Updated: Aug 22, 2022
This is the second in a series of client alerts and a webinar on the new Office of Health Care Affordability. More information on the webinar is available here.
Starting in calendar year 2025, providers, payors, and integrated health care delivery systems will be subject to a maximum annual increase in per capita total health care expenditures. On June 30, 2022, Governor Newsom signed Senate Bill 184 (“SB 184”). More details about the new Office of Health Care Affordability (“OHCA”) and the Health Care Affordability Board (“Board”), the scope of their authorities, and OHCA’s data collection authorities are available here.
This post summarizes California’s plan to set and enforce health care cost targets for health care providers, payors, and integrated health care delivery systems. This has the potential of creating incredible downward pressure on health care spending, squeezing already strapped health care providers. Providers may need to prepare to justify increased expenditures that exceed the cost target.
What is a Health Care Cost Target?
The Legislature intends to reduce the rate of growth in health care costs through this new initiative. A “health care cost target” is a “target percentage for the maximum annual increase in per capita total health care expenditures.” SB 184 authorizes the establishment of both statewide health care cost targets, as well as specific health care cost targets by health care sector. The Board will define a “health care sector,” which may include geographic regions and individual health care entities.
Statewide Health Care Cost Target Timing
For the calendar year 2025 and after, SB 184 requires that the Board set a statewide health care cost target. For payers and fully integrated delivery systems, cost targets will also be set for administrative costs and profits. For the calendar year 2025 only, the target will be for reporting purposes only and will not give rise to enforcement action, as discussed in detail below.
The Legislature required that the health care cost targets promote “a predictable and sustainable rate of change in per capita total health care expenditures.” They must be based on economic indicators (e.g., measures reflecting the broader economy, labor markets, consumer cost trends) or population-based measures (e.g., changes in state demographic factors that may influence demand).A key consideration in the stability of the health care workforce. Targets will be set on an annual basis. For four other states that have implemented similar cost targets, the cost target has been reported to be between 3.1% to 3.6%.
By December 2023, OHCA expects to develop and have the Board approve a publicly available methodology for setting the health care cost target.That methodology must be available and transparent to the public. In addition, the methodology must be developed with consideration of historical trends and projections for economic indicators and population-based measures, historical trends in cost for Medi-Cal, Medicare, and commercial health coverage, and other factors. These factors can include the health care employment cost index, nonsupervisory employee organized labor costs, the consumer price index for urban wage earners and clerical workers, impacts due to known emerging diseases, trends in the price of health care technologies, provider payer mix, state or local mandates such as required capital improvement projects, and any relevant state and federal policy changes impacting covered benefits, provider reimbursement, and costs. The health care cost targets must promote the stability of the health care workforce is promoted.
 See Department of Health Care Access and Information, Get the Facts About the Office of Health Care Affordability, available at https://hcai.ca.gov/get-the-facts-about-the-office-of-health-care-affordability/.
OHCA must provide special consideration for when the non-federal share of Medi-Cal expenditures are contributed by entities other than the state, such as intergovernmental transfers and health care-related taxes or fees (e.g., quality assurance fees).
Sector-Specific Health Care Cost Target
All health care providers are subject to the statewide health care cost target until at least through calendar year 2028.By June 1, 2028, the Board must establish specific cost targets by health care sector.
The Board will define those health care sectors by October 1, 2027.Notably, health care sectors are not limited to geographic regions but may include individual health care entities or types of health care entities such as fully integrated delivery systems. An individual health care entity is expected to have a sector target if it is either an entity that serves a population with greater health care risks or is a high-cost outlier, which are entities whose costs for the same services are substantially higher compared to the statewide average. The Board must also specify which sector target an individual health care entity is subject to if the entity falls within two or more sectors.
The Board is required to adopt sector targets in a manner that “minimizes fragmentation and potential cost shifting and that encourages cooperation in meeting statewide and geographic region targets.” These sector targets may widely vary as the Board may adjust the targets to account for the following:
Baseline costs in comparison to other health care entities in the health care sector and geographic region,
Health care workforce stability, and
Impacts on high-quality jobs.
Adjustment of Cost Target
The Board is authorized to adjust cost targets for individual health care entities in at least four ways: rewarding cost-efficient, quality care; reaching health equity; accounting for labor costs; and securing full state participation in Medi-Cal.
First, to incentivize lower-cost care without compromising quality, the Board can either adjust cost targets downward for health care entities that deliver high-cost care that is not commensurate with improvements in quality or upward for health care entities that deliver low-cost, high-quality care.
Second, the Board may use equity adjustment methodologies developed by OHCA to take into account social determinants of health and other factors related to health equity.
Third, the Board must adjust to account for actual or projected nonsupervisory employee organized labor costs, including increased expenditures related to compensation, specifically if such labor costs are projected to grow faster than the rate of any applicable cost targets.
Lastly, upon the request of the Department of Health Care Services (“DHCS”), any targets will be adjusted for health care entities in the Medi-Cal program to ensure full federal financial participation is available and not otherwise jeopardized.
It is not yet clear how the Board will determine these adjustments or whether individual health care entities can seek such adjustments independently from the Board. Nevertheless, entities may be able to relieve some burden of complying with the statewide cost target with these adjustments. Alternatively, entities may be able to comply instead with a sector-specific health care cost target.
Annual Timeline for Setting Cost Target
Before adopting cost targets, the Board must hold a public meeting to discuss the cost targets by March 1 of the year before the cost target takes effect. The Board must consider input from OHCA, the Board-established Health Care Affordability Advisory Committee, and the public, including having a minimum 45-day public comment period. The Board may only adopt such cost targets at a subsequent public meeting, which must be by June 1 of the year before the cost target takes effect.
Enforcement of Cost Targets
Starting with the calendar year 2026, OHCA may pursue the following enforcement actions against a health care entity that exceeds the target or fails to provide sufficient data:
Provide technical assistance to the entity,
Require or compel public testimony by the entity,
Requiring submission of and implementation of performance improvement plans (“PIP”) for up to three years, and,
Assessing and escalating administrative penalties through enforcement actions if the entity is not compliant with a PIP or fails to provide requested data.
 How OHCA will implement a PIP remains to be seen, especially as it attempts to reduce expenditures without eroding access, quality, equity, or workforce stability. In the instance of the Massachusetts Health Policy Commission, a model OHCA and HCAB is based off of, a recent PIP required Mass General Brigham to reduce expenditures by $105 million over 18 months.
As a way to incentive compliance, OHCA may publicly report the extent to which the health care entity exceeded the target as well as the performance on the health care cost targets by state, geographic region, and health care entity. Additionally, OHCA will publicly post the identity of a health care entity implementing a performance improvement plan and, at a minimum, a detailed summary of the entity’s compliance with the requirements of the performance improvement plan. However, before OHCA can disclose any nonpublic information, parties may explain to OHCA why the release of the information is damaging or prejudicial due to privacy, trade secret, or anticompetitive concerns and why the public interest is served in withholding the information. Any nonpublic information not released will not be subject to any laws relating to the disclosure of public records.
Enforcement actions are required to be implemented in a progressive manner. The scope and range of administrative penalties and the penalty justification factors for assessing penalties will be set by the Board. OHCA must first assist health care entities to come into compliance with cost targets, including through technical assistance and performance improvement plans, before assessing administrative penalties, which are to be used as a matter of last resort. An entity that has fully complied with an approved performance improvement plan by the deadline established by the office cannot be assessed administrative penalties.
Health care entities will have an opportunity to mitigate enforcement actions. Before OHCA can implement any enforcement action, entities will be provided at least 45 days to provide information and data that justify all or a portion of the entity’s cost growth in excess of the applicable target. Additionally, the entity may submit an application for a waiver of enforcement actions due to “reasonable” factors outside the entity’s control, including anticipated costs for investments and initiatives to minimize future costly care. Health care entities can also seek independent judicial review of an order of an administrative penalty by filing a petition for a writ of mandate.
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The new Office of Health Care Affordability represents a paradigm shift that will affect a wide range of California health care entities. More information will be posted on Friday, July 29, 2022, on the new cost and market impact review process. For more information on SB 184 and its impact on providers, please contact Felicia Sze or Samuel Chang.