CSA
Summary
Read the report at California State Auditor ↗
Los Angeles
County
Department of
Health Services:
Despite Securing Additional Funding
and Implementing Some Cost-Cutting
Measures, It Still Faces Significant
Challenges to Addressing Its Growing
Budget Deficit
September 2003
2002-019
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September 11, 2003 2002-019
The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814
Dear Governor and Legislative Leaders:
As required by Chapter 195, Statutes of 2001, the Bureau of State Audits presents its audit report
concerning Los Angeles County Department of Health Services’ (Health Services) financial capacity to
render health care services to county residents.
This report concludes that despite implementing some cost-cutting measures and securing additional
funding, Health Services still faces significant challenges to addressing its growing budget deficit. At
the end of fiscal year 2001–02, Health Services projected a budget deficit of $709.4 million by fiscal
year 2005–06. To alleviate this shortfall, Health Services developed a new strategic plan in June 2002.
As a result of an initiative approved by voters in November 2002, and agreement with the State and
federal government, Health Services is now pursuing a plan designed to result in annual net savings
increasing to $357.5 million in fiscal year 2005–06. However, even though Health Services has
successfully implemented many action items from its new strategic plan, preliminary injunctions and
prolonged negotiations threaten the implementation of other proposals. Finally, even if Health Services
successfully implements all of its strategic plan proposals, it would still face an estimated budget deficit
of $345.4 million in fiscal year 2006–07. Without stable funding and cost-cutting flexibility, Health
Services’ future financial viability and capacity to provide health care services to the residents of Los
Angeles County will continue to remain in question.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
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Los Angeles
County
Department of
Health Services:
Despite Securing Additional Funding
and Implementing Some Cost-Cutting
Measures, It Still Faces Significant
Challenges to Addressing Its Growing
Budget Deficit
CONTENTS
Summary 1
Introduction 3
Audit Results
In Its Strategic Plan, the Los Angeles County
Department of Health Services Proposes to
Address Its Deficit by Redesigning the County
Health System 7
Its Success in Securing Additional Revenue
Enabled Health Services to Proceed With
Scenario III 10
Health Services Has Implemented Several Action
Items From Its June 2002 Strategic Plan 11
Health Services Faces Major Challenges in
Implementing Some Proposals That Promise
Significant Cost Savings 19
Several Unresolved Issues Could Affect Health
Services’ Long-Term Financial Viability 23
Appendix A
Fiscal Outlook of the Los Angeles County
Department of Health Services 29
Appendix B
Glossary of Terms and Abbreviations 31
Response to the Audit
Los Angeles County Department of Health Services 33
California State Auditor’s
Comment on the Response
From the Los Angeles County
Department of Health Services 35
California State Auditor Report 2002-019 11
SUMMARY
RESULTS IN BRIEF
At the end of fiscal year 2001–02, the Los Angeles County
Department of Health Services (Health Services) estimated
its budget deficit at $326.6 million for fiscal year 2003–04
Audit Highlights . . . and projected the shortfall would grow to $709.4 million by
fiscal year 2005–06, if left unchecked. To alleviate the shortfall
Our review of the Los Angeles
while maintaining an integrated and coordinated system
County Department of Health
of care for low-income and medically indigent residents,
Services (Health Services) to
evaluate the current status Health Services developed a new strategic plan, building on
of its latest strategic plan an earlier proposal to improve efficiency and identify new
revealed that:
funding sources. Presented to the Los Angeles County Board
þ To alleviate a deficit of Supervisors (board) in June 2002, the new strategic plan
projected to reach outlines three scenarios for the county’s health care system, each
$709.4 million by fiscal
relying on different levels of funding and various reductions in
year 2005–06, Health
program size and costs. The board instructed Health Services to
Services developed a
new strategic plan in begin implementing action items shared by Scenarios II and III,
June 2002. such as reducing services at High Desert Hospital and closing
11 health centers, pending the outcome of Health Services’
þ Health Services
subsequently secured efforts to secure additional funding.
the funding it needed to
pursue a plan designed
Working with the county, the State, and federal officials,
to result in annual net
Health Services subsequently secured the funding it needs
savings increasing to
$357.5 million in fiscal to proceed with Scenario III and avoid what Health Services
year 2005–06. predicts would be more painful cuts. A voter-approved initiative
is expected to provide an estimated $146 million annually
þ Although Health Services
has implemented many to support Health Services’ emergency and trauma hospitals,
proposals from its new and public health bioterrorism needs, starting in fiscal year
strategic plan, some
2003–04 and continuing indefinitely. Further, Health Services
proposals that promise
expects agreements with the State and the federal government
significant savings face
major challenges. to provide another $250 million over fiscal years 2002–03
through 2004–05.
þ Even if Health Services
successfully implements
Health Services projected that the full and timely imple-
its proposals, it would still
face a projected deficit of mentation of the 21 proposals contained in Scenario III would
$345.4 million in fiscal result in annual net savings increasing to $357.5 million in
year 2006–07.
fiscal year 2005–06. To date, Health Services has implemented
or begun to implement 15 of the 21 proposals, including the
avoidance of capital costs at High Desert Hospital, successfully
reducing its system from six hospitals to five, closing 16 health
centers, cutting public health and administrative expenditures,
California State Auditor Report 2002-019 11
and reforming its partnership program with private-sector health
providers. By taking these actions, Health Services expects to
save $38.2 million in fiscal year 2002–03.
However, other Scenario III proposals face challenges. For
example, preliminary injunctions have so far prevented
Health Services from closing the Rancho Los Amigos National
Rehabilitation Center (Rancho Los Amigos) and reducing beds
at the Los Angeles County–University of Southern California
Medical Center (LAC/USC). Further, Health Services expects to
implement two proposals—restructuring psychiatric services
and contracting out certain administrative services—later than
initially expected. These and other delays have prevented Health
Services from saving the full $56.8 million targeted for fiscal year
2002–03 and may reduce future savings as well.
Finally, even if Health Services successfully implements all the
Scenario III proposals, it would still face a budget deficit of
$345.4 million in fiscal year 2006–07, growing to $767.8 million
in fiscal year 2007–08. The deficit results primarily from the
expiration of temporary state and federal funding agreements.
For example, the extension of the 1115 Medicaid Demonstration
Project, an agreement between the State and the federal Centers
for Medicare and Medicaid Services that provides Health Services
with $900 million over a five-year period, ends in fiscal year
2004–05. Moreover, Health Services predicts that delaying
the closure of Rancho Los Amigos and the reduction of beds
at LAC/USC until July 2004 will cause it to run a deficit of
$69.5 million by fiscal year 2005–06, increasing to $840.5 million
by fiscal year 2007–08. Without stable funding and cost-cutting
flexibility, Health Services’ future financial viability and capacity
to provide health care services to the residents of Los Angeles
County will continue to remain in question.
AGENCY COMMENT
Health Services generally agrees with the findings contained in
our report. n
22 California State Auditor Report 2002-019 California State Auditor Report 2002-019 33
INTRODUCTION
BACKGROUND
The Los Angeles County Department of Health Services
(Health Services) is the health care provider for the
county’s low-income and medically indigent residents,
serving approximately 800,000 patients. With a budget of
approximately $3.3 billion for the county fi scal year ending
June 30, 2003, Health Services’ mission is to protect, maintain,
and improve the health of communities. Serving
as provider, contractor, and coordinator, as of
July 1, 2003, Health Services operates fi ve hospitals,
Care Provided by
Health Services’ Facilities one multiservice ambulatory care center,
six comprehensive health centers, 17 health centers,
Comprehensive health center—freestanding
and one residential rehabilitation center. Health
center that provides an array of outpatient
services, including primary care, specialty Services also contracts with private sector health
care, and/or urgent walk-in services. providers to operate approximately 100 clinics.
In addition, Health Services provides public
Health center—provides primary care and/or
public health services. health services to county residents including AIDS
prevention and treatment programs, restaurant
Hospital—an institution that is built, staffed,
and equipped for the diagnosis of disease; inspections, and alcohol and drug treatment
for the treatment, both medical and surgical,
programs. Finally, its affi liation with area medical
of the sick and the injured; and for their
housing during this process. schools offers future health professionals training
grounds to develop their skills.
Multiservice ambulatory care center—
Provides specialty services, surgical and
nonsurgical procedures, comprehensive
diagnostic services, and a limited amount of
urgent care. All services are provided on an HEALTH SERVICES’ SOURCES OF FUNDING
outpatient basis.
Health Services relies on multiple funding
Public-private partnership program—a
collaborative effort between Health Services sources. One signifi cant federal source has
and private, community-based providers been the 1115 Medicaid Demonstration Project
(partners) that are committed to providing
(1115 Waiver), an agreement between the
quality health services in a culturally and
linguistically appropriate environment to State and the federal Centers for Medicare and
low-income and uninsured communities. The
Medicaid Services to provide Health Services
program is comprised of community clinics
and private medical groups with which Health with additional funding over a 10-year period
Services contracts to provide outpatient beginning July 1, 1995. The 1115 Waiver initially
primary care and limited specialty care to
was to expire June 30, 2000, but was extended
Health Services’ patients.
through June 30, 2005, providing an additional
Residential rehabilitation center—provides
$900 million in federal funding over fi ve years
supervised 24-hour live-in alcohol and
drug programs within structured treatment and requiring Health Services to meet several
recovery environments. objectives, such as providing a minimum
number of outpatient visits each year. Another
source of funding is California’s Medicaid program,
22 California State Auditor Report 2002-019 California State Auditor Report 2002-019 33
Medi-Cal, which is a primary source of health care coverage
for low-income individuals without medical insurance. Health
Services also receives funding from Medicare, the federal
program that provides health insurance to most people over
65 years old and to certain disabled persons, and the State has
provided Health Services a portion of its revenues from sales
taxes, vehicle license fees, and tobacco taxes since at least fiscal
year 1991–92. In addition, Los Angeles County contributes
proceeds from its general fund and the tobacco settlement,
which among other things requires the tobacco industry
each year for 10 years to pay $25 million to fund a charitable
foundation that will support the study of programs to reduce
teen smoking and substance abuse and the prevention of disease
associated with tobacco use. Health Services receives a small
amount of revenue from private health insurers and out-of-pocket
payments made directly by patients as well. The Figure illustrates
the proportion of Health Services’ funding from these sources for
fiscal year 2001–02.
FIGURE
Health Services’ Sources of Funding
Fiscal Year 2001–02
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Source: Health Services.
During fiscal year 2002–03, voters in Los Angeles County
approved the Preservation of Trauma Centers and Emergency
Medical Services; Bioterrorism Response Initiative (Measure B),
that is estimated to provide Health Services $146 million in
annual revenue beginning in fiscal year 2003–04. In addition,
due to an agreement between the State and the federal
government, Health Services expects to receive a total of
44 California State Auditor Report 2002-019 California State Auditor Report 2002-019 55
$250 million in revenue between fiscal years 2002–03 and
2004–05. We discuss these additional funding sources in greater
detail in the body of the report and provide Health Services’
estimates of its fiscal outlook through fiscal year 2007–08 in
Appendix A.
WE PREVIOUSLY REVIEWED HEALTH SERVICES’
PRELIMINARY PROPOSALS TO ADDRESS ITS
BUDGET CRISIS
The Bureau of State Audits (bureau) previously evaluated
the financial condition of Health Services, issuing a report
in May 2002 titled Los Angeles County Department of Health
Services: Current Proposals Will Not Resolve Its Budget Crisis, and
Without Significant Additional Revenue It May Be Forced to Limit
Services. In general, we concluded that Health Services faced
a projected shortfall of at least $688 million by fiscal year
2005–06, threatening its ability to maintain then-current levels
of health care services to low-income and medically indigent
county residents. We presented Health Services’ preliminary
proposals to address its forecasted budget deficit and assessed
its capacity to mitigate the projected shortfall. We concluded
that the preliminary proposals, contained in Health Services’
January 2002 strategic plan, needed further development.
For example, the plan did not go far enough in providing
implementation schedules, clearly defined milestones, and tools
to track progress, and most of the proposals did not include
estimates of cost savings. Essentially, Health Services intended
the January 2002 strategic plan to provide recommendations
regarding broad policy and organizational issues and to establish
redesign parameters.
SCOPE AND METHODOLOGY
Chapter 195, Statutes of 2001, required the bureau to conduct
two audits evaluating the financial capacity of Health Services
to render necessary health care services to the residents of
Los Angeles County. In particular, we were asked to do the
following in each audit:
• List and describe each of the proposals put forward to
reduce Health Services’ expenditures or increase its revenues,
including the current status of each.
44 California State Auditor Report 2002-019 California State Auditor Report 2002-019 55
• Review projections of budgetary shortfalls to determine
whether the assumptions that underlie Health Services’
baseline revenue and expenditure estimates for the period
beginning in 2001 and ending in 2005 are reasonable, and
adjust the projections as necessary.
• Devise an accounting tool adequate to track Health Services’
budget deficit.
• List and explain how 1115 Waiver extension requirements
and other existing or potential laws, regulations, or
administrative rules affect Health Services’ deficit.
• Evaluate Health Services’ timeliness and effectiveness in
addressing its deficit.
• Determine the extent to which Health Services’ proposals to
address its deficit are complete and likely to be effective.
Since the publication of our first report in May 2002, the
California Department of Health Services (state DHS) hired a
contractor to monitor Health Services’ financial condition over
the next several years. Because the scope of the contractor’s
work duplicates what we were asked to do, we met with the
state DHS and its contractor to coordinate the audit effort. To
avoid duplication of effort, as required by statute, we collectively
agreed that the bureau would limit its work reported here to a
high-level status update of Health Services’ strategic plan and
fiscal outlook since the release of our May 2002 report. We
agreed that the bureau would not evaluate the reasonableness
of projections contained in Health Services’ fiscal outlook
document or the cost-savings estimates in its current strategic
plan because the state DHS contractor would perform those
evaluations. Additionally, we did not audit any of Health
Services’ financial data contained in our report. The contractor
for the state DHS is scheduled to release its first annual report in
the fall of 2003.
To conduct our review, we examined documents and
interviewed key staff to identify Health Services’ projected
fiscal outlook and the current status of those proposals
contained in its latest strategic plan that were specifically
designed to address its projected deficit. We present a glossary of
terms in Appendix B. n
66 California State Auditor Report 2002-019 California State Auditor Report 2002-019 77
AUDIT RESULTS
IN ITS STRATEGIC PLAN, THE LOS ANGELES COUNTY
DEPARTMENT OF HEALTH SERVICES PROPOSES TO
ADDRESS ITS DEFICIT BY REDESIGNING THE COUNTY
HEALTH SYSTEM
On June 26, 2002, the Los Angeles County Department
of Health Services (Health Services) presented a
revised strategic plan that builds on the January 2002
strategic plan we assessed in our May 2002 report. Approved
by the Los Angeles County Board of Supervisors (board), the
new strategic plan consists of an overall strategy, proposals for
redesigning the county’s health care system, and three potential
scenarios for reducing the size of Health Services’ projected
deficit. Overall, the June 2002 strategic plan seeks to achieve
an integrated and coordinated system comprising a balanced
program of medical services to care for low-income patients and
those who are medically indigent—that is, county residents who
need but cannot afford medical care.
Health Services Proposes to Redesign the County’s Health
Care System
As a cornerstone of its overall strategy, Health Services proposed
to centralize specialized services at Los Angeles County—
University of Southern California Medical Center (LAC/USC)
and reduce the scope of services provided by its other hospitals.
For example, when Health Services presented its new strategic
plan, it intended either to close Rancho Los Amigos National
Rehabilitation Center (Rancho Los Amigos) or transition it to
alternate governance, possibly putting it under the control of an
existing nonprofit hospital. Further, Health Services proposed
converting High Desert Hospital (High Desert) to a multiservice
ambulatory care center offering only outpatient services.
Health Services’ strategic plan includes various other proposals
for redesigning the county’s health care system, such as
consolidating and integrating clinical staff and administrative
systems as well as redefining its relationship with area medical
schools: the University of Southern California, the University of
California at Los Angeles, and the Charles R. Drew University
of Medicine and Science. In addition, Health Services proposes
defining a benefits package for its clientele, creating an
66 California State Auditor Report 2002-019 California State Auditor Report 2002-019 77
integrated patient database, and instituting a performance
management system for its managerial and clinical personnel.
Health Services believes that, regardless of its fiscal outlook, it
should implement these proposals because they are essential to
the creation of an efficient and effective system of health care
delivery. However, because many of these proposals did not
focus specifically on addressing Health Services’ projected deficit,
we do not discuss them in more depth in this report.
Three Scenarios Depict How Health Services Can Reduce Its
Budget Deficit
To present alternative ways it could address its impending
budget shortfall, Health Services included three scenarios in
its revised strategic plan for the board’s consideration. Scenario I
depicts the county health system should the board reject Health
Services’ plan for redesigning its health system and Health Services
fail in its ongoing efforts to secure additional funding from federal,
state, and local sources. Under Scenario I, a significantly reduced
system with just three hospitals would focus on providing care
only to the most seriously ill. Most other services would be
Scenario III reflects a eliminated. Although Health Services presented Scenario I
system that would as a possible alternative for its system redesign, it did not
follow Health Services’ recommend it. Scenario II presents the system that would
proposed redesign and result if Health Services followed its plan for redesigning its
succeed in securing health system but failed to obtain additional funding. Under
additional and more Scenario II, a system with two hospitals, ambulatory care
flexible use of revenues. facilities, and health centers, although smaller, would provide
a balanced range of services. Scenario III, an extension of
Scenario II, reflects a system that would follow Health Services’
proposed redesign and succeed in securing additional and more
flexible use of revenues. The four-hospital system would allow
Health Services to shift its focus from critical revenue needs to
patient needs and best clinical practices. Table 1 outlines each
scenario’s anticipated effect on the county’s health care system
in fiscal year 2005–06.
In response to Health Services’ presentation of its strategic plan
and its three scenarios, the board instructed Health Services to
begin implementing action items shared by Scenarios II and III,
such as reducing services at High Desert and closing 11 health
centers. Depending on the likelihood of additional revenue
streams, Health Services would eventually focus on either
Scenario II or Scenario III.
88 California State Auditor Report 2002-019 California State Auditor Report 2002-019 99
TABLE 1
System Design Changes in Scenarios Presented in the June 2002 Strategic Plan
Effective Fiscal Year 2005–06
Scenario I Scenario II Scenario III
Hospitals
Los Angeles County—University of
Southern California Open (665 beds) Open (600 beds) Open (600 beds)
Martin Luther King Jr.—Charles R. Drew Open (233 beds) Open—no trauma services, Open—16 percent budget
16 percent budget cut cut (205 beds)
(205 beds)
Olive View—University of California, Open (201 beds) Reduced to multiservice Open (201 beds)
Los Angeles (UCLA) ambulatory care center
Harbor/UCLA Closed Reduced to multiservice Open (318 beds)
ambulatory care center
High Desert Hospital Closed Reduced to comprehensive Reduced to multiservice
health center ambulatory care center
Rancho Los Amigos National Closed Alternate governance or Alternate governance or
Rehabilitation Center closed closed
Health Centers
Northeast Area
El Monte & Hudson Comprehensive
Health Centers (CHCs) Closed 5 percent budget cut 5 percent budget cut
Roybal CHC Closed Closed 5 percent budget cut
Health Centers Closed (5) Closed (5) Closed (4)
Coastal Area
Long Beach CHC Closed 5 percent budget cut 5 percent budget cut
Health Centers Closed (3) Closed (3) Closed (1)
School Based Clinic Closed Closed Open
Southwest Area
Humphrey CHC Closed 5 percent budget cut 5 percent budget cut
Health Centers Closed (5) Closed (5) Closed (4)
San Fernando Valley Area
Mid-Valley CHC Closed 5 percent budget cut 5 percent budget cut
Health Centers Closed (5) Closed (5) Closed (2)
School Based Clinics Closed (3) Closed (3) Closed (2)
Antelope Valley Area
Antelope Valley/Health Services
Partnership Clinics Closed (3) Closed (3) 5 percent budget cut
Antelope Valley Rehabilitation Center Closed Open Open
South Antelope Valley Health Center Closed Open Open
Other Programs
AIDS Unchanged Unchanged Unchanged
Alcohol and Drug Services Unchanged Unchanged Unchanged
Children’s Medical Services Unchanged Unchanged Unchanged
Health Services Administration Proportionate reduction Proportionate reduction Proportionate reduction
Juvenile Court Health Services 5 percent budget cut Unchanged Unchanged
Public Private Partnerships Closed Closed Reduced
Public Health 20 percent budget cut 11 percent budget cut 7 percent budget cut
Office of Managed Care Administrative
Functions Contracted out Contracted out Contracted out
Source: Health Services.
88 California State Auditor Report 2002-019 California State Auditor Report 2002-019 99
ITS SUCCESS IN SECURING ADDITIONAL REVENUE
ENABLED HEALTH SERVICES TO PROCEED WITH
SCENARIO III
Having completed or initiated a number of action items from
Scenarios II and III, as discussed in the next section, Health
Services returned to the board in October 2002 to present a
status update of its attempts to secure additional funding. Due
to a proposed countywide special tax on the November 5 ballot
and the State’s ongoing negotiations with the federal Centers
for Medicare and Medicaid Services (CMS), both of which might
result in new funding for Health Services, the board agreed to
postpone consideration of additional Scenario II cuts, including
service reductions at Los Angeles County Harbor–University
of California Los Angeles Medical Center (Harbor/UCLA)
and Los Angeles County Olive View–University of California
Los Angeles Medical Center (Olive View/UCLA), pending
resolution of the funding situation.
In November 2002, voters overwhelmingly approved the
Preservation of Trauma Centers and Emergency Medical
Services; Bioterrorism Response Initiative (Measure B), which
is expected to provide an estimated $170 million annually
A voter-approved from increased property taxes starting in fiscal year 2003–04
initiative is expected to and continuing indefinitely. Of this amount, $140 million is
provide an estimated designated to support Health Services’ emergency and trauma
$146 million annually to hospitals and $6 million is dedicated to support its public
support Health Services’ health bioterrorism needs beginning in fiscal year 2003–04,
emergency and trauma with the bulk of the remaining balance going to noncounty
hospitals, and public trauma hospitals. Furthermore, in February 2003, the State
health bioterrorism reached an agreement with the CMS regarding the State’s two-
needs starting in fiscal year Selective Provider Contracting Program (SPCP) waiver,
year 2003–04. which has historically provided federal funding to California
hospitals that care for large numbers of low-income patients.
As a result of this agreement, Health Services expects to receive
$250 million in additional funding through county fiscal year
2004–05: $100 million in supplemental Medi-Cal inpatient
payments, $100 million pledged by the State from its federal
SPCP funding, and $50 million from the federal share of the
orthopedic hospital outpatient settlement.1 Health Services’
success in securing future funding in late 2002 and early
2003 allowed it to address its fiscal deficit by proceeding with
1 For more information on the orthopedic hospital outpatient settlement, see Belshe v.
Orthopaedic Hospital.
1100 California State Auditor Report 2002-019 California State Auditor Report 2002-019 1111
Scenario III. The remainder of our report focuses on Health
Services’ efforts to implement Scenario III and various pending
issues that could have an impact on its future financial viability.
HEALTH SERVICES HAS IMPLEMENTED SEVERAL
ACTION ITEMS FROM ITS JUNE 2002 STRATEGIC PLAN
While Health Services has implemented, or is in the process
of implementing, many of the action items contained in its
Health Services estimates June 2002 strategic plan, it has not been able to implement
it will save $38.2 million them all as expected. Consequently, Health Services estimates it
in fiscal year 2002–03 by will save $38.2 million in fiscal year 2002–03 by implementing
implementing Scenario III Scenario III items, $18.6 million short of its initial Scenario III
proposals, $18.6 million savings projection for that year. Health Services plans to
short of its initial savings make up for the loss in projected savings through a general
projections for that year. systemwide surplus in fiscal year 2002–03 of approximately
$130 million. Table 2 on the following pages shows Health
Services’ Scenario III implementation plan and cost savings
estimates from its June 2002 strategic plan as well as the status
of each action item as of July 29, 2003. Each year’s projected
savings reflect the impact of proposed changes compared
with the cost of service provided in fiscal year 2001–02. The
following sections describe the completed or initiated items as
well as the causes for any delays or failures to meet projected
savings targets.
Increase Efficiencies at Martin Luther King, Jr./
Charles R. Drew Medical Center
Scenario III proposes that Martin Luther King, Jr./Charles R. Drew
Medical Center (King/Drew) increase operational efficiency
to incrementally reduce its budget by a total of 16 percent
by fiscal year 2005–06. Health Services bases this proposal on
various studies, including our May 2002 report, which ranked
King/Drew near the bottom in terms of operating efficiency as
measured by inpatient operating expense per patient day as well
as employee days per patient day compared with other Health
Services’ hospitals. According to Health Services’ projections,
complete implementation of this proposal will lead to annual
cost savings increasing to $61.9 million in fiscal year 2005–06.
1100 California State Auditor Report 2002-019 California State Auditor Report 2002-019 1111
1122 California State Auditor Report 2002-019 California State Auditor Report 2002-019 1133
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tsoc
latipac
latipsoH
treseD
hgiH
3.0
gniogno
snoitaitogeN
2.92
3.52
2.02
2.0
20/01
20/01
secivres
cirtaihcysp
erutcurtseR
sretneC
htlaeH
evisneherpmoC
†
30/70
6.42
0.42
3.32
7.3
30/50
20/01
ledom
gnfifats
tnetsisnoc
tnemelpmI sretneC
htlaeH
aerA tsaehtroN
3.6
20/01
7.9
3.9
9.8
3.6
20/01
20/60
sretnec
htlaeh 4 esolC aerA latsaoC
0.1
20/01
5.1
4.1
4.1
0.1
20/01
20/60
retnec
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4.7
20/01
4.91
7.81
1.81
7.21
20/01
20/60
sretnec
htlaeh 4 esolC
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20/01
8.4
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pihsrentrap
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epoletnA
0.0
20/01
2.0
2.0
2.0
0.0
20/01
20/60
seicneicfife
tnecrep
5
1122 California State Auditor Report 2002-019 California State Auditor Report 2002-019 1133
sgnivaS
lautcA
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detcejorP
*sgnivaS
teN
detamitsE
detcejorP
draoB
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30/2002
3002
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fo
sa
60–5002
50–4002
40–3002
30–2002
etaD
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20/90
hguorht
20/30
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‡
‡
‡
20/30
20/30
sretnec
htlaeh 5 esolC
5.21$
20/90
0.51
$
0.51 $
0.51
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5.21$
20/90
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stisiv PPP ecudeR
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)I esahP(
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20/01
20/60
snoitcuder
htlaeh cilbuP
†
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3.2
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20/60
noitartsinimda
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6.83
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7.52
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20/01
††stnemtsujda
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2.83$
5.753$
5.903$
2.281$
8.65$
‡‡slatoT III oiranecS
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level ecivres
20–1002
raey
lacsfi htiw
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30–2002
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morf
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,30–2002
raey lacsfi
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†
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2002
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2002
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30–2002
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30–2002 raey
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For fiscal year 2003–04, King/Drew facility administration, in
concert with the clinical leadership, identified several areas
in which staffing exceeds the current clinical workload and
where, according to Health Services, staffing cuts can occur
without reducing the level of care patients receive. As a result,
Health Services incorporated the first 5 percent of the total
16 percent efficiencies at King/Drew into its current budget,
with an additional 5 percent to occur in fiscal year 2004–05
and the remaining 6 percent in fiscal year 2005–06. To assist in
implementing these efficiencies, Health Services intends to hire
a consultant on a contingency fee basis to work with King/Drew
in areas that include the emergency department, operating
room, and inventory management.
In June 2003, a physician practicing at King/Drew, and the
Union of American Physicians and Dentists filed a complaint
with the Los Angeles County Superior Court requesting
a temporary restraining order precluding any layoffs or
reductions in medical services at King/Drew or Health Services’
six comprehensive health centers until the county complies with
the Beilenson Act. The Beilenson Act requires the county to post
notices and hold public hearings (Beilenson hearings) regarding
any proposed reduction in medical services. The county did
not hold public hearings regarding the proposed personnel
reduction at King/Drew because Health Services did not intend
for these personnel reductions to reduce medical services at the
facility. The court issued a temporary restraining order which
subsequently was converted into a preliminary injunction which
prohibits any cuts that reduce the level of medical services for
medically indigent patients at King/Drew and Health Services’
six comprehensive health centers until the county posts notices
and holds hearings as required by the Beilenson Act. However,
Health Services maintains Health Services maintains that its staffing reductions at King/
that its staffing reductions Drew and its comprehensive health centers do not reduce the
at King/Drew do not level of services it provides to the community, and as such,
reduce the level of implemented a majority of the staffing reductions. Furthermore,
services it provides to Health Services expects to continue implementing its Scenario III
the community. proposal at King/Drew. (The effect of the preliminary injunction
on proposed staff reductions at Health Services’ comprehensive
health centers is discussed in more depth later in the report.)
Eliminate Inpatient Rehabilitation Services at
High Desert Hospital
Historically, Health Services provided a limited number of
inpatient rehabilitation services at High Desert. At the time of
the January 2002 strategic plan, High Desert averaged 2.2 acute
1144 California State Auditor Report 2002-019 California State Auditor Report 2002-019 1155
rehabilitation inpatients daily but maintained the legal capacity
to serve six inpatients. In March 2002, the board voted to
eliminate inpatient rehabilitation services at High Desert,
and High Desert’s inpatient rehabilitation services ceased that
month. Although this item appears in the June 2002 strategic
plan, it originated in Health Services’ January 2002 strategic plan
and was already approved and implemented before the adoption
of the revised plan. Therefore, Health Services had already built
the $500,000 annual savings related to this proposal into its
June 2002 base fiscal outlook and did not project additional
savings in its June 2002 strategic plan.
Convert High Desert to a Multiservice Ambulatory
Care Center
At the time Health Services proposed its June 2002 strategic
plan, High Desert was a small hospital with 70 inpatient beds
The board approved and no emergency room. Because Health Services operates four
Health Services’ proposal other health centers in the area, and an additional 468 beds are
to eliminate inpatient available in two nearby hospitals, the board approved Health
services at High Desert Services’ proposal to eliminate inpatient services at High Desert
because Health Services by converting it to a multiservice ambulatory care center.
operates four other
health centers in the However, the board also directed Health Services to explore
area, and an additional ways to keep High Desert open as an inpatient facility. Among
468 beds are available in the options Health Services considered were leasing beds to the
two nearby hospitals. California Department of Corrections and to a private medical
group. Health Services concluded that none of these options
provided a feasible means of allowing Health Services to
accomplish its mission in a cost-effective manner. For example,
Health Services determined that the proposal to lease the facility
to a private physicians’ group would divert at least $6.7 million
in resources to an acute care facility that would not improve
access to health care services for the medically indigent. On
June 3, 2003, the board rejected the proposal to enter into
negotiations to lease High Desert to the private physicians’
group. Additionally, on June 6, 2003, a United States District
Court denied a motion for a preliminary injunction to halt
the elimination of inpatient beds at High Desert. The plaintiffs
have since dismissed this case. As of July 1, 2003, High Desert
surrendered its hospital license.
Health Services estimated that this conversion would result
in savings of $1.4 million in fiscal year 2002–03, with annual
savings reaching $12.5 million in fiscal year 2005–06. However,
1144 California State Auditor Report 2002-019 California State Auditor Report 2002-019 1155
because the conversion did not occur in fiscal year 2002–03,
Health Services did not meet the first-year savings target
associated with this action item.
Avoid Capital Costs at High Desert
After converting High Desert to a multiservice ambulatory
care center, Health Services determined that seismic upgrades
required by Senate Bill 1953 (Chapter 740, Statutes of 1994)
would no longer be required, resulting in a cost avoidance
of $2 million in fiscal year 2002–03. However, the Chief
Administrative Office for the county contends that these savings
should not accrue to Health Services’ budget, as capital costs
generally are paid from the county’s general fund. Table 2
beginning on page 12 shows that Health Services did not realize
savings related to this action item in fiscal year 2002–03.
Implement a Consistent Staffing Model at the
Comprehensive Health Centers
Because costs among its various comprehensive health centers
varied considerably, Health Services developed a staffing
model to standardize staffing levels across facilities. According
Although implementing to the director of Health Services’ Office of Ambulatory Care
the consistent staffing (Ambulatory Care), the consistent staffing model requires a
model required staff 5 percent budget reduction at all comprehensive health centers
reductions, Health Services and an additional $10 million cut at the Humphrey Health
intended to accomplish Center in the Southwest Area designed to bring Humphrey’s
the cuts without reducing staffing level in line with that of the other comprehensive
medical services. health centers. Although implementing the model required
staff reductions, Health Services intended to accomplish the
cuts without reducing medical services and therefore did not
hold Beilenson hearings. As with the proposal regarding King/
Drew, the proposed budget reductions at the comprehensive
health centers underwent legal scrutiny, with Health Services
contending that no service reductions of the type addressed by
the Beilenson Act have or will occur. The Los Angeles County
Superior Court issued a preliminary injunction restraining
the County from implementing any reductions in the level of
medical services at King/Drew or the six comprehensive health
centers until the county posts notices and holds hearings as
required by the Beilenson Act. As the county does not believe
services will be reduced it has implemented a majority of the
personnel actions.
1166 California State Auditor Report 2002-019 California State Auditor Report 2002-019 1177
Health Services projected that implementing the staffing model
would save $3.7 million in fiscal year 2002–03 and that annual
net savings would reach $24.6 million in fiscal year 2005–06.
Although Health Services targeted May 2003 for staffing model
implementation, according to the director of Ambulatory Care,
it did not actually occur until July 2003, when 116 positions
were eliminated. Therefore, Health Services did not achieve
fiscal year 2002–03 savings as a result of this action. Despite
the July personnel reductions, the director of Ambulatory Care
anticipates Health Services will not meet its projected savings
target of $23.3 million in fiscal year 2003–04, but estimates
saving $16 million instead.
Close Some Health Centers
Between March 2002 and October 2002, Health Services closed
16 health centers. Following Beilenson hearings, the board
approved five of the health center closures in March 2002, based
Between March 2002 and on the consolidation proposal from the January 2002 strategic
October 2002, Health plan. Because the board approved the first five closures before
Services closed 16 health adopting the revised June 2002 strategic plan, Health Services
centers saving more than had already incorporated the estimated $400,000 in annual
$17.9 million in fiscal savings into its June 2002 base fiscal outlook.
year 2002–03.
In June 2002, the board approved Health Services’ proposal
to close an additional 11 health centers, pending Beilenson
hearings, and reduce the budgets of three Antelope Valley/
Health Services partnership clinics by 5 percent. Health Services
estimated that the 11 closures and 5 percent budget reductions
would generate savings of $23.2 million in fiscal year 2002–03,
with annual savings increasing to $35.6 million in fiscal
year 2005–06. Following Beilenson hearings in August 2002,
the board approved the proposed closures. Health Services
completed implementation in October 2002 by transferring
current patients to other clinics, moving 340 displaced
employees to critical unfilled positions elsewhere within the
system, and making the 5 percent efficiency cuts at the Antelope
Valley/Health Services partnership clinics.
The Northeast, Coastal, San Fernando Valley, and Antelope
Valley areas achieved their projected savings for fiscal year
2002–03 of a combined $10.5 million. The Southwest Area
achieved only $7.4 million of its $12.7 million targeted savings.
1166 California State Auditor Report 2002-019 California State Auditor Report 2002-019 1177
Reduce Public-Private Partnership Visits
The public-private partnership (PPP) program is a collaborative
effort between Health Services and private, community-based
health service providers (partners) to bring quality health care to
low-income and uninsured communities. In fiscal year 2001–02,
128 clinics participated in the program. In the June 2002 strategic
plan, Health Services recommended that PPP visits be scaled back
to save $15 million annually. Health Services estimates that it saved
$12.5 million in fiscal year 2002–03. Health Services also expects to
meet or exceed its savings goal of $15 million in fiscal year 2003–04.
Reduce Administrative Costs
In its January 2002 strategic plan, Health Services proposed
consolidating and streamlining the administrative functions
of its offices of Health Services Administration, Public Health,
and Managed Care, projecting savings of $8 million annually.
The board approved Phase I administrative reductions in
March 2002, which eliminated 94 positions. Because the board
approved this proposal before adopting the June 2002 strategic
plan, Health Services did not include these cost-savings amounts
in its June 2002 projections. Rather, Health Services already
reflected partial-year savings of $5.9 million for fiscal year
2002–03 in its June 2002 base fiscal outlook, and it subsequently
included the full $8 million annual savings in its fiscal year
2002–03 budget and later forecasts.
Building on the January 2002 strategic plan, Health Services
also recommended a $5 million annual reduction to Health
Services Administration (Administration) to be achieved by
further consolidating and streamlining administrative processes.
Phase II reductions, implemented in July 2002, eliminated
64 positions. Unlike Phase I savings, Health Services’ June 2002
base fiscal outlook did not reflect the $5 million annual savings;
however, subsequent fiscal forecasts, and its fiscal year 2002–03
budget, do reflect these savings.
Also building on the January 2002 strategic plan, Phase III
administrative reductions were designed to reflect the reduced
administrative demands of a smaller health system. Specifically,
reductions to Administration’s centralized functions were
intended to reflect reduced services in the facilities it supports.
Phase III reductions were scheduled to take place in May 2003
to parallel the timing of other Scenario III reductions.
However, because of various factors impeding Health Services’
implementing Scenario III items that would reduce the size of
1188 California State Auditor Report 2002-019 California State Auditor Report 2002-019 1199
the health care system, Administration has not undergone a
Phase III cut. Therefore, Health Services has not yet projected
any savings related to this action item.
Cut Public Health Expenditures
The Phase I and II administrative reductions just described
included a $1 million reduction to Public Health’s budget for
fiscal year 2002–03. In its June 2002 strategic plan, Health
Services recommended an additional annual reduction of
$8.9 million to Public Health’s budget, starting in October 2002.
Public Health comprises four budget areas: AIDS services,
Public Health reductions alcohol and drug services, children’s medicine, and general
occurred in such areas public health. Because of federal and state requirements, Health
as sexually transmitted Services lacks the flexibility to cut the budget for the first three
disease programs, areas. Therefore, Health Services focused its reductions in the
tuberculosis programs, area of general public health. Reductions occurred in such areas
and immunization clinics. as sexually transmitted disease programs, tuberculosis programs,
and immunization clinics. Budget cuts made by October 2002
eliminated 96.9 positions, with displaced workers moved to vacant
positions. Health Services estimates $7.5 million in actual fiscal
year 2002–03 savings related to this item. Health Services projects
savings of $9.2 million in fiscal year 2003–04, reflecting the
annual savings total of $8.9 million plus a cost-of-living increase.
HEALTH SERVICES FACES MAJOR CHALLENGES IN
IMPLEMENTING SOME PROPOSALS THAT PROMISE
SIGNIFICANT COST SAVINGS
Although Health Services has successfully implemented many
action items from its June 2002 strategic plan, preliminary
injunctions threaten the timely and complete implementation
of three action items from the strategic plan, while prolonged
negotiations hamper the implementation of another two.
Health Services projects that fully implementing these five
items on time would result in savings of $159.6 million in fiscal
year 2005–06. However, because of various roadblocks, Health
Services no longer anticipates being able to reach this goal.
Legal Injunctions Threaten the Implementation of Proposals
Related to Two Hospitals
Medically indigent and low-income residents have contested
the implementation of several proposals from Health Services’
June 2002 strategic plan. The complaint filed by Harris against
1188 California State Auditor Report 2002-019 California State Auditor Report 2002-019 1199
the board (Harris case) challenges Health Services’ planned
reduction of LAC/USC by 100 beds, as well as the proposed
closure of Rancho Los Amigos. The complaint filed by Rodde
against Bonta (Rodde case) seeks to enjoin the county from
closing Rancho Los Amigos. The resulting preliminary
injunctions may affect Health Services’ ability to implement
three action items, potentially increasing its projected deficit.
Reduce LAC/USC by 100 Beds and Implement Efficiencies
Anticipating LAC/USC’s transition to a new location with fewer
beds (census) by fiscal year 2007–08, Health Services’ June 2002
strategic plan calls for the reduction of the current LAC/USC
census by 100 acute beds: 50 in each of fiscal years 2002–03 and
2003–04. Following this reduction, Scenario III requires LAC/USC to
locate areas in which to cut expenses, reducing its cost-per-day
average to a level closer to that of Harbor/UCLA and Olive View/
UCLA hospitals, which would allow a 4.7 percent cost reduction
from its operating subsidy. Health Services projects that, taken
together, these actions would produce annual savings of
$52 million in fiscal year 2005–06.
On January 28, 2003, the county held a Beilenson hearing
regarding the 100-bed reduction at LAC/USC and the closure
On June 3, 2003, a of Rancho Los Amigos, with the board voting to proceed
U.S. District Court with implementation of both action items as outlined in the
issued a preliminary June 2002 strategic plan. In the Harris case, low-income and
injunction in the Harris medically indigent county residents filed a complaint that
case, barring the county sought to enjoin the county from reducing the level of service
from reducing at LAC/USC and closing Rancho Los Amigos. On June 3, 2003, a
the number of beds U.S. District Court issued a preliminary injunction in the Harris
at LAC/USC or closing case, barring the county from reducing the number of beds at
Rancho Los Amigos. LAC/USC, closing Rancho Los Amigos, or taking any steps to
accomplish the reduction or closure.
The Harris preliminary injunction effectively suspends
implementation of this proposal and may delay the related
efficiency reductions. The county is appealing the preliminary
injunction and anticipates a hearing by the United States Court of
Appeals for the Ninth Circuit in the fall of 2003. As a result of the
preliminary injunction, Health Services expects its deficit to increase
(see Appendix A for details on Health Services’ fiscal outlook).
Moreover, the preliminary injunction freezes LAC/USC’s census at
the then-current level of 745 budgeted beds, potentially affecting
the transition to the new LAC/USC, which will be licensed for
600 beds.
2200 California State Auditor Report 2002-019 California State Auditor Report 2002-019 2211
Transition to Alternate Governance or Close Rancho Los Amigos
Another legal action involves the proposed closure of
Rancho Los Amigos. Health Services projected that immediately
transitioning the administration and funding to alternate
governance—that is, putting it under the control of another
entity, such as an existing nonprofit hospital—or closure would
cut $70.4 million from Health Services’ budget in fiscal year
2005–06. To determine Rancho Los Amigos’ viability under
alternate governance, the board commissioned and examined
a variety of studies. The conclusion of all the analyses was that,
given the county’s determination to affect change by the end of
fiscal year 2002–03 and contribute no more than $14.7 million
to the operation of Rancho Los Amigos in fiscal year 2004–05,
Rancho Los Amigos would not be financially viable under
alternate governance.
The January 28, 2003, Beilenson hearing regarding the proposed
bed reduction at LAC/USC also addressed the future of Rancho
Los Amigos. The board approved Rancho Los Amigos’ closure,
and Health Services proceeded with implementation. However,
in March 2003, two complaints were filed, one in a U.S. District
Court and the second in a Superior Court of California. The class
action Rodde complaint, filed by disabled Medi-Cal beneficiaries,
resulted in a preliminary injunction on May 6, 2003, barring
the county from closing Rancho Los Amigos or terminating,
reducing, or making any further reductions in any medical
services that are covered by the Medi-Cal program until the
county can assure the court that disabled people will continue
to receive timely and comparable services from other Medi-
Cal providers in the county and/or that disabled people will
continue to have the same access to inpatient and outpatient
services at other health care facilities within the county health
care system that they experienced at Rancho Los Amigos.
As to the second complaint—the Harris complaint previously
discussed—the court issued a preliminary injunction on
June 3, 2003, barring the county from closing or reducing the
level of medical services at Rancho Los Amigos or from taking
any steps to accomplish these ends.
The Harris and Rodde preliminary injunctions prevent Health
Services from closing Rancho Los Amigos, pending further
court action. As it has with the Harris complaint, the county
is appealing the Rodde complaint ruling and expects a hearing
before the United States Court of Appeals for the Ninth Circuit
2200 California State Auditor Report 2002-019 California State Auditor Report 2002-019 2211
in the fall of 2003. The County and the plaintiffs in the
Health Services predicts Harris and Rodde cases are also actively pursuing settlement
that delaying the closure discussions through this court’s mediation program on the
of Rancho Los Amigos issues of the closure of Rancho Los Amigos and the reduction
and the reduction of in beds at LAC/USC. Health Services predicts that delaying the
100 beds at LAC/USC closure of Rancho Los Amigos and the reduction of 100 beds at
until July 2004 could LAC/USC until July 2004 could increase its deficit by as much as
increase its deficit by as $72.7 million in fiscal year 2007–08. We present Health Services’
much as $72.7 million in projections as of July 2003 in Appendix A.
fiscal year 2007–08.
Health Services May Not Achieve Savings Related to
Proposals to Restructure Psychiatric Services and Contract
Out Certain Administrative Functions
Ongoing negotiations hinder Health Services’ ability to
implement two Scenario III action items, potentially making
future savings targets unattainable. In its January 2002 strategic
plan, Health Services proposed what has become a Scenario III
action item—pursuing unreimbursed costs for services it
provides the county Department of Mental Health (DMH). The
June 2002 strategic plan recommends that, beginning in 2003,
Health Services restructure its psychiatric services to avoid
incurring $20.2 million in costs for providing such services to
DMH. The estimated net variable costs for which Health Services
is not reimbursed by DMH is projected to rise to $29.2 million
by fiscal year 2005–06. Health Services estimates that it saved
$254,000 in fiscal year 2002–03 by transferring responsibility
for outpatient psychiatric services provided at King/Drew to
DMH, and a similar transfer of outpatient psychiatric services is
planned from LAC/USC to DMH. However, because it has not
yet reached an improved agreement with DMH, Health Services
does not expect to achieve the full projected cost savings of
$20.2 million related to this action item in fiscal year 2003–04.
In fact, Health Services has revised its savings estimates in this
area, projecting savings of $14.1 million in fiscal year 2003–04,
$10.6 million in fiscal year 2004–05, and only $4 million in
fiscal year 2005–06. Health Services included these revised
savings estimates in its July 2003 fiscal forecast.
Health Services’ June 2002 strategic plan also recommends
contracting out certain administrative functions at its Office
of Managed Care for a savings of $2.3 million in fiscal year
2002–03 and $8 million annually thereafter. Administrative
areas targeted for outsourcing include network operations,
medical administration, financial operations, member services,
2222 California State Auditor Report 2002-019 California State Auditor Report 2002-019 2233
information systems, marketing, and compliance. However,
Health Services reported that, as of July 2003, negotiations
with its contractor, L.A. Care, were still ongoing. Consequently,
Health Services did not meet the fiscal year 2002–03 savings
target related to this item, and its fiscal year 2003–04 target
savings are also at risk, depending on the expediency with
which Health Services finalizes a contract.
SEVERAL UNRESOLVED ISSUES COULD AFFECT HEALTH
SERVICES’ LONG-TERM FINANCIAL VIABILITY
Health Services is faced with a variety of uncertainties that could
impact its future financial viability. Foremost among these are
Health Services did not Health Services’ continuous negotiations regarding additional
factor any impact of funding as well as the requisite flexibility to allow Health
the State’s fiscal year Services to take complete advantage of already available funding
2003–04 budget into its streams. For example, Health Services did not factor any impact
July 2003 fiscal forecast of the State’s fiscal year 2003–04 budget into its July 2003 fiscal
because of the delay in forecast because of the delay in the budget’s passage. According
the budget’s passage. to Health Services, the uncertainty of the State’s economy makes
forecasting for future years unreliable.
Although not an exhaustive list, the following sections
describe significant issues that Health Services has identified as
having the potential to either positively or negatively affect its
financial viability.
Health Services Is Uncertain How Much It Will Receive in
the Future Under the Emergency Services and Supplemental
Payment Fund Program
As discussed earlier, California recently entered a two-year
agreement with the CMS to extend the SPCP waiver to
December 2004. The SPCP waiver specifies the amount of special
payments Los Angeles County will receive under the Emergency
Services and Supplemental Payment Fund (Emergency Services
Fund) program during this period. The waiver also calculates the
inpatient upper payment limit for non-state-owned hospitals in
the county, such as Health Services’ hospitals. The upper payment
limit is a federal Medicaid limit on the amount of payments
that Medicaid can pay a statewide group of hospitals for a given
set of services. However, Health Services does not know how
much it will receive from the Emergency Services Fund or what
the upper payment limit will be when the SPCP waiver expires
in December 2004. Therefore, for fiscal years beyond 2004–05,
2222 California State Auditor Report 2002-019 California State Auditor Report 2002-019 2233
Health Services is forecasting payments from the Emergency
Services Fund at the level established before the SPCP waiver
agreement. However, it is possible that payments received in
future years could be less than the pre-waiver level, depending
on the future upper payment limit.
Health Services Is Pursuing Stable Funding Under the
Disproportionate Share Hospital Flexibility Proposal
In anticipation of various restructuring actions to address its
budget deficit, Health Services developed the disproportionate
share hospital (DSH) flexibility proposal to allow Los Angeles
County to maintain its share of DSH funding at the fiscal year
2001–02 level. However, because recent legal actions have thus
far prevented the elimination of 100 beds at LAC/USC and the
closure of Rancho Los Amigos on the scheduled dates, the value
of the DSH flexibility proposal is uncertain at this time. Further,
the proposal has not gained CMS approval and requires state
legislation to implement. Therefore, Health Services has not
reflected any potential financial impact of this proposal in its
July 2003 fiscal forecast shown in Appendix A.
Health Services Wants to Expand Health Coverage to the
Uninsured Using Funds From the State’s Children’s Health
Insurance Program
Los Angeles County and the Alameda County Medical Center,
a public hospital authority, are considering an 1115 Medicaid
Demonstration Project proposal to expand health coverage to
the uninsured in those counties on a regional basis. Funded
by California’s unused Children’s Health Insurance Program
allocation, the expansion would provide coverage of certain vital
health care services to uninsured adults (parents and childless
adults). Any proposal must be submitted to the State and gain
CMS approval. Health Services has not yet determined the
potential financial benefit of this proposal.
Health Services Proposes to Use Tobacco Settlement Funds to
Pay for Scenario III Transition Costs
The various restructuring activities planned under Scenario III
involve transition expenses, including the cost of restructuring
High Desert into a multiservice ambulatory care center. These
transition costs, which are not included in the savings estimates
shown in Table 2 or in the July 2003 fiscal forecast shown in
Appendix A, are onetime expenses and include costs related
2244 California State Auditor Report 2002-019 California State Auditor Report 2002-019 2255
to laying off employees and closing facilities, among others.
Health Services has not estimated the amount of these costs but
proposes paying for them with tobacco settlement funds, which
would require board approval.
The Pending Medicare Prescription Drugs and Modernization
Act of 2003 Could Result in Additional Revenues for
Health Services
Both the Senate and the House of Representatives put
forward a Medicare Prescription Drug bill, and each contained
a provision relating to the DSH program, with the House
version being more favorable to Health Services. Based on the
House proposal, Health Services estimates it could receive an
additional $29 million to $30 million in DSH funds for fiscal
year 2003–04, with a decrease of approximately $5 million per
year in subsequent years because, according to Health Services,
the proposal does not include a cost-of-living allowance.
However, Health Services has not reflected the potential impact
of the additional funding in its July 2003 fiscal forecast because
the Medicare Prescription Drugs and Modernization Act of 2003
was still pending in the House-Senate Conference Committee
as of July 24, 2003; therefore, Health Services does not know
whether it will pass, if the proposed additional DSH funding will
be included in the final version, and what the amount may be.
Resolution of Legal Challenges Could Affect Health Services’
Fiscal Forecast
Health Services’ July 2003 fiscal forecast is built on the
assumptions that Rancho Los Amigos will be closed and LAC/USC
will be reduced by 100 beds on July 1, 2004. However, because of
ongoing litigation, Health Services cannot be certain if or when
these reductions will occur. Accordingly, Health Services may
have to adjust its fiscal forecast as circumstances dictate.
Health Services’ Fiscal Forecast Assumes That Its Outpatient
Clinics and Health Centers Will Receive Federally Qualified
Health Center Status by Fiscal Year 2005–06
Under the current 1115 Waiver, Health Services receives
reimbursement for Medi-Cal costs of its hospital outpatient
clinics, comprehensive health centers, and health centers under
the cost-based reimbursement clinic provision. The Federally
Qualified Health Center (FQHC) program also reimburses on a
cost basis for Medi-Cal patients. Therefore, in anticipation of
2244 California State Auditor Report 2002-019 California State Auditor Report 2002-019 2255
the 1115 Waiver’s expiration at the end of fiscal year 2004–05,
Although Health Health Services submitted FQHC applications to the federal
Services’ applications Health Resources and Services Administration to ensure the
for Federally Qualified continued receipt of cost reimbursement for its outpatient
Health Center status clinics, comprehensive health centers, and health centers. If
were recently denied, approved, FQHC status would allow Health Services to continue
it intends to pursue an to receive $100 million annually. Although Health Services’
appeal or request for FQHC applications were recently denied, it intends to work
reconsideration. with its advocates in Washington, D.C., on a potential appeal
or request for reconsideration. Health Services’ July 2003 fiscal
forecast, shown in Appendix A, assumes FQHC approval for
relevant facilities beginning in fiscal year 2005–06.
Health Services Is Investigating Additional Long-Term
Revenue and Cost Efficiency Strategies
As part of the planning process that led to the January 2002
strategic plan, Health Services established a work group to
identify and investigate potential revenue and cost efficiency
strategies. Subsequently, Health Services has pursued a number
of strategies to enhance revenue generation and generate cost
savings without reducing service levels or making general staff
reductions. The most significant of these strategies to come to
fruition was the passage of Measure B as discussed previously.
Health Services reports that it has also identified 31 other potential
opportunities as of August 2003. For example, one proposal is to
identify and recover any overpayments of sales tax due to complex
regulations affecting health care products. Another proposal is
intended to help ensure that Health Services receives maximum
reimbursement from the State and federal government for capital
projects. Health Services does not expect the net benefit of these
other potential opportunities to exceed $40 million annually even
in the best-case scenario.
2266 California State Auditor Report 2002-019 California State Auditor Report 2002-019 2277
We conducted this review under the authority vested in the California State Auditor by
Section 8543 et seq. of the California Government Code and according to generally accepted
government auditing standards. We limited our review to those areas specified in the audit
scope section of this report.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
Date: September 11, 2003
Staff: Ann K. Campbell, Audit Principal
Michael Tilden, CPA
Brendan McCarthy
Almis Udrys
2266 California State Auditor Report 2002-019 California State Auditor Report 2002-019 2277
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2288 California State Auditor Report 2002-019 California State Auditor Report 2002-019 2299
APPENDIX A
Fiscal Outlook of the Los Angeles
County Department of Health
Services
The Los Angeles County Department of Health Services
(Health Services) periodically prepares a fiscal outlook
document for the Los Angeles County Board of
Supervisors (board) to provide updated projections regarding
funding sources, cost-cutting activities, and future deficits or
surpluses. Table A.1 on the following page contains Health
Services’ latest fiscal outlook, which it presented to the board
in July 2003. The table highlights the annual deficits projected
in Health Services’ June 2002 strategic plan and the projected
impact of savings from Scenario III reductions and newly
negotiated revenues. For example, in fiscal year 2002–03, Health
Services expects to receive $50 million from the federal share
of the orthopedic hospital outpatient settlement; in fiscal year
2003–04, Health Services expects to begin receiving Measure
B funding of $146 million annually. Finally, Table A.1 displays
Health Services’ adjusted projected surpluses or deficits for the
next five years. For example, assuming it is able to close Rancho
Los Amigos and eliminate 100 beds at Los Angeles County—
University of Southern California Medical Center on July
1, 2004, Health Services projects a deficit of $840.5 million by
fiscal year 2007–08.
2288 California State Auditor Report 2002-019 California State Auditor Report 2002-019 2299
TABLE A.1
Health Services’ Fiscal Outlook, July 2003
(Dollars in Millions Based on Fiscal Year 2002–03 Supplemental Budget Resolution)
Fiscal Years
2002–03 2003–04 2004–05 2005–06 2006–07 2007–08
Surplus/deficit projected as of June 26, 2002, strategic plan ($326.6) ($549.2) ($709.4)
Scenario III reductions/use of fund balance * 267.8 327.8 357.5
Original fiscal stabilization revenue request to help fund
Scenario III, extrapolated through fiscal year 2007–08 * (58.8) (221.4) (351.9) ($387.3) ($423.7)
Forecast update† $185.0‡ 3.8 (122.2) (6.3)§ (114.2) (151.8)
Contribution to new LAC/USC equipment fund (55.0) — — — — —
Annual surplus/(deficit) without additional funding 130.0 (55.0) (343.6) (358.2) (501.5) (575.5)
Additional Funding
Measure B — 146.0 146.0 146.0 146.0 146.0
Acceleration of Rancho Los Amigos alternate governance or
closure — 58.6 — — — —
Disproportionate Share Hospital funding redistribution
resulting from Rancho Los Amigos closure and
High Desert conversion, based on current law — — 6.7 6.7 6.9 7.1
State/federal transition agreement
Selective Provider Contracting Program 80.0 70.0 50.0 ?ll ?ll ?ll
Orthopedic outpatient lawsuit settlement—federal share 50.0 — — — — —
Subtotal, additional funds 130.0 274.6 202.7 152.7 152.9 153.1
Annual surplus/(deficit) with additional fundingll 260.0 219.6 (140.9) (205.5) (348.6) (422.4)
Fund balance at start of fiscal year 121.0 130.0# 349.6 208.7 3.2 (345.4)
Cumulative year-end fund balance/(deficit)ll 381.0 349.6 208.7 3.2 (345.4) (767.8)
Impact of deferment of Rancho Los Amigos closure
(207 beds) until July 1, 2004 — (58.6) — — — —
Impact to fund balance at start of fiscal year — — (58.6) (58.6) (58.6) (58.6)
Adjusted cumulative year-end fund balance/(deficit)ll 381.0 291.0 150.1 (55.4) (404.0) (826.4)
Impact of deferment of LAC/USC 100-bed reduction until
July 1, 2004** — (16.1) — 2.0 — —
Impact to fund balance at start of fiscal year — — (16.1) (16.1) (14.1) (14.1)
Adjusted cumulative year-end fund balance/(deficit)ll 381.0 274.9 134.0 (69.5) (418.1) (840.5)
* The $56.8 million of projected savings for fiscal year 2002–03 Scenario III savings were already in the fiscal year 2002–03 budget base, and
therefore do not appear on this schedule.
† Reflects reduced savings estimates for the Scenario III proposal to restructure psychiatric services.
‡ Already includes $50 million reserved for the new LAC/USC equipment fund.
§ Reflects release of $96.1 million trust fund originally reserved to mitigate audit finding by the Office of Inspector General.
ll We describe other factors that Health Services believes may affect its future fiscal condition on pages 23 through 26 of our report.
# Of the $381 million in the prior fiscal year’s cumulative year-end fund balance, Health Services already includes $251 million in the fiscal year
2003–04 “Forecast Update” line to consistently show Health Services’ fiscal outlook without the “Additional Funding” items.
** Defer to July 1, 2004, LAC/USC 100-bed reduction. Due to the delayed impact of Disproportionate Share Hospital funding, Health Services
will receive $2 million in fiscal year 2005–06.
Key:
High Desert: High Desert Hospital
LAC/USC: Los Angeles County/University of Southern California Medical Center
Rancho Los Amigos: Rancho Los Amigos National Rehabilitation Center
3300 California State Auditor Report 2002-019 California State Auditor Report 2002-019 3311
APPENDIX B
Glossary of Terms and Abbreviations
1115 Medicaid Refers to Section 1115 of the federal Social Security Act, which allows the secretary of Health
Demonstration Project and Human Services to waive any provision of the Medicaid law for demonstration projects
(1115 Waiver) that test a program improvement or an innovation of interest to the federal government.
For example, under an 1115 Waiver, a state can be exempt from compliance with the usual
requirements or may receive federal matching funds for expenditures not ordinarily eligible
under Medicaid.
Acute care A pattern of health care in which the patient is treated for an acute episode of illness, for the
sequel of an accident or other trauma, or during recovery from surgery. It may involve intensive
care and is often necessary for only a short period of time.
California Medical A small, independent commission established in 1982 to negotiate contracts for specific
Assistance services in the Medi-Cal program. The goal of the commission is to promote efficient and cost-
Commission (CMAC) effective Medi-Cal program expenditures through a system of negotiated contracts, fostering
competition and maintaining access to quality health care for beneficiaries.
Comprehensive health A freestanding center operated by Health Services that provides a wide array of outpatient
center care, including primary care, specialty care, and/or urgent walk-in services.
Department of Health The federal department responsible for health-related programs and issues. Formerly the
and Human Services Department of Health, Education, and Welfare.
Disproportionate share California (and other states) has special reimbursement programs aimed at making up the shortfall
hospital (DSH) for hospitals when care is provided to a patient who has little or no funds to cover the cost of care
or who is a Medi-Cal beneficiary. Under Senate Bill 855 (Chapter 279, Statutes of 1991), a hospital
that provides a certain amount of uncompensated care is designated as a DSH and may qualify
for additional funds. DSHs receive supplemental payments in addition to Medi-Cal payments for
services rendered. To qualify, a hospital must have a Medi-Cal inpatient utilization rate at least
one standard deviation above the statewide mean or a low-income utilization rate in excess of
25 percent. Funding is through intergovernmental transfers from public entities and matching
federal financial participation fund payments; no state funds are involved.
Federally Qualified A federal payment option that enables qualified providers in medically underserved areas
Health Center to receive cost-based Medicare and Medicaid reimbursement and allows for the direct
reimbursement of nurse practitioners, physician assistants, and certified nurse midwives. Many
outpatient clinics and specialty outreach services are qualified under this provision.
Health center A Health Services’ facility that provides primary care and/or public health services.
Hospital An institution that is built, staffed, and equipped for the diagnosis of disease; for the treatment,
both medical and surgical, of the sick and the injured; and for their housing during this process.
Inpatient care Care given a registered bed patient in a hospital, nursing home, or other medical or post-
acute-care institution.
Multiservice A center designed to provide specialty services, surgical and nonsurgical procedures,
ambulatory care comprehensive diagnostic services, and a limited amount of urgent care. All MACC services are
center (MACC) provided on an outpatient basis.
Measure B On November 5, 2002, the voters of Los Angeles County approved Measure B, which assessed
(Preservation of a special tax to support emergency, trauma, and bioterrorism activities in Los Angeles County.
Trauma Centers and The tax is 3 cents per square foot per parcel and became effective in fiscal year 2003–04.
Emergency Medical Health Services and the chief administrative officer recommended that Health Services
Services; Bioterrorism would receive approximately $140 million to provide trauma and/or emergency services and
Response Initiative) $6 million to support public health bioterrorism needs beginning in fiscal year 2003–04.
Medicaid A federal entitlement program for the poor who are blind, aged, disabled, or members of
families with dependent children. Each state has its own standards for qualification. Authorized
by Title XIX of the Social Security Act, Medicaid does not cover all poor people but only those
who meet specified eligibility criteria. Subject to broad federal guidelines, states determine
the benefits covered, program eligibility, rates of payment for providers, and methods of
administering the program. All states but Arizona have Medicaid programs.
Medi-Cal California’s version of the Medicaid program.
continued on next page
3300 California State Auditor Report 2002-019 California State Auditor Report 2002-019 3311
Medically indigent Medical indigency is the nexus of health need and inability to pay. Health insurance status
and family income are two important factors driving medical indigency and can be considered
risk factors.
Outpatient care Care given a person who does not require hospitalization. Also called ambulatory care. Many
surgeries and treatments are now provided on an outpatient basis, while previously they had
been considered reason for inpatient hospitalization.
Primary care Basic or general health care, traditionally provided by family practice, pediatrics, and internal
medicine.
Public-private A collaborative effort between Health Services and private, community-based providers
partnership program (partners) that are committed to providing quality health services in a culturally and
linguistically appropriate environment to low-income and uninsured communities. Comprises
community clinics and private medical groups with which Health Services contracts to provide
outpatient primary care and limited specialty care to Health Services’ patients.
Residential Provides supervised 24-hour live-in alcohol and drug programs within structured treatment
rehabilitation center recovery environments.
Secondary care Services provided by medical specialists, such as cardiologists, urologists, and dermatologists,
who generally do not have first contact with patients.
Selective Provider A state program that operates through a waiver under Section 1915(b) of the Social Security
Contracting Program Act. Originally approved in 1982, the 1915(b) waiver allows CMAC to negotiate Medi-Cal rates
(SPCP) with hospitals and to contract with a select number of hospitals. The waiver also covers the
Senate Bill 1255 Supplemental Payment program. Every two years the State must reapply to
renew the waiver.
Senate Bill 855, The law that created the inpatient DSH program. Hospitals qualify on an annual basis.
Chapter 279, Supplemental payment adjustments are made to qualified inpatient acute-care hospitals
Statutes of 1991 in addition to Medi-Cal payments for services rendered. To qualify, a hospital must have a
Medi-Cal inpatient utilization rate of at least one standard deviation above the statewide mean
or a low-income utilization rate in excess of 25 percent with at least a 1 percent Medi-Cal
utilization rate. Payments are based on the hospital’s peer group and low-income rate.
Payments are funded by intergovernmental transfers from public entities and matching federal
financial participation; no state funds are involved.
Senate Bill 1255, Welfare and Institutions Code, Section 14085.6. The law that created the Emergency
Chapter 996, Services and Supplemental Payment Fund. Supplemental payments are made to qualifying
Statutes of 1989 hospitals based on negotiations between the hospital and CMAC. Qualifying hospitals must
be DSH-qualified, contracting under the SPCP to provide Medi-Cal services, and licensed to
provide emergency services on site. Children’s hospitals, however, can maintain emergency
services in conjunction with other hospitals. Hospitals that provide emergency services must
demonstrate a need for extra funding to cover the costs of these services. CMAC determines
the award levels, and the California State Department of Health Services administers and
distributes the funds. There is no ceiling on the individual payments. Funding is through
intergovernmental transfers and matching federal financial participation.
Senate Bill 1953, This act is based on the Milestone 4 Report (prepared by the Hospital Safety Board and the
Chapter 740, Office of Statewide Health Planning and Development) from 1990 and is a long-term plan
Statutes of 1994 to bring existing hospitals up to the requirements of the 1973 Alquist Hospital Seismic Safety
Act. The intent of the act is to ensure that hospitals can remain functional after an earthquake,
maintain care of the patients already there at the time of the earthquake, and provide care to
persons injured in the earthquake.
Tobacco settlement The tobacco settlement, known as the master settlement agreement, among other things
requires the tobacco industry each year for 10 years to pay $25 million to fund a charitable
foundation that will support the study of programs to reduce teen smoking and substance
abuse and the prevention of disease associated with tobacco use.
Upper payment limit A federal Medicaid limit on the amount of payments that Medicaid can pay a statewide group
of hospitals for a given set of services. The limit is expressed as a percentage of the estimated
amount that would be paid for the same services under Medicare. A recent federal policy
change reduced the upper payment limit from 150 percent to 100 percent.
3322 California State Auditor Report 2002-019 California State Auditor Report 2002-019 3333
Agency’s comments provided as text only.
County of Los Angeles
Department of Health Services
313 N. Figueroa
Los Angeles, CA 90012
August 28, 2003
Elaine M. Howle
State Auditor
555 Capitol Mall, Suite 300
Sacramento, California 95814
Dear Ms. Howle:
The Los Angeles County Department of Health Services appreciates the Bureau of State
Audits’ second audit required under Chapter 195, Statutes of 2001, titled Los Angeles County
Department of Health Services: Despite Securing Additional Funding and Implementing Some
Cost-Cutting Measures, It Still Faces Significant Challenges to Addressing Its Growing Budget
Deficit. Additionally, the Department wishes to express its appreciation to the audit team for again
approaching this audit in a thoughtful and professional manner.
The Department generally agrees with the draft report, and requests that the minor changes
1
discussed and agreed to at the August 27, 2003 exit conference are included in your final audit
report. As stated in the draft report, the Department continues to face significant hurdles in
implementing the redesign plan adopted by our Board of Supervisors in June 2002. Many of
those hurdles, including legal challenges, are out of the Department’s control. Therefore, we have
focused our efforts on implementation of the cost-savings objectives that can be implemented at
this time. However, as your report indicates, our anticipated budget deficits continue to grow. Our
strategy for long-term stability clearly involves continued partnership with the State and Federal
governments and redesigning our system to be modern and efficient through the use of information
technology, improved clinical practices and consolidated administrative functions.
Again, the Department appreciates your attention to the important public policy decisions facing the
County’s public health system.
Sincerely,
(Signed by: Thomas L. Garthwaite)
Thomas L. Garthwaite, M.D.
Director and Chief Medical Officer
Los Angeles County Department of Health Services
3322 California State Auditor Report 2002-019 California State Auditor Report 2002-019 3333
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3344 California State Auditor Report 2002-019 California State Auditor Report 2002-019 3355
COMMENT
California State Auditor’s Comment
on the Response From the
Los Angeles County Department
of Health Services
To provide clarity and perspective, we are commenting on
the Los Angeles County Department of Health Services’
(Health Services) response to our audit report. The
number corresponds with the number we have placed in
Health Services’ response.
1
Our report includes the minor changes agreed to at the exit
conference.
3344 California State Auditor Report 2002-019 California State Auditor Report 2002-019 3355
cc: Members of the Legislature
Office of the Lieutenant Governor
Milton Marks Commission on California State
Government Organization and Economy
Department of Finance
Attorney General
State Controller
State Treasurer
Legislative Analyst
Senate Office of Research
California Research Bureau
Capitol Press
3366 California State Auditor Report 2002-019