California hospitals get shot at shattering spending ceiling

Hospitals say the spending limits have strained budgets and operational decisions such as staffing, services, and capital expenditures.SAN FRANCISCO (CN) — A lawsuit brought by the California Hospital Association against the state’s caps on hospital spending will likely move forward, a San Francisco judge ruled Wednesday.San Francisco County Superior Court Judge Joseph M. Quinn issued a tentative opinion reviving the plaintiffs’ challenge to spending limits introduced in 2024 that they say will result in more than 75% of all California hospitals operating at a loss, forcing possible layoffs and service cuts.The California Legislature established the Office of Health Care Affordability in 2022 under the California Health Quality and Affordability Act.In April 2024, the OHCA Board announced a statewide healthcare spending target aimed at reducing spending growth year-to-year. The target would start at 3.5% for 2025 and 2026 and gradually lower to 3% by 2029.A year later, they announced seven “high-cost” hospitals that would have spending targets of 1.8% in 2026, declining to 1.6% in 2029.The enforcement period for the cost targets began on Jan. 1; however, according to the state, the earliest date hospitals could be penalized for exceeding the spending caps is years away because there is no immediate penalty for noncompliance and OHCA can only issue penalties after following a “mandated progressive enforcement scheme.”“The hospitals’ operational harms flow from the existence of the allegedly arbitrary target rates and does not require an enforcement action resulting in penalties," the judge said in his tentative opinion.In its second amended complaint, the California Hospital Association, which represents roughly 400 California hospitals and health systems, says OHCA is required to develop a “transparent methodology” and follow criteria set by the state legislature when calculating cost targets.Instead, the organization claims OHCA “adopted arbitrary cost targets without regard to the Legislature’s criteria,” causing hospitals to have to adjust their budgets, staffing, services and other operational expenditures or risk enforcement sanctions.At Wednesday’s hearing, California Deputy Attorney General David Houska argued the hospital group lacks standing because its purported harms are hypothetical.However, Quinn said he doesn’t view the spending limits themselves as the harm, but rather how OHCA arrived at the rates it set.“The problem is not with the number 3.5,” the judge said. “The Legislature told the agency it has to consider X, Y and Z in setting the rate, and it didn’t, allegedly. The harm is having a rate not authorized by the Legislature, and that rate is having operational impacts.”Houska added even if the association was successful in court and the state released new cost targets, there is a chance the updated spending limits would be nearly identical or even greater than the current pricing caps.“In the absence of knowing what a lawful rate might look like, there is a possibility we go through the whole judicial process and end up where we started,” he said. “That strikes me as abstract interest.”Quinn responded, telling Houska, “It matters to the court whether that target rate is, as you put it, lawful.”“It is different if a lawful target rate has impact x than if an unlawful target rate has impact x,” the judge said. “If the rate is lawful and is having this adverse impact, that is a different claim to me and not what I reached on this demurrer.”Quinn took the case under submission and did not indicate when he would release an official ruling.Representatives for either party did not immediately respond to a request for comment.Subscribe to our free newslettersOur weekly newsletter Closing Arguments offers the latest about ongoing trials, major litigation and rulings in courthouses around the U.S. and the world, while the monthly Under the Lights dishes the legal dirt from Hollywood, sports, Big Tech and the arts.Additional Reads