Program Review and Investigations Committee



2016 Interim


<MeetMDY1> May 12, 2016


Call to Order and Roll Call

The<MeetNo2> Program Review and Investigations Committee met on<Day> Thursday,<MeetMDY2> May 12, 2016, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Greg Hager called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Danny Carroll, Co-Chair; Representative Terry Mills, Co-Chair; Senators Perry B. Clark, Dan "Malano" Seum, and Stephen West; Representatives Tim Couch, Ruth Ann Palumbo, Rick Rand, Arnold Simpson, Chuck Tackett, and Jeff Taylor.


LRC Staff: Greg Hager, Committee Staff Administrator; Chris Hall; Colleen Kennedy; Jean Ann Myatt; Perry Nutt; Chris Riley; Meredith Shores; William Spears; Shane Stevens; Joel Thomas; and Kate Talley, Committee Assistant.


Election of Co-chairs

Greg Hager asked for nominations for a Senate Co-Chair.


Senator Seum nominated Senator Carroll. Senator West seconded the motion. Senator Seum made a motion that nominations cease and that Senator Carroll be elected by acclamation. Senator Clark seconded the motion. There being no objections, Senator Carroll was elected by acclamation.


Senator Carroll asked for nominations for a House Co-Chair.


Representative Palumbo nominated Representative Mills. Representative Simpson seconded the motion. Representative Simpson made a motion that nominations cease and that Representative Mills be elected by acclamation. Representative Rand seconded the motion. There being no objections, Representative Mills was elected by acclamation.


Senator Carroll welcomed new members Senator Julie Raque Adams and Representatives Chuck Tackett and Jeff Taylor.


Minutes for December 10, 2015

Upon motion by Representative Simpson and second by Representative Palumbo, the minutes for the December 10, 2015, meeting were approved by voice vote, without objection.


            Selection of Study Topics for 2016

The committee recessed for each caucus to meet to select one study each.


            Representative Mills moved to select four topics for study by staff:

·        Kentucky Health Cooperative;

·        county jails housing state inmates;

·        practices, procedures, administrative regulations, and state laws related to adoption and foster care; and

·        qualification of property for agricultural and horticultural valuation and methods used to value that property.


Senator Carroll clarified that other topics will be addressed during the year.


Representative Mills explained that the committee chose only four topics to allow studies to be presented in a timely manner and remain relevant.


Staff Report: Medical Care for Kentucky Inmates In Community Medical Facilities: Feasibility And Savings Are Uncertain

Jean Ann Myatt said secured hospital units for inmates save money and have been used in many states, but it appears that only one has received explicit federal Medicaid approval. Nursing facility care is usually considered only for parolees because of the security cost if inmates were placed in a nursing facility.


Medicaid is available for eligible parolees, but federal Medicaid funds were denied in one state for a nursing facility dedicated to parolees. It is even less likely that federal Medicaid funds would be approved for a secured nursing facility unit for inmates, even though most Kentucky inmates now qualify under the Medicaid expansion.


Even with federal Medicaid funds, it is conceivable that correctional savings would not offset the state’s added Medicaid expenses, at least in the short term. In order for Medicaid to begin to cover costs, the eligible inmate must be an inpatient at a medical institution for 24 hours or longer.


There are four models of care that could permit the state to save money on inmate medical care. One model is for acute care, which is developing secured units in hospitals. Three long-term-care models are for nursing facilities. Two involve medical parolees, and one proposes placing inmates in a secured nursing unit.


When an inmate goes to the hospital, one or two officers stay with the inmate at all times. If a hospital has a secured unit, as few as two officers could provide security for the entire unit, reducing correctional staff cost. Many states reported using secured units, including Kentucky in the past. Some states reported that hospitals were reluctant to dedicate beds to inmates without additional compensation. It seems likely that Kentucky’s arrangements ended because hospitals did not find it worthwhile. Hospitals with more empty beds were reported more likely to be willing to consider secured units.


Most states have used these units without asking for approval, so there is some uncertainty about continued Medicaid payments. Staff found only one unit formally approved by the federal Medicaid agency. If Medicaid continued to pay for inmates in secured hospital units, the state might save up to $833,000 annually if it could arrange for secured hospital units in the Louisville area, which has four prisons. No other area has enough inmates going to hospitals to justify a secured unit.


Placing current inmates in a nursing facility, as they are in hospitals, would be practical only in a secured nursing unit. Although federal guidance has consistently indicated that federal Medicaid funds would be available for eligible inmates in long-term care, certain state and federal guaranteed rights would be restricted in a secured unit, and federal funds might be denied. For parolees, however, there are possibilities for federal Medicaid funding. These would depend on the parole process and conditions. Even with Kentucky’s relatively small Medicaid percentage costs, it is conceivable that the Department of Corrections’ (DOC) savings would not offset the state’s added Medicaid expenses, at least in the short term.


Shane Stevens said correctional savings from placing inmates in nursing facilities are unclear. Unlike hospital care, which prisons cannot provide at a reasonable cost, prisons do provide nursing care within their infirmaries. It is possible that placing nursing care eligible inmates in nursing facilities could provide savings due to Medicaid reimbursement, but such savings are uncertain. Most discussions of inmate nursing facility savings assume that there is a specific cost associated with caring for an inmate in a prison that can be offset with a Medicaid payment to a nursing facility. This assumption is only partly correct.


 Facility costs and utilities are largely fixed in a prison. Prison medical and non-medical personnel do not change immediately when an inmate is released. While it might be possible to reduce such staff gradually over time if enough inmates were released, the current number of nursing care eligible inmates is very small and almost half of the state’s inmate population reside in jails waiting to potentially replace this small group. As a result, prison personnel can also be considered a fixed cost. DOC does, however, pay a per diem of $31 for each inmate residing in a local jail. If enough inmates were placed in a nursing facility to create additional vacancies for jailed inmates to fill, this is a variable cost that could be reduced. Prescriptions, consumables, and outpatient care can also be considered variable costs for the prison system and could be reduced if inmates were relocated to a community nursing facility but the largest potential savings would result from the reduction in jail per diems.


Assuming that federal Medicaid reimbursement is approved, the shifting of variable costs from the DOC budget to the state Medicaid budget would be the primary cost savings for placing inmates or medical parolees in a nursing facility.


Most DOC costs remain fixed and consistent, however, meanwhile the nursing facility where inmates or medical parolees are to be placed also has associated fixed costs. These costs are then paid from the state Medicaid budget. This results in most of the total cost of providing inmate care in a nursing facility being duplicated within the overall state budget. Before taking federal Medicaid reimbursement into consideration, the cost to the state budget as a whole would be significantly higher. DOC still has the cost of its facilities, utilities, and personnel while the state Medicaid budget is also funding the nursing facility for each inmate residing there.


As of 2014, most inmates are eligible for federal Medicaid reimbursement. Currently, DOC reports that 52 inmates might possibly qualify for long-term care under Medicaid. However, only 18 of them would be eligible for parole under current parole statutes. If Medicaid reimbursement was approved for these inmates, the reimbursement rate would be 80 to 90 percent, leaving the state to cover approximately 10 to 20 percent of the total cost of placing these individuals in a nursing facility.


The cost differential between providing such care inside of a prison and providing long-term care in a nursing facility is the difference between the variable costs saved by DOC and the percentage of the nursing facilities’ costs not covered by federal funds. For the placing of inmates in a nursing facility to be cost effective, the variable cost savings must be greater than Kentucky’s portion of the Medicaid costs. Based on the jail per diem, prescription drugs, and outpatient care costs for the inmates who might be eligible for nursing care, the total cost of placing inmates into a nursing facility is likely to be very close to current spending levels in the short term. For some groups of inmates, the state would save a few dollars a day, while for other groups the state would lose a few dollars a day. In the long term, if enough inmates could be placed in nursing facilities, DOC might find additional savings by renegotiating the medical services contract.


Upon motion by Representative Simpson and second by Representative Palumbo, the report was adopted by roll call vote.


Staff Report: Motor Fuel Taxes And Reformulated Gasoline In Kentucky

Staff economist Perry Nutt said the three components of Kentucky’s motor fuel tax are an excise tax, a supplemental tax, and a petroleum storage tank assessment fee. The excise tax is variable, it can change based on the average wholesale price (AWP) of gasoline. The supplemental tax is fixed at 5 cents per gallon (cpg) for gasoline and 2 cpg for diesel fuel. The petroleum storage tank assessment fee is a fixed rate of 1.4 cpg.


The motor fuels excise tax is 9 percent of the AWP. The AWP is determined each quarter based on a survey of fuel dealers. The survey is conducted four times a year, in the first month of each quarter. The minimum AWP is set in statute. The maximum AWP may increase each year, but is limited to 10 percent annually. To calculate the excise tax, the AWP survey was compared to the minimum and maximum AWP to determine which AWP would be used to set the rate.


The AWP used to calculate the motor fuels excise tax will be the AWP from the survey, the minimum AWP, or the maximum AWP. If the AWP from the survey is below the minimum, the minimum AWP is used to set the excise tax rate. If the AWP from the survey is above the maximum, the maximum AWP is used to set the excise tax rate. The survey AWP is used if it is equal to or less than the maximum AWP and equal to or greater than the minimum AWP.


From 2004 through the first quarter of FY 2015, the excise tax increased from 10 cpg to 26.1 cpg. During FY 2015, the excise tax fell from 26.1 cpg to 21.2 cpg. If fuel prices had continued to fall, the excise tax could have declined an additional 5.1 cents in the fourth quarter of FY 2015 before reaching the 16.1 cpg minimum rate.


HB 299, enacted in the 2015 Regular Session, took effect in the fourth quarter of FY 2015. HB 299 increased the minimum AWP, which increased the minimum excise tax from 16.1 cpg to 19.6 cpg. HB 299 froze the excise tax at 19.6 cpg for five consecutive quarters beginning with the fourth quarter of FY 2015. In FY 2017, the AWP will be adjusted once annually based on the average of the surveys from the previous four quarters. HB 299 also limited the annual change in the AWP to plus or minus 10 percent.


Under HB 299, the excise tax was frozen at 19.6 cpg for the fourth quarter of FY 2015 and for each quarter in FY 2016. If HB 299 had not passed, the excise tax in the fourth quarter of FY 2015 would have been equal to the minimum rate allowed under the previous statutes. Under HB 299, the excise tax was 1.6 cpg lower than the rate levied in the third quarter of FY 2015. However, under HB 299 the excise tax was 3.5 cpg higher when compared to the rate that would have been levied if HB 299 had not passed. HB 299 allowed the excise tax to decline, but not as much as it would have if HB 299 had not passed.


Staff economist Meredith Shores said the Clean Air Act (CAA) gives the Environmental Protection Agency (EPA) the authority to regulate levels of six common pollutants under the National Ambient Air Quality Standards (NAAQS). EPA is responsible for setting these standards at levels that protect public and environmental health. One of the pollutants monitored under the NAAQS is ground-level ozone, also known as smog. Ozone forms when nitrogen oxide and volatile organic compounds combine. A major source of both is gasoline emissions.


Reformulated gasoline (RFG) undergoes additional processing to decrease the pollutants emitted when it is burned. Specifically, it reduces concentrations of the two pollutants that contribute to ozone. Governors have authority to require RFG in areas that are in moderate violation of the ozone standard. Governor Jones opted to enroll Louisville and Northern Kentucky in the RFG program in 1995.


In a 2008 memo, the executive director of Louisville’s Air Pollution Control Board explained that RFG reduced pollutant emissions in Louisville by 7,000 pounds per summer day. At the national level, the reduction in pollution attributable to RFG is equivalent to a decline in 16 million cars on the nation’s roads every year and 105,000 tons of pollution being eliminated annually. Once certain levels of pollution reduction are achieved, these reductions must be maintained. This is known as the CAA’s anti-backsliding provision. If RFG were no longer required, the state would have to adopt other policies that would yield similar emissions reductions. Obtaining similar reductions would likely require implementing vehicle emissions testing program or requiring reductions from industry in the area.


Due to its additional processing, RFG is more expensive than conventional gasoline. Nationally, RFG costs approximately 18 cpg more than conventional gas. However, the additional cost of RFG can vary by region. Using data from 2014 and 2015, staff observed an approximate 10 cent difference between RFG and conventional gasoline when comparing prices in Louisville and Covington, which use RFG, to prices in Cincinnati and Lexington, which use conventional gasoline. Prices in Covington were approximately 10.8 cpg higher than in Cincinnati. Prices in Louisville were 10.6 cpg higher than in Lexington. Even though Louisville and Covington sell the same blend of gasoline, Covington’s prices are over 6 cpg higher. Cincinnati has a gas tax that is 2 cpg higher than Kentucky’s gas tax though.


Gas prices in an area are affected by numerous factors and these price differences should not necessarily be interpreted as the additional cost of RFG. Some other factors that influence gasoline prices are transportation costs, competition, and location. Additionally, there are restrictions on emissions from conventional gasoline during the summer months in Cincinnati and Lexington that raise its cost relative to RFG.


In response to a question from Senator Seum, Ms. Shores said that the study did not include information about air quality credits.


Senator Seum explained his concern about such credits by noting that Louisville had continued its RFG program because of the ability of companies to purchase air quality credits or to use other methods to retain employers that polluted. He noted that one company emitted butadine, but Louisville citizens wanted to keep the jobs the company brought to the community. For that reason, Louisville instituted annual emission testing that allowed them to accumulate air quality credits.


Ford wanted to build a new truck plant in Louisville, but its paint facility could not meet emissions requirements. Phillip Morris, which was leaving Louisville, sold its air quality credits to Ford so that its plant could open. Cincinnati companies are buying air quality credits from Northern Kentucky companies and thus, continue to pollute the metropolitan area. RFG provides fewer miles per gallon and ends up polluting as much or more as conventional gasoline.


In response to a question from Senator Carroll, Mr. Nutt said that 19 states have a variable rate excise tax.


In response to questions from Senator West, Ms. Shores said that Ohio uses conventional gas, although from June to September it is required to use Reid Vapor Pressure (RVP) restrictions on the conventional gas. RVP affects the formulation of conventional gas. Kentucky could also adopt this policy in the areas that use conventional gasoline. She said she would check as to whether Kentucky would save money if it followed the Ohio model.


In response to questions from Senator Clark, Mr. Nutt said that Kentucky’s current motor fuels tax is 26 cpg compared with a 26.37 cpg average in other states. In most states, the motor fuels tax increases slowly because the demand for gasoline is stable over time.


Senator Clark noted that in Kentucky, on average citizens pay $3.90 per week to drive on Kentucky roads, which is a bargain.


In response to questions from Representative Simpson, Ms. Shores said she will look into whether airlines are required to use RFG. She said that the parts of Kentucky required to use RFG can only begin using conventional gasoline if the state finds compensating reductions in ozone. She will further study under what conditions a region that reduces its ozone level can be released from the federal regulation that they use RFG. The EPA lowered the threshold for ozone in 2015.


In response to questions from Senator West, Ms. Shores said that she does not know if Ohio receives air quality credits.


Senator West noted that if Kentucky’s high ozone regions can get the same credits Ohio receives and use conventional gasoline, it could save taxpayers money.


Upon motion by Representative Simpson and second by Senator Seum, the report was adopted by roll call vote.


The meeting adjourned at 11:20 am.