Performance Audit Division Performance Audit Department of ...

A REPORT

TO THE

ARIZONA LEGISLATURE

Performance Audit Division

Performance Audit

Department of Health Services

Division of Licensing Services-- Healthcare and Child Care Facility Licensing Fees

January ? 2009 REPORT NO. 09-01

Debra K. Davenport Auditor General

The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators and five representatives. Her mission is to provide independent and impartial information and specific recommendations to improve the operations of state and local government entities. To this end, she provides financial audits and accounting services to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of school districts, state agencies, and the programs they administer.

The Joint Legislative Audit Committee

Representative John Nelson, Chair

Representative Tom Boone Representative Jack Brown Representative Peter Rios Representative Steve Yarbrough Representative Jim Weiers (ex-officio)

Senator Robert Blendu, Vice Chair

Senator Carolyn Allen Senator Pamela Gorman Senator Richard Miranda Senator Rebecca Rios Senator Tim Bee (ex-officio)

Audit Staff

Melanie M. Chesney, Director Shan Hays, Manager and Contact Person Jeremy Weber, Team Leader Steven Meyeroff

Copies of the Auditor General's reports are free. You may request them by contacting us at:

Office of the Auditor General

2910 N. 44th Street, Suite 410 ? Phoenix, AZ 85018 ? (602) 553-0333

Additionally, many of our reports can be found in electronic format at:



DEBRA K. DAVENPORT, CPA AUDITOR GENERAL

STATE OF ARIZONA

OFFICE OF THE

AUDITOR GENERAL

January 7, 2009

WILLIAM THOMSON DEPUTY AUDITOR GENERAL

Members of the Arizona Legislature

The Honorable Janet Napolitano, Governor

Ms. January Contreras, Acting Director Department of Health Services

Transmitted herewith is a report of the Auditor General, a Performance Audit of the Department of Health Services, Division of Licensing Services--Healthcare and Child Care Facility Licensing Fees. This report is in response to an October 5, 2006, resolution of the Joint Legislative Audit Committee. The performance audit was conducted as part of the sunset review process prescribed in Arizona Revised Statutes ?41-2951 et seq. I am also transmitting with this report a copy of the Report Highlights for this audit to provide a quick summary for your convenience.

As outlined in its response, the Department of Health Services agrees with the finding and plans to implement all of the recommendations directed to it.

My staff and I will be pleased to discuss or clarify items in the report.

This report will be released to the public on January 8, 2009.

Sincerely,

Attachment

Debbie Davenport Auditor General

2910 NORTH 44th STREET ? SUITE 410 ? PHOENIX, ARIZONA 85018 ? (602) 553-0333 ? FAX (602) 553-0051

SUMMARY

The Office of the Auditor General has conducted a performance audit of the Department of Health Services (Department), Division of Licensing Services (Division)--Healthcare and Child Care Facility Licensing Fees, pursuant to an October 5, 2006, resolution of the Joint Legislative Audit Committee. This is the first in a series of three reports on the Department and was conducted as part of the sunset review process prescribed in Arizona Revised Statutes (A.R.S.) ?41-2951 et seq. This report focuses on licensing fees for healthcare and child care facilities. The other two reports will focus on the Department's substance abuse treatment programs and the 12 statutory sunset factors.

As of October 1, 2008, the Department licensed 4,476 healthcare facilities (such as hospitals, nursing homes, and assisted living centers) and 2,740 child care facilities (child care centers and group homes). In fiscal year 2008, the Department conducted 15,110 inspections of these facilities and handled more than 3,300 complaints against them. These regulatory activities cost about $10.9 million in General Fund monies. Like other states, Arizona charges fees for state licensure. Most of these fees are set or capped in statute and deposited into the General Fund, partially offsetting regulatory costs. In fiscal year 2008, the Division collected less than $1.1 million in licensing-fee revenue for these facilities.

Licensing fees could be modified to cover more regulatory costs (see pages 9 through 21)

As of fiscal year 2008, the General Fund subsidized about 90 percent of the State's cost of regulating healthcare and child care facilities. Licensing fees, which cover the remaining 10 percent, have remained largely unchanged since the 1970s and 1980s. Although the Legislature authorized the Department to increase licensing fees to generate an additional $600,000 in fee revenue in fiscal year 2009, even after this increase, the General Fund will still subsidize about 85 percent of regulatory costs.1 Further, the regulatory workload has increased significantly--the number of licensed facilities alone has increased by 19 percent between fiscal years 2003 and 2008-- and this increased workload will likely further increase the need for General Fund monies.

1 The increased revenue will not increase the Department's overall funding because the General Fund appropriation for licensing was reduced by $600,000 for fiscal year 2009.

Office of the Auditor General

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Rather than paying for regulatory costs from the General Fund, some states and some other Arizona regulatory programs set their licensing fees to cover regulatory costs. Arizona's licensing fees for healthcare and child care facilities are considerably lower than those in two states that have set healthcare licensing fees to fully cover regulatory costs. For example, California and Nevada, which both charge hospitals a licensing fee that covers the full regulatory cost, have licensing fees of $25,776 and $8,000, respectively, for a 100-bed hospital, while Arizona's fee for a hospital of the same size is $2,850. In Arizona, licensing fees fully fund regulatory activities for such professions as allopathic physicians, and within the Department itself, licensing fees fully fund regulation of environmental laboratories and hearing and speech professionals.

Although the Department does not have the authority to raise licensing fees for healthcare and child care facilities, it is the logical place to start in developing a proposal for possible fee increases. Licensing fees for these facilities are set in statute, and therefore, the Legislature would need to approve any fee changes. However, the Department is in the position to determine regulatory costs, and therefore to develop a fee proposal that could reduce or eliminate the General Fund subsidy. The Department should develop and implement a systematic approach to regularly evaluate its licensing costs and propose new fees that would cover more, if not all, of its costs. As part of this approach, the Department should consider factors that affect costs, including licensed capacity, the time it takes to regulate different types of facilities, and a facility's compliance with requirements. The Department should also assess the efficiency of its operations to ensure costs are as low as possible, assess the adequacy of its information systems for measuring its costs, and obtain input from the regulated facilities regarding proposed licensing fees. Finally, the Department should develop a proposal for legislative consideration. After receiving the Department's proposal, the Legislature should consider modifying licensing fees through revising the statutory caps, authorizing the Department to set fees in rule, or establishing a mechanism in statute for determining fees.

State of Arizona

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