Regulatory review of transactions by the new Office of Health Care Affordability (Senate Bill No. 184)
In 2023, California joins a handful of other states in establishing a health care cost commission. A new California law establishes the Office of Health Care Affordability (OHCA), whose goals are to control health care costs while maintaining quality of care and broad accessibility. The new law grants OHCA the ability to request data from certain health care entities and state agencies, and to use such data to analyze the health care market for cost trends and drivers of spending, develop data-informed policies for lowering health care costs for consumers and purchasers, set and enforce cost targets, and create a state strategy for controlling the cost of health care and ensuring affordability for consumers and purchasers. In addition to OHCA’s role with cost targets, the law vests OHCA with authority to review health care mergers, acquisitions, affiliations, and other transactions and may refer the transaction to the attorney general for further review of unfair methods of competition, anticompetitive behavior, or anticompetitive effects.
The new law also establishes the Health Care Affordability Fund for the purpose of receiving and expending revenues (upon appropriation by the California legislature) collected under the new law. Enforcement of the cost growth targets begins in 2026, at which time OHCA will be required to take certain actions against health care entities that fail to meet those targets, including performance improvement plans and administrative penalties.
This new law is lengthy and contains important amendments to health care delivery. Below are some key highlights of the law.
Health care transactions. Under the new law, health care transactions will be subject to OHCA review if they involve a change to ownership, operations, or governance structure. In particular, transactions will be subject to review if they (a) involve the sale, transfer, lease, exchange, option, encumbrance, conveyance, or disposal of a material amount of a health care entity’s assets to one or more entities or (b) transfer control, responsibility, or governance of a material amount of the assets or operations of the health care entity to one or more other entities. The law does not define “material amount of assets.”
The review process applies to physician practices (generally those with 25 or more physicians), hospitals and health systems, clinics, ambulatory surgical centers, clinical laboratories, imaging centers, pharmacy benefit managers, and health plans. Dentists, pharmacies, drug manufacturers, durable medical equipment suppliers, home health agencies, and emergency medical transportation providers are not subject to the transaction review process.
For a transaction closing on or after April 1, 2024 the parties must notify OHCA at least 90 days prior to entering into a transaction agreement (the notice obligation begins upon execution of an agreement as opposed to 90 days prior to closing). OHCA will determine within 60 days of receipt of the notice whether it will conduct a cost and market impact review. Transactions may not proceed without either the completion of a cost and market impact review or receipt of a waiver. If OHCA conducts a review, it will produce a preliminary report and solicit comment from the public and the parties. A transaction cannot close until 60 days after OHCA publishes its final report. During this time, OHCA may refer the transaction to the attorney general for review, and the attorney general may pursue litigation to block the transaction pursuant to antitrust laws or allow it to proceed subject to certain conditions, including implementation of a monitor, ongoing reporting requirements, and restrictions on managed care contracting and rate setting.
Over the course of 2023, OHCA is expected to undertake a rule-making process to define key provisions of the cost and market impact review, including material changes that warrant notification, thresholds (e.g., annual revenues or market share) for determining which entities or prospective transactions will be subject to the noticing requirements, factors to be considered in the reviews, requests for data, and relevant timelines.
Medi-Cal. The new law also extends Medi-Cal eligibility for the full scope of benefits to individuals who are 26 to 49 years old, and who may not have satisfactory immigrant status provided they are otherwise eligible for those benefits. Additionally, recognizing the importance of individuals being able to stay with their chosen primary care provider, this law requires the eligibility and enrollment plan to enable an individual to do just that – maintain their primary care provider or medical home. The law requires coordination among the counties, Medi-Cal managed care health plans, health care providers, and consumer advocates, among others, to identify and maintain primary care provider or medical home relationships. Certain eligibility extensions will also now be offered for children under five years old and pregnant individuals.
Clinical trials. Under this new law, the coverage requirements for qualifying for a clinical trial for purposes of Medi-Cal have been expanded.
Telehealth. Medi-Cal no longer requires face-to-face interactions between a patient and provider when covered health care services are provided by video synchronous interaction, audio-only synchronous interaction, remote patient monitoring, or other permissible virtual communication modalities, when those services and settings meet certain criteria. Providers that offer video synchronous or audio-only synchronous care must also offer the same services through in-person visits, or, in many cases, the providers must arrange for a referral to in-person care. Importantly, providers may now establish a new patient relationship with a Medi-Cal beneficiary through a video synchronous interaction, but providers are prohibited from doing so through other modalities (such as asynchronous interactions) unless the visit falls under a certain exemption.
Recordkeeping. Every primary supplier of pharmaceuticals or medical equipment must now maintain accounting records for 10 years (a sharp increase from the three-year retention requirement prior to 2023).
COVID-19. Administration of the COVID-19 vaccine must now be reimbursed at 100% of the Medicare national equivalent rate in effect at the time of administration without geographic adjustment.
Controlled substances. The new law creates the Opioid Settlements Fund, which requires that money in the fund be used for opioid remediation in accordance with the terms of the judgment or settlement from which the funds were received.
Notice to all California patients of the Open Payments database (Assembly Bill No. 1278)
A new state law sets forth new requirements that physicians in California provide patients with notice of the CMS Open Payments database beginning January 1, 2023. In particular, the law requires that physicians provide patients at the initial office visit a written or electronic notice of the Open Payments database, and that such notice be posted in each location where the licensee practices and in an area that is likely to be seen by all persons who enter the office. In addition, the law will, beginning January 1, 2024, require physicians to conspicuously post a similar notice on the public website used for the licensee’s practice, if such a website is used, with few exceptions. If a physician is employed by a health care employer, the law will instead require the employer to comply with these posting requirements. The law’s provisions will not apply to a physician working in a hospital emergency room. For all other physicians, however, a violation of the law’s provisions would constitute unprofessional conduct.
The new law leans heavily on enumerated definitions in existing state and federal laws, i.e., the Medical Practice Act relating to the licensure and regulation of physicians and surgeons including those engaged in the practice of osteopathy pursuant to the Osteopathic Medical Act; the Sherman Food, Drug, and Cosmetic Law regulating drug marketing practices; and the Open Payments program, which requires, among other things, annual reporting of certain payments and other transfers of value made to covered patients. CMS makes this Open Payments data available to the public via a federal government internet website. The notice that must be provided to patients by California physicians is not dependent on whether the physician actually receives payment from a drug or medical device manufacturer, and all physicians must give their patients notice of the existence of the database.
Increases to damages caps in California medical malpractice cases (Assembly Bill No. 35)
California is set to make significant changes to state law limiting the amount of money an injured patient can receive. In any action for injury that does not involve death, the cap on non-economic damages will increase to $350,000, with incremental increases over the next 10 years to $750,000. In any action for wrongful death, the cap on non-economic damages will increase to $500,000, with incremental increases over the next 10 years to $1 million. These changes in state law, effective January 1, 2023, will impact demands for arbitration and cases filed on or after that date. Beginning January 1, 2034, the limitations on non-economic damages will be adjusted annually for inflation by 2%. These caps apply regardless of the number of defendant health care providers or health care institutions against whom the claim is asserted or the number of separate causes of actions on which the claim is based.
In addition to increasing the cap on non-economic damages, the reforms made by AB 35 include revisions to limits on attorney contingency fees. If recovery is made prior to the filing of a civil complaint or arbitration demand, then attorney contingency fees are limited to 25% of the amounts recovered and if recovery is made after filing of a civil complaint or arbitration demand, then attorney contingency fees are limited to 33% of the amount recovered. Going forward, attorney fee limits will be based on the stage of representation, rather than the amount recovered by the patient.
Although California law had long protected medical professionals offering expressions of sympathy, the new state law broadly expands these protections. Under Chapter 3 of the Health and Safety Code, expressions of sympathy or regret or accepting fault relating to the pain, suffering, or death of a person or to an adverse patient safety event or unexpected health care outcome that is made prior to the filing of a lawsuit or demand for arbitration will be confidential, privileged, protected, and not subject to subpoena, discovery, or disclosure, and will not be admitted into evidence in any civil, administrative, regulatory, licensing, or disciplinary action or proceeding. Statements made after a patient or family member has filed a lawsuit or made a demand for arbitration would not be covered by these confidentiality protections.
California medical privacy law expanded to expressly include mental health apps (Assembly Bill No. 2089)
A new law expands California’s Confidentiality of Medical Information Act (CMIA) and imposes data protection obligations on businesses that deliver mental health services via digital health. The CMIA generally prohibits certain uses or disclosures of medical information without patient authorization, and consumers may institute private causes of action for related violations to recover nominal and actual damages. Violators may also be subject to administrative fines and civil penalties.
Prior to adoption of this new law, ambiguity existed regarding whether the CMIA applied to certain businesses that collect mental health information through digital health solutions, including mobile applications or websites. Whereas traditional mental health care providers, like psychologists, clearly qualify as “providers of health care,” the pre-amended CMIA left room to interpret whether digital health companies fell within the scope of the CMIA – even if they collected the exact same information as traditional health care providers.
Under the amended CMIA, any business that offers a “mental health digital service” to either manage an individual’s information, or diagnose, treat, or manage the individual’s medical condition, is now deemed a “provider of health care” subject to the CMIA. The law’s “medical information” definition is similarly expanded to include “mental health application information,” a new term denoting information that relates to a consumer’s inferred or diagnosed mental health or substance use disorder and is collected by a mental health digital service. “Mental health digital service” is defined as a mobile-based application or internet website that: (a) collects mental health application information from a consumer, (b) markets itself as facilitating mental health services to a consumer, and (c) uses the information to facilitate mental health services to a consumer.
As the surge in mobile application usage continues with respect to the delivery of mental health services, this new law is an example of the California legislature’s broader effort to keep pace in regulating that surge. Many businesses that deliver mental health services through digital health, now affirmatively considered “providers of health care,” should be aware of their data protection responsibilities under the amended CMIA, as well as increased legal exposure under the law’s private right of action.
Health care professionals and patients given more control over the disclosure of diagnostic imaging exam results (Senate Bill No. 1419)
Current California law allows health care professionals to disclose clinical lab test results to a patient in electronic form only if: (a) requested by the patient and (b) deemed appropriate by the health care professional that requested the test. With the passage of SB 1419, the applicable “tests” definition is expanded to include various specified diagnostic imaging tests in addition to those relating to clinical labs. Additionally, if the patient consents, health care professionals are no longer required to review applicable test results before they are disclosed to the patient by internet posting or other electronic means.
SB 1419 proponents cite federal information-blocking rules that generally require health care professionals to release patient data as soon as it is available in arguing that the law’s amendment is critical to: (i) granting a health care professional time to interpret significant test results accurately before releasing them to the patient electronically and (ii) allowing patients to decide how they would like to receive results rather than learning about them immediately by default.
SB 1419 also implements two other changes impacting health care information. First, the law: (a) expands the prohibition on the ability of a minor’s representative to inspect or obtain copies of the minor’s patient records, to include clinical notes and (b) prohibits a minor’s representative from inspecting the patient’s medical records when those records relate to certain sensitive medical services, including mental health and reproductive data. Second, effective in January 2024, SB 1419 will require health plans to maintain certain application programming interfaces to facilitate patient and provider access to health information.
Real-time verification of prescription drug coverage (Assembly Bill No. 2352)
A new state law will require health care services plans and health insurers with plans or policies that include prescription drug benefits and that are issued, amended, delivered, or renewed on or after July 1, 2023, to furnish specified information about a prescription drug upon request by an enrollee or insured or their prescribing provider. Such information may include the insured’s eligibility for the prescription drug, current formulary or formularies, cost-sharing information and/or utilization management requirements for the prescription drug, or other formulary alternatives.
The law requires the plan or insurer to respond in real time to that request and ensure the information is current no later than one business day after a change is made. The law prohibits a health care service plan or health insurer from, among other things, restricting a prescribing provider from sharing the information furnished about the prescription drug or penalizing a provider for prescribing, administering, or ordering a lower cost or clinically appropriate alternative drug. A willful violation of these provisions by a health care service plan or health insurer would be considered a crime.
California-backed insulin manufacturing (Senate Bill No. 838)
California legislators continue to push ahead with their efforts to foster new sources of insulin. A state law passed in 2020 (Senate Bill No. 852) requires the California Health and Human Services Agency (CHHSA) to enter into partnerships to increase patient access to affordable drugs and produce or distribute at least one form of insulin. A new law, effective January 1, 2023, requires CHHSA to establish metrics to measure program efficiency, eliminate the viability requirement for the manufacturing of insulin, and require any partnership to consider guaranteeing priority access to insulin supply for California. It also would require CHHSA, upon appropriation by the state legislature, to develop a California-based manufacturing facility for insulin. California’s budget for 2022 and 2023 includes a $100 million allotment for developing low-cost insulin to increase availability and affordability of insulin in the state.
New protections for persons with substance use disorder (Senate Bill No. 349)
California is set to expand upon existing state laws for licensure and regulation of adult alcoholism and drug abuse recovery or treatment facilities licensed by the Department of Health Care Services. Effective January 1, 2023, the Ethical Treatment for Persons with Substance Use Disorder Act provides additional protections for substance use disorder treatment clients, their families, and their communities. The law is designed to prevent treatment programs from engaging in predatory, unsafe, and unethical practices by implementing uniform ethical standards.
The law calls for treatment providers to maintain records of patient referrals to or from a recovery residence, including information about where the referred individual ultimately elects to receive treatment. It also sets forth requirements for marketing and advertising of treatment provider services, namely by prohibiting providers from making false and misleading statements in promotional materials. Moreover, the law requires treatment providers in California to adopt a client bill of rights that is made available to all clients and prospective clients. The bill of rights must include information about patient privacy, informed consent, quality assurances, treatment plan standards, and ethical practices.
Prohibition on the release of records relating to gender-affirming medical services to another state’s law enforcement (Senate Bill No. 107)
Gender-affirming health care, as defined by the World Health Organization, encompasses a range of social, psychological, behavioral, and medical interventions designed to support and affirm an individual’s gender identity when it conflicts with the gender they were assigned at birth. Numerous state legislatures, including California, debated protections for gender-affirming health care in 2022. California adopted a new law that will protect transgender children and their families if they flee to California from a state that criminalizes their parents for allowing their children to receive gender-affirming health care (e.g., Alabama, Texas, or Idaho). The legislation will also prevent the separation of families and/or criminal prosecution of parents who support their transgender children’s access to gender-affirming health care while in California.
Effective January 1, 2023, the law prohibits:
- A provider of health care, a health care service plan, or a contractor from releasing medical information related to a child receiving gender-affirming health care or gender-affirming mental health care in response to a criminal or civil action, including a foreign subpoena, based on another state’s law that authorizes a person to bring a civil or criminal action against a person or entity that allows a child to receive gender-affirming health care or gender-affirming mental health care.
- Law enforcement agencies from knowingly making or participating in the arrest or extradition of an individual pursuant to an out-of-state arrest warrant based on another state’s law against providing, receiving, or allowing a child to receive gender-affirming health care or gender-affirming mental health care in California.
- The enforcement of an order based on another state’s law authorizing a child to be removed from their parent or guardian based on that parent or guardian allowing their child to receive gender-affirming health care or gender-affirming mental health care.
- A court from finding that it is an inconvenient forum where the law or policy of another state that may take jurisdiction limits the ability of a parent to obtain gender-affirming health care or gender-affirming mental health care for their child, and the provision of such care is at issue in the case before the court. (Instead, the law will authorize a court to take temporary jurisdiction because the child has been unable to obtain gender-affirming health care.)
- A court from considering the taking or retention of a child from a person who has legal custody of the child, if the taking or retention was for obtaining gender-affirming health care or gender-affirming mental health care.
New requirements that payor staff receive training on gender-affirming care (Senate Bill No. 923)
A new California law seeks to increase access to gender-affirming care for individuals who identify as transgender, gender nonconforming, or intersex (TGI). State legislators passed the new law with the express goal of effecting systemic change in the way health care providers and employees of various health care entities receive training for gender-affirming care.
The new law, which is effective as of January 1, 2023 implements a number of changes designed to promote inclusive health care for TGI patients, including:
- Requiring staff of Medi-Cal (i.e., the California Medicaid program) managed care plans, California Program of All-Inclusive Care for the Elderly (i.e., PACE program) organizations, health care service plans, health insurers, and other delegated entities to complete evidence-based cultural competency training. The law lays out mandatory components of the training curricula and requires those health care entities to develop and implement procedures to administer the trainings.
- Mandating that employees must complete a refresher course if a complaint has been filed against the individual for not providing inclusive care and the complaint is ultimately substantiated. Health care entities must also track and monitor complaints related to trans-inclusive health care and to publicly report the data to promote compliance with the law.
- Expanding continuing education requirements for physicians and surgeons licensed in California to include evidence-based cultural and linguistic competency in providing medical services to TGI patients.
- Requiring health care service plans and specified health insurers to develop and publish provider directories specifying which of their in-network providers have represented that they offer gender-affirming services. This directory must be published on the plan or insurer’s website.
- Creating a working group that will be established by the California Health and Human Services Agency no later than March 1, 2023, and that will include TGI-serving organizations, TGI-identifying individuals, health care providers, and state agency personnel. The mission of the working group is to develop a quality standard for patient experience to measure cultural competency and to recommend trans-inclusive training curricula.
California adopts additional requirements for out-of-state telephone medical advice services (Assembly Bill No. 1102)
A new California law adopts two key changes regarding the responsibilities of telephone medical advice services (TMA Services). First, the law requires TMA Services to ensure that all health care professionals who provide telephone medical advice services from an out-of-state location operate consistent with the laws governing their respective licenses and scopes of practice, whereas prior law required TMA Services to ensure that the professionals operated consistent with the laws governing just the scopes of practice. Second, the law removes the requirement that TMA Services notify the Department of Consumer Affairs when certain changes occur, such as a change of name, physical location, or mailing address, among others, of any business, owner, partner, corporate officer, or agent for service of process in California. In its place, TMA Services are merely required to comply with all directions and requests for information made by the department and respective healing arts licensing boards. The law is effective as of January 1, 2023.
New law addresses when California pharmacies or other dispensers may refuse to fill a prescription (Assembly Bill No. 852)
A new state law imposes additional conditions under which pharmacies and other authorized dispensers of prescription drugs may decline to fill electronic prescriptions that fail to meet certain requirements such as failing to adhere to the National Council for Prescription Drug Programs SCRIPT standard or failing to comply with HIPAA. Importantly, however, this new law also prohibits pharmacies and other authorized dispensers from declining to fill prescriptions that are incompatible with their proprietary software.
Previously, prescribers had the capability to issue electronic prescriptions and California law required pharmacies or other authorized dispensers to have the capability to receive such electronic prescriptions. However, in many cases, pharmacies or other authorized dispensers were able to decline the prescription if it was not submitted via, or was not compatible with, the pharmacy’s or dispenser’s proprietary software.
As of January 1, 2023, California law prohibits a pharmacy or other authorized dispenser from refusing to dispense an electronic prescription on the sole basis that the prescription is not compatible with the receiver’s software. Moreover, this new law also added exceptions to the requirement that practitioners must issue a prescription electronically, including exceptions for a prescriber who registers with the California State Board of Pharmacy and satisfies certain criteria, one of which is confirming that they issue no more than 100 prescriptions per calendar year. Finally, the law sets out exceptions to the requirement that pharmacies must immediately transfer electronic prescriptions upon patient request such as, not surprisingly, if such a transfer would result in a violation of any state or federal law.
Skilled Nursing Facility Ownership and Management Reform Act of 2021 (Assembly Bill No. 1502)
The Skilled Nursing Facility Ownership and Management Reform Act of 2021 changes existing laws that regulate the licensing, ownership, and management of skilled nursing facilities (SNFs). The law grants the California Department of Public Health (CDPH) greater authority to prohibit unqualified and unethical owners and operators from owning and operating SNFs in the State of California. Beginning July 1, 2023, significant reforms will become effective for changes of ownership, changes of control, and changes of information related to definitions, management, time frames, application requirements, and eligibility for licensure, among others.
Specifically, the law makes the following key changes:
- Prohibits any person, corporation, or corporate chain from acquiring or operating an SNF without first obtaining a license from CDPH.
- Requires CDPH to determine whether a license applicant is reputable and responsible by examining the compliance histories of facilities owned or operated by the applicant, or any nursing home chain associated with the applicant, up to five years before the date of application. This includes facilities that are out of state.
- Requires CDPH to review and consider whether a license applicant has any criminal history prior to approval of a license.
- Authorizes CDPH to issue civil penalties for operating a facility prior to receiving a license approval.
Importantly, the law will impact any SNF acquisitions that meet the bill’s “change of ownership” definition because CDPH will no longer issue temporary licenses to individuals, entities, and corporations. Previously, new owners could operate nursing homes using the prior owner’s license while waiting for their operating license approval. This law now specifically prohibits applicants from acquiring, owning, or operating a nursing facility before their application is processed. Further, interim or longer term management agreements during change of ownership processing are prohibited unless approved by CDPH due to exigent circumstances.
New law extends the maximum period of time permitted between inspections of skilled nursing facilities from two years to 30 months (Assembly Bill No. 1907)
A new California law extends the maximum period between inspections of skilled nursing facilities by the CDPH from two years to 30 months, effective January 1, 2023. Existing law, the Long-Term Care, Health, Safety, and Security Act of 1973, required CDPH to conduct annual inspections, without notice, of long-term health care facilities (which includes SNFs) at least once every two years. It also required nursing facilities certified to participate in Medicare or Medicaid to be subject to a standard survey by the state, conducted without prior notice to the facility, at least every 15 months. The new law alleviates the challenges CDPH experienced in meeting the prior deadlines.
Skilled nursing facilities required to maintain an alternate source of power (Assembly Bill No. 2511)
By no later than January 1, 2024, skilled nursing facilities in California must have an alternative source of power (e.g., emergency generators using fuel, large capacity batteries, and renewable electrical generation facilities) sufficient to (at a minimum) maintain a safe temperature for residents and availability of life-saving equipment and oxygen-generating devices for no fewer than 96 hours during any type of power outage. Facilities that use a generator as their alternative source of power must have sufficient fuel onsite to operate the generator for at least 96 hours or make arrangements for fuel delivery for an emergency event. Similarly, facilities that use batteries or renewable electrical generation facilities must have sufficient storage or generation capacity to maintain operations for at least 96 hours.
Alternative health care service plan created to allow statewide Medi-Cal contract with Kaiser (Assembly Bill No. 2724)
A new state law permits the California Department of Health Care Services (DHCS) to enter into one or more comprehensive risk contracts with an alternate health care service plan (which is defined to refer exclusively to Kaiser) to serve as a primary Medi-Cal managed care (MCMC) plan, whereby Medi-Cal beneficiaries from eight specified groups of eligible beneficiaries in geographic regions designated by DHCS may enroll in Kaiser, including those individuals who fail to select a plan and who are assigned through the existing default enrollment process. The legislation was opposed by local health plans, certain counties, and some federally qualified health centers that raised concerns about transparency and the potential for Kaiser to select healthier, less expensive patients. Proponents of the legislation argue that these issues were appropriately addressed through certain safeguards in the legislation.
Health care and life science companies with a presence in California should monitor the implementation of the above-described laws, and are encouraged to reach out to the authors with any questions about how these new laws will impact their business.