BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          SB 932 (Hernandez) - Health care mergers, acquisitions, and  
          collaborations
          
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          |Version: April 26, 2016         |Policy Vote: HEALTH 5 - 1       |
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          |Urgency: No                     |Mandate: Yes                    |
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          |Hearing Date: May 9, 2016       |Consultant: Brendan McCarthy    |
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          This bill meets the criteria for referral to the Suspense File.

          Bill  
          Summary:  SB 932 would prohibit contracts between health care  
          providers and payors from including specified provisions. The  
          bill would require prior approval from the Department of Managed  
          Health Care for mergers and other transactions between health  
          plans and other organizations.


          Fiscal  
          Impact:  
           One-time costs of $145,000 and ongoing costs of $140,000 per  
            year for the adoption of regulations and to review proposed  
            mergers and contracts between providers and health plans by  
            the Department of Managed Health Care (Managed Care Fund). The  
            Department projects that it will need to review three mergers  
            per year, on average, and about 40 revised provider contracts  
            per year.

           Ongoing projected costs of $300,000 per year for the Attorney  
            General's Office to provide advisory opinions to the  
            Department of Managed Health Care regarding whether a  







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            transaction under review will reduce competition (Managed Care  
            Fund). The Attorney General's Office indicates that the cost  
            to contract for an economic analysis of a proposed transaction  
            will be about $100,000. Under current practice, the Department  
            would be required to reimburse the Attorney General's Office  
            for those costs.

           Minor costs for the Department of Insurance to review  
            additional materials provided by health insurers for  
            compliance with the requirement that contracts with providers  
            not include specified provisions (Insurance Fund).
          
           Likely ongoing costs in the millions per year for review of  
            contracts between hospitals and payors by the Department of  
            Public Health (Licensing and Certification Fund). The bill  
            puts restriction on hospital contracting activity in the body  
            of law regulating hospitals which is enforced by the  
            Department of Public Health as a licensing agency. To the  
            extent that the Department reviews hospital contracts as part  
            of its regular licensing surveys, the Department would incur  
            additional staff costs. The number of contracts per hospital  
            that will need to be reviewed could be substantial, depending  
            on how many contracts per payor a hospital has.
          
           Unknown potential future reduction in state health care costs  
            (various funds). See below.


          Background:  Under current law, health insurers are regulated by the  
          Department of Insurance and health plans are regulated by the  
          Department of Managed Health Care. Under current practice,  
          health insurers and health plans contract with a wide range of  
          primary care and specialty care providers as well as facilities  
          such as hospitals and pharmacies. Current law requires the  
          Department of Managed Health Care to approve significant  
          proposed mergers and acquisitions by licensed health plans.  
          Current law authorizes the Insurance Commissioner to deny a  
          permit when a California insurer is directly affected by a  
          transaction that meets certain criteria.


          Proposed Law:  
            SB 932 would prohibit contracts between health care providers  
          and payors from including specified provisions. The bill would  








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          require prior approval from the Department of Managed Health  
          Care for mergers and other transactions between health plans and  
          other organizations.
          Specific provisions of the bill would:
                 Prohibit an agreement between a hospital and a payor  
               (e.g. health plans health insurer, or self-insured  
               employers) from including specified terms - such as a  
               requirement that a payor include in its network other  
               providers owned or controlled by the hospital or a  
               requirement that the payor refrain from offering a tiered  
               network plan;
                 Prohibit an agreement between a health plan or health  
               insurer and a provider from containing any of the terms  
               prohibited above;
                 Require prior approval by the Department of Managed  
               Health Care for any proposed merger, consolidation,  
               acquisition, or purchase of a health plan and require any  
               person intending to do so to file an application for  
               licensure as a health plan;
                 Require the Department to hold a public hearing on the  
               proposed transaction;
                 Require certain criteria to be met before the Department  
               can approve the transaction, including a requirement that  
               the Department request an advisory opinion from the  
               Attorney General regarding the impact on competition;
                 Authorize the conditional approval of a transaction.


          Related  
          Legislation:  SB 1365 (Hernandez) would prohibit an outpatient  
          setting that is controlled by hospital from charging a hospital  
          facility fee unless care is provided in a hospital building.  
          That bill will be heard in this committee.


          Staff  
          Comments:  Studies have indicated that concentration of  
          providers (such as hospitals) in the health care market has  
          increased costs, due to reduced competition and greater  
          bargaining power by providers when negotiating reimbursement  
          rates with health plans and health insurers. For example, a  
          study conducted by researchers at the University of California,  
          Berkeley found that market concentration of hospitals and  
          physician groups increased health care premiums for coverage  








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          sold through Covered California.
          The intention of the bill is to limit cost increases by reducing  
          the market power of providers such as hospitals when negotiating  
          with payors. For example, the bill would prohibiting a hospital  
          from requiring a health plan to include all the hospital's  
          affiliated hospitals in the health plan network when contracting  
          for services with that hospital. The intention of this provision  
          is to reduce the incentive for hospitals to affiliate with one  
          another and require health plans to include all affiliated  
          hospitals within a network, which often reduces price  
          competition between hospitals. 


          The bill would require prior approval for health plan and health  
          insurer transactions. The intention is to prevent consolidation  
          in markets that would reduce competition between health plans  
          and therefore increase the power for health plans to increase  
          rates.


          Given the complexity of the health care market, it is difficult  
          to anticipate the extent to which the bill would be successful  
          in reducing health care costs in the future by reducing the  
          ability of providers and payors to engage in anticompetitive  
          behavior. To the extent that the bill is successful in  
          preventing contracting practices or transactions in the health  
          care market that do lead to higher prices, the bill could reduce  
          future health care spending. The extent to which that would  
          occur is unknown.


          The rates paid by the Medi-Cal program are generally set by the  
          state and are considered to be significantly below market rates.  
          Given the unique system for setting Medi-Cal reimbursement  
          rates, any reduction in overall health care costs attributable  
          to the bill is not likely to significantly impact Medi-Cal  
          expenditures. However, to the extent that the bill does result  
          in lower health care costs, health care coverage provided by  
          CalPERS to state and local government agencies could have lower  
          future costs.


          The only costs that may be incurred by a local agency relate to  
          crimes and infractions. Under the California Constitution, such  








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          costs are not reimbursable by the state.




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