REGULAR MEETING OF THE BOARD OF DIRECTORS

Transcription

1 REGULAR MEETING OF THE BOARD OF DIRECTORS Thursday, April 14, 2016 at 8:00 A.M. At Kern Health Systems 5701 Truxtun Avenue, Suite 201 Bakersfield, CA The public is invited. For more information - please call (661) / 174

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3 AGENDA BOARD OF DIRECTORS KERN HEALTH SYSTEMS 5701 Truxtun Avenue, Suite 201 Bakersfield, California Regular Meeting Thursday, April 14, :00 A.M. All agenda item supporting documentation is available for public review at Kern Health Systems in the Administration Department, 9700 Stockdale Highway, Bakersfield, during regular business hours, 8:00 a.m. 5:00 p.m., Monday through Friday, following the posting of the agenda. Any supporting documentation that relates to an agenda item for an open session of any regular meeting that is distributed after the agenda is posted and prior to the meeting will also be available for review at the same location. PLEASE REMEMBER TO TURN OFF ALL CELL PHONES, PAGERS OR ELECTRONIC DEVICES DURING BOARD MEETINGS. BOARD TO RECONVENE Directors: Patrick, Rhoades, Deats, Hoffmann, Brar, Casas, Hinojosa, Judd, McGlew, Melendez, Nyitray, Stewart CONSENT AGENDA/OPPORTUNITY FOR PUBLIC COMMENT: ALL ITEMS LISTED WITH A "CA" ARE CONSIDERED TO BE ROUTINE AND NON- CONTROVERSIAL BY KERN HEALTH SYSTEMS STAFF. THE "CA" REPRESENTS THE CONSENT AGENDA. CONSENT ITEMS WILL BE CONSIDERED FIRST AND MAY BE APPROVED BY ONE MOTION IF NO MEMBER OF THE BOARD OR AUDIENCE WISHES TO COMMENT OR ASK QUESTIONS. IF COMMENT OR DISCUSSION IS DESIRED BY ANYONE, THE ITEM WILL BE REMOVED FROM THE CONSENT AGENDA AND WILL BE CONSIDERED IN LISTED SEQUENCE WITH AN OPPORTUNITY FOR ANY MEMBER OF THE PUBLIC TO ADDRESS THE BOARD CONCERNING THE ITEM BEFORE ACTION IS TAKEN. STAFF RECOMMENDATION SHOWN IN CAPS 3 / 174

4 Agenda Board of Directors Page 2 Kern Health Systems 4/14/16 Regular Meeting PUBLIC PRESENTATIONS 1) This portion of the meeting is reserved for persons to address the Board on any matter not on this agenda but under the jurisdiction of the Board. Board members may respond briefly to statements made or questions posed. They may ask a question for clarification, make a referral to staff for factual information or request staff to report back to the Board at a later meeting. Also, the Board may take action to direct the staff to place a matter of business on a future agenda. SPEAKERS ARE LIMITED TO TWO MINUTES. PLEASE STATE AND SPELL YOUR NAME BEFORE MAKING YOUR PRESENTATION. THANK YOU! BOARD MEMBER ANNOUNCEMENTS OR REPORTS 2) On their own initiative, Board members may make an announcement or a report on their own activities. They may ask a question for clarification, make a referral to staff or take action to have staff place a matter of business on a future agenda (Government Code section (a)(2)) PUBLIC REQUESTS 3) Request of Bakersfield City Councilman Robert Smith to address the Board on the relocation of Kern Health Systems HEAR PRESENTATION; RECEIVE AND FILE ITEMS FOR CONSIDERATION CA-4) Minutes for KHS Board of Directors regular meeting on March 10, 2016 (Fiscal Impact: None) APPROVE 5) Report on Kern Health Systems strategic plan for the first quarter ending March 31, 2016 (Fiscal Impact: None) RECEIVE AND FILE 6) Report by Daniells Phillips Vaughan & Bock CPAs & Advisors on the audited financial statements of Kern Health Systems for the year ending December 31, 2015 (Fiscal Impact: None) APPROVE CA-7) Unusual travel request for Kern Health Systems Corporate Training and Development Manager to attend the Leadership Training and Certification Program in San Diego, California, from May 16, 2016 through May 20, 2016, in an amount not to exceed $6,500 (Fiscal Impact: $6,500; Budgeted) APPROVE 4 / 174

5 Agenda Board of Directors Page 3 Kern Health Systems 4/14/16 Regular Meeting 8) Report on Kern Health Systems financial statements for January 2016 (Fiscal Impact: None) RECEIVE AND FILE CA-9) Report on Accounts Payable Vendor Report and non-claims paid through MHC system for January 2016 (Fiscal Impact: None) RECEIVE AND FILE 10) Kern Health Systems Chief Medical Officer report (Fiscal Impact: None) RECEIVE AND FILE 11) Kern Health Systems Chief Executive Officer report (Fiscal Impact: None) RECEIVE AND FILE CA-12) Proposed Kern Health Systems provider contracts (rates confidential per Welfare and Institutions Code Section (m)) APPROVE; AUTHORIZE CHIEF EXECUTIVE OFFICER TO SIGN 13) Appoint a nominating committee to nominate candidates for the Board of Directors officer positions of Chairman and Vice Chairman and to recommend nominees to fill open Provider Representative positions (Fiscal Impact: None) MAKE APPOINTMENTS CA-14) Miscellaneous Documents RECEIVE AND FILE A) Minutes for KHS Finance Committee meeting on March 4, 2016 ADJOURN TO CLOSED SESSION CLOSED SESSION 15) CONFERENCE WITH LEGAL COUNSEL EXISTING LITIGATION (Government Code Section (d)(1)) Kern Health Systems v. Allied Management Group Special Investigation Unit, Inc., et al. 16) CONFERENCE WITH LABOR NEGOTIATORS Agency designated representatives: Chief Executive Officer, Douglas A. Hayward, and designated staff - Unrepresented Employees (Government Code Section ) 17) CONFERENCE WITH LABOR NEGOTIATORS Agency designated representatives: Chief Deputy County Counsel, Gurujodha S. Khalsa, and designated staff - Unrepresented Employee: Chief Executive Officer (Government Code Section ) 5 / 174

6 Agenda Board of Directors Page 4 Kern Health Systems 4/14/16 Regular Meeting 18) Request for Closed Session regarding peer review of a provider (Welfare and Institutions Code Section (o)) 19) CONFERENCE WITH REAL PROPERTY NEGOTIATORS - Kern County Property Assessor Parcel Numbers , , , , and ; Property Owner: City of Bakersfield; Agency Negotiators: Douglas A. Hayward, Chief Executive Officer and Gregory D. Bynum, Gregory D. Bynum and Associates, Inc.; Under Negotiation: Price and Terms of Payment (Government Code Section ) 20) CONFERENCE WITH REAL PROPERTY NEGOTIATORS - Kern County Property Assessor Parcel Numbers , , and ; Property Owner: Keith F. LP Holding; Agency Negotiators: Douglas A. Hayward, Chief Executive Officer and Gregory D. Bynum, Gregory D. Bynum and Associates, Inc.; Under Negotiation: Price and Terms of Payment (Government Code Section ) BOARD TO RECONVENE REPORT ON ACTIONS TAKEN IN CLOSED SESSION ADJOURN TO THURSDAY, MAY 12, 2016 AT 8:00 A.M. AMERICANS WITH DISABILITIES ACT (Government Code Section ) The meeting facilities at Kern Health Systems are accessible to persons with disabilities. Disabled individuals who need special assistance to attend or participate in a meeting of the Board of Directors may request assistance at the Kern Health Systems office, 9700 Stockdale Highway, Bakersfield, California or by calling (661) Every effort will be made to reasonably accommodate individuals with disabilities by making meeting material available in alternative formats. Requests for assistance should be made five (5) working days in advance of a meeting whenever possible. 6 / 174

7 SUMMARY BOARD OF DIRECTORS KERN HEALTH SYSTEMS 5701 Truxtun Avenue, Suite 201 Bakersfield, California Regular Meeting Thursday, March 10, :00 A.M. BOARD RECONVENED AT 8:02 A.M. Directors present: Patrick, Rhoades, Hoffmann (arrived at 8:03 a.m.), Brar, Casas, McGlew, Melendez, Stewart Directors absent: Deats, Hinojosa, Judd, Nyitray NOTE: The vote is displayed in bold below each item. For example, Rhoades-Deats denotes Director Rhoades made the motion and Director Deats seconded the motion. CONSENT AGENDA/OPPORTUNITY FOR PUBLIC COMMENT: ALL ITEMS LISTED WITH A "CA" WERE CONSIDERED TO BE ROUTINE AND APPROVED BY ONE MOTION. BOARD ACTION SHOWN IN CAPS PUBLIC PRESENTATIONS 1) This portion of the meeting is reserved for persons to address the Board on any matter not on this agenda but under the jurisdiction of the Board. Board members may respond briefly to statements made or questions posed. They may ask a question for clarification, make a referral to staff for factual information or request staff to report back to the Board at a later meeting. Also, the Board may take action to direct the staff to place a matter of business on a future agenda. SPEAKERS ARE LIMITED TO TWO MINUTES. PLEASE STATE AND SPELL YOUR NAME BEFORE MAKING YOUR PRESENTATION. THANK YOU! NO ONE HEARD 7 / 174

8 SUMMARY Board of Directors Page 2 Kern Health Systems 3/10/16 Regular Meeting BOARD MEMBER ANNOUNCEMENTS OR REPORTS 2) On their own initiative, Board members may make an announcement or a report on their own activities. They may ask a question for clarification, make a referral to staff or take action to have staff place a matter of business on a future agenda (Government Code section (a)(2)) NO ONE HEARD CA-3) CA-4) Minutes for KHS Board of Directors regular meeting on February 11, 2016 (Fiscal Impact: None) APPROVED Rhoades-Melendez: 8 Ayes; 4 Absent - Deats, Hinojosa, Judd, Nyitray Proposed Amendment A11 to Agreement with Department of Health Care Services, to extend the term for the Hyde Amendment through December 31, 2016 (Fiscal Impact: None) APPROVED; AUTHORIZED CHIEF EXECUTIVE OFFICER TO SIGN Rhoades-Melendez: 8 Ayes; 4 Absent - Deats, Hinojosa, Judd, Nyitray CA-5) Report on 2015 annual review of KHS Investment Policy (Fiscal Impact: None) RECEIVED AND FILED Rhoades-Melendez: 8 Ayes; 4 Absent - Deats, Hinojosa, Judd, Nyitray CA-6) Report on KHS investment portfolio for the fourth quarter ending December 31, 2015 (Fiscal Impact: None) RECEIVED AND FILED Rhoades-Melendez: 8 Ayes; 4 Absent - Deats, Hinojosa, Judd, Nyitray CA-7) Report on KHS 2015 annual employee travel (Fiscal Impact: None) RECEIVED AND FILED Rhoades-Melendez: 8 Ayes; 4 Absent - Deats, Hinojosa, Judd, Nyitray 8) Report on KHS recruitment and retention grant program (Fiscal Impact: None) STEVE SCHILLING, CLINICA SIERRA VISTA, HEARD; RECEIVED AND FILED Rhoades-Melendez: 8 Ayes; 4 Absent - Deats, Hinojosa, Judd, Nyitray CA-9) Proposed Policy 4.37-P, Grants Program, to provide guidelines for grants in compliance with requirements established by the Department of Managed Health Care (Fiscal Impact: None) APPROVED Rhoades-Melendez: 8 Ayes; 4 Absent - Deats, Hinojosa, Judd, Nyitray 10) Report on Kern Health Systems financial statements for December 2015 (Fiscal Impact: None) RECEIVED AND FILED McGlew-Rhoades: 8 Ayes; 4 Absent - Deats, Hinojosa, Judd, Nyitray 8 / 174

9 SUMMARY Board of Directors Page 3 Kern Health Systems 3/10/16 Regular Meeting CA-11) Report on Accounts Payable Vendor Report and non-claims paid through MHC system for December 2015 (Fiscal Impact: None) RECEIVED AND FILED Rhoades-Melendez: 8 Ayes; 4 Absent - Deats, Hinojosa, Judd, Nyitray 12) Kern Health Systems Chief Medical Officer report (Fiscal Impact: None) RECEIVED AND FILED Rhoades-Casas: 8 Ayes; 4 Absent - Deats, Hinojosa, Judd, Nyitray 13) Kern Health Systems Chief Executive Officer report (Fiscal Impact: None) STEVE SCHILLING, CLINICA SIERRA VISTA, HEARD; RECEIVED AND FILED Casas-Stewart: 8 Ayes; 4 Absent - Deats, Hinojosa, Judd, Nyitray CA-14) CA-15) Proposed Kern Health Systems provider contracts (rates confidential per Welfare and Institutions Code Section (m)) APPROVED; AUTHORIZED CHIEF EXECUTIVE OFFICER TO SIGN Rhoades-Melendez: 8 Ayes; 4 Absent - Deats, Hinojosa, Judd, Nyitray Proposed retroactive Assignment of Agreement # with Global Retirement Partners, LLC to Barnes Wealth Management Group, for investment advisory services, effective November 1, 2015 (Fiscal Impact: None) - APPROVED; AUTHORIZED CHIEF EXECUTIVE OFFICER TO SIGN Rhoades-Melendez: 8 Ayes; 4 Absent - Deats, Hinojosa, Judd, Nyitray CA-16) Miscellaneous Documents RECEIVED AND FILED Rhoades-Melendez: 8 Ayes; 4 Absent - Deats, Hinojosa, Judd, Nyitray A) Minutes for KHS QI/UM Committee meeting on November 19, 2015 B) Minutes for KHS Finance Committee meeting on February 5, 2016 ADJOURNED TO CLOSED SESSION AT 9:05 A.M. Stewart-McGlew CLOSED SESSION 17) CONFERENCE WITH LEGAL COUNSEL EXISTING LITIGATION (Government Code Section (d)(1)) Kern Health Systems v. Allied Management Group Special Investigation Unit, Inc., et al. SEE RESULTS BELOW 18) Request for Closed Session for the purpose of discussion of, or taking action on matters involving, health authority trade secrets (Welfare and Institutions Code Section (n)) SEE RESULTS BELOW 9 / 174

10 SUMMARY Board of Directors Page 4 Kern Health Systems 3/10/16 Regular Meeting 19) Request for Closed Session regarding peer review of a provider (Welfare and Institutions Code Section (o)) SEE RESULTS BELOW BOARD RECONVENED REPORT ON ACTIONS TAKEN IN CLOSED SESSION Item 17, concerning a CONFERENCE WITH LEGAL COUNSEL EXISTING LITIGATION (Government Code Section (d)(1)) Kern Health Systems v. Allied Management Group Special Investigation Unit, Inc., et al. HEARD; NO REPORTABLE ACTION TAKEN Item No. 18 concerning a Request for Closed Session for the purpose of discussion of, or taking action on matters involving, health authority trade secrets (Welfare and Institutions Code Section (n)) HEARD; NO REPORTABLE ACTION TAKEN NOTE: DIRECTOR CASAS LEFT THE DAIS AT 9:51 A.M. PRIOR TO THE VOTE ON ITEM 19 AND DID NOT RETURN Item No. 19 concerning a Request for Closed Session regarding peer review of a provider (Welfare and Institutions Code Section (o)) HEARD; BY A UNANIMOUS VOTE OF THOSE DIRECTORS PRESENT (5 ABSENT CASAS, DEATS, HINOJOSA, JUDD, NYITRAY), THE BOARD APPROVED ALL PROVIDERS RECOMMENDED FOR INITIAL CREDENTIALING; DIRECTOR HOFFMANN ABSTAINED FROM VOTING ON ABBASSI, BELLA, HAWKINS, JONES, MADRILEJO, HALL, MATUK, MEYER, MOTIU (CSV ONLY), RAGHUKULTILAK, TAVEROS; DIRECTOR MCGLEW ABSTAINED FROM VOTING ON MATUK; DIRECTOR STEWART ABSTAINED FROM VOTING ON ABBASSI, HAWKINS, JONES, HALL, MOTIU (CSV ONLY), RAGHUKULTILAK, TAVEROS ADJOURN TO THURSDAY, APRIL 14, 2016 AT 8:00 A.M. McGlew /s/ Kimberly Hoffmann, Pharm.D., BCPP Secretary, Board of Directors Kern Health Systems 10 / 174

11 To: Board of Directors From: Douglas Hayward, CEO Date: April 14, 2016 Re: Update on KHS Strategic Plan Background At the close of each quarter Management updates the Board on KHS s Strategic Planning Process. Overall the Strategic Plan continues to proceed according to expectation. A status update will be given by Jeremy McGuire, Director of Governmental Affairs and Business Development. In the presentation, items highlighted in green indicate an item is on track, items in white have not started, and items in yellow are behind schedule. Requested Action Receive and file 11 / 174

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21 To: KHS Board of Directors From: Robert Landis, CFO Date: April 14, 2016 Re: Report by Daniells Phillips Vaughan & Bock Regarding the 2015 Audit Representatives from the accounting firm Daniells Phillips Vaughan & Bock will be present to report on the 2015 audit. Attached for your review are the December 31, 2015 audited financial statements for Kern Health Systems. Requested Action Approve 21 / 174

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23 FINANCIAL REPORT DECEMBER 31, / 174

24 KERN HEALTH SYSTEMS FINANCIAL REPORT (Audited) DECEMBER 31, / 174

25 C O N T E N T S INDEPENDENT AUDITOR S REPORT ON THE FINANCIAL STATEMENTS 1-2 MANAGEMENT S DISCUSSION AND ANALYSIS 3-7 FINANCIAL STATEMENTS Statement of net position 8 Statement of revenues, expenses and changes in net position 9 Statement of cash flows 10 Notes to financial statements REQUIRED SUPPLEMENTARY INFORMATION Schedules of proportionate share of the net pension liability 29 Schedules of pension contributions OTHER INDEPENDENT AUDITOR S REPORT Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards / 174

26 Daniells Phillips Vaughan & Bock CPAs & Advisors Certified Public Accountants Business & Personal Consultants Member of the McGladrey Alliance Member of AICPA Division for Firms Private Companies Practice Section NANCY C. BELTON INDEPENDENT AUDITOR S REPORT To the Board of Directors Kern Health Systems Bakersfield, California Report on the Financial Statements We have audited the accompanying financial statements of Kern Health Systems, as of and for the year ended December 31, 2015, and the related notes to the financial statements, which collectively comprise the Kern Health Systems basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion New Stine Road Bakersfield, CA Tel Fax / 174

27 Basis for Qualified Opinion Kern Health Systems has used a valuation date of June 30, 2013 and a measurement date of June 30, 2014, the most current information available from California Public Employees Retirement System (CalPERS) at the time of issuance of the financial statements, for calculating and recording their net pension liability due to the implementation of GASB 68 for the year ended December 31, The earliest valuation date and measurement date allowed by the Government Accounting Standards Board (GASB) for the year ended December 31, 2015 is June 30, 2013 and December 31, 2014, respectively. Qualified Opinion In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of Kern Health Systems, as of December 31, 2015, and the changes in financial position, and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis, schedules of proportionate share of the net pension liability, and schedules of pension contributions on pages 3-7 and be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated March 28, 2016 on our consideration of Kern Health Systems internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Kern Health Systems internal control over financial reporting and compliance. Bakersfield, California March 28, / 174

28 KERN HEALTH SYSTEMS Management s Discussion and Analysis Our discussion and analysis of Kern Health Systems ( KHS, We, Us, Our ) financial performance provides an overview of KHS financial activities for the calendar years ended December 31, 2015 and Presentation of balances in the financial tables may differ from prior periods. Account balances have been reclassified to better present financial categories. Please read the discussion and analysis in conjunction with the KHS financial statements, which begin on page 8. Financial Highlights: Our net position increased in 2015 by $33,833,440 or approximately percent while in 2014 our net position increased by $8,043,485 or percent. With the implementation of the Affordable Care Act ( ACA ), the Medi-Cal program was expanded to provide eligibility to nearly all low-income people under age 65 with incomes at or below 138% of the federal poverty line. Newly qualified members referred to as the Expansion population phased in beginning January 1, During 2015 we experienced a 72% membership growth in the Expansion population from the end of 2014 to the end of Our Medi-Cal enrollment growth showed an average monthly increase of 45,322 members or 27.92% in 2015 compared to This compared to an average monthly increase of 35,454 members or 27.94% in 2014 compared to The membership increase for 2015 is largely due to the increased Expansion population. During 2015 we added approximately 20,000 additional Expansion members compared to Expansion members increased to 22% of total membership at the end of 2015 compared to 15% of total membership at the end of We reported an operating gain of $33,420,031 or $13.41 PMPM in 2015 and operating income of $8,695,657 or $4.46 PMPM in The operating income in 2015 is largely due to an increase in Expansion membership and the adequate reimbursement rate received for those members from DHCS. The revenue received for Expansion members was $210 million or approximately 38% of Premium revenue in 2015 compared to $102 million or approximately 25% of Premium revenue in The medical loss ratio for the Expansion population was 85% for 2015 and Managed Care Organization (MCO) Tax Revenues of $23,574,449 or $9.46 PMPM are included in premium revenue in 2015 and $15,259,903 or $7.83 PMPM in MCO Tax Revenue is offset by MCO Tax Expense reported as part of operating expenses and had no effect on net position. The increase in nonoperating income (expenses) of $1,065,581 between 2015 and 2014 is primarily attributable to a decrease in Community Grant expense of $959,986 offset by an increase in investment income of $106,197. In 2014, our board of directors allocated $959,986 to qualifying providers to help establish an Emergency Room Diversion Grant Program to reduce inappropriate use of emergency departments through expanded or enhanced use of primary care and urgent care sites. In 2015, enhanced provider payments and programs were funded from available ACA resources. We continued with incentives and accrued approximately $5.7 million to reward providers who demonstrate improved Healthcare Effectiveness Data and Information (HEDIS) outcomes / 174

29 We successfully implemented a new core claims processing system in September 2015 which will give us the ability to absorb continued membership growth, expand into new markets and gain operational efficiencies. For the year ended December 31, 2015, $3.2 million was spent on the new core system compared to $3.4 million spent in 2014 when implementation began. The asset is included as part of furniture and equipment on the Statement of Net Position. Operational Highlights: The implementation of the new core system mentioned above increased our claims autoadjudication rate, reduced manual processes, improved our call center statistics and improved the integration of our workflow systems. We successfully implemented ICD-10 which allows for the coding of more than 14,400 different codes and permits for the tracking of many new diagnoses. We established diabetic clinic sites at Bakersfield Memorial Hospital and Kern Medical Center. Using this Annual Report Our financial statements consist of three statements: a Statement of Net Position, a Statement of Revenues, Expenses and Changes in Net Position; and a Statement of Cash Flows. These financial statements and related notes provide information about the activities of KHS. The Statement of Net Position and Statement of Revenues, Expenses and Changes in Net Position One of the most important questions asked about our finances is, Is KHS as a whole better or worse off as a result of the year s activities? The Statement of Net Position and the Statement of Revenues, Expenses, and Changes in Net Position report information about our resources and activities in a way that helps answer this question. These statements include all restricted and unrestricted assets and all liabilities using the accrual basis of accounting. All of the current year s revenues and expenses are taken into account regardless of when cash is received or paid. These two statements report our net position and changes in it. Our net position, the difference between the assets and liabilities, are one way to measure our financial health. Over time, increases or decreases in net position indicate whether our financial health is improving or deteriorating. Non-financial factors, however, such as changes in member base and measures of the quality of service to members should be considered in evaluating the overall health of KHS. The Statement of Cash Flows The final required statement is the Statement of Cash Flows. The statement reports cash receipts, cash payments, and net changes in cash resulting from operations, investing, and financing activities. It provides answers to such questions as Where did cash come from? What was cash used for? and What was the change in cash balance during the reporting period? / 174

30 Condensed Financial Information Statements of Net Position KHS net position is the difference between its assets and liabilities reported in the Statement of Net Position. Our net position increased in 2015 and 2014 by $33,833,440 and $8,043,485, respectively. In 2015, with the required implementation of the Government Accounting Standards Board new authoritative pronouncement (GASB 68), a prior period adjustment was recognized that decreased beginning net position by $4,554,410. Our Statements of Net Position as of December 31, 2015, 2014, and 2013 are as follows: Assets Current assets $ 248,491,865 $ 189,171,990 $ 123,771,756 Capital assets, net 15,905,463 13,234,389 10,506,568 Restricted assets 300, , ,000 Total Assets $ 264,697,328 $ 202,706,379 $ 134,578,324 Deferred Outflows of Resources $ 1,306,546 $ - $ - Liabilities Accrued medical services payable $ 138,059,525 $ 106,491,858 $ 30,662,108 Accrued expenses 12,573,372 15,560,124 31,305,304 Net pension liability 3,690, Total Liabilities $ 154,323,477 $ 122,051,982 $ 61,967,412 Deferred Inflows of Resources $ 1,746,970 $ - $ - Net Position Net investment in capital assets $ 15,905,463 $ 13,234,389 $ 10,506,568 Restricted 300, , ,000 Unrestricted 93,727,964 67,120,008 61,804,344 Total Net Position $ 109,933,427 $ 80,654,397 $ 72,610,912 KHS net position for 2015, 2014, and 2013 exceeded all regulatory requirements for Tangible Net Equity (TNE) / 174

31 Statements of Revenues, Expenses and Changes in Net Position Operating results and changes in our net position show an increase in net position by $33,833,440 and $8,043,485 for the years ended December 31, 2015 and 2014, respectively. The increases are made up of various different components as outlined below: Per Member Per Month in Dollars Enrollment Total member months 2,491,983 1,948,121 1,522,667 Average monthly members 207, , ,889 Operating Revenues Premium revenues $ 559,593,374 $ 407,073,736 $ 232,137,818 $ $ $ Other operating revenues 24,746,763 21,414,951 31,992, Total operating revenues 584,340, ,488, ,130, Operating Expenses Medical and hospital 502,329, ,849, ,724, Administrative 23,986,596 21,653,356 17,493, MCO premium tax 23,574,449 15,259,903 9,607, Depreciation 1,029,556 1,030, , Total operating expenses 550,920, ,793, ,785, Operating income 33,420,031 8,695,657 5,345, Nonoperating Income (Expenses) Investment income 418, , , Loss on sale of assets (5,458) (4,856) (2,469) (0.00) (0.00) (0.00) Community grant - (959,986) (73,500) - (0.49) (0.05) Total nonoperating income (expenses) 413,409 (652,172) 161, (0.33) 0.11 Changes in net position 33,833,440 8,043,485 5,507, Net position, beginning, as previously stated 80,654,397 72,610,912 67,103, Prior period adjustment (4,554,410) - - (1.83) - - Net position, beginning, as restated 76,099,987 72,610,912 67,103, Net position, ending $ 109,933,427 $ 80,654,397 $ 72,610,912 $ $ $ Operating Income and Losses The first component of the overall change in net position is our operating income. This is the difference between the premium revenues and the cost of medical services. We incurred operating income for the years ended December 31, 2015 and 2014 of $33,420,031 and $8,695,657, respectively. The primary components of the operating income for 2015 are: Premium revenues increased $152,519,638 or $15.60 PMPM in Approximately $108 million or $43.34 PMPM is attributed to the increased Expansion revenue and $8,314,546 or $1.63 PMPM of the increase is due to increased MCO tax revenue received for In addition to the Expansion membership, in 2015 we also began receiving an increase in Hepatitis-C supplemental kick payments that accounted for $12,743,378 million or $5.11 PMPM in / 174

32 The Medi-Cal average monthly membership increased by 45,322 members or 27.92% over 2014 due primarily to the increased Expansion membership. The medical and hospital services costs increased by $120,479,739 or $5.57 PMPM between 2015 and This increase is attributed to the significantly increased membership growth provider contract rate increases, and new requirements for KHS to cover new benefits and services. The Medical Loss ratio (Medical and Hospital Services expense as a percentage of Total Operating Revenue excluding MCO tax revenue) was 89.6% in 2015 and 92.4% in Administrative expenses increased by $2,333,240 and decreased by $1.49 PMPM over 2014 which is attributed to the increase in salaries and benefits for additional staff needed to meet the demand of the growing membership experienced in Administrative expense as a percentage of total Operating Revenue (excluding MCO tax revenue) was 4.3% in 2015 compared to 5.2% in 2014 primarily due to the achievement of economies of scale and synergies. Nonoperating Revenues and Expenses Nonoperating revenues and expenses consisted primarily of investment income and community grants. In 2015, Investment and other income increased by $106,197 from 2014 primarily due to higher cash equivalent and investment balances maintained throughout Community grant expense decreased $959,986 in 2015 from In 2015, enhanced provider payments were funded from available ACA resources. KHS Cash Flow Changes in KHS cash flows are consistent with changes in operating income and nonoperating revenues and expenses and are reflective of timing differences pertaining to payment of accrued medical services and paid rates. Other Economic Factors Our operations depend primarily on the continuation of our contract with and funding by the State for the Two-Plan Model of the Medi-Cal Managed Care Program. We believe in the State and Federal long-term commitment to these programs. Our participation in these programs is ongoing. Contacting KHS Financial Management This financial report is designed to provide our members, providers, suppliers, regulatory agencies, taxpayers, and creditors with a general overview of KHS finances and show KHS accountability for the money it receives. If you have questions about this report or need additional financial information please contact Robert Landis, CFO, Kern Health Systems, at 9700 Stockdale Hwy, Bakersfield, California / 174

33 KERN HEALTH SYSTEMS STATEMENT OF NET POSITION December 31, 2015 ASSETS AND DEFERRED OUTFLOWS OF RESOURCES Current Assets Cash and cash equivalents (Note 2) $ 154,918,862 Investments (Notes 2 and 3) 62,827,244 Premiums receivable 29,488,460 Other receivables (Note 4) 557,951 Prepaid expenses 699,348 Total current assets 248,491,865 Capital Assets (Note 5) Land 785,856 Buildings and improvements 10,309,440 Furniture and equipment 15,488,985 26,584,281 Less accumulated depreciation 10,678,818 15,905,463 Other Assets Restricted investments (Notes 2, 3 and 7) 300,000 Total assets 264,697,328 Deferred Outflows of Resources (Note 8) 1,306,546 Total assets and deferred outflows of resources $ 266,003,874 LIABILITIES, DEFERRED INFLOWS OF RESOURCES AND NET POSITION Current Liabilities Accrued medical services payable (Note 6) $ 138,059,525 Accrued expenses 12,573,372 Total current liabilities 150,632,897 Noncurrent Liabilities Net pension liability (Note 8) 3,690,580 Commitments and contingencies (Note 10) Deferred Inflows of Resources (Note 8) 1,746,970 Net Position Net investment in capital assets 15,905,463 Restricted (Note 7) 300,000 Unrestricted 93,727,964 Total net position 109,933,427 Total liabilities, deferred inflows of resources and net position $ 266,003,874 See Notes to Financial Statements / 174

34 KERN HEALTH SYSTEMS STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION Year Ended December 31, 2015 Operating Revenue Premiums earned $ 559,593,374 Coordination of benefits/subrogation 21,336,111 Other operating income 2,304,906 Stop-loss insurance recoveries (Note 9) 1,105,746 Total operating revenue 584,340,137 Operating Expenses Medical and hospital 502,329,505 Administrative 23,986,596 MCO premium tax 23,574,449 Depreciation 1,029,556 Total operating expenses 550,920,106 Operating income 33,420,031 Non-operating Revenue (Expenses) Investment and other income 418,867 (Loss) on sale of assets (5,458) Total non-operating revenue 413,409 Change in net position 33,833,440 Net position, beginning, as previously stated 80,654,397 Prior period adjustment (Note 12) (4,554,410) Net position, beginning, as restated 76,099,987 Net position, ending $ 109,933,427 See Notes to Financial Statements / 174

35 KERN HEALTH SYSTEMS STATEMENT OF CASH FLOWS Year Ended December 31, 2015 Cash Flows from Operating Activities Premiums received $ 596,280,660 Coordination of benefits/subrogation received 21,336,111 Stop-loss insurance recoveries 2,865,615 Other operating income 2,176,689 Medical and hospital payments (470,761,838) Administrative expenses paid (44,942,024) Net cash provided by operating activities 106,955,213 Cash Flows From Noncapital Financing Activities Due from affiliates 5,000 Other non-operating income 21,350 Net cash provided by noncapital financing activities 26,350 Cash Flows From Capital And Related Financing Activities Acquisition of capital assets - Net cash (used in) capital and related financing activities (3,706,088) Cash Flows From Investing Activities Net purchases of investments (33,527,661) Proceeds from maturities of investments 15,567,670 Net cash (used in) investing activities (17,959,991) Net increase in cash and cash equivalents 85,315,484 Cash and cash equivalents: Beginning 69,603,378 Ending $ 154,918,862 See Notes to Financial Statements / 174

36 Reconciliation of operating activities to net cash provided by operating activities Operating income $ 33,420,031 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 1,029,556 Loss on sale of assets 5,458 Changes in: Deferred outflows of resources (818,296) Net pension liability (1,352,080) Deferred inflows of resources 1,746,970 Changes in working capital components: (Increase) decrease in: Premiums receivable and other receivables 44,436,455 Prepaid expenses (93,796) Increase (decrease) in: Accrued medical services payable 31,567,667 Accrued expenses (2,986,752) Net cash provided by operating activities $ 106,955, / 174

37 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS Note 1. Nature of Activities and Summary of Significant Accounting Policies Nature of activities: Kern Health Systems (KHS) was originally formed on August 17, 1993, as a nonprofit public benefit corporation. It was later dissolved and converted into a County health authority for the purpose of establishing and operating a comprehensive managed care system to provide health care services; to meet the health care needs of low-income families and individuals in the County of Kern; to demonstrate ways of promoting quality care and cost efficiency; to negotiate and enter into contracts authorized by Welfare and Institutions Code Section ; to arrange for the provision of health care services provided pursuant to Chapter 7, of Part 3, of Division 9 (commencing with Section 14000) of the Welfare and Institutions Code; and to do all things reasonably related or incidental to those purposes. On December 6, 1994, the County of Kern Board of Supervisors enacted Chapter 2.94 of the Ordinance Code, creating KHS as the County health authority. A summary of the KHS significant accounting policies follows: Accounting policies: KHS uses the accrual basis of accounting. The accompanying financial statements have been prepared in accordance with the standards of the Governmental Accounting Standards Board (GASB). In addition, KHS follows the provisions of the American Institute of Certified Public Accountants Audit and Accounting Guide, Health Care Organizations. Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with respect to KHS financial statements include the various components of accrued medical services payable and the net pension liability. Cash and cash equivalents: Cash and cash equivalents include highly liquid instruments with an original maturity of three months or less when purchased. Investments valuation and income recognition: Investments in marketable securities with readily determinable fair values and all investments in debt securities are reported at their fair values in the statements of net position. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note 3 for further discussion of fair value measurements. Capital Assets: Property and equipment is stated at cost. Depreciation is computed by the straight line method over the estimated service lives of the related assets, which are as follows: Years Buildings and improvements Furniture and equipment 3-5 KHS capitalization policy is to capitalize all items with a unit cost greater than $1,000 with the exception of computer software which has a per unit capitalization of $5,000 and an expected useful life of greater than one year. Items that do not meet KHS capitalization policy and that do not have a useful life of greater than one year are expensed to repairs and maintenance in the period incurred / 174

38 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS Accrued Compensated Absences: KHS employees earn personal time off (PTO) on a bi-weekly basis at various rates based on continuous years of service. Employees are allowed to accumulate up to one and one half times their annual benefit rate before accruals cease. Unused PTO is carried forward into subsequent years. Any unused accumulated balance will be paid to the employee upon separation of service. Compensated balances are accrued and recorded in accordance with GASB Codification Section C60. Net position: The basic financial statements utilize a net position presentation. categorized as net investment in capital assets, restricted and unrestricted. Net position is Net investment in capital assets consists of capital assets net of accumulated depreciation, reduced by the current balance of any outstanding borrowings used to finance the purchase or construction of those assets. Restricted net position is non-capital net position that must be used for a particular purpose, as specified by regulators, creditors, grantors, or contributors external to KHS. Unrestricted net position is the remaining net position that does not meet the definition of net investment in capital assets or restricted. Operating revenues and expenses: KHS distinguishes operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and delivering services in connection with KHS principal ongoing operations. The principal operating revenues of KHS are premium revenue received from the California Department of Health Care Services (DHCS). Operating expenses include the cost of medical and hospital services provided to members and administrative expenses. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. Premiums revenue: Premiums are due monthly and are recognized as revenues during the period in which KHS is obligated to provide services. Premium revenue is fixed in advance of the periods covered on a per member per month (PMPM) basis and are generally not subject to significant accounting estimates. Premium payments received from DHCS are based on an eligibility list produced by DHCS. Premium payments are required to be returned if DHCS later discovers that the eligibility list contains individuals who were not eligible. KHS PMPM rates are typically adjusted annually. KHS receives premium revenue in the form of a maternity kick payment which is a one-time payment for the delivery of a child. Maternity kick payments in the amount of $23.8 million or 4.3% of total premium revenue were received for the year ended December 31, KHS also receives premium revenue in the form of a Hepatitis C kick payment based on the utilization of certain classes of Hepatitis C drugs prescribed. Hepatitis C payments in the amount of $12.7 million or 2.3% of total premium revenue were received for the year ended December 31, Premiums are also subject to prior year retroactive rate adjustments based on actual and expected health care costs and are recognized when known in the current year. KHS recognized $3.9 million dollars of premium revenue as a result of retroactive rate adjustments for the year ended December 31, KHS premiums may be periodically amended to include or exclude certain health benefits such as pharmacy and behavioral health services or to cover a new population of members such as seniors and persons with disabilities (SPD) or expansion members / 174

39 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS Included in premiums revenue for the year ended December 31, 2015 is a decrease of approximately $1.6 million of Affordable Care Act (ACA) revenue attributable to the year ended December 31, The California Department of Health Care Services (DHCS), the agency that regulates the Medi-Cal program, initially implemented a reimbursement methodology with no underwriting risk to managed care plans; therefore recognition of ACA funds was considered to be pass-through funds. Subsequently, DHCS changed the reimbursement methodology during the second half of 2014, and transferred the full underwriting risk to the managed care plans. As a result, the $1.6 million reduction in current year revenue the DHCS took back related to the year ended December 31, Health care service cost recognition: KHS contracts with various health care providers for the provision of certain medical care services to its members. KHS compensates most of these providers on a fee for services basis. The cost of health care services provided but unpaid is accrued in the period in which it is provided to a member based in part on estimates, including an accrual for medical services provided but not reported to KHS. Additionally, KHS funds a provider performance quality incentive pool on a per member per month basis (PMPM). Provider participation is based on the similar Healthcare Effectiveness Data and Information Set (HEDIS) scores that DHCS uses to measure KHS in determining member assignment. KHS determines the level of provider participation based on HEDIS scores, with any remaining funds in the pool allocated to the following year incentive pool, community grants, or other quality improvement projects. Premium taxes: Effective January 1, 2009, California enacted the Managed Care Organization (MCO) tax under Senate Bill 78 (SB 78). The California Department of Health Care Services increased capitation rates by the amount of the tax to offset the expense. The MCO tax rate was originally assessed at 2.35% of premium revenue and payable to the California Department of Insurance through June 30, Beginning July 1, 2013, under Assembly Bill 1422 (AB 1422), the MCO tax rate was increased to % and payable to the California State Board of Equalization. Premium taxes are assessed based on the premium revenue collected. The premium revenues received include the premium tax assessment. These amounts are reported on a gross basis and are included in total operating revenues with the MCO tax expense presented separate from all other medical and administrative expense. Risk management: KHS is exposed to various risks of loss from Health Insurance Portability and Accountability Act (HIPAA) violations; data breaches from cyber-attacks; torts; theft of, damage to, and destruction of assets; business interruption; errors and omissions; employee injuries and illnesses; natural disasters; and employee health, dental, and accident benefits. Commercial insurance coverage is purchased for claims arising from such matters. Pass-through funding from DHCS: During the year ended December 31, 2015, KHS received $52,558,998 of supplemental fee revenue from DHCS. KHS passes these funds through to the hospitals and providers. This amount is not reflected in the statement of revenues, expenses and changes in net position for the year ended December 31, 2015, as this pass through amount does not meet the requirements for revenue recognition under Government Accounting Standards. Advertising: KHS expenses advertising costs as they are incurred. Advertising expense totaled $355,783 for the year ended December 31, Subsequent events: KHS has evaluated subsequent events through March 28, 2016, the date on which the financial statements were available to be issued. There were no subsequent events considered material by management that would require disclosure in the financial statements / 174

40 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS Change in Accounting Principles: In June 2012, the Governmental Accounting Standards Board (GASB) issued Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27. The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for pensions. It also improves information provided by state and local governmental employers about financial support for pensions that is provided by other entities. This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for pensions with regard to providing decision-useful information, supporting assessments of accountability and inter-period equity, and creating additional transparency. This Statement replaces the requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, as well as the requirements of Statement No. 50, Pension Disclosures, as they relate to pensions that are provided through pension plans administered as trusts or equivalent arrangements (hereafter jointly referred to as trusts) that meet certain criteria. The requirements of Statements No. 27 and No. 50 remain applicable for pensions that are not covered by the scope of this Statement. The scope of this Statement addresses accounting and financial reporting for pensions that are provided to the employees of state and local governmental employers through pension plans that are administered through trusts that have the following characteristics: Contributions from employers and non-employer contributing entities to the pension plan and earnings on those contributions are irrevocable. Pension plan assets are dedicated to providing pensions to plan members in accordance with the benefit terms. Pension plan assets are legally protected from the creditors of employers, non-employer contributing entities, and the pension plan administrator. If the plan is a defined benefit pension plan, plan assets are also legally protected from creditors of the plan members. This Statement establishes standards for measuring and recognizing liabilities, deferred outflows of resources, and deferred inflows of resources, and expense/expenditures. For defined benefit pensions, this Statement identifies the methods and assumptions that should be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee service. Note disclosure and required supplementary information requirements about pensions also are addressed. Distinctions are made regarding the particular requirements for employers based on the number of employers whose employees are provided with pension through the pension plan and whether pension obligations and pension plan assets are shared. Employers are classified in one of the following categories for purposes of this Statement: Single employers are those whose employees are provided with defined benefit pensions through single-employer pension plans pension plans in which pensions are provided to the employees of only one employer (as defined in this Statement). Agent employers are those whose employees are provided with defined benefit pensions through agent multiple-employer pension plans pension plans in which plan assets are pooled for investment purposes but separate accounts are maintained for each individual employer so that each employer s share of the pooled assets is legally available to pay the benefits of only its employees. Cost-sharing employers are those whose employees are provided with defined benefit pensions through cost-sharing multiple-employer pension plans pension plans in which the pension obligations to the employees of more than one employer are pooled and plan assets can be used to pay the benefits of the employees of any employer that provides pensions through the pension plan / 174

41 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS In addition, this Statement details the recognition and disclosure requirements for employers with liabilities (payables) to a defined benefit pension plan and for employers whose employees are provided with defined contribution pensions. This Statement also addresses circumstances in which a nonemployer entity has a legal requirement to make contributions directly to a pension plan. KHS has implemented the provisions of this Statement for the year ended December 31, In November 2013, the GASB issued Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date An Amendment of GASB Statement No. 68. The objective of this Statement is to address an issue regarding application of the transition provisions of Statement No. 68, Accounting and Financial Reporting for Pensions. The issue relates to amounts associated with contributions, if any, made by a state or local government employer or nonemployer contributing entity to a defined benefit pension plan after the measurement date of the government s beginning net pension liability. Statement No. 68 requires a state or local government employer (or nonemployer contributing entity in a special funding situation) to recognize a net pension liability measured as of a date (the measurement date) no earlier than the end of its prior fiscal year. If a state or local government employer or nonemployer contributing entity makes a contribution to a defined benefit pension plan between the measurement date of the reported net pension liability and the end of the government s reporting period, Statement No. 68 requires that the state or local government employer or nonemployer contributing entity recognize its contribution as a deferred outflow of resources. In addition, Statement No. 68 requires recognition of deferred outflows of resources and deferred inflows of resources for changes in the net pension liability of a state or local government employer or nonemployer contributing entity that arise from other types of events. At transition to Statement No. 68, if it is not practical for an employer or nonemployer contributing entity to determine the amounts of all deferred outflows of resources and deferred inflows of resources related to pensions, paragraph 137 of Statement No. 68 required that beginning balances for deferred outflows of resources and deferred inflows of resources not be reported. Consequently, if it is not practical to determine the amounts of all deferred outflows of resources and deferred inflows of resources related to pensions, contributions made after the measurement date of the beginning net pension liability could not have been reported as deferred outflows of resources at transition. This could have resulted in a significant understatement of an employer or nonemployer contributing entity s beginning net position and expense in the initial period of implementation. This Statement amends paragraph 137 of Statement No. 68 to require that, at transition, a government recognize a beginning deferred outflow of resources for its pension contributions, if any, made subsequent to the measurement date of the beginning net pension liability. Statement No. 68, as amended, continues to require that beginning balances for other deferred outflows of resources and deferred inflows of resources related to pensions be reported at transition only if it is practical to determine all such amounts. KHS has implemented the provisions of this Statement for the year ended December 31, As the result of implementing GASB Statement No. 68, KHS has restated the beginning net position in the Statement of Revenues, Expenses and Changes in Net Position, effectively decreasing net position as of January 1, 2015, by $4,554,410. The decrease results from recognizing the net pension liability, net of related deferred inflows and outflows of resources / 174

42 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS Note 2. Cash, Cash Equivalents and Investments Cash, cash equivalents and investments at December 31, 2015 are classified in the accompanying financial statements as follows: Cost Fair Value Investments: Restricted: Certificates of deposit $ 300,000 $ 300,000 Unrestricted: Certificates of deposit 6,250,000 6,241,396 Corporate bonds and notes 19,223,590 19,402,638 Municipal bonds and notes 13,680,634 13,851,612 Government agency bonds and notes 23,207,191 23,331,598 Total unrestricted 62,361,415 62,827,244 Total investments $ 62,661,415 63,127,244 Cash and cash equivalents: Noninterest-bearing deposits 74,857,688 LAIF and money market funds 80,060,974 Cash on hand 200 Total cash and cash equivalents 154,918,862 Total cash, equivalents and investments $ 218,046,106 Investments are principally held in debt securities and in general are accounted for as available-for-sale securities and are classified as current assets without regard to the securities contractual dates because they may be readily liquidated. The securities are recorded at fair value with unrealized gains and losses, if any, recorded on a quarterly basis. Deposits are carried at cost plus accrued interest. The bank balances are protected by a combination of FDIC insurance and the bank s collateral pool, in accordance with California Government Code. Investments Authorized by KHS Investment Policy The investments listed above are managed by KHS Chief Financial Officer (CFO). Investments managed by the CFO are invested in accordance with KHS investment policy and are reviewed by the KHS Board of Directors and the KHS Finance Committee quarterly / 174

43 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS The table below identifies the cash equivalent and investment types that are authorized by the KHS investment policy. Maximum Maximum Allowed or Authorized Maximum Percentage Investment of Portfolio Maximum Investment Type Maturity Of Portfolio of One Issuer Ratings U.S. Treasury Obligations 5 years 100% None Not Rated Federal Agencies and U.S. Government Enterprises 5 years 100% 35% Not Rated State of California and Local Agency Obligations 5 years 100% 5% A-1 State and Local Agency Obligations outside of California 5 years 20% 5% A-1 Banker's Acceptances 180 days 40% (1) A-1 Commercial Paper 270 days 25% (2) A-1 Negotiable Certificates of Deposit 5 years 30% 5% (7) A-1 Government Repurchase Agreements 1 year 100% (3) A-1 Corporate Debt Securities 5 years 30% (5) A Money Market Funds 5 years 20% (4) AAA Mortgage or Asset-Backed Securities 5 years 20% 5% (6) Variable and Floating Rate Securities 5 years 30% 5% AAA Local Agency Investement Fund (LAIF) 5 years 50% 5% Not Rated (1) May not exceed the 5% limit of any one commercial bank and may not exceed the 5% limit for any security on any bank. (2) May not exceed more than 10% of the outstanding commercial paper of the issuing corporation. (3) 50% if maturity is less than or equal to 7 days; 25% if maturity is greater than 7 days. (4) May not exceed more than 10% of the money market fund s assets. (5) Medium-term notes or other corporate security of any one corporate issuer must not exceed more than 5% of the portfolio. (6) Rated AAA by a nationally recognized rating service and issued by an issuer having an A or better rating for its long-term debt. (7) Maturities greater than one year and less than five years shall not exceed the FDIC Insurance maximum at the time of purchase. Disclosures Relating to Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in the market interest rates / 174

44 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS Disclosures Relating to Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. KHS is required to disclose the rating for all investments. Cash invested in the Local Agency Investment Fund (LAIF) are considered exempt from disclosure under GASB Codification Section 150. GASB Codification Section 150 requires disclosure of any investments of any single issuer in excess of 5% of its total investments, excluding investments issued or explicitly guaranteed by the U.S. government and investments in mutual funds, external investment pools, and other pooled investments. There were no investments of any single issuer that exceeded 5% of its total investments as of December 31, Custodial Credit Risk Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, KHS will not be able to recover its deposits or not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty (e.g., broker-dealer) to a transaction, KHS will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The California Government Code and KHS investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits or investments, other than the following provision for deposits: The California Government Code requires that a financial institution secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. Cash Equivalents in State Investment Pool KHS is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by California Government Code Section under the oversight of the Treasurer of the State of California. The fair value of the District s investment in this pool is reported in the accompanying financial statements at amounts based upon the District s pro-rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to be the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis. Note 3. Fair Value Measurements The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC 820 are described below: Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that KHS has the ability to access / 174

45 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS Level 2 Level 3 Inputs to the valuation methodology include: Quoted prices for similar assets or liabilities in active markets; Quoted prices for identical or similar assets or liabilities in inactive markets; Inputs other than quoted prices that are observable for the asset or liability; Inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset s or liability s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. Following is a description of the valuation methodologies used for assets measured at fair value. Certificates of deposit: Valued based on amortized cost or original cost plus accrued interest. Corporate, Municipal and Government agency bonds and notes: Valued at the closing price reported on the active market on which the individual securities are traded. All investments held by KHS at December 31, 2015 are considered to be level 1 assets. Note 4. Other Receivables Other receivables consist of the following at December 31, 2015: Reinsurance recoveries $ 307,210 Other 250,741 $ 557, / 174

46 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS Note 5. Capital Assets Capital asset activity for the year ended December 31, 2015 is as follows: Balance Balance January 1, December 31, 2015 Additions Deletions Transfers 2015 Capital Assets Not Being Depreciated: Land $ 785,856 $ - $ - $ - $ 785,856 Capital Project in Progress 3,434,465 3,227,152 - (6,661,617) - Subtotal 4,220,321 3,227,152 - (6,661,617) 785,856 Capital Assets Being Depreciated: Buildings and Improvements 10,309, ,309,440 Furniture and Equipment 8,475, ,936 (126,581) 6,661,617 15,488,985 Subtotal 18,784, ,936 (126,581) 6,661,617 25,798,425 Accumulated Depreciation: Buildings and Improvements 2,662, , ,797,612 Furniture and Equipment 7,107, ,346 (121,123) - 7,881,206 Subtotal 9,770,385 1,029,556 (121,123) - 10,678,818 Net Depreciable Capital Assets 9,014,068 (550,620) (5,458) 6,661,617 15,119,607 Total Capital Assets $ 13,234,389 $ 2,676,532 $ (5,458) $ - $ 15,905,463 Note 6. Accrued Medical Services Payable KHS accrues a liability of unpaid claims for medical services, including estimates of costs related to incurred but not yet reported (IBNR) claims using standard actuarial development methodologies based upon historical data including the period between the dates services are rendered and the dates claims are received and paid, expected medical cost inflation, seasonality patterns and changes in membership. A key component of KHS IBNR estimation process is the completion factor, which is a measure of how complete the claims paid to date are relative to the estimate of the claims for services rendered in a given period. The completion factors are more reliable for older service periods and are more volatile and less reliable for more recent periods, since a large portion of health care claims are not submitted to KHS until several months after services have been rendered. Accordingly, for the most recent months, the incurred claims are estimated from a trend analysis based on per member per month claims trends developed from the experience in preceding months. The majority of the IBNR reserve balance held at year-end is associated with the most recent months incurred services as these are the services for which the fewest claims have been paid. As mentioned in the preceding paragraph, the degree of uncertainty in the estimates of incurred claims is greater for the most recent months incurred services / 174

47 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS KHS consistently applies the IBNR estimation from period to period. Any adjustments from the prior year are included in the current period as a change in estimate. As additional information becomes known, KHS will adjust assumptions accordingly to change the IBNR estimate. KHS recognized $3.0 million of favorable prior year IBNR adjustments for the year ended December 31, Accrued medical services and related claims adjustment expenses payable consist of the following at December 31, 2015: Expansion risk corridor $ 58,236,832 Estimated incurred but not reported claims 48,936,753 Claims payable 16,229,197 Affordable Care Act (ACA) enhancement 9,190,028 Provider performance quality incentive 3,769,891 Allowance for claims processing expense 1,696,824 $ 138,059,525 Note 7. Restricted Investments and Tangible Net Equity As required by the State of California s Department of Managed Health Care, Section , KHS has acquired certificates of deposit with three financial institutions totaling $300,000. These certificates of deposit have been assigned to the Director of the Department of Managed Health Care as part of the process of obtaining and maintain its Knox-Keene license, and are legally restricted for this purpose. These certificates of deposit mature in amounts of $100,000 each on June 5, 2016, June 8, 2016 and July 30, KHS is a fully licensed health-care service plan under the Knox-Keene Health Care Services Plan Act of 1975 (the Act ). Under the Act, KHS is required to maintain a minimum level of tangible net equity. The required equity level was approximately $26.0 million at December 31, KHS tangible net equity was approximately $109.9 million at December 31, Note 8. Employee Pension Plans CalPERS Plan description: All qualified permanent and probationary employees are eligible to participate in KHS Miscellaneous Employee Pension Plan, a cost-sharing multiple-employer defined benefit pension plan administered by the California Public Employees Retirement System (CalPERS). Benefit provisions under the Plan are established by State statute and Local Government resolution. CalPERS issues publicly available reports that include a full description of the pension plan regarding benefit provisions, assumptions and membership information that can be found on the CalPERS website at / 174

48 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS Benefits provided: CalPERS provides service retirement and disability benefits, annual cost of living adjustments and death benefits to eligible employees. Benefits are based on years of credited service, equal to one year of full time employment. Members with five years of total service are eligible to retire at age 50 (classic miscellaneous members) or 52 (PEPRA miscellaneous members) with statutorily reduced benefits. All members are eligible for non-duty disability benefits after 10 years of service. The death benefit is one of the following: the Basic Death Benefit, the 1957 Survivor Benefit, or the Optional Settlement 2W Death Benefit. The cost of living adjustments for each plan are applied as specified by the Public Employees Retirement Law. The Plans provisions and benefits in effect at December 31, 2015, are summarized as follows: Miscellaneous - Classic Hire date Prior to January 1, 2013 On or after January 1, 2013 Benefit formula Benefit vesting schedule 5 years of service 5 years of service Benefit payments Monthly for life Monthly for life Retirement age Monthly benefits, as a % of eligible compensation 3% 3% Retirement employee contribution rates 7.762% 6.880% Required employer contribution rates 7.846% 8.005% to 8.049% Miscellaneous - PEPRA Hire date Prior to January 1, 2013 On or after January 1, 2013 Benefit formula N/A 62 Benefit vesting schedule N/A 5 years of service Benefit payments N/A Monthly for life Retirement age N/A 52 Monthly benefits, as a % of eligible compensation N/A 2% Retirement employee contribution rates N/A 6.250% Required employer contribution rates N/A 8.005% to 8.049% Contributions: Section 20814(c) of the California Public Employees Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. Funding contributions for both Plans are determined annually on the actuarial basis as of June 30 by CalPERS. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. KHS is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. For the year ended December 31, 2015, the contributions recognized as part of pension expense for each plan were as follows: Miscellaneous Classic PEPRA Contributions - employer $ 833,756 $ 49,387 Contributions - employee (paid by employer) $ - $ / 174

49 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS Pension Liabilities, Pension Expenses, and Deferred Outflows/Inflows of Resources Related to Pensions As of December 31, 2015, KHS reported net pension liabilities for its proportionate shares of the net pension liability of each Plan as follows: Miscellaneous - Classic $ 3,680,147 Miscellaneous - PEPRA 10,433 $ 3,690,580 KHS net pension liability for each Plan is measured as the proportionate share of the net pension liability. The net pension liability of each of the Plans is measured as of June 30, 2014, and the total pension liability for each Plan used to calculate the net pension liability was determined by an actuarial valuation as of June 30, 2013 rolled forward to June 30, 2014 using standard update procedures. KHS proportion of the net pension liability was based on a projection of KHS long-term share of contributions to the pension plans relative to the projected contributions of all participating employers, actuarially determined. KHS proportionate share of the net pension liability for each Plan as of June 30, 2013 and 2014 was as follows: Miscellaneous Classic PEPRA Proportion - June 30, % % Proportion - June 30, % % Change - (Decrease) % % For the year ended December 31, 2015, KHS recognized pension expense of $883,143. At December 31, 2015, KHS reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Outflows of Resources Deferred Inflows of Resources Pension contributions subsequent to measurement date $ 1,306,546 $ - Changes in employer's proportion and differences between the employer's contributions and the employer's proportionate share of contributions - 506,764 Net differences between projected and actual earnings on plan investments - 1,240,206 Total $ 1,306,546 $ 1,746,970 $1,306,546 reported as deferred outflows of resources related to contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended December 31, Amounts reported as deferred inflows of resources related to pensions will be recognized as pension expense as follows: / 174

50 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS Year ended December 31, 2016 $ 491, , , $ 310,050 1,746,970 Actuarial Methods and Assumptions: The total pension liabilities in the June 30, 2013 actuarial valuations were determined using the following actuarial assumptions: Classic Miscellaneous PEPRA Valuation date June 30, 2013 June 30, 2013 Measurement date June 30, 2014 June 30, 2014 Actuarial cost method Entry-Age Normal Cost Method Entry-Age Normal Cost Method Actuarial assumptions: Discount rate 7.50% 7.50% Inflation 2.75% 2.75% Payroll growth 3.00% 3.00% Projected salary increase Varies by Entry Age and Service Varies by Entry Age and Service Investment rate of return 7.50% (a) 7.50% (a) Mortality Derived using CalPERS' Member- Derived using CalPERS' Membership Data for all Funds (b) ship Data for all Funds (b) (a) Net of pension plan investment and administrative expenses; includes inflation (b) The mortality table used was developed based on CalPERS' specific data. The table includes 20 years of mortality improvements using Society of Actuaries Scale BB. Discount Rate: The discount rate used to measure the total pension liability was 7.50% for each Plan. To determine whether the municipal bond rate should be used in the calculation of a discount rate for each plan, CalPERS stress tested plans that would most likely result in a discount rate that would be different from the actuarially assumed discount rate. Based on the testing, none of the tested plans run out of assets. Therefore, the current 7.50 percent discount rate is adequate and the use of the municipal bond rate calculation is not necessary. The long term expected discount rate of 7.50 percent will be applied to all plans in the Public Employees Retirement Fund (PERF). The stress test results are presented in a detailed report that can be obtained from the CalPERS website at According to Paragraph 30 of Statement 68, the long-term discount rate should be determined without reduction for pension plan administrative expense. The 7.50 percent investment return assumption used in this accounting valuation is net of administrative expenses. Administrative expenses are assumed to be 15 basis points. An investment return excluding administrative expenses would have been 7.65 percent. Using this lower discount rate has resulted in a slightly higher Total Pension Liability and Net Pension Liability. CalPERS checked the materiality threshold for the difference in calculation and did not find it to be a material difference / 174

51 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS CalPERS is scheduled to review all actuarial assumptions as part of its regular Asset Liability Management (ALM) review cycle that is scheduled to be completed in February Any changes to the discount rate will require Board action and proper stakeholder outreach. For these reasons, CalPERS expects to continue using a discount rate net of administrative expenses for GASB 67 and 68 calculations through at least the fiscal year. CalPERS will continue to check the materiality of the difference in calculation until such time as we have changed our methodology. The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major class. In determining the long-term expected rate of return, CalPERS took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Using historical returns of all the funds asset classes, expected compound returns were calculated over the short-term (first 10 years) and the long-term (11-60 years) using a building-block approach. Using the expected nominal returns for both short-term and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and longterm returns. The expected rate of return was then set equivalent to the single equivalent rate calculated above and rounded down to the nearest one quarter of one percent. The table below reflects the long-term expected real rate of return by asset class. The rate of return was calculated using the capital market assumptions applied to determine the discount rate and asset allocation. The rates of return are net of administrative expenses. Asset Class New Strategic Allocation Miscellaneous - Classic and PEPRA Plans Real Return Years 1-10 (a) Real Return Years 11+ (b) Global Equity 47% 5.25% 5.71% Global Fixed Income 19% 0.99% 2.43% Inflation Sensitive 6% 0.45% 3.36% Private Equity 12% 6.83% 6.95% Real Estate 11% 4.50% 5.13% Infrastructure and Forestland 3% 4.50% 5.09% Liquidity 2% -0.55% -1.05% Total 100% (a) An expected inflation of 2.5% used for this period (b) An expected inflation of 3.0% used for this period Sensitivity of the Proportionate Share of the Net Pension Liability to Changes in the Discount Rate: The following presents KHS proportionate share of the net pension liability for each Plan, calculated using the discount rate for each Plan, as well as what KHS proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1-percentage point lower or 1-percentage point higher than the current rate: / 174

52 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS Miscellaneous Classic PEPRA 1% Decrease 6.50% 6.50% Net Pension Liability $ 6,556,883 $ 18,588 Current Discount Rate 7.50% 7.50% Net Pension Liability $ 3,680,147 $ 10,433 1% Increase 8.50% 8.50% Net Pension Liability $ 1,292,728 $ 3,665 Pension Plan Fiduciary Net Position: Detailed information about each pension plan s fiduciary net position is available in the separately issued CalPERS financial reports. Retirement Plan Plan description and funding policy: KHS has a 401(a) retirement plan, which was approved by the IRS on August 15, All full-time employees are eligible to participate in the Plan. KHS matches 100% up to a maximum of 6% of the employee s salary. KHS contributions do not vest until the employee has been employed for three years when at such time the employee becomes 100% vested. Participants are not allowed to make contributions to the Plan; only employer contributions are allowable. Expense determined in accordance with the plan formula was $708,787 for the year ended December 31, Note 9. Stop-Loss Insurance KHS purchases stop-loss insurance to reduce the risk associated with large losses on individual hospital claims. The premium costs are based on a deductible for each member in addition to a deductible layer for the plan referred to as an Aggregate Specific Retention amount. Coverage provides reimbursement of approximately 95 percent of the cost of each member s acute care hospital admission(s) in excess of the deductibles, up to a maximum payable of $1,000,000 per member per contract year. The deductible for each individual member was $175,000 and the Aggregate Specific Retention deductible was $0.20 per member per month (PMPM) or a minimum of $400,000 for the year ended December 31, Stop-loss insurance premiums of $1,683,287 are included in medical and hospital expense for the year ended December 31, Stop-loss insurance recoveries of $1,105,746 are included in operating revenue for the year ended December 31, / 174

53 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS Note 10. Commitments and Contingencies Litigation In June 2014 a $1,380,000 judgment was entered in favor of KHS, related to a claim that KHS had brought against a group of defendants alleging negligent misrepresentation. Subsequent to the favorable determination, the defendants filed claims against KHS seeking approximately $3,600,000 in attorney fees, on the basis of the jury finding in favor of them on a breach of contract theory. The trial court has denied the motions of the defendants and cited many reasons for the denial. The defendants have filed appeals which are currently pending. The judgment in favor of KHS has been secured by an appeal bond pending the outcome of the appeal. Management along with its legal counsel intend to aggressively defend the appeals, and are of the opinion that in the unlikely event of an unfavorable determination, the amount would be only a fraction of the amount requested because the breach of contract cause of action was one of several pled in the complaint. An estimate for the outcome of this matter has not been reflected in the financial statements since management is of the opinion that no material losses will result. KHS is subject to litigation claims that arise in the normal course of business. While it is not feasible to determine the outcome of any of these uncertainties, it is the opinion of management that their outcomes will not have a material adverse effect on the financial position, results of operations or cash flows of KHS. Regulatory Matters The health-care industry is subject to numerous laws and regulations of federal, state and local governments. Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties. Management believes that KHS is in compliance with fraud and abuse, as well as other applicable government laws and regulations. Compliance with such laws and regulations can be subject to future government review and interpretations as well as regulatory actions unknown or unasserted at this time. Patient Protection and Affordable Care Act In March 2010, the President signed into law the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively referred to as the Healthcare Reform Legislation), which considerably transforms the U.S. health-care system and increases regulations within the U.S. health insurance industry. This legislation is intended to expand the availability of health insurance coverage to millions of Americans. The Healthcare Reform Legislation contains provisions that take effect from 2010 through 2018, with most measures effective in Under the Healthcare Reform Legislation, Medi-Cal coverage expanded as of January 2014 to nearly all low-income people under age 65 with income at or below 138% of the federal poverty line. For the year ended December 31, 2015, KHS served an average of 39,500 Medi-Cal Expansion members per month, which generated revenues of approximately $210 million. Lease Commitment KHS leases office space under an operating lease that expires in December KHS has two options to terminate and cancel the lease effective 60 months or 90 months from December KHS is obligated to pay the landlord the unamortized amount of tenant improvements and real estate commissions outstanding at the time of termination of the lease. Rental expense for the year ended December 31, 2015 was $283,872. At December 31, 2015 total annual rental commitments are as follows: / 174

54 KERN HEALTH SYSTEMS NOTES TO FINANCIAL STATEMENTS Years ending December 31, 2016 $ 292, , , , ,880 Later years $ 1,032,264 2,580,660 Contract Commitment In September 2014 KHS entered into a ten year contract with a vendor to supply software, licensing, support and maintenance, including a migration process from the existing software. At December 31, 2015 the total future contract commitments are as follows: Years ending December 31, 2016 $ 385, , , , ,760 Later years $ 1,543,040 3,471,840 Note 11. Concentration of Revenue KHS operating revenue is primarily derived from the California Department of Health Care Services (DHCS). KHS contracts with DHCS to provide health care services, subject to cancellation upon written notice. For the year ended December 31, 2015 approximately 95% of KHS total operating revenues were received from DHCS. Note 12. Prior Period Adjustment As a result of the implementation of GASB 68 as explained in Note 8, a restatement to beginning net position was required. Net pension liability recognized for KHS proportionate share of CalPERS Defined Benefit Plans resulted in a decrease to beginning net position of $4,554, / 174

55 REQUIRED SUPPLEMENTARY INFORMATION 55 / 174

56 KERN HEALTH SYSTEMS SCHEDULES OF PROPORTIONATE SHARE OF THE NET PENSION LIABILITY As of December 31, 2015 CalPERS - Miscellaneous Classic Plan- Last 10 Years* Proportion of the net pension liability % Proportionate share of the net pension liability $ 3,680,147 Covered - employee payroll $ 12,085,241 Proportionate share of the net pension liability as a percentage of covered-employee payroll 30.45% Plan's fiduciary net position $ 3,055,626 Plan fiduciary net position as a percentage of the total pension liability 83.03% * Fiscal year 2015 was the first year of implementation, therefore only one year is shown. CalPERS - Miscellaneous PEPRA Plan - Last 10 Years* Proportion of the net pension liability % Proportionate share of the net pension liability $ 10,433 Covered - employee payroll $ 1,968,326 Proportionate share of the net pension liability as a percentage of covered-employee payroll 0.53% Plan's fiduciary net position $ 8,663 Plan fiduciary net position as a percentage of the total pension liability 83.03% * Fiscal year 2015 was the first year of implementation, therefore only one year is shown / 174

57 KERN HEALTH SYSTEMS SCHEDULES OF PENSION CONTRIBUTIONS Year Ended December 31, 2015 CalPERS - Miscellaneous Classic Plan- Last 10 Years* Contractually required contribution (actuarially determined) $ 898,902 Contributions in relation to the actuarially determined contributions 898,902 Contribution deficiency (excess) $ - Covered-employee payroll $ 12,085,241 Contributions as a percentage of covered-employee payroll 7.44% Notes to Schedule Valuation date: June 30, 2013 Methods and assumptions used to determine contribution rates: Actuarial cost method Entry-Age Normal Cost Method Amortization method Level percentage of assumed future payrolls Remaining amortization period 30 years Asset valuation method 5-year smoothed market Inflation 2.75% Salary increases 3.00% Investment rate of return 7.50% Net of pension plan investment and administrative expenses; includes inflation Retirement age 59 years and 5 years of service Mortality 20 years of projected on-going mortality improvement using Scale BB published by the Society of Actuaries * Fiscal year 2015 was the first year of implementation, therefore only one year is shown / 174

58 KERN HEALTH SYSTEMS SCHEDULES OF PENSION CONTRIBUTIONS Year Ended December 31, 2015 CalPERS - Miscellaneous PEPRA Plan- Last 10 Years* Contractually required contribution (actuarially determined) $ 195,010 Contributions in relation to the actuarially determined contributions 195,010 Contribution deficiency (excess) $ - Covered-employee payroll $ 1,968,326 Contributions as a percentage of covered-employee payroll 9.91% Notes to Schedule Valuation date: June 30, 2013 Methods and assumptions used to determine contribution rates: Actuarial cost method Entry-Age Normal Cost Method Amortization method Level percentage of assumed future payrolls Remaining amortization period 30 years Asset valuation method 5-year smoothed market Inflation 2.75% Salary increases 3.00% Investment rate of return 7.50% Net of pension plan investment and administrative expenses; includes inflation Retirement age 52 years and 5 years of service Mortality 20 years of projected on-going mortality improvement using Scale BB published by the Society of Actuaries * Fiscal year 2015 was the first year of implementation, therefore only one year is shown / 174

59 OTHER INDEPENDENT AUDITOR S REPORT 59 / 174

60 Daniells Phillips Vaughan & Bock CPAs & Advisors Certified Public Accountants Business & Personal Consultants Member of the McGladrey Alliance Member of AICPA Division for Firms Private Companies Practice Section NANCY C. BELTON INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Directors Kern Health Systems Bakersfield, California We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Kern Health Systems, as of and for the year ended December 31, 2015, and the related notes to the financial statements, which collectively comprise Kern Health Systems basic financial statements, and have issued our report thereon dated March 28, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Kern Health Systems internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Kern Health Systems internal control. Accordingly, we do not express an opinion on the effectiveness of Kern Health Systems internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified New Stine Road Bakersfield, CA Tel Fax / 174

61 Compliance and Other Matters As part of obtaining reasonable assurance about whether Kern Health Systems financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Bakersfield, California March 28, / 174

62 62 / 174

63 KERN HEALTH SYSTEMS Report to the Finance Committee March 28, / 174

64 Daniells Phillips Vaughan & Bock CPAs & Advisors Certified Public Accountants Business & Personal Consultants Member of the McGladrey Alliance Member of AICPA Division for Firms Private Companies Practice Section March 28, 2016 Finance Committee Kern Health Systems 9700 Stockdale Highway Bakersfield, California Attention: Wayne Deats, Jr., Chair, Finance Committee We are pleased to present this report related to our audit of the financial statements of Kern Health Systems for the year ended December 31, This report summarizes certain matters required by professional standards to be communicated to you in your oversight responsibility for Kern Health Systems financial reporting process. This report is intended solely for the information and use of the Finance Committee and management and is not intended to be and should not be used by anyone other than these specified parties. It will be our pleasure to respond to any questions you have about this report. We appreciate the opportunity to continue to be of service to Kern Health Systems. Daniells Phillips Vaughan & Bock 300 New Stine Road Bakersfield, CA Tel Fax / 174

65 Contents Required Communications Summary of Significant Accounting Estimates... 3 Summary of Recorded Audit Adjustments... 4 Exhibit A Letter Communicating Significant Deficiencies in Internal Control over Financial Reporting Exhibit B - Representation Letter / 174

66 Required Communications Generally accepted auditing standards (AU-C 260, The Auditor s Communication with Those Charged with Governance) require the auditor to promote effective two-way communication between the auditor and those charged with governance. Consistent with this requirement, the following summarizes our responsibilities regarding the financial statement audit as well as observations arising from our audit that are significant and relevant to your responsibility to oversee the financial reporting process. Area Our Responsibilities with regard to the Financial Statement Audit Overview of the Planned Scope and Timing of the Financial Statement Audit Accounting Policies and Practices Comments Our responsibilities under auditing standards generally accepted in the United States of America have been described to you in our arrangement letter dated November 2, We have issued a separate communication regarding the planned scope and timing of our audit and have discussed with you our identification of and planned audit response to significant risks of material misstatement. Preferability of Accounting Policies and Practices Under generally accepted accounting principles, in certain circumstances, management may select among alternative accounting practices. In our view, in such circumstances, management has selected the preferable accounting practice. Adoption of, or Change in, Accounting Policies Management has the ultimate responsibility for the appropriateness of the accounting policies used by the Organization. The Organization adopted the provisions of GASB 68 and GASB 71 for its year ended December 31, The primary objective of GASB 68 is to improve accounting and financial reporting by state and local governmental employers about financial support for pensions that is provided by other entities. GASB 71 addresses a transitional issue related to the implementation of GASB 68. The full impact of implementing these standards has been presented and fully disclosed in the financial statements, related footnotes, and supplementary schedules for Kern Health Systems. Significant or Unusual Transactions We did not identify any significant or unusual Page 1 66 / 174

67 Area Comments transactions or significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus. Audit Adjustments Uncorrected Misstatements Disagreements with Management Consultations with Other Accountants Significant Issues Discussed with Management Significant Difficulties Encountered in Performing the Audit Letter Communicating Control Deficiencies in Internal Control over Financial Reporting Certain Written Communications between Management and Our Firm Management s Judgments and Accounting Estimates Summary information about the process used by management in formulating particularly sensitive accounting estimates and about our conclusions regarding the reasonableness of those estimates is in the attached Summary of Significant Accounting Estimates. Audit adjustments proposed by us and recorded by Kern Health Systems are shown on the attached Summary of Recorded Audit Adjustments. There were no uncorrected misstatements identified. We encountered no disagreements with management over the application of significant accounting principles, the basis for management s judgments on any significant matters, the scope of the audit, or significant disclosures to be included in the financial statements. We are not aware of any consultations management had with other accountants about accounting or auditing matters. No significant issues arising from the audit were discussed with or were the subject of correspondence with management. We did not encounter any significant difficulties in dealing with management during the audit. We have separately communicated a control deficiency in internal control over financial reporting identified during our audit of the financial statements, and this communication is attached as Exhibit A. Copies of certain written communications between our firm and the management of KHS, including the representation letter provided to us by management, are attached as Exhibit B. Page 2 67 / 174

68 KERN HEALTH SYSTEMS Summary of Significant Accounting Estimates Year Ended December 31, 2015 Accounting estimates are an integral part of the preparation of financial statements and are based upon management s current judgment. The process used by management encompasses their knowledge and experience about past and current events and certain assumptions about future events. You may wish to monitor throughout the year the process used to determine and record these accounting estimates. The following describes the significant accounting estimates reflected in the Organization s December 31, 2015, financial statements: Estimate Estimated claims payable Risk sharing payable Incurred but not reported claims Net pension liability Management s Estimation Process Estimates are based on historical information for total claims received and paid Estimates are based on historical information for total claims received and paid Estimates are based on historical information for total claims received and paid Estimate is based on actuarial reports provided by CalPERS Basis for Our Conclusions on Reasonableness of Estimate Estimate is in accordance with GAAP Estimate is in accordance with GAAP Estimate is in accordance with GAAP Estimate is in accordance with GAAP Page 3 68 / 174

69 KERN HEALTH SYSTEMS Summary of Recorded Audit Adjustments Year Ended December 31, 2015 Effect Increase (Decrease) Description Assets Liabilities Equity Revenue Expense To properly record the payment made during FYE 2015 for the unfunded pension liability to CalPERS as a deferred outflow as required by GASB 68 $ 95,446 $ 95,446 $ - $ - $ - To record prior period adjustment, due to the implementation of GASB 68, for the net pension liability 488,250 5,042,660 (4,554,410) - - To reclassify prior year contributions that were paid prior to the measurement date that are associated with the net pension liability to be reported in the financial statements of the current year (488,250) (488,250) To reclassify current year contributions made after the measurement date 1,211, (1,211,100) To record current year changes in the net pension liability - 883, ,140 Total $ 1,306,546 $ 5,532,996 $ (4,554,410) $ - $ (327,960) Page 4 69 / 174

70 Exhibit A Letter Communicating Control Deficiencies in Internal Control over Financial Reporting 70 / 174

71 Daniells Phillips Vaughan & Bock CPAs & Advisors Certified Public Accountants Business & Personal Consultants Member of the McGladrey Alliance Member of AICPA Division for Firms Private Companies Practice Section NANCY C. BELTON March 28, 2016 To Management and the Finance Committee Kern Health Systems Bakersfield, California In planning and performing our audit of the financial statements of Kern Health Systems (KHS) as of and for the year ended December 31, 2015, in accordance with auditing standards generally accepted in the United States of America, we considered KHS internal control over financial reporting (internal control) as a basis for designing audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of KHS internal control. Accordingly, we do not express an opinion on the effectiveness of KHS internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A deficiency in design exists when (a) a control necessary to meet the control objective is missing, or (b) an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met. A deficiency in operation exists when a properly designed control does not operate as designed or when the person performing the control does not possess the necessary authority or competence to perform the control effectively. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Following are descriptions of other identified deficiencies in internal control that we determined did not constitute significant deficiencies or material weaknesses: Payroll Review and Approval KHS policy is for all timesheets to be reviewed and approved by the employee s supervisor. This is documented by the supervisor checking the approval box within the payroll software. One 300 New Stine Road Bakersfield, CA Tel Fax Page 5 71 / 174

72 particular supervisor was not following this procedure, resulting in several timesheets missing approval documentation. We recommend that all employees be required to follow the internally developed policies and procedures to ensure that all timesheets are approved. Management s Response KHS has since implemented an indicator within the payroll system which now requires all timesheets to be checked as approved prior to the system allowing payroll to be processed. Existing internal controls, including timecard review by the payroll supervisor and department heads of Human Resources and/or Accounting, were in place during the time prior to the implementation of the timecard approval indicator to ensure the accuracy of payroll. This communication is intended solely for the information and use of management, the Finance Committee, and others within the organization and is not intended to be, and should not be, used by anyone other than these specified parties. Daniells Phillips Vaughan & Bock Page 6 72 / 174

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79 To: KHS Board of Directors From: Robert Landis, CFO and Anita Martin, Director of HR Date: April 14, 2016 Re: Travel Request for Corporate Training and Development Manager Background As KHS continues to grow, developing and offering supervisor and leadership training has been one of the ongoing strategic directives from our Board of Directors. The benefits are two-fold: it offers continued growth and development of the leadership team and enables mid management to effectively address and respond to the challenges they face. In 2014, KHS rolled out the online interactive Supervisor Training, which replaced the offsite Supervisor Bootcamp that had been offered. This was at a savings of $1,175 per supervisor, or approximately $7,050 annually. It is in this spirit KHS invested in professional leadership (Corporate Training and Development Manager) to seek cost effective solutions to our Training and Development needs. Discussion Another example of how KHS will continue to enhance its Supervisor and Managers leadership performance in 2016 is for each mid-level manager to complete the Situational Leadership II ( SLII ) training seminar. Offsite, this is only offered through PAS Consultants, here in Bakersfield: the same organization who conducted the Supervisor Bootcamp. KHS estimates, based on the number of qualified mid-level managers who would participate in the Situational Leadership II training, the cost would run up to $53,625 or $1,375 per manager or supervisor. However, since our goal is to reduce the need for expensive outside training programs so that we may have more control over both content and training timeframe, KHS intends to offer this course through our in-house Corporate Trainer and Development Manager, Shannon Foster. For Ms. Foster to do so, will require she receive certification in this curriculum. The location for the nearest training is San Diego, California. The cost for the training certification program is approximately $6,500 including related travel and accommodations. The savings using in-house training vs. outside consulting is: $47,125 ($53,625 - $6,500 = $47,125). 79 / 174

80 The certification will have the added benefit of our in-house trainer being able to teach other management training seminars offered through Blanchard Workshops. For example, in 2016, 3 additional leadership seminars will be offered: Listening and Challenging Conversations (How to effectively and succinctly communicate with your employees) Core Leadership Skills (Designed to develop consistent and successful managerial skills) Other On-demand modules which may be applied collectively or selectively depending on the circumstance and need. In 2016, the Training and Development Program anticipates 28 managers and supervisors to receive training in one or more modules. Again, if consultants were conducting this training, KHS could be expected to incur $26,300 in training expense. Therefore, with an investment of $6,500 KHS anticipates saving for all 2016 training programs to be $73,425 (53,625 +$26,300 = $79,925 - $6,500 = $73,425). Requested Action Approve request to send Shannon Foster, KHS Corporate Training and Development Manager to San Diego to become SLII Certified for an amount not to exceed $6,500. A copy of the training content and description is attached. 80 / 174

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89 To: KHS Board of Directors From: Robert Landis, CFO Date: April 14, 2016 Re: January 2016 Financial Results The January results reflect a $2,407,467 Net Increase in Net Position which is a $325,341 favorable variance to the budget. Listed below are the major variances for the month: 1) Total Revenues reflect a $.3 million favorable variance primarily due to: A) $.1 million unfavorable variance relating to Family and Other primarily due to lower than expected enrollment. B) $.6 million favorable variance relating to Expansion primarily due to higher than expected enrollment ($1.3 million), lower than expected HEP-C revenue ($.9 million), and higher than expected maternity revenue ($.2 million). C) $.2 million unfavorable variance relating to SPD primarily due to higher than expected enrollment ($.5 million) and lower than expected HEP-C revenue ($.7million). 2) Total Medical Costs reflect a $.3 million unfavorable variance primarily due to: A) $.4 million unfavorable variance in Physician Services primarily due to higher than expected Expansion enrollment along with higher than expected utilization. B) $1.0 million favorable variance in Other Professional Services primarily due to the Autism transition from Kern Regional Center beginning in February instead of January. C) $.8 million unfavorable variance in Inpatient primarily due to higher than expected Expansion enrollment along with higher than expected utilization. D) $.6 million unfavorable variance in Outpatient Hospital primarily due to higher than expected Expansion enrollment along with higher than expected Expansion and Family and Other utilization. E) $1.9 million favorable variance in Pharmacy primarily due to lower than expected HEP-C utilization. F) $1.1 million variance for Expansion Risk Corridor Expense due to lower than expected medical expense utilization for the Expansion membership population. The January Medical Loss Ratio is 91.3% which is slightly unfavorable to the 90.9% budgeted amount. The December Administrative Expense Ratio is 4% which is favorable to the 5.1% budgeted amount. 89 / 174

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109 To: KHS Board of Directors From: Chandrakala Gowda M.D., MBA, Chief Medical Officer Date: April 14, 2016 Re: Chief Medical Officer s Report Medical Cost and Utilization Trend Analyses: (Attachment A) Physician Services: (Primary Care Physician, Specialist, Hospitalist and Ancillary Services): The monthly cost per enrollee for all aid categories was below or at budget for February 2016 except for a slight increase for Seniors and Persons with Disability (SPD). Across the board, utilization of services contributing to HEDIS quality measurements was up for the month. This means members diagnosed with conditions HEDIS tracks for quality purposes are being treated and followed more frequently. Diabetes (one of the conditions HEDIS tracks) was the predominant reason for increased utilization of professional visits in the SPD and Expanded Eligible group. Routine child health (another HEDIS measurement) was the most common reason for increased utilization of professional visits in the Family aid category. Pharmacy The monthly cost per enrollee for all aid categories, except SPDs, continues to perform better than budget for February The cost per script for SPDs is slightly over the budget which reflects the price increase of common medications like insulin (use extensively by our population). Recent changes to the formulary and permission protocols for Surgeons and Endocrinologist now make it easier for members to obtain newer therapeutic agents. Inpatient Services The monthly cost per enrollee for all aid categories was below budget for February Newborns constituted the top reason for inpatient care utilization for the Expanded Eligible and 109 / 174

110 Family aid categories. Rehabilitation after joint replacement and cerebrovascular accident was the main reason for admissions in the SPD aid category. Outpatient Hospital (Outpatient Diagnostic, Outpatient Surgery, Outpatient Observation, and Outpatient Other) February 2016 is showing utilization trend and monthly cost per enrollee for all categories below budget. End stage renal disease was the most common reason for visit in the SPD and Family aid category. Treatment of cancer with chemotherapeutics was the most common reason for the visit with Expanded Eligible group. Emergency Room (ER) The monthly cost per enrollee for all aid categories was below budget for February Infection of multiple sites in the respiratory tract was the top reason for ER visit in the Family Aid Category. Headache and Urinary tract infection constituted the top reason for Expanded Eligible and SPD aid categories. Hospital Utilization Reports (Attachment B Attachment C Attachment D) Inpatient Admissions Bakersfield Memorial Hospital continues to provide the majority of inpatient services. SJCH is showing the 2 nd highest utilization followed by Kern Medical and Mercy. Obstetrics Services For the past 4 months, there has been 16% increase in number of births at Kern Medical second only to BMH which continues to yield the highest number of births each month. For the month of January, vaginal births were at 80% and cesarean section at 20%, continuing a 4/1 trend that began four months ago.. ER Visits There also has been a steady average of 6% increase of visits for Mercy Hospital visits for the months of October thru January with a decrease in Bakersfield Memorial Hospital. Higher utilization of emergency visits was, in part, due to the seasonality related to flu. 110 / 174

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121 KERN HEALTH SYSTEMS CHIEF EXECUTIVE OFFICER S REPORT For April, 14 th 2016 BOARD OF DIRECTORS MEETING REGULATORY AND COMPLIANCE ACTIVITIES Regulatory and Compliance Monthly Activities Report Attachment A is the monthly update on regulatory and compliance activities impacting KHS. Regulatory Compliance Audit Program (quarterly review) The Department of Health Care Services (DHCS) Medi-Cal Managed Care Division (MMCD) communicates with Medi-Cal managed care contractors such as KHS by means of All Plan and/or Policy Letters. All Plan Letters (APLs) are the means by which MMCD conveys information or interpretation of changes in policy or procedure at the Federal or State levels, and provides instruction to contractors on how to implement these changes. Policy Letters (PLs) provide instruction to contractors about changes in Federal or State law and Regulation that affect the way in which they operate, or deliver services to Medi-Cal beneficiaries. Both APLs/PLs supplement the original guidance as set forth by the contract between KHS and the DHCS. To confirm KHS compliance with all such DHCS guidance, the Compliance Department has instituted a two prong approach. Retrospective reviews (audits) are done to validate compliance with older APLs/PLs and prospective reviews are done to see that new APLs/PLs are instituted according to instruction. Compliance offers oversight and coordination for stakeholders (KHS staff) to see that deadlines and requirements are met. The list of APLs/PLs for 2015 (Repeat findings /Status Update) 2016 (new) and 2011 (older) along with findings and recommendations are included under Attachment B. PROGRAM DEVELOPMENT SUMMARY UPDATE Autism Services The 6-month transition from Kern Regional Center to KFHC is moving along as planned. Each month staff reaches out to prospective members to assess their needs and coordinate with their providers to ensure continuity. Additionally, requirements for regulatory reporting are being met Waiver (MCAL 2020) Kern Medical continues to meet with various County stakeholders to discuss options for the Whole Person Care grant proposal. KHS staff has been attending these discussions as an 121 / 174

122 Kern Health Systems Board of Directors Meeting CEO Report April, 2016 Page 2 of 7 interested party. The release date for the grant application from DHCS is May 16 th, with responses due July 1 st. An additional element of the 1115 waiver requires DHCS to conduct an access assessment of Medi-Cal Managed Care. DHCS is in the early stages of forming an advisory committee to help define the requirements of the review. Health Homes DHCS released a final program concept paper along with applications and readiness assessments for Health Plans. Kern County is not scheduled to implement until January 2018, so we will not begin working with DHCS until So that KHS may be prepared to move forward by January 2018, staff is working internally to develop a grant proposal for the creation of 5-6 pilot health homes. The Grant application will be based on the State s concept paper and guidelines will be released this fall. Palliative Care Benefit DHCS continues to work on refining the draft concept paper that outlines the benefit and eligible population. An updated concept paper is expected to be released in the near future. Coverage for Undocumented Children DHCS will begin moving eligible members from partial-scope Medi-Cal to full-scope Medi-Cal in Mid-May. Draft FAQ documents and Eligibility Notices have been shared by DHCS. Those eligible will initially be moved into Fee-For-Service Medi-Cal and will then be given 60-days to select a MCAL health plan. DHCS will be sending updated counts of eligible members as the transition approaches. There will also be opportunity to enroll new members who are not currently enrolled in partial-scope Medi-Cal. KHS staff are working to educate network providers and county enrollment entities about the new eligibility opportunity. California Children Services (CCS) Re-Design DHCS is moving forward with solidifying the policy decision to pilot a CCS carve-in. They have submitted Trailer Bill Language through the state budget, and may also introduce legislative bills if necessary. Additionally, the State continues to work on defining plan readiness and monitoring criteria as well as holding technical workgroups. These workgroups are discussing items like quality measures, data sharing requirements, care coordination, and eligible conditions. LEGISLATIVE SUMMARY UPDATE Attachment C is the monthly update on proposed new legislation impacting Kern Health Systems. 122 / 174

123 Kern Health Systems Board of Directors Meeting CEO Report April, 2016 Page 3 of 7 KHS APRIL ENROLLMENT: Medi-Cal Enrollment As of April 1, 2016, Medi-Cal enrollment is 160,101, which represents an increase of 1.2% from March enrollment. Seniors and Persons with Disabilities (SPDs) As of April 1, 2016, SPD enrollment is 12,607, which represents an increase of 0.5% from March enrollment. Expanded Eligible Enrollment As of April 1, 2016, Expansion enrollment is 51,600, which represents an increase of 2.9% from March enrollment. Kaiser Permanente (KP) As of April 1, 2016, Kaiser enrollment is 5,680, which represents an increase of 3.5% from March enrollment. Total KHS Medi-Cal Managed Care Enrollment As of April 1, 2016, total Medi-Cal enrollment is 229,988, which represents as increase of 1.6% from March enrollment. Membership as of Month of Eligibility FAMILY SPD EXPANSION KP BABIES Monthly/ Member Months Total ,281 12,551 47,640 5, , ,551 12,206 48,222 5, , ,238 12,545 50,143 5, , ,101 12,607 51,600 5, ,988 *Babies are incorporated in all perspective Aid Code Categories 123 / 174

124 Kern Health Systems Board of Directors Meeting CEO Report April, 2016 Page 4 of 7 UPDATES: ADMINISTRATIVE INITIATIVES Provider Contracting Activity To meet the comprehensive health care needs of our members, staff continuously updates our network with new and re-contracting providers. Contracting activity for last month includes: Finalized agreements: Ascension Center (ABA provider) Dr. Thomas Terro (Orthopedic Surgery) Dr. Young Ko (PCP) Pinnacle Women s Health Group (OB/GYN) BMH Ortho On-Call renewal Health South Amendment Premier Valley Medical Group Added Coumadin Clinic 124 / 174

125 Kern Health Systems Board of Directors Meeting CEO Report April, 2016 Page 5 of 7 Negotiations in Progress: Proximity Urgent Care Children s Hospital of Central California renewal Kern Medical Center contract renewal (July 2016) San Dimas Medical Group OB/GYN Bakersfield Memorial Hospital Burn Unit amendment Dr. Alfred Coppola Orthopedist denied contract offer VIPO rate negotiations for burn garment SJCH Hospital Agreement #2 Transition of Care CCCG Dignity Interventionist Contract finalizing legal review Bakersfield Heart Hospital - pending outpatient rate proposal meet Feb WalMart Pharmacies Kern County pending contract review UCLA contract renegotiation Marketing/Public Relations Update Sponsorships for April, 2016: KHS donated $2,500 to the Kern County Cancer Fund to sponsor the 2016 Campout Against Cancer on April 2 nd in Bakersfield. KHS donated $1,000 to the Bakersfield Foundation to sponsor the 2016 Great American Cleanup Greater Bakersfield Green Expo event on April 23 rd in Bakersfield. KHS is also partnering with Garden Pathways to provide healthy snacks to volunteers cleaning up the 34 th Street neighborhood. KHS donated $3,500 to the American Cancer Society to sponsor 2016 Relay for Life events that will take place in Bakersfield and several outlying Kern County communities (Delano, Wasco/Shafter, Taft, Tehachapi, Mountain Communities - Frazier Park). KHS donated $7,500 to the March of Dimes to sponsor the 2016 March for Babies on April 23 rd in Bakersfield. Alan Avery, Chief Operating Officer, is the Chair for the 2016 March for Babies Walk. In addition to our sponsorship, KHS employees on team My Baby Love have raised almost $18,000 for the March of Dimes to date. KHS donated $2,000 to the Links for Life to sponsor the 2016 Gala Event on April 23 rd in Bakersfield. 125 / 174

126 Kern Health Systems Board of Directors Meeting CEO Report April, 2016 Page 6 of 7 Community Events for April, 2016: 4/7 Greenfield Health and Safety Greenfield Family Resource Center 4/9 Outreach Clinic Health Mill Creek Park 4/9 American Cancer Society Delano Relay for Life event in Delano 4/9 Community Action Partnership of Kern (CAPK) Head Start Resource Fair in Delano 4/10 Grimmway Farm Annual Company Picnic Health and Resource Kern County Fair 4/13 Bakersfield College Health & Wellness Bakersfield campus 4/16 Taft Health Buena Vista High School in Taft 4/21 Homeless Consumer & Service Provider St. Vincent de Paul in Bakersfield 4/23 Estrella TV Celebrando su Salud Health Mercado Latino 4/26 Shafter High School Parent & Family Center Grand Opening in Shafter 4/30 American Cancer Society Wasco/Shafter Relay for Life event in Wasco Community Based Organization Grant Program The Affordable Care Act expanded the enrollment gateway and Kern Family Health Care (KFHC) is meeting this challenge by broadening our community visibility. Our strategy is to be a good corporate citizen by supporting community outreach programs that are dedicated to improving access to health care coverage, health promotion and chronic disease intervention. We developed a Community Grant Program to financially aid and encourage innovative efforts to bring beneficial services to our community. Effective, April 1, 2016, eligible community organizations can begin applying to receive grant funding from the KFHC Community Grant Program (see the KFHC Community Grant Program Application under Attachment D). In total, 25 community based organizations have been pre-qualified for participation. Examples of the type of organizations and their causes for qualifying under the grant program include: Asthma Camp organized by the Delano Family Resource Center Assist Foster Youth with health access issues at the Foster Youth Resource Center (Dream Center) organized by the Kern County Network for Children 126 / 174

127 Kern Health Systems Board of Directors Meeting CEO Report April, 2016 Page 7 of 7 Provide Lead Testing during the health fair organized by the Lamont Family Resource Center Community Garden project of the South Chester Collaborative in Bakersfield Assist with outreach staffing needs at the Frazier Park Family Resource Center Completed applications must be submitted during the application period, and received no later than the application deadline, May 2, The Grant Committee will review eligible applications, conduct follow-up interviews and make recommendations to the CEO for grant awards. Awards will be between $500 and $2000. The CBO Grant Program was budgeted for a total of $50,000. Dashboard Presentation The Dashboard Reports showing KHS critical performance measurements for Administrative Services are located under Attachment E. The 1 st Qtr Projects Report summarizing projects tracked quarterly throughout the year is found under Attachment F. The March, 2016 Staffing Report showing actual positions vs. budgeted positions by Department is located under Attachment G. 127 / 174

128 Attachment A Board of Directors Meeting April 14, 2016 STATE Department of Health Care Services (DHCS) All Plan Letters (APL)/Policy Letters (PL) The DHCS issued one (1) APL and zero (0) PLs during the month of March to provide guidance for Managed Care Plans (MCP). All Plan Letter (APL) APL (revised) The Department issued a revision to APL The purpose of the original APL was to provide clarification regarding family planning services related to contraceptive supplies for MCPs and their delegates. Effective May 1, 2016, MCPs must pay for up to thirteen cycles a 12 month supply of o r a l contraceptives, up to twelve patches in a 90 day period, and up to four vaginal rings in a 90 day period if such quantity is dispensed in an onsite clinic and billed by a qualified family planning provider. This also includes out-of-plan providers. Policy Letters (PL) No PLs were issued during the month of March / 174

129 Department of Managed Health Care (DMHC) Licensing Roundtable Meeting On a quarterly basis, the Department hosts a Licensing Roundtable Meeting with the Plans. The topics vary depending on the current issues of the day. During this meeting, California Senate Bill (SB) 137 [Provider Directories], California Assembly Bill (AB) x2 15 [Aid-in-Dying Drugs], and the DMHC recommended shift to an audit methodology for Annual Timely Access Reporting were discussed. Provider Directories Department staff provided an overview of key questions received by the Plans pertaining to the SB 137 Checklist for Full Service Health Care Service Plans. KHS Director of Compliance is currently working to draft the Plan s written response to the SB 137 Checklist, which is due to the Department no later than April 22, The DMHC may work on a frequently asked questions document in order to to formalize guidance and provide additional clarification. Some of the key responses albeit technical in nature are included below: DMHC comment: Suppression of provider types: DMHC had previously indicated they would not want certain providers that do not interface with consumers or that consumers do not get to select such as hospitalists, certain ancillary providers, etc. to be suppressed from provider directories. Plan comment: The Plans asked DMHC to reconsider their position on this matter as consumer facing provider directories are not the same as network adequacy filings. To include hospitalists, certain ancillary providers, etc. could confuse consumers regarding which providers they actually have access to. To note that referrals or prior authorizations are needed would complicate Plan Provider Directories. DMHC comment: Contract changes: (j) is the only section that requires specific provisions in the Plan-provider contracts. Other sections can be executed through other options, such as changes to the Plan s provider manual or to Plan policies and incorporated by reference. A notice amendment may be permissible. Plans can submit an attestation that contracts have been executed vs. actual signature pages. DMHC: The Department previously stated that they may allow Plans to provide printed provider directories only as requested and be for limited geographies / 174

130 Plan comment: Plans have concerns that they may not be able to utilize such flexibility as DHCS guidance requires Health Care Option to maintain full printed directories that need to be updated twice a year for issuance to new plan enrollees. DMHC comment: Reports of Provider Directory inaccuracies cannot be exempted as grievances; however, the Department acknowledges that not all such reports are grievances. Plan comment: Plans asked that the Department reconsider the inclusion of Provider Directory grievances as access grievances under Senate Bill 964. Aid-in-Dying Drugs DMHC indicated that Plans should not communicate availability or exclusion of this benefit in EOCs. The law is clear in not mandating coverage by Plans. The DMHC Help Center will not refer inquiries related to end of life to Independent Medical Review. DMHC may consider additional guidance or an FAQ Annual Timely Access Reporting DMHC stated they intend to require a mandatory move to system audits for Measurement Year It is the Department s position that an audit of what actually occurred will provide reliable data. DMHC will issue a survey to Plans next month to gather information to better understand provider operations, potential vendors, and instances where an audit methodology does not work such as solo mental health providers, FQHCs, etc. Plans will be given 60 days to complete the survey. Medical Loss Ratio Update: KHS received late notice from the DHCS that the originally schedule MLR exam noted below for the time period July 1, 2014 through June 30, 2015 was cancelled. KHS will be part of next year s MLR exam schedule with the review period being July 2015 through June KHS received notice that both the Department of Managed Health Care and Department of Health Care Services intend to conduct a medical loss ratio and administrative expense evaluation of KHS for the fiscal year ending June 30, The purpose of this evaluation is to assess the Plan s financial condition and the accuracy of previously reported financial information / 174

131 Routine Examination The DMHC has notified KHS that it intends to perform a Routine Examination of the Plan as required by Section 1382 (a) of the Knox-Keene Health Care Services Plan Act. This examination will be of the Plan s fiscal and administrative affairs including an examination of the financial report for the quarter ending March 31, The examination fieldwork will begin on June 13, 2016; however, the Department has requested that the Plan provide financial records and other documentation needed for the examination. BHT (ABA Services) carve-in September 15, 2014 Update: The Plan is currently in the process of responding to the Department s additional inquiry. Previously, a revised Exhibit I-3 was submitted to the DMHC after the February Board meeting, which incorporated all newly contracted Board approved ABA providers. The DHCS has carved in Behavioral Health Therapy (BHT) services to Medi-Cal beneficiaries 0 to 21 years of age diagnosed with Autism Spectrum Disorder (ASD). Interim guidance was provided to the Plans via DHCS APL Additionally, the DMHC has drafted a checklist that the Plans must adhere to in order to measure health plan compliance with the new requirement. Plans are required to file an amendment to their licenses, issue members notices announcing the new benefit, update evidence of coverage pamphlets, and most importantly, develop a network of providers qualified to deliver the necessary services. The Plans will be required to substantiate that their networks are in compliance with Knox Keene Timely Access standards. All Plan & Policy Letter Reviews COMPLIANCE The Q All Plan & Policy Letter Reviews matrix is included with this month s compliance report. The Compliance Department performs prospective reviews of new DHCS All Plan and Policy Letters to notify the departments of potential necessary changes to policy and procedures, which ultimately impacts operations. Retrospective reviews are performed to ascertain if the changes made to the Plans operations were adequate to comply with DHCS instruction / 174

132 DHCS Medical Audit 2015 Update: Corrective Action Plans for the audit findings was submitted to the Department for their review and approval after which a copy of the final report will be shared with the Board. The onsite portion of the audit was completed August 12 th. The Medical Audit focused on the Plan s Utilization Management, Case Management & Coordination of Care, Access and Availability of Care, Member s Rights, Quality Management, Administrative and Organizational Capacity, and State Supported Services. The audit included a one (1) year look back at policies and procedures in effect during the audit period with a review of audit samples taken from requested data. March reporting to government agencies Report Name/Item BHT Monthly APL Evidence of Coverage KHS response to DHCS Medical Monitoring Unit Status On-Time On-Time / 174

133 APL Number Description Impacted Department(s) Impacted Functions KHS Board of Directors Meeting, April 14, 2016 MMCD 2015 ALL PLAN LETTERS ATTACHMENT B Plan Compliance Review Date Plan Compliance Completion Date Initial Status/Comment Initial Compliance Status Current Status/Comment Current Compliance Review Status APL pdf Continuity of Care for New Enrollees Transitions to Managed Care After Requesting a Medical Exemption MS, MIS, UM SharePoint; Utilization Review; MHC; Reporting 2/29/2016 4/29/2016 In Process APL pdf Multipurpose Senior Services Program Complaint, Grievance, Appeal, and State Hearing Responsibilities in Coordinated Care initiative Counties APL pdf Podiatric and Chiropractic Services at Federally Qualified Health Centers and Rural Health Clinics Q2 APL pdf Medi-Cal Managed Care Health Plan Requirements for Nursing Facility Services in Coordinated Care Initiative Counties for Beneficiaries Not Enrolled in Cal MediConnect APL pdf Data Request Requirements for Child Health Disability Prevention Report Contained in Policy Letter HE, MIS Data report submission requirements 3/4/2016 3/4/2016 Compliance requirement met N/A N/A APL pdf Reporting Requirements Related To Provider Preventable Conditions Q2 APL pdf Dispute Resolution Process for Mental Health Services Q2 APL pdf Professional Fees For Office Visits Associated with Alcohol and Substance Use Disorder Treatment Services Q2 APL pdf Proper Use and Billing for Makena Claims, PR, UM Claims, ARGUS, TAR process 3/4/2016 4/29/2016 In Process APL pdf Affordable Care Act Section 1202 Increased Payments for Medi-Cal Primary Care Services - Revised Guidance and Contractual Requirements Q3 APL pdf Designated Public Hospitals: Billing for Beneficiaries with California Children's Services Eligible Conditions and/or Medi-Cal Managed Care Q2 APL pdf Dental Services - Intravenous Sedation and General Anesthesia Coverage Q3 APL pdf APL pdf APL pdf Requirements For Medi-Cal Managed Care Health Plans and Qualified Agency Contract Administrative and Financial Sanctions Physical Health Care Covered Services Provided for Members Who are Admitted To Inpatient Psychiatric Facilities Q2 APL pdf Hepatitis C Virus Treatment Policy Update Q2 APL pdf Provision of Certified Nurse Midwife and Alternative Birth Center Facility Services Q3 APL pdf APL pdf Criteria For Coverage of Wheelchairs and Applicable Seating and Positioning Components Continuity of Care for Medi-Cal Beneficiaries Who Transition into Medi-Cal Managed Care Q2 Q2 APL pdf Abortion Services Q4 APL pdf General Acute Care Inpatient Services: Claiming For Beneficiaries Covered by Medi-Cal Managed Care and Medi-Cal Diagnosis Related Group Fee-For-Service Q2 APL pdf APL pdf Memorandum of Understanding Requirements For Medi-Cal Managed Care Health Plan and Regional Centers Facility Site Review Tools For Ancillary Services And Community Based Adult Services Providers Q4 Q2 133 / 174

134 APL Number Description Impacted Department(s) Impacted Functions KHS Board of Directors Meeting, April 14, 2016 Plan Compliance Review Date Plan Compliance Completion Date Initial Status/Comment Initial Compliance Status Current Status/Comment Current Compliance Review Status APL15-024R2.pdf Quality And Performance Improvement Requirements Q2 APL pdf Responsibilities For Behavioral Health Treatment Coverage For Children Diagnoses With Autism Spectrum Disorder Q4 APL pdf Actions Required Following Notice of A Credible Allegation of Fraud Q4 KEY Compliance - YES In Process Compliance - NO N/A./Informational 134 / 174

135 MMCD ALL PLAN LETTERS APL Number Description Impacted Department(s) ATTACHMENT B Plan Compliance Impacted Functions Review Date Status/Comment Compliance Status APL (PDF) MEDI-CAL PROVIDER AND SUBCONTRACT SUSPENSIONS, TERMINATIONS, AND DECERTIFICATIONS PR/MS/Kaiser Provider terminations, suspensions, and decertifications; 1/25/2016 impacts PR and MS for member notices in such cases New policy created for Provider Terminations. Pending stakeholder policy review and execution. APL (PDF) APL (PDF) MEDI-CAL MANAGED CARE HEALTH PLAN MEDS/834 CUTOFF AND PROCESSING SCHEDULE FAMILY PLANNING SERVICES POLICY FOR CONTRACEPTIVE SUPPLIES IT/MS/Kaiser UM/Claims/Complian ce/kaiser Eligibility and MED file 1/18/2016 processes Claims and Pharmacy 2/9/2016; 4/5/2016 APL (PDF) MEDI-CAL MANAGED CARE HEALTH PLANS CARVED-OUT DRUGS Pharmacy KFHC Formulary 2/19/2016 APL (PDF) REQUIREMENTS FOR USE OF NON-MONETARY MEMBER INCENTIVES FOR INCENTIVE PROGRAMS, FOCUS GROUPS, AND MEMBER SURVEYS Health Services, Member Services, Marketing, Compliance Non-Monetary member incentives approval process; Policy I 3/14/2016 Informational- no material change Policy 3.21-P revised to reflect policy changes; pending policy review execution Discussed with Pharmacy Director. No changes to current processes or policies are needed. Meeting to review new forms and policy/process changes. Policy was revised with forms attached to the policy. KEY Compliance - YES Compliance - NO Outcome Pending N/A - informational document 135 / 174

136 APL Number Description Impacted Department(s) Impacted Functions KHS Board of Directors Meeting, April 14, 2016 MMCD 2011 ALL PLAN LETTERS ATTACHMENT B Plan Compliance Review Date Plan Compliance Completion Date Initial Status/Comment Initial Compliance Status Current Status/Comment Current Compliance Review Status APL pdf Quality and Performance Improvement Program Requirements for 2011 APL pdf APL pdf APL pdf APL pdf APL pdf APL pdf APL pdf AID Codes 4H and 4L: Identifying Foster Care Children in The California Work Opportunity and Responsibility to Kids (CalWorks) or 1931(b) Programs Disclosure of Select Provider Contracting Program Rates AID Code 4T: Aid Code To Identify Children in the New Federal Kin-Gap Program Competency And Sensitivity Training Required In Serving The Needs of Seniors and Persons with Disabilities Reporting Responsibilities Regarding Third-Party Tort Liability Transition to Updated HIPAA Transactions For Enrollment and Premium Payments Rate Setting: Increased Percentage of Countywide Rates Q4 Q2 APL pdf APL pdf Rates For Emergency Based Inpatient Services Provided by Out-Of- Network Acute Care Hospitals Rates for Post Stabilization Inpatient Services Provided By Out-Of- Network Acute Care Hospitals APL pdf APL pdf APL pdf Readability and Suitability of Written Health Education Materials Extended Continuity of Care For Seniors And Persons with Disabilities Medi-Cal Managed Care Plan Ongoing Provider File Submission Requirements Q2 APL pdf Quality and Performance Improvement Program Requirements for 2012 APL pdf Six New Derivative Foster Care Aid Codes to Identify Non-Minor Dependents in the California Work Opportunity Responsibility to Kids, Foster Care, Kinship Guardianship Assistance Payment Program and Adoption Assistance Program APL11-023x.pdf Aid Code OW: Transitional Full Scope Medi-Cal Coverage To Breast and Cervical Cancer Treatment Program Beneficiaries Terminated From Aid Code OP APL pdf Managed Care Plan MEDS/FAME/ Cutoff and Processing Schedule KEY Compliance - YES In Process Compliance - NO N/A/Informational 136 / 174

137 ATTACHMENT C Legislative Summary April 2016 The legislative session is in full-swing with committee hearings taking place regularly. Many bills are beginning to take shape, allowing our trade associations to reach an official position. As bills progress, staff will continue to provide feedback as needed. Below are the bills being tracked for this session: Title Description Status AB 73 (Waldron) This bill would provide that if medically necessary antiretroviral drugs used in the treatment of HIV/AIDS is prescribed by a Medi-Cal beneficiary s treating provider for that purpose, and coverage for that prescribed drug is denied by a Medi-Cal managed care plan in which the beneficiary is enrolled, that denial shall be reviewed. If the treating provider demonstrates, consistent with federal law, that in his or her reasonable, professional judgment, the drug is medically necessary and consistent with the federal Food and Drug Administration s labeling and use rules and regulations, as specified, the beneficiary would be entitled to an automatic urgent appeal, as defined AB73 LHPC Oppose 2/4/ Referred to Com. on HEALTH AB 796 (Nazarian) Extends the current sunset for coverage of PDD or autism until 2022 and requires the Board of Psychology to convene a committee to develop a list of evidence-based treatment modalities for PDD or autism AB796 2/4/ Referred to Coms. on HEALTH and HUMAN S. AB 1568 (Bonta) SB 815 (Hernandez) This bill would require the State Department of Health Care Services to implement a waiver or demonstration project authorized under a specified federal waiver that, among other things, includes a delivery system transformation and alignment incentive program for designated public hospital systems and district municipal hospitals. The bill would require the department to consult with interested stakeholders and the Legislature in implementing this waiver or demonstration project AB1568 3/30/ Set for hearing April / 174

138 AB 1668 (Calderon) AB 1696 (Holden) Investigational drugs, biological products, and devices. Permits manufacturers of investigational drugs, biological products, or devices to make products available to eligible patients with serious or immediately life-threatening diseases or conditions, and authorizes, but does not require, plans to provide coverage AB1668 This bill would provide that tobacco cessation services are covered benefits, subject to utilization controls, under the Medi-Cal program and would require those services to include all intervention recommendations, as periodically updated, assigned a grade A or B by the United States Preventive Services Task Force, and, at a minimum, 4 quit attempts per year. The bill would also require, only to the extent consistent with the recommendations of the United States Preventive Services Task Force, tobacco cessation services to include at least 4 counseling sessions per quit attempt and a 12-week treatment regimen of any medication approved by the federal Food and Drug Administration for tobacco cessation. 3/29/ From committee: Do pass and re-refer to Com. on APPR LHPC/CAHP Oppose 3/29/ Re-referred to Com. on APPR AB 1715 (Holden) AB 1739 (Waldron) 160AB1696 This bill would establish the Behavior Analyst Act. The bill would require a person to apply for and obtain a license from the board prior to engaging in the practice of behavior analysis, as defined, either as a behavior analyst or an assistant behavior analyst. The bill would require these applicants to, among other things, meet certain educational and training requirements, and submit fingerprints for both a state and federal criminal background check. The bill would require an assistant behavior analyst applicant to provide proof to the board of ongoing supervision by a licensed behavior analyst or a licensed psychologist who is qualified to practice behavior analysis, as specified AB1715 This bill would require the department to treat serologic-specific IgE allergy tests and percutaneous skin allergy tests as equivalent in their sensitivity and accuracy for confirming the existence of an allergy in a patient, and to treat those tests as medically necessary for those individuals with a medical history consistent with specified conditions. The bill would require the department to update its provider bulletins, as necessary, to reference the most current professional literature and guidance related to allergy testing AB1739 CAHP Support if Amended 4/5/ Action From B.&P.: Do pass as amended. To APPR 3/17/ Re-referred to Com. on HEALTH. 138 / 174

139 AB 1763 (Gipson) Requires health plans, on or after January 1, 2018, to provide coverage for colorectal cancer screening examinations and laboratory tests, including additional examinations and laboratory tests recommended by the treating physician if the individual is at high risk for colorectal cancer without cost sharing for individuals age 50 or older 160AB1763 2/18/ Referred to Com. on HEALTH AB 1795 (Atkins) AB 1808 (Wood) AB 1831 (Low) This bill would provide that the treatment services be for the duration of the period of treatment for an individual made eligible for treatment due to a diagnosis of breast cancer or cervical cancer, or who is diagnosed with a reoccurrence of breast cancer or cervical cancer, as long as the individual continues to meet all other eligibility requirements. The bill would require the department to provide breast cancer screening and diagnostic services to individuals of any age who are symptomatic, as defined, and to individuals who are 40 years of age or older, who meet the other eligibility requirements AB1795 Existing law authorizes a minor who is 12 years of age or older to consent to mental health treatment or counseling services on an outpatient basis, or to residential shelter services, under certain circumstances, where those services are provided by any one of specified professionals, including a marriage and family therapist, a marriage and family therapist intern, a professional clinical counselor, and a clinical counselor intern. This bill would additionally authorize a marriage and family therapist trainee and a clinical counselor trainee, while working under the supervision of certain licensed professionals, to provide those services AB1808 This bill would require a health care service plan contract or health insurance policy issued, amended, or renewed on or after January 1, 2017, that provides coverage for prescription drugs benefits to allow for early refills of covered topical ophthalmic products at 70% of the predicted days of use AB1831 3/29/ Re-referred to Com. on APPR. 4/5/ Read second time. Ordered to third reading 2/25/ Referred to Com. on HEALTH. 139 / 174

140 AB 1863 (Wood) This bill would include a marriage and family therapist within those health care professionals covered under Medi-Cal for FQHCs and RHCs. The bill would require an FQHC or RHC that currently includes the cost of services of a marriage and family therapist for the purposes of establishing its FQHC or RHC rate to apply to the department for an adjustment to its per-visit rate, and, after the rate adjustment has been approved by the department, would require the FQHC or RHC to bill these services as a separate visit, as specified AB1863 3/29/ Action From HEALTH: Do pass. To APPR. AB 1954 (Burke) AB 2004 (Bloom) AB 2050 (Steinorth) AB 2077 (Burke) This bill would require every health care service plan contract or health insurance policy issued, amended, renewed, or delivered on or after January 1, 2017, to provide coverage for reproductive and sexual health care services, as defined, through out-of-network providers under specified circumstances. The bill would prohibit those plan contracts or insurance policies from requiring an enrollee or insured to receive a referral in order to receive reproductive or sexual health care services AB1954 This bill would require a health care service plan contract or a health insurance policy issued, amended, or renewed on or after January 1, 2017, to include coverage for hearing aids for an enrollee or insured under 18 years of age, as specified AB2004 This bill would require a health care service plan contract or health insurance policy issued, amended, or renewed on or after January 1, 2017, that provides coverage for prescription drug benefits to implement a medication synchronization policy for the dispensing of prescription drugs so that prescriptions that are refilled at the same frequency may be filled concurrently AB2050 This bill would amend procedures that ensure eligible recipients of insurance affordability programs move between the Medi-Cal program and the Exchange without any breaks in coverage AB2077 2/25/ Referred to Com. on HEALTH 3/10/ Re-referred to Com. on HEALTH 3/28/ Re-referred to Com. on HEALTH 4/5/ Action From HEALTH: Do pass. To APPR 140 / 174

141 AB 2084 (Wood) AB 2207 (Wood) AB 2209 (Bonilla) AB 2394 (Garcia) This bill would provide that comprehensive medication management (CMM) services, as defined, are a covered benefit under the Medi-Cal program, and would require those services to include, among other things, the development and implementation of a written medication treatment plan that is designed to resolve documented medication therapy problems and to prevent future medication therapy problems. The bill would require the department to evaluate the effectiveness of CMM on quality of care, patient outcomes, and total program costs, as specified AB2084 The bill would require a Medi-Cal managed care health plan to provide dental health screenings for eligible beneficiaries and refer them to appropriate Medi-Cal dental providers AB2207 This bill would prohibit, on and after January 1, 2017, a health care service plan or health insurer that provides hospital, medical, or surgical expenses from implementing clinical care pathways, as defined, for use by providers in order to manage an enrollee's or insured's care AB2209 This bill would add to the schedule of benefits nonmedical transportation, as defined, subject to utilization controls and permissible time and distance standards, for a beneficiary to obtain covered Medi-Cal services. The bill would specify that these provisions shall not be interpreted to add a new benefit to the Medi-Cal program. The bill would require the department to adopt regulations by July 1, AB2394 LHPC Concern 4/5/ Action From HEALTH: Do pass. To APPR 3/3/ Referred to Com. on HEALTH. 3/3/ Referred to Com. on HEALTH 3/29/ Re-referred to Com. on HEALTH 141 / 174

142 AB 2400 (Nazarian) AB 2507 (Gordon) The bill would specify that for nonformulary drugs, an external exception request may be filed in lieu of filing a grievance with the health care service plan or health insurer following an adverse benefit determination. With respect to formulary drugs, the bill would require the grievance system established by the plan or an insurer's internal grievance process to require a plan or insurer that provides coverage for outpatient prescription drugs to resolve grievances or complaints that involve the disapproval of a request for a formulary drug within 72 hours for nonurgent requests, and within 24 hours if exigent circumstances exist AB2400 This bill would add video communications, telephone communications, communications, and synchronous text or chat conferencing to the definition of telehealth. The bill would also provide that the required prior consent for telehealth services may be digital as well as oral or written AB2507 CAHP Oppose 4/6/ Read second time and amended. Re-referred to APPR 3/8/ Referred to Com. on HEALTH AB 2670 (Hernandez) SBX2 2 (Hernandez) Would require the State Department of Health Care Services to annually administer the Consumer Assessment of Health Care Providers and Systems (CAHPS) Health Plan surveys, which are developed by the federal Agency for Healthcare Research and Quality, for all Medi-Cal managed care plan populations, and would require the CAHPS survey to be administered for all Medi-Cal managed care plan models, including county organized health systems and geographic managed care AB2670 This bill, on July 1, 2016, and until July 1, 2019, would establish a new managed care organization provider tax, to be administered by the State Department of Health Care Services. The tax would be assessed by the department on licensed health care service plans, managed care plans contracted with the department to provide Medi-Cal services, and alternate health care service plans (AHCSP), as defined, except as excluded by the bill AB20 3/10/ Referred to Com. on HEALTH. 3/1/ Signed by the Governor 142 / 174

143 SB 818 (Nielsen) SB 960 (Hernandez) SB 997 (Lara) SB 999 (Pavley) This bill would appropriate certain sums to the State Department of Developmental Services to provide a 10% rate increase for certain developmental service providers and regional center operating budgets, and would appropriate certain sums to the State Department of Health Care Services to restore rates paid to Medi-Cal providers to those levels in effect prior to the implementation of the provider rate reductions. The bill would make these rate increases retroactive to July 1, SB818 The bill would provide that, to the extent that federal financial participation is available, face-to-face contact between a health care provider and a patient shall not be required under the Medi-Cal program for "reproductive health care provided by store and forward." The bill would define that term to mean an asynchronous transmission of medical information to be reviewed at a later time by a physician, nurse practitioner, certified nurse midwife, licensed midwife, physician assistant, or registered nurse at a distant site, where the provider at the distant site reviews the dental information without the patient being present in real time, as defined and as specified SB960 This bill, until January 1, 2019, authorizes the enrollment of eligible children who, as of May 1, 2016, were enrolled in comprehensive, lowcost coverage provided by a health care service plan with a total enrollment in excess of five million lives, in full-scope Medi-Cal with the same health care service plan, notwithstanding any other law or existing Medi-Cal managed care contract. The bill would prohibit the child from being enrolled in fee-for-service Medi-Cal or another Medi-Cal managed care plan unless a responsible adult seeks enrollment in fee-for-service Medi-Cal or another Medi-Cal managed care plan after the child obtains full-scope Medi-Cal benefits. The bill would require the department to provide notice to the family before the child's transition to full-scope Medi-Cal, as specified SB997 This bill would authorize a pharmacist to dispense FDA-approved, selfadministered hormonal contraceptives as provided on the prescription, including a prescription for a 12-month supply, or, when dispensing pursuant to protocols developed by the Board of Pharmacy, up to a 12- month supply at one time SB999 1/28/ Referred to Coms. on HEALTH and HUMAN S. 4/5/ Set for hearing April 20 CAHP Oppose 4/5/ Set for hearing April 13 CAHP Oppose 4/4/ re-refer to Committee on Health. 143 / 174

144 SB 1034 (Mitchell) This bill would modify requirements to be a qualified autism service professional to include providing behavioral health treatment, such as clinical management and case supervision. The bill would require that a treatment plan be reviewed no more than once every 6 months, unless a shorter period is recommended by the qualified autism service provider. The bill would extend the operation of these provisions indefinitely. The bill would make conforming changes SB1034 2/25/ Referred to Com. on HEALTH SB 1113 (Beall) This bill would require a health care service plan to reimburse services provided by a mental health provider operating within the scope of its practice for services provided on a school campus SB1113 4/6/ Action From ED.: Do pass. To HEALTH SB 1135 (Monning) SB 1159 (Hernandez) This bill would require a health care plan after January 1, 2017 to provide information to enrollees and insureds regarding the standards for timely access to health care services and other specified health care access information, including information related to receipt of interpreter services in a timely manner, no less than annually, and would make these provisions applicable to Medi-Cal managed care plans. The bill would require a health care service plan, including a Medi-Cal managed care plan, or health insurer to provide an enrollee or an insured with information regarding consumer assistance provided by the licensing agency, as specified. The bill would also require a health care service plan or a health insurer to provide a contracting health care provider with specified information relating to the provision of referrals or health care services in a timely manner SB1135 Would require certain health care entities, including health care service plans, to provide specified information to the Secretary of California Health and Human Services. The bill would authorize the secretary to report a health care entity that fails to comply with that requirement to the health care entity s regulating agency and would authorize the regulating agency to enforce that requirement using its existing enforcement procedures SB1159 CAHP Oppose 3/30/ Read second time and amended. Re-referred to Com. on HEALTH. 3/29/ Set for hearing April / 174

145 SB 1361 (Nielsen) SB 1401 (McGuire) This bill, to the extent any necessary federal approvals are obtained, would restore coverage of one pair of eyeglasses provided every 2 years to an individual 21 years of age or older who is unable to meet or exceed the driver's license vision standards established by the Department of Motor Vehicles SB1361 Would require the State Department of Public Health, on or before January 1, 2017, to develop at least 3 regional pilot projects in counties located in designated areas of the state. The pilot projects would be targeted to increase access to in-home, private duty nursing care for children receiving Medi-Cal benefits who are eligible for in-home, shift nursing care services. The bill would require, for a period of at least 2 years, an increased reimbursement rate for participating licensed home health agencies that are currently providing private duty nursing. 03/17/16 Set for hearing April /31/16 Set for hearing April 13. SB 1471 (Hernandez) SB1401 Requires plans to include disclosure of the process used to authorize or deny behavioral health treatment SB1471 3/10/ Referred to Com. on HEALTH. 145 / 174

146 Attachment D Kern Family Health Care Implements New Community Grant Program! Mission: Kern Family Health Care (KFHC) is dedicated to improving the health status of our members through an integrated managed health care delivery system. We are committed to making quality health care accessible in our community. In recognition of the essential role that community organizations have in our health care delivery system, we have created a Community Grant Program to financially aid and encourage innovative efforts to bring beneficial services to our community. EFFECTIVE, April 1, 2016, eligible community organizations can begin applying to receive grant funding from the KFHC Community Grant Program. Eligibility and Criteria: Community organizations* (not provider based) that serve Medi-Cal beneficiaries and low income populations are eligible to apply for funding. Eligible applicants must prepare and submit a completed Community Grant Program application that is responsive to areas of significant need within KFHC s core mission. Application Process: A public notice announcing the application period along with the grant application will be made available at and mailed by request when made in writing. Completed applications must be submitted during the application period, and received no later than the application deadline, May 2, Applications should be ed to: KFHCgrantprogram@khs-net.com Award Process and Evaluation: The Grant Committee will review eligible applications, conduct follow-up interviews and make recommendations to the CEO for grant awards. Awarded applicants will be required to submit a year-end grant money utilization report. Questions? Contact: KFHCgrantprogram@khs-net.com *Organizations that serve the community without discrimination on the basis of age, disability, religion, veteran status, race, creed, sexual orientation or sexual preferences, gender, gender identity, or national origin. 146 / 174

147 Kern Family Health Care Community Grant Program Application Thank you for your interest in the Kern Family Health Care Community Grant Program. Our grant funding supports ongoing community programs with proven and measurable outcomes that are aligned with the Kern Family Health Care (KFHC) mission statement. Please complete the application below and submit to: Mail: Kern Family Health Care Community Grant Program 9700 Stockdale Highway Bakersfield, CA Organization/Agency: Year founded: Address: Federal Employer ID Number or Social Security Number (SSN): Phone: Executive Director (if applicable): Contact Person and Title: Service Area: Is your agency public or non-profit? Yes No other (explain below) Name of your grant project: Total project budget: Amount requesting from KFHC: *Grant allocation amounts range from $500-$2,000 Signature: For additional information or questions, please contact the KHS Marketing & Public Affairs Department at (661) for Stephanie Camarena or (661) for Maritza Jimenez. The Kern Family Health Care Community Grant Committee will screen all grant requests. Requests failing to meet the requirements set forth in this application will not be considered. If approved, the grant will be awarded to the grantee within 30 days following approval / 174

148 Kern Family Health Care Community Grant Program Application I. ORGANIZATION BACKGROUND Briefly include key descriptions of your organization. II. PROJECT OVERVIEW & GOALS In four sentences or less, provide a summary of your project. Scope of Work (see scope of work form on pg. 5, please fill out & include with application). To what extent does this project meet Kern Family Health Care goals: Improving quality of life, improving population health, improving access to health care coverage, chronic disease education (Diabetes, Asthma, Nutrition, Prenatal Care and Healthy Living), being proactive in preventive care? Define specifically how. What health care or other beneficial need(s) to the Kern County community does your organization intend to meet through your proposed program or initiative? List any collaborating organizations or project subcontractors if any, their role in this project and how their participation will enhance your program. How many Kern County residents will directly or indirectly, benefit from your proposed program or initiative? (Including how this will benefit KFHC members) / 174

149 III. TARGET POPULATION Describe your project s target population: Race/Ethnicity: Asian% Black/African American% White% Latino/Hispanic% Pacific Islander% Other% Gender: Male% Female% Age Group: Children% Teens% Adults% Seniors% Note other project population characteristics, such as disabilities, high prevalence of a particular health condition(s), level of uninsured, etc. IV. EVALUATION & STRATEGIC BENEFIT How will your organization evaluate and report the effectiveness and outcomes of your proposed program or initiative? Specifically outline the kind of public recognition that Kern Family Health Care will receive if your project is funded. Please be very specific and include promotional strategy via social media, website, media interviews, press releases, etc. V. BUDGET Budget Justification - (see Budget and Budget Justification form on pg. 6, please fill out & include with application) / 174

150 SCOPE OF WORK Organization/Agency: Project Title: Goal: Objective Activity Person Responsible Timeline Projected Outcome / 174

151 BUDGET AND BUDGET JUSTIFICATION FORM Organization/Agency: Project Title: Activities Expense Amount Community Outreach Efforts: Supplies/Materials: Equipment: Technology: Personnel: Operations: Food/Beverages: Other: Total Grant Request = / 174

152 Kern Family Health Care Community Grant Program Application Guidance for Grant Seekers Background Kern Family Health Care s Community Grant Committee is committed to assisting community partners and supporting the accomplishment of their program goals. We encourage you to utilize this guidance sheet as a tool to help organize and report program successes. Definitions Organization Background Briefly describe key descriptions of your organization. It should include information regarding history, mission, goals, programs, etc. that will help KFHC better understand your organizations goals and beneficiaries. Project Goal (Scope of Work) Is a brief statement about what the program intends to achieve and by when. Objectives (Scope of Work) - Must be quantifiable and minimally include who is doing how much of what and by when. Activities (Scope of Work) These are community outreach efforts, events, classes, etc. that produces outputs and over time contribute to outcomes. Outcome (Scope of Work) This is a qualitative result. This is the overall change or projected change derived from accomplished objectives and activities. Ask yourself the following questions to test the quality of your Scope of Work plan: Are there outputs and outcomes for each activity? Do the outcomes contribute to the objectives? Are the outcomes and objectives achievable by this program? Is it clear how progress, outcomes and objectives will be demonstrated? Questions? Contact: KFHCgrantprogram@khs-net.com / 174

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163 ATTACHMENT F Kern Health Systems 2016 Project Summary Q1 Open Projects Project Title Start Date End Date Percent Complete Comments 2 Dimensional PCP Profiling 1/2016 8/ % 274 Provider Data Improvement 1/2016 7/ % Project added to schedule to comply with new state requirement Alternate Product Line Analysis 1/2016 9/ % Behavioral Health Therapy 1/2015 8/ % 2015 project carried over to 2016 Configuration Team Work Items 12/2015 8/ % Contracts Management Software 7/ /2016 0% Corporate Data Reporting Tool 7/ /2016 0% Disaster Recovery and Business 7/ /2016 0% Continuity Eligibility to CAP Reconciliation 2/ / % Health Homes Implementation 1/2016 6/ % InfoSec Review and Remediation 7/ /2016 0% Maintaining Historical DHCS Capitation 7/ /2016 0% Rates Measuring Member Satisfaction 1/2016 6/ % Member Services Procurement 02/2015 4/ % 2015 project carried over to 2016 Pharmacy WF Integration 10/2015 4/ % 2016 project initiated in 2015 Provider/Member Portal Procurement 10/2015 5/ % 2016 project initiated in 2015 Provider/Member Portal 4/ /2016 0% Implementation QI Site Review Automation 3/2016 7/ % QI Workflow 5/ /2016 0% QNXT Related Enhancements 12/ / % 2016 project initiated in 2015 QNXT Upgrade 5/ /2016 0% Real-Time EDI 11/2015 6/ % 2015 project carried over to 2016 UM/CM/DM Platform Procurement 3/ / % Project added to schedule in place of Coverage for Undocumented Children Closed Projects Project Title Start Date End Date Realized Benefit Comments 1099 Reporting 10/2015 2/2016 Regulatory Automate COB Process n/a n/a n/a Moved into QNXT Enhancement Project to make room in the schedule for 274 Provider Data Improvement regulatory project Call Center Upgrade (Screen Pop) n/a n/a n/a Moved into QNXT Enhancement Project to make room in the schedule for 274 Provider Data Improvement regulatory project Coverage for Undocumented Children n/a n/a n/a Project was removed - once the state requirements were received it was determined that there were no changes that required a project 163 / 174