 and RCW 70.38.085 are each amended to read as follows:

The council shall establish health service areas within the state and designate regional health councils organized, composed, and established in accordance with this chapter and criteria established by the council, considering the resources available for such purpose and promoting the coordination and integration of health planning, policymaking, and service delivery at the regional level.

Each designated regional health council shall have as its primary responsibility the provision of effective health planning for its health service area and the promotion of health services, manpower, and facilities which meet identified needs and reduce documented inefficiencies. To meet its primary responsibility, a designated regional health council shall carry out the following functions:

(1) Exercise such duties, powers, and responsibilities as are prescribed for health systems agencies in federal law, consistent with the policy of this chapter.

(2) Identify local health problems and concerns and assemble and analyze health data and information consistent with the requirements of the board;

(3) Develop, consistent with the criteria established by the council, other materials of assistance to the council in preparation of the state health plan;

(4) Review and make recommendations to the council respecting the need for health services in the health service area of the council;

(5) Seek the assistance of individuals and public and private entities in the health service area, to the extent practicable; ((~~and~~))

(6) Exercise such other duties and functions as may be established by the council or department to fulfill the intent and purposes of this chapter, which may include review, analysis, and recommendations on applications for certificates of need;

(7) Provide assistance to employers and employee groups, as well as other health purchasers, to form health care coalitions around the state;

(8) Assist the department in carrying out its data collection and dissemination duties and collect and distribute information concerning innovations in the delivery of health services and the enhancement of competition in the health care marketplace; and

(9) Assist existing health care coalitions and local health councils to pursue their goals in an efficient and effective manner.

In addition, the regional health councils may establish, biennially review, and amend as necessary a regional health plan which provides at least a statement of health goals and priorities for the health service area and sets forth the number, type, and distribution of health facilities, services, and manpower needed within the health service area to meet the goals of the plan.

Sec. 7. Section 10, chapter 161, Laws of 1979 ex. sess. as last amended by section 21, chapter 288, Laws of 1984 and RCW 70.38.105 are each amended to read as follows:

(1) The department is authorized and directed to implement the certificate of need program in this state pursuant to the provisions of this chapter.

(2) There shall be a state certificate of need program which is administered consistent with the requirements of federal law as necessary to the receipt of federal funds by the state.

(3) No person shall engage in any undertaking which is subject to certificate of need review under subsection (4) of this section without first having received from the department either a certificate of need or an exception granted in accordance with this chapter.

(4) The following shall be subject to certificate of need review under this chapter:

(a) The construction, development, or other establishment of a new health care facility;

(b) The sale, purchase, or lease of part or all of any existing hospital as defined in RCW 70.39.020;

(c) Any capital expenditure by or on behalf of a health care facility which substantially changes the services of the facility after January 1, 1981, provided that the substantial changes in services are specified by the department in rule;

(d) Any capital expenditure by or on behalf of a health care facility which exceeds the expenditure minimum as defined by RCW 70.38.025. However, a capital expenditure which is not subject to certificate of need review under (a), (b), (c), (e), (f), or (g) of this subsection and which is solely for any one or more of the following is not subject to certificate of need review except to the extent required by the federal government as a condition to receipt of federal assistance and does not substantially affect patient charges:

(i) Communications and parking facilities;

(ii) Mechanical, electrical, ventilation, heating, and air conditioning systems;

(iii) Energy conservation systems;

(iv) Repairs to, or the correction of, deficiencies in existing physical plant facilities which are necessary to maintain state licensure;

(v) Acquisition of equipment, including data processing equipment, which is not or will not be used in the direct provision of health services;

(vi) Construction which involves physical plant facilities, including administrative and support facilities, which are not or will not be used for the provision of health services;

(vii) Acquisition of land; and

(viii) Refinancing of existing debt;

(e) A change in bed capacity of a health care facility which increases the total number of licensed beds or redistributes beds among facility and service categories of acute care, skilled nursing, intermediate care, intermediate care of the mentally retarded, and boarding home care if the bed redistribution is to be effective for a period in excess of six months;

(f) Acquisition of major medical equipment((:

~~(i) If the equipment will be owned by or located in a health care facility; or~~

(ii) If, after January 1, 1981, the equipment is not to be owned by or located in a health care facility, the department finds consistent with federal regulations the equipment will be used to provide services for hospital inpatients, or the person acquiring such equipment did not notify the department of the intent to acquire such equipment at least thirty days before entering into contractual arrangements for such acquisition));

(g) Any new institutional health services which are offered in or through a health care facility, and which were not offered on a regular basis by, in, or through such health care facility within the twelve-month period prior to the time such services would be offered; and

(h) Any expenditure by or on behalf of a health care facility in excess of the expenditure minimum made in preparation for any undertaking under subsection (4) of this section and any arrangement or commitment made for financing such undertaking. Expenditures of preparation shall include expenditures for architectural designs, plans, working drawings, and specifications. The department may issue certificates of need permitting predevelopment expenditures, only, without authorizing any subsequent undertaking with respect to which such predevelopment expenditures are made.

(5) No person may divide a project in order to avoid review requirements under any of the thresholds specified in this section.

NEW SECTION. Sec. 8. The department shall not require a hospital to obtain a certificate of need for the offering of an acute inpatient institutional health service or the acquisition of major medical equipment for the provision of an acute inpatient institutional health service or the obligation of a capital expenditure for the provision of an acute inpatient institutional health service if it:

(1) Meets charity care criteria specified in regulations promulgated by the state hospital commission; and

(2) Meets service geographic distribution, quality of care, and appropriate utilization criteria established by the state health plan and regulations promulgated by the department; and

(3) Has seventy-five percent of qualified inpatient revenue, as documented by the health facility and certified by the hospital commission from one or more of the following sources:

(a) Revenue received pursuant to Title XVIII, United States Social Security Act, when such revenue is based on diagnostic related group prices which include capital related expenses or other risk-based payment programs as approved by the state agency;

(b) Revenue received pursuant to Title XIX, United States Social Security Act, when such revenue is based on diagnostic related group prices which include capital related expenses;

(c) Revenue received under negotiated arrangements with public or private payers based on all-inclusive per diem rates for one or more hospital service categories;

(d) Revenue received under negotiated arrangements with public or private payers based on all-inclusive per discharge or per admission rates related to diagnostic related groups or other service or intensity related measures;

(e) Revenue received under arrangements with one or more health maintenance organizations; or

(f) Other prospectively determined forms of inpatient hospital reimbursement approved in advance by the state agency in accordance with rules.

Sec. 9. Section 2, chapter 161, Laws of 1979 ex. sess. as last amended by section 43, chapter 41, Laws of 1983 1st ex. sess. and RCW 70.38.025 are each amended to read as follows:

When used in this chapter, the terms defined in this section shall have the meanings indicated.

(1) "Board of health" means the state board of health created pursuant to chapter 43.20 RCW.

(2) "Capital expenditure" is an expenditure, including a force account expenditure (i.e., an expenditure for a construction project undertaken by a facility as its own contractor) which, under generally accepted accounting principles, is not properly chargeable as an expense of operation or maintenance. Where a person makes an acquisition under lease or comparable arrangement, or through donation, which would have required review if the acquisition had been made by purchase, such expenditure shall be deemed a capital expenditure. Capital expenditures include donations of equipment or facilities to a health care facility which if acquired directly by such facility would be subject to certificate of need review under the provisions of this chapter and transfer of equipment or facilities for less than fair market value if a transfer of the equipment or facilities at fair market value would be subject to such review. The cost of any studies, surveys, designs, plans, working drawings, specifications, and other activities essential to the acquisition, improvement, expansion, or replacement of any plant or equipment with respect to which such expenditure is made shall be included in determining the amount of the expenditure.

(3) "Council" means the state health coordinating council created in RCW 70.38.055 and described in Public Law 93-641.

(4) "Department" means the state department of social and health services.

(5) "Expenditure minimum" means, for the purposes of the certificate of need program, one million dollars adjusted by the department by rule to reflect changes in the United States department of commerce composite construction cost index; or a lesser amount required by federal law and established by the department by rule.

(6) "Federal law" means Public Law 93-641, as amended, or its successor.

(7) "Health care facility" means hospices, hospitals, psychiatric hospitals, tuberculosis hospitals, nursing homes, kidney disease treatment centers, ambulatory surgical facilities, rehabilitation facilities, birthing centers, urgi-centers, and home health agencies, and includes such facilities when owned and operated by the state or by a political subdivision or instrumentality of the state and such other facilities as required by federal law and implementing regulations, but does not include Christian Science sanatoriums operated, listed, or certified by the First Church of Christ Scientist, Boston, Massachusetts. In addition, the term does not include any nonprofit hospital: (a) Which is operated exclusively to provide health care services for children; (b) which does not charge fees for such services; (c) whose rate reviews are waived by the state hospital commission; and (d) if not contrary to federal law as necessary to the receipt of federal funds by the state.

(8) "Health maintenance organization" means a public or private organization, organized under the laws of the state, which:

(a) Is a qualified health maintenance organization under Title XIII, section 1310(d) of the Public Health Services Act; or

(b) (i) Provides or otherwise makes available to enrolled participants health care services, including at least the following basic health care services: Usual physician services, hospitalization, laboratory, x-ray, emergency, and preventive services, and out-of-area coverage; (ii) is compensated (except for copayments) for the provision of the basic health care services listed in (b)(i) to enrolled participants by a payment which is paid on a periodic basis without regard to the date the health care services are provided and which is fixed without regard to the frequency, extent, or kind of health service actually provided; and (iii) provides physicians' services primarily (A) directly through physicians who are either employees or partners of such organization, or (B) through arrangements with individual physicians or one or more groups of physicians (organized on a group practice or individual practice basis).

(9) "Health services" means clinically related (i.e., preventive, diagnostic, curative, rehabilitative, or palliative) services and includes alcoholism, drug abuse, and mental health services and as defined in federal law.

(10) "Health service area" means a geographic region appropriate for effective health planning which includes a broad range of health services and a population of at least four hundred fifty thousand persons.

(11) "Institutional health services" means health services provided in or through health care facilities and entailing annual operating costs of at least five hundred thousand dollars adjusted by the department by rule to reflect changes in the United States department of commerce composite construction cost index; or a lesser amount required by federal law and established by the department by rule: PROVIDED, That no new health care facility may be initiated as an institutional health service.

(12) "Major medical equipment" means medical equipment which is used for the provision of medical and other health services and which costs in excess of one million dollars, adjusted by the department by rule to reflect changes in the United States department of commerce composite construction cost index; or a lesser amount required by federal law and established by the department by rule; except that such term does not include medical equipment acquired by or on behalf of a clinical laboratory to provide clinical laboratory services if the clinical laboratory is independent of a physician's office and a hospital and it has been determined under Title XVIII of the Social Security Act to meet the requirements of paragraphs (10) and (11) of section 1861(s) of such act;

(13) "Person" means an individual, a trust or estate, a partnership, a corporation (including associations, joint stock companies, and insurance companies), the state, or a political subdivision or instrumentality of the state, including a municipal corporation or a hospital district.

(14) "Provider" generally means a health care professional or an organization, institution, or other entity providing health care but the precise definition for this term shall be established by rule of the department, consistent with federal law.

(15) "Public health" means the level of well-being of the general population; those actions in a community necessary to preserve, protect, and promote the health of the people for which government is responsible; and the governmental system developed to guarantee the preservation of the health of the people.

(16) "Regional health council" means a public regional planning body or a private nonprofit corporation which is organized and operated in a manner that is consistent with the laws of the state and which is capable of performing each of the functions described in RCW 70.38.085. A regional health council shall have a governing body for health planning which is composed of a majority (but not more than sixty percent of the members) of persons who are residents of the health service area served by the entity; who are consumers of health care; who are broadly representative of the social, economic, linguistic, and racial populations, and geographic areas of the health service area, and major purchasers of health care; and who are not, nor within the twelve months preceding appointment have been, providers of health care. The remainder of the members shall be residents of the health service area served by the agency who are providers of health care.

(17) "Regional health plan" means a document which provides at least a statement of health goals and priorities for the health service area. In addition, it sets forth the number, type, and distribution of health facilities, services, and manpower needed within the health service area to meet the goals of the plan.

(18) "State health plan" means a document developed in accordance with RCW 70.38.065.

NEW SECTION. Sec. 10. Section 9, chapter 139, Laws of 1980, section 3, chapter 119, Laws of 1982 and RCW 70.38.111 are each repealed.

NEW SECTION. Sec. 11. Sections 1 and 8 of this act are each added to chapter 70.38 RCW.