The Source Blog

This post is part of our ongoing coverage of the CHA v. OHCA lawsuit. See case page here.

In this post, we examine the claims made by the California Hospital Association (CHA) in its recent lawsuit filed against the California Office of Health Care Affordability (OHCA) regarding OHCA's plan to implement spending targets for hospitals (Case #  CPF25519370).  While many stakeholders, including CHA, the California Medical Association (CMA), and others, have expressed concerns about the spending targets announced by OHCA and the methodology used to establish them, dissatisfaction with an administrative agency’s policy choices does not, on its own, constitute a legal basis for invalidating those actions. This post examines the legal claims in CHA’s lawsuit.  When OHCA files its own brief, we will take the opportunity to examine their defenses as well.

The case filed by CHA has two causes of action.

CHA first cause of action is a petition for a writ of mandamus.  A writ of mandamus is a court order that compels an administrative agency to perform a specific duty or to prevent the agency from exceeding its jurisdiction.  In this case, the CHA is seeking a writ to correct what it claims is OHCA’s abuse of discretion, and to compel OHCA to act in conformance with state laws, the federal Constitution, and the California Constitution.  CHA’s second cause of action is a petition for declaratory relief.  When a court orders declaratory relief, it clarifies the rights and obligations of parties to resolve legal uncertainties before harm occurs.  It is a way of asking the court to settle questions of law. CHA’s filing includes specific requests for declaratory relief. The arguments supporting both causes of action are very similar and are discussed together.

CHA’s brief included six claims of abuse that we discuss in more detail.

a) OHCA’s failure to follow its duty to promote access, equity, quality of health care, and workforce stability in its creation of cost targets

OHCA’s enabling statute states that it is to “[p]romote … quality and health equity” and “[a]dvance standards for health care workforce stability".  By establishing a statewide cost target, prematurely establishing a hospital cost target, and relying on incomplete and faulty data, CHA claims that the adoption of these cost targets applicable to hospitals will compromise the delivery of quality and equitable care.  CHA estimates that the targets will result in the loss of 40,000 hospital jobs, would cause the elimination of vital health services, and would result in 75% of state hospitals operating at a loss.  CHA claims that the cost targets, as currently proposed, would directly counter OHCA's statutorily defined duties.  Although CHA is claiming that the spending targets are in opposition to OHCA’s duties, OHCA’s enabling statute explicitly states that its duties include supporting the Health Care Affordability Board “through data collection and analysis and recommendations, to establish specific health care cost targets by health care sector, including fully integrated delivery systems, geographic regions, and individual health care entities, as appropriate.”

b) OHCA failing to create cost targets that are informed by historical cost data and economic indicators

OHCA’s proposed cost target was derived from an average of median household income growth in California over the last 20 years as a way to measure consumer affordability.  The Board picked household income growth after considering other metrics, including growth in average wages, the Consumer Price Index, gross state product per capita, and potential gross state product (a forecasted measure of the long-run growth in the economy).  CHA claims that OHCA made decisions on the cost targets prematurely and used faulty and incomplete data.  By focusing on historical growth in household income, CHA claims the “cost targets … do not reasonably adjust for critical health economic considerations, like COVID-19, inflation, cost trends in labor, technology, and required capital investments (including seismic safety requirements), changes in federal funding (including the significant Medicaid changes passed by Congress in the OBBBA), state mandates (including minimum wage changes), and other factors outside hospitals’ control.”

c) OHCA’s creation of the hospital section, which arbitrarily singled out hospitals while ignoring payers and all other subject health care entities

In April 2024, the Health Care Affordability Board approved a statewide healthcare spending target for health plans and providers to meet annual rates of growth in per capita healthcare spending, with the intention of slowing healthcare spending growth.  At an April 2025 Health Care Affordability Board meeting, the Board voted to set a hospital sector spending target equal to the statewide spending target.

According to an April OHCA release:

Before choosing hospitals as a sector subject to a separate spending target, the Board considered other potential sectors: 1) geographic regions, 2) provider category (e.g. hospitals, physician’s organizations), 3) payer and/ or provider by market category, and 4) individual health care entities.  These options were ruled out because OHCA only began the collection of payer-level and regional total medical expenses in 2024.  It would be more informative to have more than one year of spending growth trend before defining sectors based on geographic region, market, payer, physician organizations, and/or fully integrated delivery system.  In contrast, OHCA has historical data on hospital spending.

CHA claims this is untrue, as “HCAI, OHCA's parent department, collects and publicly reports data similar to what it used to analyze historical hospital spending on long-term care facilities and primary care clinics, both of which are defined as health care entities under OHCA's statute.  Additionally, the Department of Managed Health Care collects, and in the case of health plans, publishes comparable financial data for health plans and physician groups licensed as risk-bearing organizations.”

OHCA’s enabling statute requires the OHCA Board to define initial healthcare sectors by 2027 and set sector-specific cost targets by 2028.  CHA claims that by defining a hospital healthcare sector before the deadline, it is evidence that OHCA "arbitrarily and improperly" singled out hospitals.  CHA claims this is improper, as "hospital spending, and in particular, hospital inpatient spending, grew at the lowest rate compared to other services in California”.

d) OHCA’s failure to follow required processes in designating certain hospitals as “high cost” and assigning even lower cost targets to those hospitals, and that OHCA adopted it as an underground regulation without following the mandated process for adopting regulations

In addition to authorizing OHCA to enforce hospital cost targets, the Health Care Affordability Board voted to create more stringent cost targets for seven high-cost hospitals.  These seven hospitals were selected based on net patient revenue, prices paid by commercial insurers compared to Medicare, and other cost and market benchmarks.  There were originally eleven hospitals under consideration for this category, but the OHCA Board reduced it to seven in response to feedback.

CHA’s brief considers the creation of the “high cost” category to be “an arbitrary, incoherent categorization of hospitals” and states “[i]f OHCA seeks to set or adjust a health care target for specific health care entities, it must develop a methodology that takes into account entities’ ability to serve populations with greater health care risks.”  CHA claims that the action and methodology of defining high-cost hospitals is not exempted from administrative procedure act requirements in OHCA's enabling statute, and therefore would make it an "underground regulation".  "Underground regulations" are regulations adopted by agencies without using the proper public rulemaking process, and thus not binding and enforceable.  CHA claims that the Board created the high-cost criteria itself, not based on statute, but by interpreting the law, and that the "application of a separate cost target to this category is clearly not the only legally tenable interpretation of the OHCA statute."

e) OHCA’s establishment of cost targets facially violate the Takings and Substantive Due Process clauses

“Takings clauses", whether they be in the US or a state constitution, prevent the government from taking private property for public use without providing just compensation.  "Substantive due process" is the idea that laws can be deemed invalid if they infringe on fundamental rights, unless the government can provide a sufficient reason for doing so.  CHA claims the targets violate the takings and substantive due process clauses of both the United States and California Constitutions as they “are confiscatory and subject hospitals to enforcement without a cogent articulation of how to comply with the cost targets”, “depriving hospitals so significantly of their ability to carry out their provision of health care so as to practically deprive the hospitals of their property without due process of law.”  As evidence, CHA cites California hospitals consistently providing “public comment to OHCA regarding the myriad ways in which the cost targets would fundamentally deprive hospitals of their ability to operate and provide care, and would result in limiting hospital revenue so that such revenue will not cover hospital costs or generate a fair return.”  It should be noted that price caps in other contexts, such as rent control, have withstood legal challenges in the past.  Additionally, other states have previously successfully instituted hospital rate setting programs, and Medicare’s drug price negotiation program has successfully survived takings challenges.

f) OHCA’s enforcement of cost targets violates Procedural Due Process

Procedural due process is the concept that, before the government can deprive someone of their rights, including property rights, certain procedural steps must be taken, including providing adequate notice and affording a fair opportunity to be heard.

According to CHA:

[O]nce OHCA’s cost targets enter their enforcement period in January 2026, hospitals will need to act to comply with the cost targets to avoid enforcement.  Yet, with less than three months to spare, OHCA still has not provided hospitals with a sufficient indication of how they can comply with the cost targets, as OHCA has still not cogently articulated how it intends to measure hospital spending and evaluate hospitals’ compliance with the cost targets.

CHA also cites a lack of information about how OHCA will review justifications for exceeding cost targets.  According to the brief, this means “[t]he risk of erroneous deprivation is high given the lack of finalized methodology, leaving hospitals to discover the applicable criteria only after sanctions are initiated."  CHA's brief claims that the lack of a definitive, disclosed methodology means that hospitals will have to guess what criteria will ultimately apply, and those that guess incorrectly will receive penalties, making the cost targets impermissibly vague and constitutionally unenforceable.  Health Care Affordability Board meeting minutes, however, would indicate the Board’s intent to communicate “with health plans and entities about the enforcement of targets and provide guidance on how to adjust operations.”

Conclusion

CHA's filing relies heavily on transcripts from OHCA Board meetings and California Legislative committees, noting whenever Board members or Legislators raised questions or concerns about OHCA's actions, and attempting to use this as evidence that what OHCA was doing was clearly identified as being wrong.  However, any board or committee deliberation will involve questions and expressions of concern. CHA's brief seems to give these routine exchanges disproportionate weight, and overlooks the fact that the Board engaged in significant discussions before ultimately voting to adopt the targets.

Additionally, CHA repeatedly cites negative public comments submitted in response to OHCA’s proposals as evidence that the cost targets are flawed.  In any instance where a public comment period is held for proposed regulations, a spectrum of responses will be observed, ranging from extremely supportive to extremely negative, with a range of comments in between.  Comments were posted on the HCAI website and summarized and presented to the Board at subsequent meetings. Additionally, several of the negative comments cited in the brief come from California hospitals, or CHA itself.  Relying its own submitted comments as evidentiary support to advance its position in the brief seems logically tenuous at best.

CHA's objections seems to center on OHCA’s decision to act before it was obligated to, its reliance on data and methodology that produced targets lower than CHA would have liked, and the fact that (so far) hospitals have been the primary focus of OHCA’s oversight.  Even if OHCA were to lose this case, the likely remedy would be to repeat the rate-setting process at a slower, more procedurally deliberate pace, hardly a knockout punch for the program.

The Source will update readers on OHCA’s response to the case once it is filed.

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