Existing law, the Knox-Keene Health Care Service Plan Act of 1975, provides for the licensure and regulation of health care service plans by the Department of Managed Health Care, and makes a willful violation of the act a crime. Existing law requires a health care service plan that intends to merge with, consolidate with, or enter into an agreement resulting in its purchase, acquisition, or control by, an entity, to give notice to, and secure prior approval from, the Director of the Department of Managed Health Care. Existing law authorizes the director to disapprove the transaction or agreement if the director finds it would substantially lessen competition in health care service plan products or create a monopoly in this state. Existing law authorizes the director to conditionally approve the transaction or agreement, contingent upon the health care service plans agreement to fulfill one or more conditions to benefit subscribers and enrollees of the health care service plan, provide for a stable health care delivery system, and impose other conditions specific to the transaction or agreement, as specified.

This bill would additionally require a health care service plan that intends to acquire or obtain control of an entity, as specified, to give notice to, and secure prior approval from, the director. Because a willful violation of this provision would be a crime, the bill would impose a state-mandated local program. The bill would also authorize the director to disapprove a transaction or agreement if it would substantially lessen competition in the health system or among a particular category of health care providers, and would require the director to provide information related to competition to the Attorney General. The bill would revise the directors authority to conditionally approve a transaction or agreement, including authorizing the director to review information from federal agencies and other state agencies, including agencies in other states, that is relevant to any of the parties to the transaction, as specified. With respect to a conditional approval, the bill would also authorize the director to contract with an independent entity to monitor compliance with the established conditions and report to the department. The bill would prohibit the director from waiving, or delaying implementation of, certain requirements imposed under existing law and the bill, notwithstanding a specified provision.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Existing law, the Knox-Keene Health Care Service Plan Act of 1975, provides for the licensure and regulation of health care service plans by the Department of Managed Health Care, and makes a willful violation of the act a crime. Existing law requires a health care service plan that intends to merge with, consolidate with, or enter into an agreement resulting in its purchase, acquisition, or control by, an entity, to give notice to, and secure prior approval from, the Director of the Department of Managed Health Care. Existing law authorizes the director to disapprove the transaction or agreement if the director finds it would substantially lessen competition in health care service plan products or create a monopoly in this state. Existing law authorizes the director to conditionally approve the transaction or agreement, contingent upon the health care service plans agreement to fulfill one or more conditions to benefit subscribers and enrollees of the health care service plan, provide for a stable health care delivery system, and impose other conditions specific to the transaction or agreement, as specified.

This bill would additionally require a health care service plan that intends to acquire or obtain control of an entity, as specified, to give notice to, and secure prior approval from, the director. Because a willful violation of this provision would be a crime, the bill would impose a state-mandated local program. The bill would also authorize the director to disapprove a transaction or agreement if it would substantially lessen competition in the health system or among a particular category of health care providers, and would require the director to provide information related to competition to the Attorney General. The bill would revise the directors authority to conditionally approve a transaction or agreement, including authorizing the director to review information from federal agencies and other state agencies, including agencies in other states, that is relevant to any of the parties to the transaction, as specified. The bill would prohibit the director from waiving, or delaying implementation of, certain requirements imposed under existing law and the bill, notwithstanding a specified provision.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Existing law, the Knox-Keene Health Care Service Plan Act of 1975, provides for the licensure and regulation of health care service plans by the Department of Managed Health Care, and makes a willful violation of the act a crime. Existing law requires a health care service plan that intends to merge with, consolidate with, or enter into an agreement resulting in its purchase, acquisition, or control by, an entity, to give notice to, and secure prior approval from, the Director of the Department of Managed Health Care. Existing law authorizes the director to disapprove the transaction or agreement if the director finds it would substantially lessen competition in health care service plan products or create a monopoly in this state. Existing law authorizes the director to conditionally approve the transaction or agreement, contingent upon the health care service plans agreement to fulfill one or more conditions to benefit subscribers and enrollees of the health care service plan, provide for a stable health care delivery system, and impose other conditions specific to the transaction or agreement, as specified.

This bill would additionally require a health care service plan that intends to acquire or obtain control of an entity, as specified, to give notice to, and secure prior approval from, the director. Because a willful violation of this provision would be a crime, the bill would impose a state-mandated local program. The bill would also authorize the director to disapprove a transaction or agreement if it would substantially lessen competition in the health system or among a particular category of health care providers, and would require the director to provide information related to competition to the Attorney General. The bill would revise the directors authority to conditionally approve a transaction or agreement, including authorizing the director to review information from federal agencies and other state agencies, including agencies in other states, that is relevant to any of the parties to the transaction, as specified.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

SENATE COMMITTEE ON

Senator Anthony Portantino, Chair

2023 - 2024 Regular Session

AB 1092 (Wood) - Health care service plans: consolidation

Bill Summary:

AB 1092 would require a health plan that intends to acquire or obtain control of an entity through a change of governance or control of a material amount of assets of that entity to give notice to, and secure prior approval from, the director of the Department of Managed Health Care (DMHC). 

Fiscal Impact:

• The DMHC estimates costs of approximately $2,694,000 in 2023-24, $4,689,000 in 2024-25, $4,641,000 in 2025-26, $4,642,00 in 2026-27, $4,643,000 in 2027-28, and $4,644,000 in 2028-29 and annually thereafter for state administration (Managed Care Fund).

• The Department of Justice estimates General Fund costs of $21,000 in 2023-24 and $41,000 in 2024-25 and ongoing thereafter, for staffing resources to provide advice to health care providers and plans.

Background:

The DMHC regulates health plans under the Knox-Keene Health Care Service Plan Act. Current law requires a health plan that intends to merge or consolidate with, or enter into an agreement resulting in its purchase, acquisition, or control by, any entity, including another health plan or health insurer to give notice to, and secure prior approval from the DMHC director. Existing law authorizes the director to conditionally approve the transaction or agreement, contingent upon the health care service plan’s agreement to fulfill one or more conditions to benefit subscribers and enrollees of the health care service plan, provide for a stable health care delivery system, and impose other conditions specific to the transaction or agreement, as specified. Existing law authorizes the director to disapprove the transaction or agreement if the director finds it would substantially lessen competition in health care service plan products or create a monopoly in this state.

Proposed Law:

Specific provisions of the bill would:

• Additionally require a health plan that intends to acquire or obtain control of an entity through a change of governance or control of a material amount of assets of that entity to give notice to, and secure prior approval from, the DMHC director.
• Additionally authorize the director to include in its conditional approval, the health care service plan’s agreement to control costs to subscribers and enrollees; authorize the director to contract with an independent entity to monitor compliance with any or all conditions associated with approval of a transaction or agreement; and require the director to review information from federal agencies and other state agencies, including agencies in other states, that is relevant to any of the parties to the transaction.
• Additionally authorize the director to disapprove a transaction or agreement if the director finds the transaction or agreement would substantially lessen competition in the health system or among a particular category of health care providers; and require that in so doing, the director provide information related to competition to the Attorney General.

-- END --

SENATE COMMITTEE ON

Senator Anthony Portantino, Chair

2023 - 2024 Regular Session

AB 1092 (Wood) - Health care service plans: consolidation

Bill Summary:

AB 1092 would require a health plan that intends to acquire or obtain control of an entity through a change of governance or control of a material amount of assets of that entity to give notice to, and secure prior approval from, the director of the Department of Managed Health Care (DMHC). 

Fiscal Impact:

• The DMHC estimates costs of approximately $2,694,000 in 2023-24, $4,689,000 in 2024-25, $4,641,000 in 2025-26, $4,642,00 in 2026-27, $4,643,000 in 2027-28, and $4,644,000 in 2028-29 and annually thereafter for state administration (Managed Care Fund).

• The Department of Justice estimates General Fund costs of $21,000 in 2023-24 and $41,000 in 2024-25 and ongoing thereafter, for staffing resources to provide advice to health care providers and plans.

Background:

The DMHC regulates health plans under the Knox-Keene Health Care Service Plan Act. Current law requires a health plan that intends to merge or consolidate with, or enter into an agreement resulting in its purchase, acquisition, or control by, any entity, including another health plan or health insurer to give notice to, and secure prior approval from the DMHC director. Existing law authorizes the director to conditionally approve the transaction or agreement, contingent upon the health care service plan’s agreement to fulfill one or more conditions to benefit subscribers and enrollees of the health care service plan, provide for a stable health care delivery system, and impose other conditions specific to the transaction or agreement, as specified. Existing law authorizes the director to disapprove the transaction or agreement if the director finds it would substantially lessen competition in health care service plan products or create a monopoly in this state.

Proposed Law:

Specific provisions of the bill would:

• Additionally require a health plan that intends to acquire or obtain control of an entity through a change of governance or control of a material amount of assets of that entity to give notice to, and secure prior approval from, the DMHC director.
• Additionally authorize the director to include in its conditional approval, the health care service plan’s agreement to control costs to subscribers and enrollees; authorize the director to contract with an independent entity to monitor compliance with any or all conditions associated with approval of a transaction or agreement; and require the director to review information from federal agencies and other state agencies, including agencies in other states, that is relevant to any of the parties to the transaction.
• Additionally authorize the director to disapprove a transaction or agreement if the director finds the transaction or agreement would substantially lessen competition in the health system or among a particular category of health care providers; and require that in so doing, the director provide information related to competition to the Attorney General.

-- END --

SENATE JUDICIARY COMMITTEE

Senator Thomas Umberg, Chair

2023-2024 Regular Session

Bill No: AB 1092 (Author:Wood)

Version: June 28, 2023

Hearing Date: July 11, 2023

Fiscal: Yes

Urgency: No

Consultant: AM

SUBJECT

Health care service plans: consolidation

DIGEST

This bill requires a health plan that intends to acquire or obtain control of an entity through a change of governance or control of a material amount of assets of that entity to give notice to, and secure prior approval from, the director of the Department of Managed Health Care (DMHC). The bill authorizes the DMHC director (director) to additionally conditionally approve the transaction or agreement if the health care service plan’s agreement to control costs to subscribers and enrollees, contract with an independent entity to monitor conditions approved by the director associated with approval of a merger, consolidation, transaction or agreement, and makes failure to comply with a condition grounds for disciplinary action. The bill authorizes the director to disapprove a transaction or agreement because it would substantially lessen competition among a particular category of health care providers, and requires the director to provide the AG information related to competition.

EXECUTIVE SUMMARY

This bill seeks to expand on the provisions of AB 595 (Wood, Ch. 292, Stats. 2018) and additionally require a health plan that intends to acquire or obtain control of an entity through a change of governance or control of a material amount of assets of that entity to give notice to, and secure prior approval from, the director. It specifically includes controlling costs to subscribers and enrollees as a condition the director can place on approval of a merger, acquisition, or change of governance or control. Additionally, it authorizes the director to disapprove the transaction or agreement if the director finds it would substantially lessen competition in the health system or among a particular category of health care providers.

The bill is author sponsored. The bill is supported by various labor organization and health advocacy groups. It is opposed by the California Association of Health Plans and Vision Service Plan. The bill passed the Senate Health Committee on a vote of 9 to 2.

PROPOSED CHANGES TO THE LAW

Existing law:

1. The Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene Act) and the California Department of Insurance (CDI) to regulate health and other insurers. (Health & Saf. Code § 1340, et seq., and Ins. Code § 106, et seq.)
   
2. Requires a health plan that intends to merge or consolidate with, or enter into an agreement resulting in its purchase, acquisition, or control by, any entity, including another health plan or health insurer to give notice to, and secure prior approval from the DMHC director. (Health & Saf. Code § 1399.65.(a)(1).)
   
3. Requires a health plan described in 2) above to meet all of the Knox-Keene Act requirements and file all necessary information for the director to make a determination to approve, conditionally approve, or disapprove the transaction, as specified. (Health & Saf. Code § 1399.65(a)(3).)
   
4. Authorizes the director to conditionally approve the transaction, contingent upon an agreement to fulfill one or more conditions to benefit subscribers and enrollees, provide for a stable health care system, and impose other conditions specific to the transaction in furtherance of KKA. (Health & Saf. Code § 1399.65(a)(4).)
5. Requires DMHC to engage stakeholders in determining the measures for improvement. For a major transaction or agreement, requires the director to obtain an independent analysis of the impact of the transaction or agreement on subscribers and enrollees, the stability of the health care delivery system, and other relevant provisions law, and authorizes the director to obtain an independent analysis for other transactions. (Health & Saf. Code § 1399.65(a)(4).)
   
6. Authorizes the director to disapprove the transaction upon a finding that it would substantially lessen competition in the health care system or create a monopoly in this state, including, but not limited to, health coverage products for a specific line of business, in addition to any grounds for disapproval. (Health & Saf. Code § 1399.65(b).)
   
7. Establishes the Office of Health Care Affordability (OHCA) in the Department of Health Care Access and Information (HCAI), which is responsible for analyzing the health care market for cost trends and drivers of spending, developing data-informed policies for lowering health care costs for consumers and purchasers, creating a state strategy for controlling the cost of health care and ensuring affordability for consumers and purchasers, and enforcing cost targets. (Health & Saf. Code § 127501.)
   
8. Requires OHCA to review and evaluate consolidation, market power, and other market failures through cost and market impact reviews of mergers, acquisitions, or corporate affiliations involving health plans, health insurers, hospitals, physician organizations, pharmacy benefit managers, and other health care entities. (Health & Saf. Code § 127501.)
   
9. Requires OHCA to monitor cost trends and other market failures on competition, prices, access, quality, and equity.
   1. Requires OHCA to promote competitive health care markets by examining mergers, acquisitions, corporate affiliations, or other transactions that entail a material change to ownership, operations, or governance structure involving health plans, health insurers, hospitals or hospital systems, physician organizations, providers, pharmacy benefit managers, and other health care entities, in a manner supportive of the efforts of the Attorney General (AG), DMHC, and CDI.
   2. Requires OHCA to prospectively analyze those transactions likely to have significant effects, seek input from the parties and the public, and report on the anticipated impacts to the health care market. (Health & Saf. Code § 127507.)
      
10. Requires a health care entity to provide OHCA with written notice of agreements or transactions that will occur on or after April 1, 2024, at least 90 days prior to entering into an agreement to do either of the following:
    1. sell, transfer, lease, exchange, option, encumber, convey, or otherwise dispose of a material amount of its assets to one or more entities; or,
    2. transfer control, responsibility, or governance of a material amount of the assets or operations of the health care entity to one or more entities. (Health & Saf. Code § 127507.)
       
11. Exempts the following from 11) above:
12. agreements or transactions involving health plans that are subject to review by the DMHC director under the Knox-Keene Act;
13. agreements or transactions involving health insurers that are subject to review by the Insurance Commissioner;
14. agreements or transactions where a county is purchasing, acquiring, or taking control, responsibility, or governance of an entity to ensure continued access in that county; and
15. agreements or transactions involving nonprofit corporations that are subject to review by the AG, as specified. (Health & Saf. Code § 127507.)
    
16. Authorizes agreements described in 13) above to be referred to OHCA for a cost and market impact review by the reviewing authority. (Health & Saf. Code § 127507.)
    
17. Authorizes the court, in any civil action brought by the AG or a district attorney, as specified, in addition to granting such prohibitory injunctions and other restraints as it may deem expedient to deter the defendant from, and insure against, his committing a future violation, as specified, to grant such mandatory injunctions as may be reasonably necessary to restore and preserve fair competition in the trade or commerce affected by the violation. (Bus. & Prof. Code § 16754.5.)
18. Establishes the Unfair Competition Law (UCL), which provides a statutory cause of action for any unlawful, unfair, or fraudulent business act or practice and unfair, deceptive, untrue, or misleading advertising, including over the internet. (Bus. & Prof. Code § 17200 et seq.)
19. Establishes the Cartwright Act as California’s antitrust law that prohibits anticompetitive activity. (Bus. & Prof. Code § 16000 et. seq.)
    1. Provides that, except as expressly provided, every trust is unlawful, against public policy and void. (Bus. & Prof. Code § 16726.)
    2. In any civil action brought by the Attorney General or a district attorney under the Cartwright Act, the court may, in addition to granting such prohibitory injunctions and other restraints as it may deem expedient to deter the defendant from, and insure against, the defendant’s committing a future violation of the Act, grant such mandatory injunctions as may be reasonably necessary to restore and preserve fair competition in the trade or commerce affected by the violation.

This bill:

1. Requires a health plan that intends to acquire or obtain control of an entity through a change of governance or control of a material amount of assets of that entity to give notice to, and secure prior approval from, the DMHC director. 
   1. Acquiring an entity includes the sale, transfer, lease, exchange, option, conveyance, or other disposition of an entity’s assets to a health care service plan if a material amount of the assets of the entity are involved in the agreement or transaction, and also includes the acquisition of an entity by a corporate affiliate of a health plan if the agreement or transaction will impact enrollees of the health plan in this state.
   2. Obtaining control of an entity occurs if the entity transfers control, responsibility, or governance of a material amount of its assets or operations to a health care service plan.
   3. Transfer includes the substitution of one or more new corporate members that would transfer the control of, responsibility for, or governance of the entity, and also includes the substitution of one or more members of the entity’s governing body, or an arrangement, written or oral, that would transfer voting control of the members of the governing body.
      
2. Authorizes the director to contract with an independent entity to monitor compliance with any or all conditions associated with approval of a transaction or agreement and report to DMHC. Requires the health plan to cooperate with the independent entity by, among other things, responding promptly to requests for information.
   1. Requires a plan to reimburse the director for the reasonable costs of the independent monitor authorized pursuant to this bill.
   2. Requires a contract entered into with a consultant or consultants under this bill to be on a noncompetitive bid basis and exempt from public contracting requirements, as specified.
3. Authorizes the director to conditionally approve the transaction, in addition to existing factors, contingent upon the health plan’s agreement to control costs to subscribers and enrollees. Requires the director to review information from federal agencies and other state agencies, and agencies in other states that is relevant to any of the parties to the transaction and indicate compliance with those laws.
   
4. Authorizes the director to disapprove the transaction or agreement if the director finds the transaction or agreement would substantially lessen competition among a particular category of health care providers. Requires the director to provide to the AG information related to competition.
5. Provides that the bill does not narrow, abrogate, or otherwise alter the authority of the AG to maintain competitive markets, including, but not limited to, seeking injunctive relief, as specified, and prosecute state and federal antitrust and unfair competition violations.
   
6. Makes failure to comply with a condition associated with approval of a transaction or agreement grounds for disciplinary action by the director. Prohibits the director from waiving, or delaying implementation of, any requirement imposed on a health plan pursuant to these provisions.

COMMENTS

1. Stated need for the bill

The author writes:

This bill expands regulatory oversight over health plan transactions, building on prior legislation (AB 595 (Wood), Chapter 292, Statutes of 2018), which requires an entity that intends to merge with a health plan to give notice to, and secure prior approval from, the Department of Managed Health Care (DMHC) Director. This bill applies to health plans that merge or acquire other entities, like a physician group, for example. AB 1092 also authorizes the DMHC Director to disapprove a transaction with a finding that the transaction would substantially lessen competition and requires DMHC to forward competitive information to the Attorney General. A majority of studies show that mergers and acquisitions in health care are not lowering costs for anyone but the entities doing it and there are real concerns about how these mergers and acquisitions could reduce or limit access to certain health care services.

1. Health care consolidation in California

The Senate Health Committee analysis provides the following background on health care consolidation in California:

According to a California Health Care Foundation issue brief (Gudiksen, Gu and King, 2021), between 2006 and 2014, the combined market share of the top four health insurers climbed from 74% to 83%, and the coronavirus pandemic fueled another round of consolidation including significant activity by private equity firms. Recent consolidations are occurring through transactions including joint ventures, strategic alliances, affiliations, and other agreements between companies. The brief indicates there is a large and growing body of evidence that mergers of health care companies have consistently resulted in increased prices for health care services with little to no improvement in quality. The brief also points out that DMHC regulates only the plans operating in California and not any parent corporations, and CDI does not have authority over mergers affecting an insurer that is not residing in the state. The brief suggests giving DMHC and CDI authority to include affordability standards when reviewing health plans sales in California.^[1]

In November of 2020, the Assembly Health Committee held an Informational Hearing titled “Health Care Industry Consolidation and its Impact on California’s Health Care Prices” and noted in the Background Paper for the Informational Hearing that:

A critical factor in the fast growth of prices in California compared with the rest of the country is market concentration. This market concentration, including hospital and physician consolidation, has been proliferating in the state along with price acceleration according to a 2019 CHCF report entitled, “Sky’s the Limit: Health Care Prices and Market Consolidation in California (Sky’s the Limit report).” As market concentration rises, so do prices. The Sky’s the Limit report points out that while there are potential benefits to hospital-physician consolidation (also known as vertical consolidation, further discussed below), including reduced transaction costs and technological interdependencies that improve coordination of care, such integration can also result in higher prices, particularly when the hospital or physician organization has significant share in its market. The combined effect of higher hospital and physician prices results in higher health insurance premiums, making healthcare even more unaffordable.^[2]

1. AB 595 (Wood, Ch. 292, Stats. 2018)

In 2018, the Legislature enacted AB 595 (Wood, Ch. 292, Stats. 2018) to require a health care service plan subject to the Knox-Keene Act that intends to merge or consolidate with, or enter into an agreement resulting in its purchase, acquisition, or control by, any entity, to give notice to, and secure prior approval from, the director. (Health & Saf. Code § 1399.65.) Under existing law, the director can conditionally approve the transaction or agreement contingent on certain factors, including the health care service plan’s agreement to fulfill one or more conditions to benefit subscribers and enrollees of the plan, provide for a stable health care delivery system, and impose other conditions specific to the transaction or agreement in furtherance of the Knox-Keene Act.

The Senate Health Committee analysis details a recent example of a merger review by the director in December 2021 where conditions were placed on the merger:

DMHC reviewed Centene Corporation’s acquisition of Magellan Health, Inc. DMHC’s authority to review the sale or purchase of a health plan, in this case Magellan, as the parent company of two licensed plans triggered the review. DMHC conducted a comprehensive review of the merger including obtaining an independent impact analysis that evaluated the impact of the merger on subscribers and enrollees and the stability of the health care delivery system. As part of its review, DMHC considered the findings and recommendations in the independent impact analysis and conducted a public meeting to solicit input from the public. DMHC approved the acquisition and imposed several conditions on the plans, including:

• • the plans will continue Magellan’s market presence in California and continue its existing contracts to provide behavioral health services at the same rates for at least two years;
  • the plans will help to control health care costs and keep premium rate increases to a minimum, including no increases in premiums as a result of acquisition costs;
  • a third-party monitor will be put in place to oversee the plans’ compliance with competition related conditions, including holding the Magellan and Centene plans separate to ensure the Magellan plans are run as a separate business; and
  • the plans must invest $10 million to support the acceleration of behavioral health integration into primary care practices in California’s health care delivery system.^[3]

1. OHCA

OHCA was established last year through the California Health Care Quality and Affordability Act (Act) (SB 184 (Committee on Budget and Fiscal Review, Ch. 47, Stats. 2022)), which was enacted in recognition that health care affordability has reached a crisis point. OHCA’s website notes that:

Health care spending in California reached $10,299 per capita and $405 billion overall in 2020, up 30% from 2015. Californians with job-based coverage are facing higher out-of-pocket costs, with the share of workers with a large deductible ($1,000 or more) increasing from 6% in 2006 to 54% in 2020. For the third consecutive year, the 2022 CHCF California Health Policy Survey found that half of Californians (49%) – and fully two-thirds of those with lower incomes (under 200% of the federal policy level) – reported skipping or delaying at least one kind of health care due to cost in the past 12 months. Among those who reported skipping or delaying care due to cost, about half reported that their conditions worsened as a result.^[4]

The Act emphasized that it is in the public interest that all Californians receive health care that is accessible, affordable, equitable, high-quality, and universal, and tasked OHCA with three primary responsibilities: managing spending targets, monitoring system performance, and assessing market consolidation. In order to perform these duties, OHCA “will collect, analyze, and publicly report data on total health care expenditures, and enforce spending targets set by a new Health Care Affordability Board. To ensure a balanced approach to slow spending growth, OHCA will monitor system performance by measuring quality, equity, adoption of alternative payment models, investment in primary care and behavioral health, and workforce stability. Through cost and market impact reviews, OHCA will analyze transactions that are likely to have significant impact on market competition, the state’s ability to meet targets, or affordability for consumers and purchasers. Based on results of the review, OHCA will then coordinate with other state agencies to address consolidation as appropriate.”^[5] Enforcement by OHCA is not expected to begin until 2026, and in 2024 it will begin collecting notices related to transactions among health care entities, which will trigger cost and market impact reviews on transactions that are likely to significantly impact market competition. OHCA will only review transactions existing law requires DMHC to consider if requested by DMHC.

1. This bill addresses the issue of consolidation in the health care industry by expanding the power of the DMHC Director to review transactions where a health care service plan intends to acquire or obtain control of an entity through a change of governance or control of a material amount of assets

This bill addresses the issue of consolidation in the health care industry by requiring a health care service plan that intends to acquire or obtain control of an entity through a change of governance or control of a material amount of assets of that entity to give notice to, and secure prior approval from, the director. The director is required to review information from federal agencies and other state agencies, including agencies in other states, that is relevant to any of the parties to the transaction, and that may indicate compliance with state or federal laws, including the laws of other states. The health care service seeking approval under these provisions is required to cooperate with the department in obtaining information from out-of-state agencies or federal agencies. It specifically includes controlling costs to subscribers and enrollees as a condition the director can place on approval of a merger, acquisition, or change of governance or control in regards to a merger, consolidation, or acquisition through a change of governance or control.

In recognition of the AG’s existing authority to enforce antitrust violations, the bill specifically provides that it does not narrow, abrogate, or otherwise alter the authority of the AG to maintain competitive markets, including, but not limited to, seeking injunctive relief under Section 16754.5 of the Business and Professions Code, and prosecute state and federal antitrust and unfair competition violations.

1. Statements in support

The Western Center on Law and Poverty writes in support stating:

Economic studies have shown that past health insurer mergers lead to premium increases and have no demonstrable effect on improving health care quality. To provide oversight, the Legislature passed AB 595 (Wood) in 2017-18, Chapter 292 of 2018, which required oversight by DMHC when health plans are acquired or merge, including when two health plans merge, that transaction be reviewed for impacts on competition, cost, quality and health disparities, and approved by the DMHC. The law required DMHC to hold a public meeting about the merger, and gave the department the authority to approve, deny or approve the merger with conditions to prevent negative impacts on consumers.

AB 1092 would close a gap in oversight, by requiring that when a health plan buys or takes control of another entity that is not another health plan, they go through the same review, public input and consent process.

Since AB 595’s enactment, health plans have been purchasing and investing in other entities including physician groups and pharmacy benefit managers. In fact, United Healthcare, a health insurance company, may today be the largest employer of physicians in America, and it continues to grow. In recent years, Optum Health, a medical group owned by United Healthcare, purchased multiple physician entities in Southern California, Monarch, and DaVita Healthcare Partners – two of the largest in the state. Health plans acquiring other entities, like physician groups further concentrates the health care market, which can have negative impacts on costs and quality of care.

1. Statements in opposition

The California Association of Health Plans writes in opposition stating:

The impacts of AB 1092 extend beyond mergers and acquisitions by stating, “A health care service plan that intends to acquire or obtain control of an entity through a change of governance or control of a material amount of assets of that entity shall give notice to, and secure prior approval from, the director.” The added language is very problematic as it would allow the DMHC director to reach deeper into health plan operations and control intracompany arrangements and changes in corporate governance. Even a relatively basic consolidation or transfer of assets within the same corporate family could trigger prior approval from state regulators and hold back innovative transactions.

AB 1092 adds burdensome new language to the existing provision of law that allows DMHC to conditionally approve health plan transactions. Specifically, the bill adds a contingency on health plans to “control costs to subscribers and enrollees.” Health plans do their best to control costs for their enrollees, contingencies like this, while well meaning, are ill-defined and are very difficult to attain because they ignore the undercurrents of the health care market. The language fails to account for other cost drivers such as increases in utilization, provider rates, government mandates, and rising drug costs, all which impact consumer costs in the short and long term.

Other provisions of AB 1092 raise additional concerns. Current law already requires that proposed transactions by health plans be approved by the DMHC. It is unclear why subjecting health plan transactions to more stringent review by the Attorney General is necessary. At the very least, clarity is needed in terms of the scope of review by the Attorney General compared to review and approval by other state entities. While we understand the desire to ensure a competitive marketplace, we have not been provided any reliable example of public harm to justify a deviation from prevailing standards.

Additionally, the newly enacted Office of Health Care Affordability aims to take a comprehensive approach to addressing rising healthcare costs. As part of its mission the Office is required to monitor the impact of consolidation and promote competitive markets in a manner supportive of the efforts of the Attorney General and the DMHC. This involves prospectively analyzing transactions and report on the anticipated impacts to the health care market. Considering this, it is not entirely clear why this bill is needed.

Vision Service Plan writes in opposition unless amended seeking an exemption from the bill for where an affiliate of a health care service plan makes an acquisition in the optometric space.

SUPPORT

American Federation of State, County and Municipal Employees California

California Agents and Health Insurance Professionals

California Pan - Ethnic Health Network

California Pharmacists Association

California Rural Legal Assistance Foundation

Service Employees International Union California

Health Access California

Leukemia & Lymphoma Society

NARAL Pro-choice California

National Health Law Program

Western Center on Law & Poverty, Inc.

OPPOSITION

California Association of Health Plans

Vision Service Plan

RELATED LEGISLATION

Pending Legislation: None known.

Prior Legislation:

SB 184 (Committee on Budget and Fiscal Review, Ch. 47, Stats. 2022), among many other provisions, created OHCA within HCAI to collect, analyze, and publicly report data on total health care expenditures, and enforce spending targets set by a Health Care Affordability Board.

AB 2080 (Wood, 2022) would have prohibited the use of six contract requirements, as specified, by a health care provider, health facility, and others that restrict the behavior of a health plan or insurer, and would have permitted the AG and any other state entity charged with reviewing health care market competition to review contracts containing these provisions and decide to consent or deny consent to the transaction, as specified. AB 2080 was not set for a hearing in the Senate Health Committee.

SB 977 (Monning, 2020) would have required the AG, beginning July 1, 2021, to establish the Health Policy Advisory Board for the purpose of evaluating and analyzing health care markets in California and providing recommendations to the AG's office, as specified. SB 977 was not taken up for a vote on the Assembly Floor.

SB 538 (Monning, 2018) would have prohibited contracts between hospitals and contracting agents, health care service plans, or health insurers from containing certain provisions, such as setting payment rates or other terms for nonparticipating affiliates of the hospital, and would have required the contracting agent, plan, or insurer to keep the contract’s payment rates confidential from any payor, as defined, that is or may become financially responsible for the payment. SB 538 was never set for a hearing in the Assembly Health Committee.

AB 595 (Wood, Ch. 292, Stats. 2018) required a health care service plan that intends to merge or consolidate with, or enter into an agreement resulting in its purchase, acquisition, or control by, any entity, to give notice to, and secure prior approval from, the DMHC Director, as specified.

PRIOR VOTES

Senate Health Committee (Ayes 9, Noes 2)

Assembly Floor (Ayes 62, Noes 18)

Assembly Appropriations Committee (Ayes 11, Noes 4)

Assembly Health Committee (Ayes 10, Noes 4)

**************

1. Sen. Health Committee Analysis AB 1092 (2023-24 Reg. Sess.) as amended Jun. 28, 2023 at p. 5. ↑

2. Asm. Comm. on Health, Health Care Industry Consolidation and its Impact on California’s Health Care Prices (Nov. 12, 2020), available at https://ahea.assembly.ca.gov/sites/ahea.assembly.ca.gov/files/Final%20Consolidation%20background%20paper.pdf. ↑

3. Sen. Health Committee Analysis AB 1092 (2023-24 Reg. Sess.) as amended Jun. 28, 2023 at p. 5. ↑

4. Office of Health Care Affordability, Overview, available at https://hcai.ca.gov/ohca/. ↑

5. Ibid. ↑

SENATE COMMITTEE ON HEALTH

Senator Dr. Susan Talamantes Eggman, Chair

BILL NO: AB 1092

SUBJECT: Health care service plans: consolidation

SUMMARY:

Requires a health plan that intends to acquire or obtain control of an entity through a change of governance or control of a material amount of assets of that entity to give notice to, and secure prior approval from, the director of the Department of Managed Health Care (DMHC). Authorizes the DMHC director to contract with an independent entity to monitor conditions approved by the director associated with approval of a merger, consolidation, transaction or agreement; makes failure to comply with a condition grounds for disciplinary action; and, authorizes the director to disapprove a transaction or agreement because it would substantially lessen competition among a particular category of health care providers.

Existing law:

1. Establishes the Department of Managed Health Care (DMHC) to regulate health plans under the Knox-Keene Health Care Service Plan Act of 1975 (KKA) and the California Department of Insurance (CDI) to regulate health and other insurers. [HSC §1340, et seq., and INS §106, et seq.]
   
2. Requires a health plan that intends to merge or consolidate with, or enter into an agreement resulting in its purchase, acquisition, or control by, any entity, including another health plan or health insurer to give notice to, and secure prior approval from the DMHC director. [HSC §1399.65]
   
3. Requires a health plan described in 2) above to meet all of the KKA requirements and file all necessary information for the director to make a determination to approve, conditionally approve, or disapprove the transaction, as specified. [HSC §1399.65]
   
4. Authorizes the director to conditionally approve the transaction, contingent upon an agreement to fulfill one or more conditions to benefit subscribers and enrollees, provide for a stable health care system, and impose other conditions specific to the transaction in furtherance of KKA. [HSC §1399.65]
5. Requires DMHC to engage stakeholders in determining the measures for improvement. For a major transaction or agreement, requires the director to obtain an independent analysis of the impact of the transaction or agreement on subscribers and enrollees, the stability of the health care delivery system, and other relevant provisions law, and authorizes the director to obtain an independent analysis for other transactions. [HSC §1399.65]
   
6. Authorizes the director to disapprove the transaction upon a finding that it would substantially lessen competition in the health care system or create a monopoly in this state, including, but not limited to, health coverage products for a specific line of business, in addition to any grounds for disapproval. [HSC §1399.65]
   
7. Authorizes the director to from time to time adopt, amend, and rescind any rules, forms, and orders that are necessary to carry out the provisions of KKA, including rules governing applications and reports, and defining any terms, whether or not used in KKA, as specified. Authorizes the director to waive any requirement of any rule or form in situations where in the director’s discretion that requirement is not necessary in the public interest or for the protection of the public, subscribers, enrollees, or persons or plans subject to KKA. [HSC §1344]
   
8. Establishes the Office of Health Care Affordability (OHCA) in the Department of Health Care Access and Information (HCAI), which is responsible for analyzing the health care market for cost trends and drivers of spending, developing data-informed policies for lowering health care costs for consumers and purchasers, creating a state strategy for controlling the cost of health care and ensuring affordability for consumers and purchasers, and enforcing cost targets. [HSC §127501]
   
9. Requires OHCA to review and evaluate consolidation, market power, and other market failures through cost and market impact reviews of mergers, acquisitions, or corporate affiliations involving health plans, health insurers, hospitals, physician organizations, pharmacy benefit managers, and other health care entities. [HSC §127501]
   
10. Requires OHCA to monitor cost trends, including conducting research and studies on the health care market, including, but not limited to, the impact of consolidation, market power, venture capital activity, profit margins, and other market failures on competition, prices, access, quality, and equity. [HSC §127507]
    
11. Requires OHCA to promote competitive health care markets by examining mergers, acquisitions, corporate affiliations, or other transactions that entail a material change to ownership, operations, or governance structure involving health plans, health insurers, hospitals or hospital systems, physician organizations, providers, pharmacy benefit managers, and other health care entities, in a manner supportive of the efforts of the Attorney General (AG), DMHC, and CDI. Requires OHCA to prospectively analyze those transactions likely to have significant effects, seek input from the parties and the public, and report on the anticipated impacts to the health care market. [HSC §127507]
    
12. Requires a health care entity to provide OHCA with written notice of agreements or transactions that will occur on or after April 1, 2024, at least 90 days prior to entering into an agreement to do either of the following:
    1. Sell, transfer, lease, exchange, option, encumber, convey, or otherwise dispose of a material amount of its assets to one or more entities; or,
    2. Transfer control, responsibility, or governance of a material amount of the assets or operations of the health care entity to one or more entities. [HSC §127507]
       
13. Exempts the following from 12) above:
    1. Agreements or transactions involving health plans that are subject to review by the DMHC director under KKA;
    2. Agreements or transactions involving health insurers that are subject to review by the Insurance Commissioner;
    3. Agreements or transactions where a county is purchasing, acquiring, or taking control, responsibility, or governance of an entity to ensure continued access in that county; and,
    4. Agreements or transactions involving nonprofit corporations that are subject to review by the AG, as specified. [HSC §127507]
       
14. Authorizes agreements described in 13) above to be referred to OHCA for a cost and market impact review by the reviewing authority. [HSC §127507]
    
15. Authorizes the court, in any civil action brought by the AG or a district attorney, as specified, in addition to granting such prohibitory injunctions and other restraints as it may deem expedient to deter the defendant from, and insure against, his committing a future violation, as specified, to grant such mandatory injunctions as may be reasonably necessary to restore and preserve fair competition in the trade or commerce affected by the violation. [BPC §16754.5]

This bill:

1. Requires a health plan that intends to acquire or obtain control of an entity through a change of governance or control of a material amount of assets of that entity to give notice to, and secure prior approval from, the DMHC director. Acquiring an entity also includes the acquisition of an entity by a corporate affiliate of a health plan if the agreement or transaction will impact enrollees of the health plan in this state
   
2. Authorizes the director to contract with an independent entity to monitor compliance with any or all conditions associated with approval of a transaction or agreement and report to DMHC. Requires the health plan to cooperate with the independent entity by, among other things, responding promptly to requests for information.
   
3. Requires a plan to reimburse the director for the reasonable costs of the independent monitor authorized pursuant to this bill.
4. Requires a contract entered into with a consultant or consultants under this bill to be on a noncompetitive bid basis and exempt from public contracting requirements, as specified.
5. Authorizes the director to conditionally approve the transaction contingent upon the health plan’s agreement to control costs to subscribers and enrollees. Requires the director to review information from federal agencies and other state agencies, and agencies in other states that is relevant to any of the parties to the transaction and indicate compliance with those laws.
   
6. Authorizes the director to disapprove the transaction or agreement if the director finds the transaction or agreement would substantially lessen competition among a particular category of health care providers. Requires the director to provide to the AG information related to competition. Prohibits the authority of the AG to maintain competitive markets, including, but not limited to, seeking injunctive relief, as specified, and prosecute state and federal antitrust and unfair competition violations from being narrowed, abrogated, or otherwise altered by this bill, as specified.
   
7. Makes failure to comply with a condition associated with approval of a transaction or agreement grounds for disciplinary action by the director.
8. Prohibits the director from waiving, or delaying implementation of, any requirement imposed on a health plan under this bill.
   
9. Indicates:
   1. “Acquiring” an entity includes the sale, transfer, lease, exchange, option, conveyance, or other disposition of an entity’s assets by a health plan if a material amount of the assets are involved in the agreement or transaction;
   2. “Obtaining control” of an entity occurs if the entity transfers control, responsibility, or governance of a material amount of its assets or operations to a health plan; and,
   3. “Transfer” includes the substitution of one or more new corporate members that would transfer the control of, responsibility for, or governance of the entity. “Transfer” also includes the substitution of one or more members of the entity’s governing body, or an arrangement, written or oral, that would transfer voting control of the members of the governing body.
      

FISCAL EFFECT:

According to the Assembly Appropriations Committee, DMHC estimates the total cost of this bill to be approximately $1.23 million in fiscal year (FY) 2023-24, $1.78 million in FY 2024-25, and $1.75 million in FY 2025-26 and annually thereafter (Managed Care Fund (MCF)). These costs would be incurred for the following:

1. Additional workload to review health plan asset information, including consultant funding and adding a staff member to analyze the effects of a transaction agreement on subscribers and enrollees and the stability of the health care delivery system.
2. Additional workload and one staff member to review health plan documents and other disclosure documents for compliance with the requirements of this bill.
3. Additional workload and one staff member to conduct legal research and issue legal memoranda to clarify the requirements set forth by this bill.
4. Annual software licensing costs for modernization efforts.

DMHC reports that, generally, a $1 million increase to the MCF could result in a two-cent increase per enrollee on assessments to full-service health plans and a 1-cent increase per enrollee to specialized health plans. To the extent this bill and others result in an additional assessment on health plans, consumers could face increased premiums.

PRIOR VOTES:

COMMENTS:

1. Author’s statement. According to the author, this bill expands regulatory oversight over health plan transactions, building on prior legislation AB 595 (Wood, Chapter 292, Statutes of 2018), which requires an entity that intends to merge with a  health plan to give notice to, and secure prior approval from, the DMHC director. This bill applies to health plans that merge or acquire other entities, like a physician group, for example. This bill also authorizes the DMHC director to disapprove a transaction with a finding that the transaction would substantially lessen competition and requires DMHC to forward competitive information to the AG. A majority of studies show that mergers and acquisitions in health care are not lowering costs for anyone but the entities doing it and there are real concerns about how these mergers and acquisitions could reduce or limit access to certain health care services.
2. Health Care Consolidation. According to a California Health Care Foundation issue brief (Gudiksen, Gu and King, 2021), between 2006 and 2014, the combined market share of the top four health insurers climbed from 74% to 83%, and the coronavirus pandemic fueled another round of consolidation including significant activity by private equity firms. Recent consolidations are occurring through transactions including joint ventures, strategic alliances, affiliations, and other agreements between companies. The brief indicates there is a large and growing body of evidence that mergers of health care companies have consistently resulted in increased prices for health care services with little to no improvement in quality. The brief also points out that DMHC regulates only the plans operating in California and not any parent corporations, and CDI does not have authority over mergers affecting an insurer that is not residing in the state. The brief suggests giving DMHC and CDI authority to include affordability standards when reviewing health plans sales in California.
3. Past Review. An example of a merger review with conditions occurred in December of 2021 when DMHC reviewed Centene Corporation’s acquisition of Magellan Health, Inc. DMHC’s authority to review the sale or purchase of a health plan, in this case Magellan, as the parent company of two licensed plans triggered the review. DMHC conducted a comprehensive review of the merger including obtaining an independent impact analysis that evaluated the impact of the merger on subscribers and enrollees and the stability of the health care delivery system. As part of its review, DMHC considered the findings and recommendations in the independent impact analysis and conducted a public meeting to solicit input from the public. DMHC approved the acquisition and imposed several conditions on the plans, including:
   1. The plans will continue Magellan’s market presence in California and continue its existing contracts to provide behavioral health services at the same rates for at least two years;
   2. The plans will help to control health care costs and keep premium rate increases to a minimum, including no increases in premiums as a result of acquisition costs;
   3. A third-party monitor will be put in place to oversee the plans’ compliance with competition related conditions, including holding the Magellan and Centene plans separate to ensure the Magellan plans are run as a separate business; and,
   4. The plans must invest $10 million to support the acceleration of behavioral health integration into primary care practices in California’s health care delivery system.
4. OHCA. OHCA is charged with collecting data on total health care expenditures, analyzing the health care market for cost trends and drivers of spending, promoting strategies for managing the cost of health care and improving affordability for consumers and purchasers while maintaining or improving quality and equity, and enforcing cost targets. The first cost-targets are expected to be issued by June of 2024 for 2025. Enforcement is not expected until 2026. OHCA will begin to collect notices related to transactions among health care entities in 2024 which will trigger cost and market impact reviews on transactions that are likely to significantly impact market competition. In terms of transactions considered by DMHC, OHCA will only review those if requested by DMHC.
   
5. Double referral. This bill has been double referred. Should it pass out of this committee it will be referred to the Senate Judiciary Committee.
   
6. Related legislation. AB 1091 (Wood) prohibits a contract issued, amended, or renewed on or after January 1, 2024, between a health plan or health insurer and a health care provider or health facility from containing terms that, among other things, restrict the plan or insurer from steering an enrollee or insured to another provider or facility or require the plan or insurer to contract with other affiliated providers or facilities. AB 1091 requires specified health entities to provide written notice to the AG at the same time as another state or federal agency is notified or otherwise at least 90 days before entering an agreement or transaction to make a specified material change with a value of $15 million or more. AB 1091 authorizes the AG to consent to, give conditional consent to, or not consent to that agreement, and would require the AG to notify the entity of the decision within 90 days, which may be extended by one 45-day period if specified conditions are met. AB 1091 is currently pending in Assembly Health Committee.
   
7. Prior legislation. AB 2080 (Wood of 2022) would have prohibited the use of six contract requirements, as specified, by a health care provider, health facility, and others that restrict the behavior of a health plan or insurer; permits the AG and any other state entity charged with reviewing health care market competition to review contracts containing these provisions; and, requires a medical group, hospital or hospital system, health facility, as specified, health plan, health insurer, or pharmacy benefit manager to provide written notice to, and obtain written consent from, the AG before entering into an agreement or transaction involving a material amount of assets, as specified. AB 2080 was not heard in the Senate Health Committee.
   
   SB 184 (Committee on Budget and Fiscal Review, Chapter 47, Statutes of 2202), establishes OHCA within HCAI. Requires OHCA to collect, analyze, and publicly report data on total health care expenditures, and enforce spending targets set by a Health Care Affordability Board.
   

SB 977 (Monning of 2020) would have required the AG, beginning July 1, 2021, to establish the Health Policy Advisory Board for the purpose of evaluating and analyzing health care markets in California and providing recommendations to the AG's office. SB 977 would have required a health care system, as defined, a private equity group, or hedge fund to provide written notice to, and obtain the written consent of, the AG prior to a change in control, or an acquisition, as defined, between the entity and a health care facility or provider. SB 977 would have provided for an expedited review process for transactions under $1 million, county facilities, and academic centers, as defined. SB 977 would have required a health care system, private equity group, or hedge fund to provide advance written notice to the AG prior to a change of control or acquisition between a health care system, private equity group, or hedge fund and a non-physician provider, as defined. SB 977 would have made it unlawful for one or more health care systems, either independently or dependently, to use their market power to, among other things, cause anticompetitive effects, as described, or authorizes the AG to bring a civil action for a violation of this unlawful conduct. Would have sunset the AG's authority to review changes of control on January 1, 2026. SB 977 was not taken up for a vote on the Assembly Floor.

SB 538 (Monning of 2018) would have established the Health Care Market Fairness Act of 2018, and would have prohibited contracts between hospitals, as defined, and contracting agents, health care service plans, or health insurers from containing certain provisions, including, but not limited to, setting payment rates or other terms for nonparticipating affiliates of the hospital, and requiring the contracting agent, plan, or insurer to keep the contract’s payment rates confidential from any payor, as defined, that is or may become financially responsible for the payment. SB 538 was held at the request of the author in the Assembly Health Committee.

AB 595 (Wood, Chapter 292, Statutes of 2018) requires a health plan that intends to merge or consolidate with, or enter into an agreement resulting in its purchase, acquisition, or control by, any entity, as defined, including another health care service plan or a licensed health insurer, to give notice to, and secure prior approval from, the DMHC director.  

1. Support. Health Access California writes this bill would require that when a health plan buys or takes control of another entity that is not another health plan, they go through the same review, public input and consent process. Since AB 595’s enactment, health plans have been purchasing and investing in other entities including physician groups and pharmacy benefit managers, further concentrating the health care market. Health insurance companies, including Centene, Cigna, Humana, and Anthem, have purchased or invested in physician entities across the country. In recent years, Optum Health, a medical group owned by United Healthcare, purchased multiple physician entities in Southern California, Monarch, and DaVita Healthcare Partners – two of the largest in the state. United Healthcare, a health insurance company, may today be the largest employer of physicians in America, and it continues to grow. In addition to expanding health plan merger oversight, this bill clarifies review of the parties’ compliance with laws and regulations from other state and federal agencies. Centene’s recent settlement with the AG for overcharging California’s Medi-Cal program for prescription drugs demonstrates why review of the companies’ conduct is necessary to protect consumers. In 2021, the DMHC approved Centene’s acquisition of Magellan Health - the state’s contractor to deliver Medi-Cal Rx - with conditions to protect access to behavioral health services and prevent premium increases. This year, the AG settled with Centene over allegations that they overcharged California’s Medi-Cal program by falsely reporting higher prescription drug costs incurred by two of its managed care plans. Centene had settled with nine states over the course of 10 months in 2021 and 2022 for overbilling their Medicaid programs for prescription drugs and services.
   
2. Opposition. The California Association of Health Plans (CAHP) writes this bill places even more arduous conditions into existing law that will ultimately give the government more leverage to demand expensive undertakings from CAHP members. Added language is very problematic as it would allow the DMHC director to reach deeper into health plan operations and control intercompany arrangements and changes in corporate governance. Even a relatively basic consolidation or transfer of assets within the same corporate family could trigger prior approval from state regulators and hold back innovative transactions. This bill adds burdensome new language that is ill-defined and very difficult to attain because it ignores the undercurrents of the health care market. The language fails to account for other cost drivers such as increases in utilization, provider rates, government mandates, and rising drug costs, all which impact consumer costs in the short and long term. It is unclear why subjecting health plan transactions to more stringent review by the AG is necessary. At the very least, clarity is needed in terms of the scope of review by the AG compared to review and approval by other state entities. While CAHP understands the desire to ensure a competitive marketplace, CAHP has not been provided any reliable example of public harm to justify a deviation from prevailing standards.
   
3. Oppose unless amended. VSP Vision and its subsidiary VSP Ventures is concerned the acquisition approval in this bill would impact Ventures’ ongoing independent optometric practice support efforts of “practice asset acquisition,” which provides for facilities and equipment while maintaining the independent practice of optometry. Ventures requests an amendment to clarify that this activity does not trigger a DMHC review.
   

SUPPORT AND OPPOSITION:

Support: American Federation of State, County and Municipal Employees, AFL-CIO

California Agents & Health Insurance Professionals
California Pharmacists Association
California State Council of Service Employees International Union
Health Access California
NARAL Pro-choice California
National Health Law Program
National Union of Healthcare Workers
Purchaser Business Group on Health

Rising Communities (formerly Community Health Councils)
The Leukemia & Lymphoma Society
Western Center on Law & Poverty
Young Invincibles

Oppose: California Association of Health Plans

VSP Vision and VSP Ventures (unless amended)

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 1092

Author:(Wood)

As Amended Ver:March 30, 2023

Majority vote

SUMMARY

Requires a health care service plan (health plan) that intends to acquire or obtain control of an entity, to give notice to, and secure prior approval from, the Department of Managed Health Care (DMHC) Director. Authorizes the DMHC Director to disapprove a transaction or agreement if it would substantially lessen competition in the health system or among a particular category of health care providers, and requires the DMHC Director to provide information related to competition to the Attorney General (AG). Prohibits the DMHC Director from waiving, or delaying implementation of specified provisions of this bill.

Major Provisions

COMMENTS

Health care in Northern California is already heavily consolidated. Research shows that consolidation in Northern California has led average inpatient procedures to cost nearly twice that of Southern California. Although the industry argues that consolidation improves quality, there is no literature, other than industry-sponsored studies, that supports that assertion. According to the Centers for Medicare and Medicaid Services, health care spending increased by 9.7% from 2019 to 2020, and although that growth was due in part to the COVID-19 pandemic, national health spending is projected to grow at an average annual rate of 5.4% between 2019 and 2028, much faster than the average annual growth of 4.2% from 2010 to 2019. This will result in expenditures projected to grow 1.1 percentage points faster on average between 2019 and 2028, rising from $4.1 trillion in 2020, to $6.2 trillion in 2028.

According to the January 2020 California Health Care Foundation (CHCF) report entitled “Getting to Affordability: Spending Trends and Waste in California’s Health Care System,” per capita spending has grown steadily over time for all sources of coverage: employer-sponsored insurance, Medi-Cal, Medicare, and private health insurance. Private health insurance coverage had the highest growth rates at 4% per year. Most of the spending comes from inpatient hospital stays and office-based medical provider services ($60 billion each) followed by prescription drugs ($45.6 billion). A critical factor in the fast growth of prices in California compared with the rest of the country is market concentration. According to a December 2021 CHCF Issue Brief, “Markets or Monopolies? Considerations for Addressing Health Care Consolidation in California,” over the past thirty years, markets for health insurers and providers have gone through waves of consolidation. The CHCF Brief notes that as of 2018, 95% of metropolitan areas in the United States had highly concentrated hospital markets, and that markets for health insurers are also highly concentrated. In 2022, CHCF noted that in California, as in the US, an increasing share of physician practices are owned by hospitals and health systems. A 2019 study showed that the share of primary care physicians in practices owned by hospitals and health systems increased from 24% to 42% between 2010 and 2018; an even greater increase was observed among specialists, from 25% to 52%. An analysis of California health systems found increasing concentration in the largest health systems. In 2018, the 10 largest systems accounted for 46% of all physicians in California, up from 30.7% just two years earlier.

1. Insurance market consolidation. As noted in a 2020 Kaiser Family Foundation brief, “What we know about Provider Consolidation,” when insurance markets become more consolidated, there are two distinct impacts. As insurance companies consolidate and have more market power, evidence suggests that they are able to obtain lower prices from providers. For example, one study looking at the impact of health plan concentration on hospital prices found that hospital prices in the most concentrated health plan markets were approximately 12% lower than in more competitive health plan markets. Another study found a similar pattern for both hospitals and some types of specialists. However, these lower prices do not necessarily lead to lower premiums. A national study found that lower provider prices only translate into lower premiums if the insurance market is sufficiently competitive; where health insurance markets are more concentrated, premiums tend to be higher.
2. Existing oversight of health plan mergers. AB 595 (Wood), Chapter 292, Statutes of 2018, requires a health plan that intends to merge with, consolidate with, or enter into an agreement resulting in its purchase, acquisition, or control by, an entity to give notice to, and secure prior approval from, the DMHC Director. Existing law authorizes the DMHC Director to disapprove the transaction or agreement if the DMHC Director finds it would substantially lessen competition in health plan products or create a monopoly in this state. This bill clarifies that the provisions of AB 595 also apply to transactions by health plans and allows the DMHC Director to disapprove a transaction that would substantially lessen competition in a health system or among a particular category of health care providers, and to forward that information to the AG.

In 2021, the DMHC reviewed the acquisition of Magellan Health by Centene Corporation (plans) under the provisions of AB 595. The DMHC’s review of the merger included obtaining an independent impact analysis that evaluated the impact of the merger on subscribers and enrollees. As part of its review, the DMHC considered the findings and recommendations in the independent impact analysis. The DMHC also conducted a public meeting on the proposed merger, to solicit input from the public. By approving the acquisition, the DMHC imposed several conditions on the plans, including:

• 1. The plans will continue Magellan’s market presence in California and continue its existing contracts to provide behavioral health services at the same rates for at least two years;
  2. The plans will help to control health care costs and keep premium rate increases to a minimum, including no increases in premiums as a result of acquisition costs;
  3. A third-party monitor will be put in place to oversee the plans’ compliance with competition related conditions, including holding the Magellan and Centene plans separate to ensure the Magellan plans are run as a separate business; and,
  4. The plans must invest $10 million to support the acceleration of behavioral health integration into primary care practices in California’s health care delivery system.

1. Office of Health Care Affordability (OHCA). In 2022, the California Health Care Quality and Affordability Act (SB 184 (Committee on Budget and Fiscal Review), Chapter 47, Statutes of 2022) established OHCA within the Department of Health Care Access and Information. Recognizing that health care affordability has reached a crisis point as health care costs continue to grow, OHCA’s enabling statute emphasizes that it is in the public interest that all Californians receive health care that is accessible, affordable, equitable, high-quality, and universal. OHCA has three primary responsibilities: managing spending targets, monitoring system performance, and assessing market consolidation. OHCA will collect, analyze, and publicly report data on total health care expenditures, and enforce spending targets set by a new Health Care Affordability Board. OHCA also requires health care entities to provide written notice of agreements and transactions that merge and if OHCA finds that the change is likely to have a risk of a significant impact on market competition, the state’s ability to meet cost targets, or costs for purchasers and consumers, OHCA will conduct a cost and market impact review. Through cost and market impact reviews, OHCA will analyze transactions that are likely to significantly impact on market competition, the state’s ability to meet targets, or affordability for consumers and purchasers. Based on results of the review, OHCA will then coordinate with other state agencies to address consolidation as appropriate.

According to the Author

This bill expands regulatory oversight over health plan transactions, building on prior legislation (AB 595), which requires an entity that intends to merge with a health plan to give notice to, and secure prior approval from, the DMHC Director. This bill applies to health plans that merge or acquire other entities, like a physician group, for example. The author concludes that a majority of studies show that mergers and acquisitions in health care are not lowering costs for anyone but the entities doing it and there are real concerns about how these mergers and acquisitions could reduce or limit access to certain health care services.

Arguments in Support

Health Access California writes that although health plans claim that mergers lead to more efficiencies, lower costs, higher quality, and better value care, history and research shows the opposite to be true. Economic studies have shown that past health insurer mergers lead to premium increases and have no demonstrable effect on improving health care quality. This bill will ensure that when a health plan buys or takes control of another entity, the transaction will be reviewed for the impacts on consumers and allows DMHC to condition mergers to protect consumers from negative impacts on costs and quality of care. In addition to expanding health plan merger oversight, this bill clarifies review of the parties' compliance with laws and regulations from other state and federal agencies. Centene's recent settlement with the AG for overcharging California's Medi-Cal program for prescription drugs demonstrates why review of the companies’ conduct is necessary to protect consumers. In 2021, the DMHC approved Centene’s acquisition of Magellan Health, the state’s contractor to deliver Medi-Cal Rx, with conditions to protect access to behavioral health services and prevent premium increases. This year, the AG settled with Centene over allegations that they overcharged California’s Medi-Cal program by falsely reporting higher prescription drug costs incurred by two of its managed care plans. This was after Centene had settled with nine states over the course of 10 months in 2021 and 2022 for overbilling their Medicaid programs for prescription drugs and services. As health plans continue to buy other entities, this bill would ensure there is comprehensive review of the impacts for consumers and give the DMHC authority to intervene on the public's behalf and put in place conditions to prevent negative impacts and protect affordable, accessible, quality care.

Arguments in Opposition

The California Association of Health Plans (CAHP) writes that this bill includes several problematic provisions that will only make healthcare more complicated, more expensive, and less efficient and places even more arduous conditions into existing law that will ultimately give the government more leverage to demand expensive undertakings from CAHP members. CAHP states that the added language is very problematic as it would allow the DMHC Director to reach deeper into health plan operations and control intercompany arrangements and changes in corporate governance. Even a relatively basic consolidation or transfer of assets within the same corporate family could trigger prior approval from state regulators and hold back innovative transactions. Specifically, this bill adds a contingency on health plans to “control costs to subscribers and enrollees.” Health plans do their best to control costs for their enrollees, contingencies like this, while well meaning, are ill-defined and are very difficult to attain because they ignore the undercurrents of the health care market. This language fails to account for other cost drivers such as increases in utilization, provider rates, government mandates, and rising drug costs, all which impact consumer costs in the short and long term. It is unclear why subjecting health plan transactions to more stringent review by the AG is necessary. At the very least, clarity is needed in terms of the scope of review by the AG compared to review and approval by other state entities. While CAHP understands the desire to ensure a competitive marketplace, CAHP has not been provided any reliable example of public harm to justify a deviation from prevailing standards. Additionally, the newly enacted OHCA aims to take a comprehensive approach to addressing rising healthcare costs. As part of its mission, OHCA is required to monitor the impact of consolidation and promote competitive markets in a manner supportive of the efforts of the AG and the DMHC. This involves prospectively analyzing transactions and report on the anticipated impacts to the health care market. Considering this, it is not entirely clear why this bill is needed. California’s market is a bellwether of competition and choice, providing millions access to affordable health care. Ensuring that California maintains its healthy market is good for consumers. CAHP concludes that certain transactions can improve efficiencies, achieve economies, and benefit the overall market. Policy makers should not inadvertently disrupt this balance.

FISCAL COMMENTS

According to the Assembly Appropriations Committee, DMHC estimates the total cost of this bill to be approximately $1.23 million in fiscal year (FY) 2023-24, $1.78 million in FY 2024-25, and $1.75 million in FY 2025-26 and annually thereafter (Managed Care Fund (MCF)). These costs would be incurred for the following:

1. Additional workload to review health plan asset information, including consultant funding and adding a staff member to analyze the effects of a transaction agreement on subscribers and enrollees and the stability of the health care delivery system.
2. Additional workload and one staff member to review health plan documents and other disclosure documents for compliance with the requirements of this bill.
3. Additional workload and one staff member to conduct legal research and issue legal memoranda to clarify the requirements set forth by this bill.
4. Annual software licensing costs for modernization efforts.

DMHC reports that, generally, a $1 million increase to the MCF could result in a two-cent increase per enrollee on assessments to full-service health plans and a 1-cent increase per enrollee to specialized health plans. To the extent this bill and others result in an additional assessment on health plans, consumers could face increased premiums.

VOTES

ASM HEALTH: 10-4-1

YES: Wood, Aguiar-Curry, Arambula, Boerner Horvath, Maienschein, McCarty, Rodriguez, Santiago, Villapudua, Weber

NO: Waldron, Flora, Vince Fong, Joe Patterson

ABS, ABST OR NV: Wendy Carrillo

ASM APPROPRIATIONS: 11-4-1

YES: Holden, Bryan, Calderon, Wendy Carrillo, Mike Fong, Hart, Lowenthal, Papan, Pellerin, Weber, Ortega

NO: Megan Dahle, Dixon, Mathis, Sanchez

ABS, ABST OR NV: Robert Rivas

UPDATED

VERSION: March 30, 2023

CONSULTANT: Kristene Mapile / HEALTH / (916) 319-2097 FN: 0000778

Date of Hearing: April 19, 2023

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Chris Holden, Chair

ABPCA Bill Id:AB 1092

Author:(Wood) – As Amended Ver:March 30, 2023

Urgency: No State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill requires a health care service plan (health plan) that intends to acquire or obtain control of an entity to give notice to, and secure prior approval from, the Director of the Department of Managed Health Care (DMHC). The bill also authorizes the DMHC director to disapprove a transaction or agreement if it would substantially lessen competition in the health system or among a particular category of health care providers, requires the DMHC director to provide information related to competition to the Attorney General (AG), and prohibits the DMHC director from waiving or delaying any provisions of this statute.

FISCAL EFFECT:

DMHC estimates the total cost of this bill to be approximately $1.23 million in fiscal year (FY) 2023-24, $1.78 million in FY 2024-25, and $1.75 million in FY 2025-26 and annually thereafter (Managed Care Fund (MCF)). These costs would be incurred for the following:

• Additional workload to review health plan asset information, including consultant funding and adding a staff member to analyze the effects of a transaction agreement on subscribers and enrollees and the stability of the health care delivery system.
• Additional workload and one staff member to review health plan documents and other disclosure documents for compliance with the requirements of this bill.
• Additional workload and one staff member to conduct legal research and issue legal memoranda to clarify the requirements set forth by this bill.
• Annual software licensing costs for modernization efforts.

DMHC reports that, generally, a $1 million increase to the MCF could result in a 2-cent increase per enrollee on assessments to full-service health plans and a 1-cent increase per enrollee to specialized health plans. To the extent this bill and others result in an additional assessment on health plans, consumers could face increased premiums.

COMMENTS:

1. Purpose. According to the author:

This bill expands regulatory oversight over health plan transactions, building on prior legislation (AB 595 (Wood), Chapter 292, Statutes of 2018), which requires an entity that intends to merge with a health plan to give notice to, and secure prior approval from, the DMHC Director. This bill applies to health plans that merge or acquire other entities, like a physician group, for example. A majority of studies show that mergers and acquisitions in health care are not lowering costs for anyone but the entities doing it and there are real concerns about how these mergers and acquisitions could reduce or limit access to certain health care services.

1. Background. A December 2021 California HealthCare Foundation (CHCF) Issue Brief, “Markets or Monopolies? Considerations for Addressing Health Care Consolidation in California,” describes how markets for health insurers and providers have gone through waves of consolidation over the past thirty years. The CHCF brief notes that, as of 2018, 95% of metropolitan areas in the United States had highly concentrated hospital markets, and markets for health insurers are also highly concentrated. In 2022, CHCF noted that in California, as in the US, an increasing share of physician practices are owned by hospitals and health systems. A 2019 study showed that the share of primary care physicians in practices owned by hospitals and health systems increased from 24% to 42% between 2010 and 2018; an even greater increase was observed among specialists, from 25% to 52%. An analysis of California health systems found increasing concentration in the largest health systems. In 2018, the 10 largest systems accounted for 46% of all physicians in California, up from 30.7% just two years earlier.
2. Related Legislation. AB 1091 (Wood) prohibits a contract between a health plan or health insurer and a health care provider or health facility from containing terms that, among other things, restrict the plan or insurer from steering an enrollee or insured to another provider or facility or require the plan or insurer to contract with other affiliated providers or facilities. AB 1091 also requires specified health entities to provide written notice to the AG at the same time as another state or federal agency is notified or at least 90 days before entering an agreement or transaction to make a specified material change with a value of $15 million or more. AB 1091 is currently pending in Assembly Health Committee.
3. Prior Legislation.
   1. AB 2080 (Wood), of the 2021-22 Legislative Session, would have required a health plan that intends to acquire or obtain control of an entity to give notice to, and secure prior approval from, the DMHC director. The bill would have authorized the director to disapprove a transaction or agreement if it would substantially lessen competition in the health system or among a particular category of health care providers, among other provisions. AB 2080 was referred to, but not heard in Senate Health Committee.
   2. SB 977 (Monning), of the 2019-20 Legislative Session, would have required the AG, beginning July 1, 2021, to establish the Health Policy Advisory Board for the purpose of evaluating and analyzing health care markets in California and providing recommendations to the AG's office, required a health care system, a private equity group, or hedge fund to provide written notice to, and obtain the written consent of, the AG prior to a change in control, or an acquisition between the entity and a health care facility or provider, among many other provisions. SB 977 was not taken up for a vote on the Assembly Floor.
   3. SB 538 (Monning), of the 2017-18 Legislative Session, would have established the Health Care Market Fairness Act of 2018, and would have prohibited contracts between hospitals and contracting agents, health care service plans, or health insurers from containing certain provisions, including setting payment rates or other terms for nonparticipating affiliates of the hospital, and requiring the contracting agent, plan, or insurer to keep the contract’s payment rates confidential from any payor, that is or may become financially responsible for the payment. SB 538 was held at the request of the author in the Assembly Health Committee.

Analysis Prepared by: Allegra Kim / APPR. / (916) 319-2081

Date of Hearing: March 28, 2023

ASSEMBLY COMMITTEE ON HEALTH

Jim Wood, Chair

ABPCA Bill Id:AB 1092

Author:(Wood) – As Introduced Ver:February 15, 2023

SUBJECT: Health care service plans: consolidation.

SUMMARY: Requires a health care service plan (health plan) that intends to acquire or obtain control of an entity, to give notice to, and secure prior approval from, the Department of Managed Health Care (DMHC) Director. Authorizes the DMHC Director to disapprove a transaction or agreement if it would substantially lessen competition in the health system or among a particular category of health care providers, and requires the DMHC Director to provide information related to competition to the Attorney General (AG). Specifically, this bill:

1. Requires a health plan that intends to acquire or obtain control of an entity through a change of governance or control of a material amount of assets of that entity to give notice to, and secure prior approval from, the DMHC Director.
   
2. Authorizes the DMHC Director to conditionally approve the transaction or agreement, contingent upon the health plan’s agreement to control costs to subscribers and enrollees, in addition to other conditions described in existing law.
3. Requires the DMHC Director to also review information from federal agencies and other state agencies that may be relevant to any of the parties to the transaction, as specified.
   
4. Authorizes the DMHC Director to disapprove the transaction or agreement if the DMHC Director finds the transaction or agreement would substantially lessen competition in the health system or among a particular category of health care providers, in addition to any grounds for disapproval as a result of information provided by a health plan pursuant to existing law. Requires the DMHC Director to provide to the AG information related to competition. Specifies that nothing in this bill can be construed to prohibit the authority of the AG to maintain competitive markets and prosecute state and federal antitrust and unfair competition violations from being narrowed, abrogated, or otherwise altered by this bill.
   
5. Defines acquiring an entity to include the sale, transfer, lease, exchange, option, conveyance, or other disposition of an entity’s assets by a health plan if a material amount of the assets of the entity are involved in the agreement or transaction. Provides that obtaining control of an entity occurs if the entity transfers control, responsibility, or governance of a material amount of its assets or operations to a health plan. Specifies that transfer includes the substitution of one or more new corporate members that would transfer the control of, responsibility for, or governance of the entity; and, includes the substitution of one or more members of the entity’s governing body, or an arrangement, written or oral, that would transfer voting control of the members of the governing body.
   
6. Makes other technical and conforming changes.

EXISTING LAW:

1. Establishes DMHC to regulate health plans under the Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene Act), and the AG, who has charge of all legal matters in which California is interested, including enforcement against anticompetitive conduct through the Cartwright Act, and review and consent of transactions involving charitable assets. [Health and Safety (HSC) §1340, et seq., Government Code §12500, et seq.]
   
2. Requires a health plan that intends to merge or consolidate with, or enter into an agreement resulting in its purchase, acquisition, or control by, an entity, including another health plan or health insurer to give notice to, and secure approval from, the DMHC Director. Requires a public meeting prior to approving, conditionally approving, or disapproving a major transaction or agreement. [HSC §1399.65]
   
3. Defines “major transaction” under the Knox-Keene Act to mean a transaction or agreement that meets any of the following criteria:
   1. Affects a significant number of enrollees;
   2. Involves a material amount of assets; and,
   3. Adversely affects either the subscribers or enrollees or the stability of the health care delivery system because of the entity’s market position, including, but not limited to, the entity’s market exit from a market segment or the entity’s dominance of a market segment. [HSC §1399.65]
      

FISCAL EFFECT: Unknown. This bill has not yet been analyzed by a fiscal committee.

COMMENTS:

1. PURPOSE OF THIS BILL. According to the author, this bill expands regulatory oversight over health plan transactions, building on prior legislation (AB 595 (Wood), Chapter 292, Statutes of 2018), which requires an entity that intends to merge with a health plan to give notice to, and secure prior approval from, the DMHC Director. This bill applies to health plans that merge or acquire other entities, like a physician group, for example. The author concludes that a majority of studies show that mergers and acquisitions in health care are not lowering costs for anyone but the entities doing it and there are real concerns about how these mergers and acquisitions could reduce or limit access to certain health care services.
2. BACKGROUND. Health care in Northern California is already heavily consolidated. Research shows that consolidation in Northern California has led average inpatient procedures to cost nearly twice that of Southern California. Although the industry argues that consolidation improves quality, there is no literature, other than industry-sponsored studies, that supports that assertion. According to the Centers for Medicare and Medicaid Services, health care spending increased by 9.7% from 2019 to 2020, and although that growth was due in part to the COVID-19 pandemic, national health spending is projected to grow at an average annual rate of 5.4% between 2019 and 2028, much faster than the average annual growth of 4.2% from 2010 to 2019. This will result in expenditures projected to grow 1.1 percentage points faster on average between 2019 and 2028, rising from $4.1 trillion in 2020, to $6.2 trillion in 2028.

According to the January 2020 California Health Care Foundation (CHCF) report entitled “Getting to Affordability: Spending Trends and Waste in California’s Health Care System,” per capita spending has grown steadily over time for all sources of coverage: employer-sponsored insurance, Medi-Cal, Medicare, and private health insurance. Private health insurance coverage had the highest growth rates at 4% per year. Most of the spending comes from inpatient hospital stays and office-based medical provider services ($60 billion each) followed by prescription drugs ($45.6 billion). A critical factor in the fast growth of prices in California compared with the rest of the country is market concentration. According to a December 2021 CHCF Issue Brief, “Markets or Monopolies? Considerations for Addressing Health Care Consolidation in California,” over the past thirty years, markets for health insurers and providers have gone through waves of consolidation. The CHCF Brief notes that as of 2018, 95% of metropolitan areas in the United States had highly concentrated hospital markets, and that markets for health insurers are also highly concentrated. In 2022, CHCF noted that in California, as in the US, an increasing share of physician practices are owned by hospitals and health systems. A 2019 study showed that the share of primary care physicians in practices owned by hospitals and health systems increased from 24% to 42% between 2010 and 2018; an even greater increase was observed among specialists, from 25% to 52%. An analysis of California health systems found increasing concentration in the largest health systems. In 2018, the 10 largest systems accounted for 46% of all physicians in California, up from 30.7% just two years earlier.

• 1. Insurance market consolidation. As noted in a 2020 Kaiser Family Foundation brief, “What we know about Provider Consolidation,” when insurance markets become more consolidated, there are two distinct impacts. As insurance companies consolidate and have more market power, evidence suggests that they are able to obtain lower prices from providers. For example, one study looking at the impact of health plan concentration on hospital prices found that hospital prices in the most concentrated health plan markets were approximately 12% lower than in more competitive health plan markets. Another study found a similar pattern for both hospitals and some types of specialists. However, these lower prices do not necessarily lead to lower premiums. A national study found that lower provider prices only translate into lower premiums if the insurance market is sufficiently competitive; where health insurance markets are more concentrated, premiums tend to be higher.
  2. Existing oversight of health plan mergers. AB 595 requires a health plan that intends to merge with, consolidate with, or enter into an agreement resulting in its purchase, acquisition, or control by, an entity to give notice to, and secure prior approval from, the DMHC Director. Existing law authorizes the DMHC Director to disapprove the transaction or agreement if the DMHC Director finds it would substantially lessen competition in health plan products or create a monopoly in this state. This bill clarifies that the provisions of AB 595 also apply to transactions by health plans and allows the DMHC Director to disapprove a transaction that would substantially lessen competition in a health system or among a particular category of health care providers, and to forward that information to the AG.

In 2021, the DMHC reviewed the acquisition of Magellan Health by Centene Corporation (plans) under the provisions of AB 595. The DMHC’s review of the merger included obtaining an independent impact analysis that evaluated the impact of the merger on subscribers and enrollees. As part of its review, the DMHC considered the findings and recommendations in the independent impact analysis. The DMHC also conducted a public meeting on the proposed merger, to solicit input from the public. By approving the acquisition, the DMHC imposed several conditions on the plans, including:

• • 1. The plans will continue Magellan’s market presence in California and continue its existing contracts to provide behavioral health services at the same rates for at least two years;
    2. The plans will help to control health care costs and keep premium rate increases to a minimum, including no increases in premiums as a result of acquisition costs;
    3. A third-party monitor will be put in place to oversee the plans’ compliance with competition related conditions, including holding the Magellan and Centene plans separate to ensure the Magellan plans are run as a separate business; and,
    4. The plans must invest $10 million to support the acceleration of behavioral health integration into primary care practices in California’s health care delivery system.
  1. Office of Health Care Affordability. In 2022, the California Health Care Quality and Affordability Act (SB 184 (Committee on Budget and Fiscal Review), Chapter 47, Statutes of 2022) established the Office of Health Care Affordability (OHCA) within the Department of Health Care Access and Information (HCAI). Recognizing that health care affordability has reached a crisis point as health care costs continue to grow, OHCA’s enabling statute emphasizes that it is in the public interest that all Californians receive health care that is accessible, affordable, equitable, high-quality, and universal. OHCA has three primary responsibilities: managing spending targets, monitoring system performance, and assessing market consolidation. OHCA will collect, analyze, and publicly report data on total health care expenditures, and enforce spending targets set by a new Health Care Affordability Board. OHCA also requires health care entities to provide written notice of agreements and transactions that merge and if OHCA finds that the change is likely to have a risk of a significant impact on market competition, the state’s ability to meet cost targets, or costs for purchasers and consumers, OHCA will conduct a cost and market impact review. Through cost and market impact reviews, OHCA will analyze transactions that are likely to significantly impact on market competition, the state’s ability to meet targets, or affordability for consumers and purchasers. Based on results of the review, OHCA will then coordinate with other state agencies to address consolidation as appropriate.

1. SUPPORT. Health Access California writes that although health plans claim that mergers lead to more efficiencies, lower costs, higher quality, and better value care, history and research shows the opposite to be true. Economic studies have shown that past health insurer mergers lead to premium increases and have no demonstrable effect on improving health care quality. This bill will ensure that when a health plan buys or takes control of another entity, the transaction will be reviewed for the impacts on consumers and allows DMHC to condition mergers to protect consumers from negative impacts on costs and quality of care. In addition to expanding health plan merger oversight, this bill clarifies review of the parties’ compliance with laws and regulations from other state and federal agencies. Centene’s recent settlement with the AG for overcharging California’s Medi-Cal program for prescription drugs demonstrates why review of the companies’ conduct is necessary to protect consumers. In 2021, the DMHC approved Centene’s acquisition of Magellan Health, the state’s contractor to deliver Medi-Cal Rx, with conditions to protect access to behavioral health services and prevent premium increases. This year, the AG settled with Centene over allegations that they overcharged California’s Medi-Cal program by falsely reporting higher prescription drug costs incurred by two of its managed care plans. This was after Centene had settled with nine states over the course of 10 months in 2021 and 2022 for overbilling their Medicaid programs for prescription drugs and services. As health plans continue to buy other entities, this bill would ensure there is comprehensive review of the impacts for consumers and give the DMHC authority to intervene on the public’s behalf and put in place conditions to prevent negative impacts and protect affordable, accessible, quality care.
2. OPPOSITION. The California Association of Health Plans (CAHP) writes that this bill includes several problematic provisions that will only make healthcare more complicated, more expensive, and less efficient and places even more arduous conditions into existing law that will ultimately give the government more leverage to demand expensive undertakings from CAHP members. CAHP states that the added language is very problematic as it would allow the DMHC Director to reach deeper into health plan operations and control intercompany arrangements and changes in corporate governance. Even a relatively basic consolidation or transfer of assets within the same corporate family could trigger prior approval from state regulators and hold back innovative transactions. Specifically, this bill adds a contingency on health plans to “control costs to subscribers and enrollees.” Health plans do their best to control costs for their enrollees, contingencies like this, while well meaning, are ill-defined and are very difficult to attain because they ignore the undercurrents of the health care market. This language fails to account for other cost drivers such as increases in utilization, provider rates, government mandates, and rising drug costs, all which impact consumer costs in the short and long term. It is unclear why subjecting health plan transactions to more stringent review by the AG is necessary. At the very least, clarity is needed in terms of the scope of review by the AG compared to review and approval by other state entities. While CAHP understands the desire to ensure a competitive marketplace, CAHP has not been provided any reliable example of public harm to justify a deviation from prevailing standards. Additionally, the newly enacted OHCA aims to take a comprehensive approach to addressing rising healthcare costs. As part of its mission, OHCA is required to monitor the impact of consolidation and promote competitive markets in a manner supportive of the efforts of the AG and the DMHC. This involves prospectively analyzing transactions and report on the anticipated impacts to the health care market. Considering this, it is not entirely clear why this bill is needed. California’s market is a bellwether of competition and choice, providing millions access to affordable health care. Ensuring that California maintains its healthy market is good for consumers. CAHP concludes that certain transactions can improve efficiencies, achieve economies, and benefit the overall market. Policy makers should not inadvertently disrupt this balance.
3. RELATED LEGISLATION. AB 1091 (Wood) prohibits a contract issued, amended, or renewed on or after January 1, 2024, between a health plan or health insurer and a health care provider or health facility from containing terms that, among other things, restrict the plan or insurer from steering an enrollee or insured to another provider or facility or require the plan or insurer to contract with other affiliated providers or facilities. Requires specified health entities to provide written notice to the AG at the same time as another state or federal agency is notified or otherwise at least 90 days before entering an agreement or transaction to make a specified material change with a value of $15 million or more. Authorizes the AG to consent to, give conditional consent to, or not consent to that agreement, and would require the AG to notify the entity of the decision within 90 days, which may be extended by one 45-day period if specified conditions are met. AB 1091 is currently pending in Assembly Health Committee.
4. PREVIOUS LEGISLATION.
   1. SB 184 establishes OHCA within HCAI. Requires OHCA to collect, analyze, and publicly report data on total health care expenditures, and enforce spending targets set by a Health Care Affordability Board.
   2. SB 977 (Monning) of 2020 would have required the AG, beginning July 1, 2021, to establish the Health Policy Advisory Board for the purpose of evaluating and analyzing health care markets in California and providing recommendations to the AG's office. Would have required a health care system, as defined, a private equity group, or hedge fund to provide written notice to, and obtain the written consent of, the AG prior to a change in control, or an acquisition, as defined, between the entity and a health care facility or provider. Would have provided for an expedited review process for transactions under $1 million, county facilities, and academic centers, as defined. Would have required a health care system, private equity group, or hedge fund to provide advance written notice to the AG prior to a change of control or acquisition between a health care system, private equity group, or hedge fund and a non-physician provider, as defined. Would have made it unlawful for one or more health care systems, either independently or dependently, to use their market power to, among other things, cause anticompetitive effects, as described, and would have authorized the AG to bring a civil action for a violation of this unlawful conduct. Would have sunset the AG's authority to review changes of control on January 1, 2026. SB 977 was not taken up for a vote on the Assembly Floor.
   3. SB 538 (Monning) of 2018 would have established the Health Care Market Fairness Act of 2018, and would have prohibited contracts between hospitals, as defined, and contracting agents, health care service plans, or health insurers from containing certain provisions, including, but not limited to, setting payment rates or other terms for nonparticipating affiliates of the hospital, and requiring the contracting agent, plan, or insurer to keep the contract’s payment rates confidential from any payor, as defined, that is or may become financially responsible for the payment. SB 538 was held at the request of the author in the Assembly Health Committee.
   4. AB 595 requires a health plan that intends to merge or consolidate with, or enter into an agreement resulting in its purchase, acquisition, or control by, any entity, as defined, including another health plan or a licensed health insurer, to give notice to, and secure prior approval from, the DMHC Director.
5. AMENDMENTS. The author is proposing an amendment to prohibit the DMHC Director from waiving any provisions of this statute.
6. DOUBLE REFERRAL. This bill has been double-referred; upon passage of this committee, it will be referred to the Assembly Judiciary Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

American Federation of State, County and Municipal Employees, AFL-CIO
California State Council of Service Employees International Union (SEIU California)
Community Health Councils
Health Access California
National Health Law Program
The Leukemia & Lymphoma Society

Western Center on Law and Poverty

Young Invincibles

Opposition

California Association of Health Plans

Analysis Prepared by: Kristene Mapile / HEALTH / (916) 319-2097