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									                                                                                    AB 824
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Date of Hearing: April 26, 2011

                          ASSEMBLY COMMITTEE ON HEALTH
                                William W. Monning, Chair
                       AB 824 (Chesbro) – As Amended: March 31, 2011

SUBJECT: Rural hospitals: physician services.

SUMMARY: Establishes a pilot project to permit certain rural hospitals to directly employ
physicians and surgeons (physicians). Specifically, this bill:

1) Establishes the Rural Hospital Physician and Surgeon Services Demonstration Project
   (demonstration project), which permits a rural hospital, whose service area includes a
   medically underserved area, a medically underserved population, or that has been federally
   designated as a health professional shortage area, to employ one or more physicians, not to
   exceed 10 physicians at one time, as specified, to provide medical services.

2) Permits the rural hospital to retain all or part of the income generated by the physician for
   medical services billed and collected by the rural hospital, if the physician approves the

3) Permits a rural hospital to participate in the demonstration project if both of the following
   conditions are met:

   a) The rural hospital documents that it has been unsuccessful in recruiting one or more
      primary care or specialty physicians for at least 12 continuous months beginning July 1,
      2010. Requires an exception to be provided to the 12-month recruiting process when
      there is an unexpected or sudden vacancy that needs to be filled immediately; and,

   b) The chief executive officer of the rural hospital certifies to the Medical Board of
      California (MBC) that the inability to recruit primary care or specialty physicians has
      negatively impacted patient care in the community, based on a number of factors,
      including, but not limited to, the number of patients referred for care outside the
      community, the number of patients who experienced delays in treatment, and the length
      of the treatment delays.

4) States that the total number of licensees employed by the rural hospital at one time shall not
   exceed 10, unless the employment of additional physicians is deemed appropriate by the
   MBC on a case-by-case basis. Requires the MBC, in making this determination, to take into
   consideration whether access to care is improved for the community served by the hospital
   by increasing the number of physicians employed.

5) Requires a rural hospital employing a physician to develop and implement a written policy to
   ensure that each employed physician exercises his or her independent medical judgment in
   providing care to patients.

6) Requires each physician employed by a rural hospital to sign a statement biennially
   indicating that the physician:
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   a) Voluntarily desires to be employed by the hospital;
   b) Will exercise independent medical judgment in all matters relating to the provision of
      medical care to his or her patients; and,
   c) Will report immediately to MBC any action or event that the physician reasonably and in
      good faith believes constitutes a compromise of his or her independent medical judgment
      in providing care to patients in a rural hospital or other health care facility owned or
      operated by the rural hospital.

7) Requires a rural hospital to retain the signed statement for at least three years and submit a
   copy of the signed statement to MBC within 10 working days after the statement is signed.

8) Prohibits a rural hospital from interfering with, controlling, or directing a physician’s
   exercise of his or her independent medical judgment in providing medical care to patients.
   Requires, if MBC believes that a rural hospital has violated this prohibition, MBC to refer the
   matter to the State Department of Public Health (DPH), and requires DPH to investigate the
   matter, as specified.

9) States that nothing in this bill exempts a rural hospital from a reporting requirement or affects
   the authority of MBC to take action against a physician’s license.

10) Requires MBC to deliver a report to the Legislature regarding the demonstration project no
    later than January 1, 2019, and requires the report to include an evaluation of the
    effectiveness of the demonstration project in improving access to health care in rural and
    medically underserved areas and the demonstration project’s impact on consumer protection
    as it relates to intrusions into the practice of medicine.

11) Sunsets the project on January 1, 2020.

12) Defines a "rural hospital" as:

   a) A general acute care hospital located in an area designated as nonurban by the United
      States Census Bureau;
   b) A general acute care hospital located in a rural-urban commuting area code of four or
      greater as designated by the United States Department of Agriculture; or,
   c) A rural general acute care hospital, as defined based on existing hospital peer groupings.


1) Prohibits corporations and other artificial legal entities from having any professional rights,
   privileges, or powers (known as the "prohibition against the corporate practice of medicine
   (CPM)"), and further provides that the Division of Licensing of MBC may, pursuant to
   regulations MBC has adopted, 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.

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.
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3) Provides certain 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 physician’s professional judgment in a manner that is prohibited by
      the CPM prohibition or any other provision of law;
   d) Under the Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene), 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; and,
   e) In the Medi-Cal Program, permits 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.

4) Authorizes until January 1, 2011, a pilot project to allow 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. To qualify for the project, a district
   hospital must: be in a county with population of 750,000 or less; have reported net losses in
   2000-01; and, have at least 50% of combined patient days from Medicare, Medi-Cal, and
   uninsured patients.

FISCAL EFFECT: This bill has not yet been analyzed by a fiscal committee.


1) PURPOSE OF THIS BILL. According to the author's office, this bill is necessary due to an
   overall shortage of physicians and the fact that many California hospitals face significant
   obstacles attracting and retaining physicians. The author states that the situation is especially
   difficult in California's rural areas, and the physician shortage limits access to health care for
   Californians in these communities. The author states that this bill will improve access to
   health care in California's rural communities by allowing rural hospitals to directly employ
   physicians and bill for their professional services.
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2) PHYSICIAN SHORTAGE. The University of California’s Final Report of the Advisory
   Council on Future Growth in the Health Professions indicates that California will face a
   shortage of nearly 17,000 doctors by 2015. The January 2007 California Medical
   Association (CMA) informational brochure, “Doctors in California,” states that, the average
   age of physicians in rural and underserved urban communities is approaching 60, with many
   of these physicians planning to retire within the next two years.

3) CPM BAR. The CPM prohibition is also sometimes referred to as the CPM doctrine, ban, or
   bar. According to a 1991 report by the United States Department of Health and Human
   Services Office of Inspector General (OIG) entitled, “State Prohibitions on Hospital
   Employment of Physicians,” state laws prohibiting hospitals and other non-medical
   corporations from employing physicians derive from laws requiring that individuals must be
   licensed to practice medicine. In some states, including California, judicial decisions dating
   back to the 1930’s have interpreted these laws to preclude hospitals, with some exceptions,
   from employing physicians for the purpose of practicing medicine. According to OIG, the
   rationale for the prohibition on employment of physicians is based on the potential for
   conflict between a physician’s loyalty to the patient and the financial interests of the
   corporation that would employ the physician. OIG also reported that opponents of the CPM
   bar contend that it is a vestige of an earlier era and that in the current health care system
   hospitals need authority to control all aspects of health care delivery and personnel within
   their walls, including medical care. According to OIG, only five states: California; Colorado;
   Iowa; Ohio; and, Texas, clearly prohibit hospitals from employing physicians and even in
   these states, as in California, certain types of hospitals and providers are exempt from the bar.
   In practice, states with CPM bars, including California, permit professional service or
   medical corporations to practice medicine, but only if controlled by physicians.
   According to MBC, current California law generally prohibits corporations or other entities
   that are not controlled by physicians from practicing medicine, to ensure that lay persons are
   not controlling or influencing the professional judgment and practice of medicine by
   physicians. California’s CPM bar is the result of statute, judicial decisions, and Attorney
   General (AG) opinions over several decades. For example, the statute exempts from the
   CPM bar the clinics of teaching hospitals and California, and courts subsequently held that
   the CPM bar does not apply to state university medical schools and hospitals, specifically
   including hospitals operated by the University of California, and that counties are generally
   exempt from the CPM bar. A 1975 AG opinion (58 Ops.Cal.Atty.Gen. 291) found that
   licensed community clinics may lawfully employ physicians, including those community
   clinics which are a subsidiary of a parent hospital organization, if specific conditions are met.
   In 1996, the California Court of Appeals held that hospital districts may not have physician

4) CALIFORNIA RESEARCH BUREAU REPORT. According to an October 2007 California
   Research Bureau (CRB) report, “The Corporate Practice of Medicine Doctrine,” the CPM bar
   evolved in the early 20th century when mining companies had to hire physicians directly to
   provide care for their employees in remote areas. However, problems arose when
   physicians’ loyalty to the mining companies conflicted with patients’ needs. Eventually,
   physicians, courts, and legislatures prohibited CPM in an effort to preserve physician
   autonomy and improve patient care. The CRB report states that, over the years, various state
   and federal statutes have substantially weakened the CPM bar. One example cited by CRB is
   the exemption from the CPM bar for health maintenance organizations (HMOs) in the 1973
   federal HMO Act. California subsequently provided the same type of exemption under
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   Knox-Keene, the state licensing law governing HMOs and other similar health plans. The
   CRB report further states, “Corporate managed organizations now dominate the health care
   environment, and even physicians who are not employed by them are likely to provide
   services for them.” CRB noted that California prohibits hospital employment of physicians,
   but provides for several notable exemptions in addition to HMOs, including teaching
   hospitals, certain community clinics, narcotic treatment programs, and some non-profit
   organizations to employ physicians. CRB suggested that the exemptions to CPM have
   effectively circumvented the CPM bar. According to CRB, the American Medical
   Association, historically the driving force behind the CPM bar, no longer views physician
   employment as a violation of medical ethics and has removed the doctrine from its ethical
   code. CRB found no research examining the effects of the CPM bar on health care quality or
   costs. CRB concluded that: “The evolution and erosion of the CPM bar 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.”

5) MBC PILOT PROJECT. SB 326 (Chesbro), Chapter 411, Statutes of 2003, established a
   pilot project permitting district hospitals meeting specific requirements to hire and employ up
   to two physicians each, for a total of twenty physicians statewide, if the district hospital met
   the following conditions:

   a) Operates in a county of 750,000 or less population;
   b) Reported net operating losses in fiscal year 2000-01; and,
   c) Has a patient base of at least 50% combined Medi-Cal, Medicare, and uninsured patients.

   SB 326 required MBC to administer and evaluate the project prior to its sunset on January 1,
   2011. In its 2008 report, the MBC stated that it was “challenged in evaluating the program
   and preparing this report because the low number of participants did not afford us sufficient
   information to prepare a valid analysis of the pilot. …” While MBC supports the CPM bar, it
   also believes there may be justification to extend the pilot so that a better evaluation can be
   made. However, until there is sufficient data to perform a full analysis of an expanded pilot,
   MBC contends that the statutes governing the corporate practice of medicine should not be
   amended as a solution to solve the problem of access to health care.

6) SUPPORT. The California Hospital Association (CHA), the sponsor of this legislation,
   writes in support that this bill will improve access to health care in California's rural
   communities by giving physicians the choice to be employed. According to CHA, the
   overall shortage of physicians is made worse by an obsolete law that denies physicians their
   right to choose where and how they care for patients. CHA maintains that it is increasingly
   clear that high-quality, cost-effective health care can only be provided if physicians and
   hospitals work closely together. This can be accomplished, according to CHA, if physicians
   are allowed to establish a variety of practice settings based on the circumstances of their
   communities and their personal needs. CHA argues that employment of a physician by a
   hospital should be one of the options available to physicians desiring to locate in California's
   rural communities. CHA cites a recent survey conducted by Merrit Hawkins & Associates
   which found that 22% of final-year graduates said that hospital employment was the practice
   setting that they would be most open to, as compared to 4% in the same survey five years
   earlier. CHA, the Regional Council of Rural Counties, the California State Association of
   Counties, and Mee Memorial Hospital all stress the significant obstacles that rural hospitals
   face attracting and retaining physicians. They state the reasons are varied but often include
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   the higher Medicare/Medi-Cal payer mix in rural communities with the accompanying lower
   reimbursements. Supporters assert that rural areas tend to have higher proportions of low-
   income, uninsured, and older patients. Hence, primary care physicians and specialists cannot
   generate sufficient income to sustain a rural practice. Supporters maintain that if rural
   hospitals had the ability to directly hire physicians, they could provide the economic
   incentive to attract and retain these physicians resulting in increased access to quality health
   care services for millions of rural residents.

7) OPPOSITION. The CMA and the California Chapter of the American College of
   Emergency Physicians write in opposition to this bill that physicians must retain the
   independent practice of medicine, free from corporate influence. CMA states that the bar
   against CPM has been in place in California since 1938 and has been protected by the courts
   and the Legislature since. According to CMA, the bar provides a fundamental protection for
   patients by ensuring their physicians' sole interest is what is best for the patient. CMA
   asserts that when hospitals are allowed to directly employ and charge for physician services,
   quality of care suffers due to the fact that hospitals derive income from patient beds being
   filled. While CMA writes that they agree that access to physician services is essential and
   that, in some areas, there are physician shortages, this bill is not the answer to solve the
   question of access. The CMA maintains that they have been very supportive of measures to
   deal with physician supply problems, including advocating for increased slots for medical
   training in California, the development of a medical school at UC Merced, and establishing a
   well-funded loan repayment program that will place physicians in underserved areas. CMA
   lastly argues that hospital employment of physicians eliminates competition for outpatient
   services and instead forces all care to be delivered through the hospital. According to CMA,
   as hospitals gain market share in small communities, physicians not employed will likely be
   forced out of business. This will result, CMA asserts, in increased costs as the hospital is
   able to negotiate higher rates from third party payers for both physicians and hospital


   a) AB 926 (Hayashi) reenacts a pilot project, until January 1, 2022, that allows qualified
      district hospitals, as specified, to employ up to 50 physicians and surgeons, under certain
      circumstances. AB 926 is scheduled to be heard by the Assembly Business, Professions
      & Consumer Protection Committee.

   b) AB 1360 (Swanson) permits health care districts in medically underserved areas to
      employ physicians and surgeons, under certain circumstances. AB 1360 will be heard by
      the Assembly Health Committee on May 3, 2011.


   a) 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 Business,
      Professions and Economic Development Committee.

   b) 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
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       not interfere with, control, or otherwise direct the professional judgment of the physician.
       SB 726 failed passage in the Senate Business, Professions and Economic Development

   c) AB 1944 (Swanson) of 2008 was similar to this bill and would have allowed health care
      districts to employ a physician. AB 1944 died in Senate Health Committee.

   d) 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.

   e) 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 Business and Professions Committee.

10) DOUBLE REFERRAL. This bill has been double-referred. Should this bill pass out of this
    committee, it will be referred to the Assembly Business, Professions & Consumer Protection



California Hospital Association (sponsor)
Association of California Healthcare Districts
Barton Memorial Hospital
California Center for Rural Policy, Humboldt State University
California State Association of Counties
Catalina Island Medical Center
Eastern Plumas Health Care
El Centro Regional Medical Center
George L. Mee Memorial Hospital
John C. Fremont Healthcare District
Lompoc Valley Medical Center
Mammoth Hospital
Modoc Medical Center
Regional Council of Rural Counties
St. Joseph Health System – Humboldt County
Sutter Amador Hospital
Tehachapi Valley Healthcare District
Trinity Hospital


California Chapter of the American College of Emergency Physicians
California Medical Association

Analysis Prepared by:   Tanya Robinson-Taylor / HEALTH / (916) 319-2097

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