On October 15, the California Hospital Association (CHA) filed a petition against the California Office of Health Care Affordability (OHCA) and related entities. The petition challenges the imposition of stringent cost targets on hospitals across California, arguing that these targets are arbitrary, capricious, and not based on comprehensive data analysis. CHA contends that the cost targets violate both state and federal laws, including the Takings and Due Process Clauses of the U.S. Constitution, by being confiscatory and lacking a clear methodology for compliance. Furthermore, the petition asserts that OHCA’s actions were prematurely implemented without adequate stakeholder engagement, potentially leading to significant operational disruptions and threatening the quality and accessibility of health care services.

Background

The CHA represents approximately 400 hospitals and health systems in California, advocating for their ability to provide high-quality, accessible, and equitable health care. The petition challenges OHCA’s actions, which include setting a statewide cost target and specific targets for hospitals deemed “high-cost.” These targets are designed to limit the annual increase in hospital revenues, a move that CHA argues could severely impact hospital operations and patient care.

Key Concerns Raised by CHA

  1. Arbitrary Cost Targets: CHA contends that the cost targets set by OHCA are arbitrary and not based on comprehensive data analysis. The targets — capping revenue increases at 3.5% for most hospitals and 1.8% for high-cost hospitals — are seen as unrealistic given the rising costs of labor, technology, and compliance with state and federal mandates. 
  2. Impact on Hospital Operations: The petition highlights the potential for significant operational disruptions, including layoffs and service reductions. CHA estimates that these cost targets could lead to the loss of approximately 40,000 jobs and the closure of essential services like emergency rooms and maternity care. 
  3. Legal and Constitutional Challenges: CHA argues that OHCA’s actions violate both state and federal laws, including the Takings and Due Process Clauses of the U.S. Constitution. The petition claims that the cost targets are confiscatory and lack a clear methodology for compliance, creating uncertainty and potential legal liabilities for hospitals. 
  4. Premature Implementation: According to CHA, OHCA has rushed the implementation of these cost targets without adequate stakeholder engagement or consideration of the broader implications on health care access and quality. 

Our Take

This lawsuit underscores a critical tension between regulatory efforts to control health care costs and the operational realities faced by hospitals. For example, the CHA pointed out that recent federal legislation is expected to reduce payments to hospitals under the Medicaid program. This reduction, coupled with increased uncompensated care costs, exacerbates the financial strain on hospitals, making the cost targets even more challenging to meet. The CHA contends that its input and that of its members were largely ignored during the decision-making process. We will continue to monitor this litigation and update on any significant developments.