December 18, 2013
Pursuant to Elections Code Section 9005, we have reviewed the
proposed initiative
(A.G. File No. 13‑0040) that would require certain home care
organizations to spend at least
75 percent of their revenue on direct home care services versus
administrative overhead.
Background
Private Home Care Industry. Private home
care organizations employ home care aides to provide services to
consumers who are unable to perform the activities on their own due to
their age or disability. Because these private entities are not
currently required to be licensed, it is difficult to determine the
exact number of organizations currently in operation in California.
(Chapter 790, Statutes of 2013 [AB 1217, Lowenthal], will require
licensure of private home care organizations beginning in 2015.)
Additionally, official data is not currently available on the annual
revenue each home care organization is currently generating. However, in
our research, we found estimates of between 1,200 and 2,500 private home
care organizations in California with annual revenue ranging from
$100,000 to over $5 million (based on a survey of a significant portion
of the home care industry).
Services Provided by Private Home Care Organizations.
These private home care organizations employ home care aides to provide
services such as bathing, dressing, feeding, personal hygiene,
transferring, ambulating, toileting, housekeeping, laundry, and
transportation. Some home care organizations also operate home health
and hospice services in addition to their home care services.
Proposal
This measure would require private home care entities to spend at
least 75 percent of their annual revenue on direct services costs, file
cost reports with state agencies, and pay penalties for failure to
comply with the measure's provisions. Although the measure becomes
effective upon enactment, home care organizations are not required to
comply with the main provisions until January 2016 (or up to one year
later if determined necessary by a specified state agency).
The measure states that it does not apply to certain home care
entities, or to the provision of certain home care services, including,
but not limited to: (1) individual home care aides who contract directly
with consumers, (2) licensed hospice programs, (3) licensed health
facilities, (4) services provided under the In-Home Supportive Services
program, and (5) licensed residential care facilities for the elderly.
Places New Requirements on Private Home Care Industry
Defines Direct Home Care Costs and Administrative
Overhead Costs. This measure defines“direct home care
services”as the wages and benefits, payroll taxes, workers’ compensation
and unemployment insurance premiums, recruiting, training, orientation,
and background checks for all home care aides and care managers. The
measure defines “administrative overhead costs" as all costs other than
direct home care costs. Examples of administrative overhead costs
include compensation and benefits for executives, profit, facility and
office equipment costs, advertising costs, distribution to shareholders,
and conference costs.
Establishes a Minimum Direct Home Care Services Ratio.
This measure would require home care organizations to spend at least 75
percent of their annual home care services revenue on direct home care
services, and no more than 25 percent on administrative overhead costs.
Creates Process to Apply for an Adjustment to the Ratio.
This measure allows home care organizations to apply for
an adjustment to the Minimum Direct Home Care Service Ratio for two-year
increments of time if such an adjustment is needed to allow the
organization to continue to operate and maintain “financial integrity.”
Establishes Penalties for Organizations That Do Not
Comply. Home care organizations that are out of compliance
with this initiative may be subject to a civil penalty of between $1,000
and $10,000 annually for each violation.
Requires the Department of Social Services (DSS) to Administer and
Enforce
This measure places several new implementation, oversight, and
enforcement responsibilities with DSS. Below, we summarize the major new
responsibilities for the department.
Requires Home Care Organizations to Provide Cost Reports
Annually. To ensure that home care organizations are in
compliance with the Minimum Direct Home Care Services Ratio, this
measure requires these entities to submit annual cost reports to DSS.
These reports must specify the amount of home care services revenue,
direct home care services costs, and administrative overhead costs. The
DSS is required to make these reports available to the public upon
request.
Requires DSS to Review Applications for Adjustments to
the Ratio. The DSS would be responsible for developing the
procedure through which a home care organization would apply for an
adjustment to the Minimum Direct Home Care Service Ratio. In determining
whether an organization is eligible for an adjustment, DSS is required
to consider such things as whether the organization has (1)
administrative overhead costs that are incurred for reasons beyond the
control of the organization, (2) start-up costs for new organizations,
and (3) higher costs associated with higher-cost geographic areas.
Requires DSS to Enforce Compliance With the Measure.
This measure gives DSS the authority to verify that home care
organizations are in compliance with this measure through
investigations, inspections, and audits. When the department has
identified a violation, it is required to notify the organization of the
violation in writing. This notification is required to contain
information about assessed penalties and the organization’s right to
request a hearing held by DSS.
Requires DSS to Make Oversight Information Publicly
Available. In addition to receiving the annual cost
reports, DSS would be required to make information regarding complaints,
citations, findings of violations, assessments of penalties and fines,
and other enforcement actions reasonably available to the public. The
measure also requires the department to establish a public registry of
home care organizations. This measure would require the registry to
indicate which home care organization had violated the requirements of
this measure and the nature of the violation.
Authorizes DSS to Establish Fees to Cover Implementation
and Enforcement Costs. In order to cover the costs of
administering and enforcing the measure, this measure gives DSS the
authority to assess fees on home care organizations. It should be noted
that, under this measure, these fees would count towards a home care
organization's administrative overhead costs.
Establishes the Home Care Enforcement Fund.
All fees, fines, and penalties collected as a result of this measure
would be deposited into the Home Care Enforcement Fund established by
the measure to be used by DSS for implementation and enforcement.
Additionally, if the resources in the fund are more than is needed for
implementation and oversight, DSS has the ability to use the remaining
funds to further other department purposes.
Fiscal Effects
Apart from state agency administrative costs, the fiscal impact of
the measure on state and local governments depends largely on the
behavioral responses of home care organizations subject to the measure,
as discussed below.
State Agency Administrative Costs
The measure imposes new administrative, oversight, and workload
responsibilities on DSS. Although the cost to comply with these
administrative duties is likely in the range of $7 million to $10
million annually, the measure gives DSS the authority to establish a fee
to be paid by home care organizations to cover these costs. Should DSS
exercise this authority, there would be no state General Fund cost
associated with the new requirements the measure places on DSS.
Potential Behavioral Responses Could Vary Widely
At this time, the number of home care organizations that are not in
compliance with the Minimum Direct Home Care Service Ratio is unknown.
Therefore, it is unknown how many home care organizations would be
required to take action in order to comply with the measure's
requirements. Further, if there are organizations that are not currently
spending at least 75 percent of their revenue on direct services, there
is no data available to tell us how close they are to meeting the ratio
requirement or what their annual revenue is today. As a result of this
measure, there are various behavioral responses that could occur across
the private home care industry for organizations that are not spending
at least 75 percent of their revenue on direct home care costs. Below,
we provide a listing of the primary potential behavioral responses, the
deployment of which depend on the unique circumstances of each home care
organization (discussed further below).
- Apply for an Adjustment to the Ratio.
In order to be in compliance with this measure, some home care
organizations may decide to exercise the option to apply for an
adjustment to the Minimum Direct Home Care Service Ratio. The
purpose of the provision of the measure that allows home care
organizations to apply for this adjustment is to permit
organizations to continue to operate and maintain financial
integrity.
- Redistribute Expenditures Within Existing Revenue.
Some home care organizations may decide to redistribute their costs
within their existing revenue stream in order to comply with the
required cost ratio. For example, an organization with $1 million in
annual revenue that is currently spending only $650,000 on direct
services and $350,000 on administrative overhead may try to find a
way to shift $100,000 from administration to direct services. An
example of this would be an organization that decides to reduce its
profit or administrative costs and increase the home care worker
hourly wage.
- Increase Total Annual Revenue. In
order to comply with the ratio, a home care organization could
decide to increase its total annual revenue. An example of this
behavior would be an organization that currently has $1 million in
annual revenue, of which $650,000 (65 percent) is spent on direct
services. This organization could increase what they charge
recipients for services so that their annual revenue increases to
$1.45 million. If the additional $450,000 that is generated is used
for direct service costs (such as pay increases for home care
workers), the organization would now be in compliance with the ratio
($1.1 million direct costs/$1.45 million total revenue).
- Go Out of Business. If a home care
organization is not able or willing to apply for an adjustment to
the required cost ratio or find a way to be in compliance with the
ratio, it may decide to go out of business.
- Operate Out of Compliance, Pay Penalty.
A home care organization may choose to operate out of compliance and
pay the civil penalties assessed by DSS. In these cases, an
organization would have to decide that it is more cost-effective for
them to pay the fine than operate in compliance. It should be noted
that Chapter 790 will require licensure of private home care
organizations in the future. To the extent operating out of
compliance would jeopardize an organization’s licensing status, this
response is less likely.
Response to Measure Will Likely Vary Across the Private
Home Care Industry. Private home care organizations may
implement one or a combination of strategies identified above (or others
that we have not identified in this analysis) in response to meeting the
requirements of this measure. Strategies will likely vary based on the
characteristics of each individual organization. Some of the relevant
characteristics include:
- How Close the Organization Is to Meeting the Ratio.
A home care organization that is very close to meeting the ratio
requirement may react very differently than an organization that
would have to make significant changes to its business to become
compliant with the measure.
- Existing Prices Charged. As we point
out, one reaction a home care organization may have to come into
compliance with this measure is to charge more for services. We note
that if an organization is already charging more than other
competing organizations for services, it would be less likely to
increase its prices to a level that would make it difficult for them
to compete for clients.
- Amount of Annual Profit. A home care
organization that is currently able to secure a large portion of its
revenue as profit would likely have a different reaction than an
organization that has a very small portion of its annual revenue
going towards profit. This is because organizations that have more
profit may have more ability to redirect some of the profit
(considered to be administrative overhead costs under the measure)
towards direct services than an organization with very little profit
available to redirect.
- Size of Organization. The size of an
organization may impact how it reacts to this measure. A small
organization may have fixed costs associated with rent and necessary
overhead that may make it more difficult for them to reduce
administrative costs than a larger organization.
Fiscal Impact of Potential Behavioral Responses
Some Responses to Measure Would Have Little, if Any,
Impact on State or Local Finances. The ability to receive
an adjustment to the required cost ratio could potentially allow home
care organizations receiving the adjustment to continue to operate
largely as they currently do. In such cases, there would likely be
little, if any, fiscal impact on state and local governments. Similarly,
to the extent organizations are able to shift costs from administrative
overhead to direct services without changing their overall annual
revenue, there could be little, if any, impact on state and local
government finances.
Some Responses Could Result in Uncertain Costs or
Savings. As we discuss above, a potential reaction to this
measure may be for a home care organization to increase its annual
revenue. To the extent an organization increases the price of its
services (using the price increase to increase the wages of its home
care aides), there could be an increase in state revenues in the form of
higher personal income taxes paid by home care aides (if these home care
aides are earning enough to be required to pay annual income taxes).
Under the scenario where a home care organization goes out of
business, there could be lost tax revenue to the state if another
organization does not pick up the clients that were previously being
served by the organization that went out of business. This is because
the organization that went out of business would no longer be paying
corporate taxes and some of the home care aides of the former business
may no longer be working or paying income taxes. (On the other hand, it
is possible that the organization may stop operating a home care
business, but decide to operate a home health or referral agency
instead, thus continuing to generate tax revenue to the state.)
Overall Fiscal Impact Depends on the Mix of Behavioral
Responses. The net fiscal impact of this measure (beyond
the relatively certain state agency administrative costs) will depend on
how each private home care organization will respond to the measure.
Since how an organization responds to the measure will vary based on the
individual characteristics of that organization, the initiative’s fiscal
impact on state and local governments could vary by home care
organization. For example, a home care organization that raises revenue
and wages for aides to become compliant with this measure could have a
positive effect on state finances through potentially higher income
taxes. However, this positive effect on state revenues could be offset
if another organization goes out of business and an organization that
stays in business does not assume its prior clients.
Most Likely Responses Have Little to No Net Fiscal
Impact. Although we have pointed out various responses
home care organizations may exercise as a result of this measure, and
have noted the uncertainty surrounding the response that each individual
home care organization would make to the measure, we consider the most
likely responses to be ones that result in, at most, a minor net fiscal
impact on state and local governments. Prior to going out of business,
we consider it to be likely that an organization would apply for an
adjustment to the cost ratio that is required by this measure. This is
because the purpose of the adjustment is to permit home care
organizations to continue to operate and maintain their financial
integrity. As discussed above, an adjustment could potentially allow the
home care organization to operate similarly to its current operations.
We also think that organizations that are close to meeting the ratio
requirement would likely manage to adjust their costs within their
existing revenue to become compliant. Both of these likely responses
would have little to no impact on state and local finances. Finally, we
consider it unlikely that organizations that go out of business as a
result of not being able to comply with this measure are not at least
substantially replaced by new or existing organizations that are able to
operate within the requirements of this measure. As a result, we find
that the most likely responses to this component of this measure are
those that have, at most, a minor net impact on state and local
finances.
Summary of Fiscal Effects
Based on our analysis, we estimate that the measure would have the
following significant fiscal impact:
- State administrative costs of between $7 million and $10 million
annually, with the authority to fully recover these costs from fees
levied on certain home care organizations.
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