Report 2010-108 Summary - June 2010
Department of Public Health:
It Reported Inaccurate Financial Information and Can Likely Increase Revenues for the State and Federal Health Facilities Citation Penalties Accounts
Our review of the Department of Public Health's (Public Health) management of the state and federal Health Facilities Citation Penalties accounts (state and federal accounts) over a nearly seven-year period revealed the following:
- Public Health's poor internal controls led to significant errors in the fund balance for the federal account—for at least five years, it or its predecessor overstated the fund balances that are included in the governor's budget.
- The federal account's ending fund balance for fiscal year 2008-09 was overstated by $9.9 million.
- With a projected fund balance of $345,000 by the end of this fiscal year, the federal account is nearly insolvent.
- Although Public Health generally collects all nonappealed monetary penalties it inappropriately granted reductions to some.
- For 135 citations it inappropriately granted monetary penalty reductions, decreasing revenue collected by approximately $70,000.
- In part, due to a lengthy appeals process, Public Health collects a significantly lower portion of monetary penalties for appealed citations.
- Of more than 1,400 citations appealed over the period we reviewed, about 1,000 remained unresolved and amounted to nearly $9 million in monetary penalties.
- Just 6 percent of appealed citations resolved during the period we reviewed were dismissed in favor of facilities.
- Public Health reduced monetary penalties for the appealed citations resolved during the nearly seven-year period we reviewed by an average of 59 percent, which amounted to more than $2.7 million.
- Opportunities exist for Public Health to increase revenue for both the state and federal accounts.
- It could have collected nearly $3.3 million more if the monetary penalties had been adjusted to reflect the rate of inflation.
- It is not conducting all state surveys within the periods specified by law and therefore may not be identifying noncompliance that may result in monetary penalties.
RESULTS IN BRIEF
The Department of Public Health (Public Health) is responsible for licensing and monitoring certain health facilities, including more than 2,500 long-term health care facilities (facilities). Teams of evaluators from Public Health's Licensing and Certification Division (division) inspect facilities to ensure that they meet applicable federal and state requirements and that they investigate any complaints made against a facility. Generally, if a team finds during a survey or complaint investigation that a facility is not in compliance with a state requirement, the division may impose a Civil Money Penalty (monetary penalty), and if the team finds noncompliance with a federal requirement, it may make a recommendation to the Centers for Medicare and Medicaid Services (CMS) that it impose a monetary penalty. Monetary penalties collected from facilities are deposited into either the State Health Facilities Citation Penalties Account (state account) or the Federal Health Facilities Citation Penalties Account (federal account), depending on the nature of the noncompliance. Public Health uses the funds in these accounts primarily to pay for temporary management companies, which are firms it appoints to take control over a facility that violates applicable requirements. In addition, in recent years, the Department of Aging (Aging) has received an appropriation from the federal account for its Long-Term Care Ombudsman Program (ombudsman program), which is charged with investigating and seeking to resolve complaints made by, or on behalf of, facilities' residents.
However, members of the Legislature have raised concerns about the solvency of the federal account and whether it will be able to support existing services that protect residents of facilities. Specifically, since at least fiscal year 2004-05, Public Health or its predecessor1 has overstated the fund balances for the federal account on the fund condition statements that are included in the governor's budget each year. Of particular note is that Public Health's budget section, which is responsible for preparing the fund condition statements, overstated the federal account's ending fund balance by $9.9 million2 for fiscal year 2008-09. These errors occurred in large part because the budget section did not include Aging's fund balance for the federal account when the budget section prepared the fund condition statements, which masked the fact that the federal account is now nearly insolvent. In fact, Public Health estimates that the fund balance for the federal account will be approximately $345,000 by June 30, 2010, and will decrease to $249,000 by June 30, 2011. Had Public Health established strong internal controls—including an adequate procedure manual that directed staff to include all applicable amounts when preparing the fund condition statements—and performed sufficient supervisory review of these statements, significant errors in the fund balance for the federal account may not have occurred.
A primary concern with the financial condition of the federal account is the fact that in recent years it has funded Aging's ombudsman program. To address the potential adverse effects of the federal account's insolvency on the ombudsman program, Public Health entered into an interagency agreement with Aging to provide it with up to $700,000 in fiscal year 2009-10, and Public Health has proposed eliminating the division's expenditures from the federal account in fiscal year 2010-11 to help the account avoid insolvency. Certain members of the Legislature are also taking steps to address funding for the ombudsman program. Specifically, Assembly Bill 2555, introduced in February 2010, seeks to appropriate $1.6 million from the state account to Aging for its ombudsman program. As of June 16, 2010, the Senate is considering this bill. However, because Public Health uses money from the state account to fund temporary management companies, and because these expenditures can fluctuate greatly from year to year depending on need, such an appropriation could strain the resources in the state account and potentially limit the division's ability to pay for temporary management companies.
Although CMS is generally responsible for issuing citations resulting from facility noncompliance with federal requirements and for collecting the related monetary penalties, Public Health's division is responsible for issuing citations that result from facility noncompliance with state requirements. For the period covering fiscal year 2003-04 through March 15, 2010, the division collected the monetary penalties for nearly 98 percent of the nonappealed citations—or citations not contested by the facilities—that the division issued. This high proportion of collections is likely due to a state law that requires the division to reduce monetary penalty amounts paid by facilities within certain time frames. Specifically, state law grants a facility an automatic 35 percent reduction in the monetary penalty amount originally imposed by the division if the amount is paid within the required time frame—either 15 or 30 business days, depending on the type of citation and facility. Further affecting the total amount that the division ultimately collects is the fact that facilities are more likely to pay citations that involve lower monetary penalties. Thus, most of the nonappealed citations consist of citations issued for less severe violations of noncompliance with state requirements than for more severe violations.
State law allows for reductions to monetary penalties paid and not contested within certain time frames; however, during the period covering fiscal year 2003-04 through March 15, 2010, the division inappropriately granted a monetary penalty reduction of 35 percent for 135 citations. As a result, the division improperly decreased the amount of revenue ultimately collected for the state account by approximately $70,000. This inappropriate reduction was due mainly to inaccurate programming of the system that the division uses to track the citations it issues to facilities.
Facilities may contest a monetary penalty by requesting a citation review conference, administrative hearing, arbitration, or they may challenge the penalty in court. Due to the appeals process, Public Health takes significantly longer to collect the monetary penalties for appealed citations, or citations contested by facilities, than it does for nonappealed citations. Specifically, of the more than 1,400 citations appealed by facilities that were issued by the division between the beginning of fiscal year 2003-04 and March 15, 2010, roughly 1,000,3 or 69 percent, were still awaiting final decisions at the end of this period. The monetary penalties corresponding to these appealed citations amounted to nearly $9 million. State law specifies that facilities are not required to pay monetary penalties on contested citations that have not been resolved, and this specification creates an incentive for facilities to appeal citations.
Another significant incentive for facilities to appeal citations is the potential that the monetary penalty will be reduced by more than the 35 percent reduction they would have received if they did not contest the monetary penalty and paid it on time. In fact, 313, or 71 percent of the 439 appealed citations resolved during our review period received reductions to the original monetary penalties imposed. Of the 313 appealed citations, Public Health reduced 243 amounting to $2.7 million, or an average of 59 percent, of the original amount imposed. Not surprisingly, citations issued by the division for the most egregious facility violations, referred to as Class AA and A violations, which impose the highest monetary penalties, are often appealed by facilities. One potential way to deter facilities from needlessly appealing citations would be to require them to pay their monetary penalties at the time they contest their citations. This possible change in requirements is particularly relevant to the delays in Public Health's collecting penalties from facilities with appealed citations; during the nearly seven-year period that we reviewed, just 6 percent of the resolved appeals were dismissed in favor of the facilities. Because citations can remain in the appeals process for several years, the State loses potential revenue, and facilities cited for violations, which can include patient or resident deaths, essentially do not have to pay the respective monetary penalties for their violations until decisions are reached to uphold or modify the penalties.
Rather than pursuing an appeal through the judicial system, a facility may request a citation review conference in which an independent hearing officer from Public Health's Office of Legal Services (Legal Services) makes a determination on whether to uphold, modify, or dismiss the citation. Because of Public Health's staffing issues and workload priorities, more than 600 citations—with corresponding monetary penalties amounting to nearly $5 million—were awaiting citation review conferences as of February 2010. According to Public Health's deputy director of Legal Services, delays in the process for citation review conferences may encourage facilities to appeal citations and request citation review conferences as a way to delay paying their monetary penalties. An option that could assist Public Health in collecting monetary penalties more promptly from those facilities seeking to contest citations by way of citation review conferences is to align the State's process more closely with the process used by CMS. The current federal process does not delay the payment of any monetary penalties imposed by CMS. If the State's process were more similar to that used by CMS, Public Health could better ensure the timely collection of monetary penalties. In addition, it is likely that fewer facilities would request citation review conferences, since doing so would not delay their payment of monetary penalties.
In reviewing Public Health's process for issuing and collecting monetary penalties, we identified several opportunities for Public Health to increase revenue for both the state and federal accounts by seeking changes to state law and by ensuring that the division adheres to current state law. For example, the monetary penalty amounts specified in state law have not been updated regularly to reflect the rate of inflation. We adjusted the monetary penalty amounts that the division actually collected from fiscal year 2003-04 through March 15, 2010, to reflect the rate of inflation, and we determined that the division could have collected nearly $3.3 million more. The largest revenue increase, totaling more than $2.2 million, would have resulted if state law had adjusted the penalty amounts for Class B violations. Citations for Class B violations are issued for the least severe violations and are issued much more frequently than Class AA or A violations for noncompliance with state requirements. Had the monetary penalty amounts been adjusted, Public Health could have increased revenue for the state account. Further, the division is not conducting all state surveys within the periods specified by law. Because surveys may result in the division's identifying noncompliance with state and federal requirements and imposing monetary penalties, the division is probably not assessing as many monetary penalties as it could.
To ensure that the governor's budget does not overstate funds available for appropriation in the federal account, Public Health should do the following:
- Include text in the budget section's procedure manual requiring staff to reconcile the fund balance as supported by Aging's and Public Health's accounting records to the fund condition statement prepared for inclusion in the governor's budget.
- Ensure the performance of a supervisory review of the reconciliation of the fund condition as supported by Aging's and Public Health's accounting records to the fund condition statement prepared for inclusion in the governor's budget.
To increase revenue for the state account, Public Health should take these steps:
- Update the system it uses to track citations that it issues to facilities so that it makes sure that it is using the correct time frames specified in law when granting 35 percent reductions to nonappealed monetary penalties.
- Seek legislation authorizing it to require facilities that want to contest their monetary penalties to pay the penalties upon their appeals. Public Health could then deposit the penalties into an interest bearing account. The original monetary penalties deposited, plus interest accrued in the account, should then be liquidated by Public Health in accordance with the terms of the decisions on the appeals.
To ensure consistency with federal guidance related to federal requirements, and that it is not creating incentives for facilities to appeal citations issued for noncompliance with state requirements, Public Health should provide guidance to its staff that discourages settling appealed monetary penalties for a better term than had the facility not contested the citation and paid the penalty within the time frame specified in law to receive a 35 percent reduction. If Public Health believes instances occur when it is appropriate to reduce a monetary penalty by more than 35 percent, it should document which statutory or regulatory factors that formed the basis for concluding that the original class of citation and corresponding monetary penalty amount were no longer considered valid or relevant.
To make certain that Legal Services completes citation review conferences expeditiously, Public Health should do the following:
- Continue to take steps to eliminate its backlog of appealed citations awaiting citation review conferences.
- Seek legislation amending its process for citation review conferences to reflect the federal process more closely by prohibiting facilities from seeking delays on the payment of monetary penalties because Legal Services has not completed the citation review conferences before the effective dates of the monetary penalties.
To increase revenue for the state or federal accounts, Public Health should take the following steps:
- Seek legislation authorizing it to revise periodically the penalty amounts to reflect an inflation indicator, such as the Consumer Price Index.
- Ensure that it conducts all state surveys of facilities every two years, as required by state law.
Public Health generally agrees with most of our recommendations and states that it will take corrective action to address them. However, Public Health did not agree with our recommendation related to settling appealed monetary penalties for a better term than had the facility paid the monetary penalty in time to receive the 35 percent reduction. Public Health partially agreed with our recommendations related to assessing interest on late payments and increasing its coordination with CMS.
1 On July 1, 2007, the California Department of Health Services (Health Services) was reorganized and became two departments: the California Department of Health Care Services and Public Health. Before it was reorganized, Health Services administered the state and federal accounts. Public Health now administers these accounts.
2 A fund balance is the amount of money in a fund that is available for appropriation, and in the governor's budget, three fund condition statements present the summary of the operations of a fund for the past, current, and budget year.
3 This amount includes appealed citations waiting for citation review conferences.