Major Regulatory Updates from the West Coast: New California and Washington Approaches to Healthcare Private Equity and MSO Regulation
State legislatures on the West Coast are intensifying their focus on private equity and management service organizations (MSOs) in healthcare, introducing new regulatory measures that could significantly reshape investment strategies, ownership structures, and operational matters in the healthcare space in these states. As state legislatures respond to growing concerns about the role of non-licensed entities in healthcare decision-making, recent proposals reflect a heightened focus on transaction scrutiny, ownership structures, and the autonomy of licensed providers.
California’s Senate Bill 351 (“SB 351”) and Assembly Bill 1415 (“AB 1415”), introduced in February 2025, seek to reinforce state oversight of healthcare investments, particularly those involving private equity, hedge funds, and MSOs. While SB 351 reinforces existing restrictions on corporate control over clinical decision-making, AB 1415 expands the authority of the California Office of Health Care Affordability (OHCA), extending its pre-transaction notice and clearance requirements to a broader range of entities. Meanwhile, Washington’s Senate Bill 5387 (“SB 5387”) is moving through committee review and proposes strict regulations that would limit lay ownership of healthcare practices and curb MSO involvement in operational control.
Below provides an overview of the key components and takeaways from these state legislative efforts.
Legislative Developments at a Glance
Legislation
Key Provisions
Status
SB 351 (California, First Read Feb. 12, 2025)
Codifies limits on private equity and hedge fund influence in clinical decision-making; bans non-competes & non-disparagement clauses; grants enforcement authority to the Attorney General.
Moving through committee review.
AB 1415 (California, Feb. 21, 2025)
Expands OHCA oversight and pre-closing transaction filing requirements to private equity, hedge funds, MSOs, health systems and other provider entities.
Assembly-Pending Referral.
SB 5387 (Washington, First Read Jan. 21 2025)
Requires healthcare providers to hold majority ownership of practices; limits roles, ownership and control among individuals and entities involved MSO-professional entity arrangements;
Moving through committee review.
California’s SB 351: Focused on Maintaining Clinical Decision-Making Autonomy
SB 351 reinforces California’s existing corporate practice of medicine (CPOM) prohibition by specifying certain restrictions on private equity firms and hedge funds in clinical decision-making. The bill enumerates specific restrictions to ensure that key medical and operational decisions remain within the control of licensed providers.
Specifically, SB 351 would codify the following restrictions:
Prohibiting investors from determining diagnostic tests, treatment options, patient volume, or referral requirements.
Restricting non-licensed entities from owning or managing patient medical records or influencing billing and coding practices.
Expanding enforcement authority, allowing the California Attorney General to seek injunctive relief for violations.
Banning non-compete and non-disparagement clauses in management contracts and asset sale agreements involving medical and dental practices.
While SB 351 strengthens the state’s CPOM framework, it does not contain a mandatory state pre-approval process for private equity-backed healthcare transactions, which was a feature of the much publicized Assembly Bill 3129 last year, which was ultimately vetoed by Governor Gavin Newsom.[i] Rather, the core provisions focus on clarifying what are generally recognized legal boundaries surrounding the corporate practice of medicine doctrine and clinical autonomy.
California’s AB 1415: Expanded OHCA Authority Over Healthcare Transactions
Concurrently, AB 1415 proposes a significant expansion of OHCA’s authority over healthcare transactions. The bill would broaden the scope of entities required to file pre-transaction notices with OHCA, including private equity groups, hedge funds, MSOs, and health system affiliates, all of which were previously outside the agency’s direct oversight.
If enacted, AB 1415 would reshape California’s healthcare transactional landscape by:
Requiring private equity firms, hedge funds, and newly formed holding entities involved in healthcare deals to submit filings to OHCA with respect to their involvement in material transactions.
Expanding the definition of “provider” to health systems and their affiliates to subject such entities to OHCA review. The definition is also reframed to include “any private or public health care provider”, as opposed to the current framework which lists out specific licensure or service line categories constituting a “provider”.
Expressly bringing management services organizations (MSOs) under OHCA authority, which were notably excluded under prior regulations, and consequently more directly impacting physician practice management models.
The proposed expansion of OHCA’s jurisdiction under AB 1415 represents a dramatic shift in California’s approach to healthcare transaction oversight. By requiring private equity groups, hedge funds, MSOs, and health systems to submit pre-transaction notices, the bill would broaden the regulatory reach of OHCA.
While AB 1415 would not grant OHCA the authority to block transactions outright (unlike the approach taken in last years’ AB 3129), its review process could delay closings involving such entities and introduce additional compliance burdens to navigate healthcare deals in California. As seen with prior legislative efforts, this bill signals a continued push for increased scrutiny of non-licensed entities and investors in healthcare. While the measure is likely to face intense lobbying efforts, it is worth reminding our readers that Governor Newsom’s veto statement specifically called out the existing OHCA authority and framework as a reason why AB 3129 was not necessary. Here, it will be interesting to see whether carving in private equity stakeholders within the OHCA framework makes this type of legislation more likely to get enacted into law.
Washington’s SB 5387: New Restrictions on Healthcare Ownership Structures
Meanwhile, Washington’s SB 5387 takes a relatively strict and targeted approach to regulating lay entity arrangements and influence over health care practices. Specifically, the bill includes the following key features:
Non-licensed individuals, corporations, or entities cannot own or control health care practices or employ licensed healthcare providers unless explicitly permitted under state law.
Whereas under existing law shareholders, officers and directors of professional service entities do not necessarily have to be licensed in Washington, this bill would require Washington-licensed healthcare providers to retain control of such entities by holding a majority of the voting shares, serving as the majority of directors, and occupying key leadership roles. The bill also adds what appears to be an active practice requirement to be an owner of a professional health care entity.
Shareholders, directors and officers of professional health care practices would be prevented from owning equity in or serving as an officer, director, employee or contractor of an MSO contracted with such practice, or receiving significant financial compensation from such MSO in return for ownership or management of the professional entity. Such shareholders, directors and officers would also not be able to transfer or relinquish control over the issuing of shares in the practice or the paying of dividends.
The provisions in SB 5387 take an approach similar to the version of California’s AB 3129 originally passed by the California State Assembly in May 2024, as well as Oregon’s HB 4130 passed by the Oregon House of Representatives in February 2024 (which ultimately failed to be enacted into law). Both prior bills called into question the viability of the “friendly” PC-MSO model commonly used by private equity and other investors, which typically involve succession agreements and similar arrangements that give certain control rights to MSOs relating to professional entities, among other features. Here, by delineating broad ownership and control requirements and restrictions involving professional entities and MSOs, it could prove to be difficult in practice to utilize such PC-MSO structures in Washington if the bill as currently drafted is enacted into law.
Looking Ahead
California and Washington are advancing significant legislative changes that would reshape the west coast healthcare investment landscape. We will continue tracking the proposed bills as they progress and provide updates on their impact on healthcare transactions in these states. For more information, contact our team for guidance on navigating these proposed changes.
FOOTNOTES
[i] See our previous blog series on California Assembly Bill 3129 pursued by CA state legislators in 2024: Update: Governor Newsom Vetoes California’s AB 3129 Targeting Healthcare Private Equity Deals | Healthcare Law Blog (sheppardhealthlaw.com), published October 2, 2024, Update: AB 3129 Passes in California Senate and Nears Finish Line | Healthcare Law Blog (sheppardhealthlaw.com), published September 6, 2024, California’s AB 3129: A New Hurdle for Private Equity Health Care Transactions on the Horizon? | Healthcare Law Blog (sheppardhealthlaw.com), published April 18, 2024, and Update: California State Assembly Passes AB 3129 Requiring State Approval of Private Equity Healthcare Deals | Healthcare Law Blog (sheppardhealthlaw.com), published May 30, 2024.
Listen to this post
IRS Issues Guidance on Recent Relief from Health Coverage Reporting to Individuals
In December 2024, the Paperwork Burden Reduction Act (“PBRA”) was signed into law, providing, among other things, for an alternative manner for employers and other reporting entities to satisfy their obligations with respect to furnishing IRS Forms 1094-C and 1095-C to individuals. Under the PBRA, beginning with the forms for the 2024 calendar (due March 3, 2025), a reporting entity may forego automatically furnishing the forms to individuals if certain notice requirements are satisfied. In particular, in lieu of automatically furnishing the forms, the PBRA allows a reporting entity to post a clear, conspicuous, and accessible notice, stating that individuals may receive a copy of the forms upon request (the “Replacement Notice”).
However, the PBRA did not contain specifics as to how to satisfy the Replacement Notice requirement. On February 21, 2025, the IRS issued new guidance, IRS Notice 2025-15, which helps to clarify the Replacement Notice requirement. Notice 2025-15 provides that a reporting entity may satisfy the Replacement Notice requirement by complying with existing regulations regarding a similar replacement notice procedures for Form 1094-B. Based on those existing regulations and Notice 2025-15:
The Replacement Notice must be posted on the reporting entity’s website, in an area reasonably accessible to all responsible individuals (e.g., current and former employees), accompanied by an email address and a physical address to make requests and a telephone number for any questions.
The Replacement Notice must be written in plain, non-technical terms in a font-size large enough to draw attention.
The Replacement Notice must be posted by the due date for furnishing the 1095-B or 1095-C, including the automatic 30-day extension, if applicable. For example, for 2024 Forms 1095-B and 1095-C, the Notice must be posted by March 3, 2025.
The Replacement Notice must be retained in the same place on the website through October 15 of the year following the calendar year to which the Replacement Notice relates.
The employer must furnish the Form 1095-B or 1095-C to a requesting responsible individual within 30 days of the date the request is received, but not earlier than January 31 of the year following the calendar year for which the return was required, and the Form may be provided electronically if the requesting individual consents.
Takeaway
The alternative manner of furnishing Forms 1095-B and 1095-C will be an attractive option for many employers looking to eliminate paper mailers, and reduce printing and mailing costs and burden. This can be a viable option as long as all of the requirements are met regarding the Replacement Notice and the employer has procedures in place to the timely furnish the forms when requested by a responsible individual. However, employers should keep in mind that certain states have their own guidelines requiring ACA-like written statements, and, if an employer is subject to any such state requirements, they may need to continue to provide paper forms via mail.
McDermott+ Check-Up: February 28, 2025
THIS WEEK’S DOSE
House Passes Budget Resolution. The Senate and House must now align on a unified resolution for the reconciliation process to begin in earnest.
Senate Holds Nomination Hearings for OSTP Director, FTC Commissioner, OMB Deputy Director. Discussion focused on nominees’ views on artificial intelligence, pharmacy benefit managers (PBMs), and the impact of paused federal funding on grants and healthcare programs.
Senate HELP Committee Advances Secretary of Labor Nominee Chavez-DeRemer. Lori Chavez-DeRemer received some bipartisan support, and a full Senate vote is expected next week.
House Energy & Commerce Committee Advances Oversight Plan. The markup turned highly partisan as Republicans put forth an agenda that includes biological threat preparedness and response, substance use, and Medicare and Medicaid operations.
House Energy & Commerce Health Subcommittee Holds Hearing on PBM Reform. Members agreed on the need for PBM reform and referenced work from the 118th Congress.
Senate Aging Committee Examines Opioid Epidemic. Members discussed varying policy approaches to combatting opioid use disorder among seniors.
President Trump Signs Healthcare Price Transparency EO. The executive order (EO) directs agencies to increase enforcement of healthcare price transparency regulations.
Trump Administration Issues Memo Requiring Federal Agencies to Submit RIF Plans. Among a number of directives, the memo directs agencies, including the US Department of Health and Human Services (HHS), to submit phase one of a reduction in force (RIF) plan for their federal workforce by March 13.
HHS Issues Policy Statement on Notice-and-Comment Rulemaking. It remains unclear what scope of rules could be impacted by this statement.
CONGRESS
House Passes Budget Resolution. On February 25, the House voted 217 – 215 to advance its version of a budget resolution to outline the reconciliation process. In a dramatic display of how quickly things can change, the vote was initially cancelled because of ongoing opposition from Reps. Burchett (R-TN), Davidson (R-OH), Spartz (R-IN), and Massie (R-KY) due to concerns that the resolution did not include enough spending cuts. With only a one-seat margin, Republicans couldn’t proceed with that much opposition. However, three of the representatives were convinced to change their votes moments after the vote had been cancelled, and the vote proceeded. Ultimately, all Democrats voted no, and Rep. Massie was the sole Republican to join them.
The resolution would enable a single reconciliation bill to tackle immigration, energy, defense, and temporary extension of tax cuts from the first Trump administration. The resolution directs the House Energy & Commerce Committee to find at least $880 billion in savings, which could include significant Medicaid cuts.
The House vote follows the Senate’s vote last week to advance its version of a “skinny” budget resolution that did not include tax policy and would therefore include less healthcare savings. With two options for how to proceed on reconciliation, the House and Senate now must negotiate a unified budget resolution and pass it through both bodies in order for the reconciliation process to begin. Those budget negotiations will proceed mostly behind the scenes, as Congress must turn its attention to funding government before the March 14 deadline.
Senate Holds Nomination Hearings for OSTP Director, FTC Commissioner, OMB Deputy Director. The Senate Committee on Commerce, Science, and Transportation held a nomination hearing for Michael Kratsios to serve as the director of the Office of Science and Technology Policy (OSTP) and for Mark Meador to serve as a commissioner for the Federal Trade Commission (FTC). Members questioned Meador about FTC investigations into PBMs and consolidation, and Meador noted his intent to ensure competition in the healthcare industry. Members questioned Kratsios about guardrails for artificial intelligence, and he expressed his view that artificial intelligence can make a positive impact on healthcare.
The Senate Homeland Security & Governmental Affairs Committee held a nomination hearing for Dan Bishop to serve as deputy director of the Office of Management and Budget (OMB). Discussion predominately focused on border security and federal workforce cuts. Health-related topics included the impact of paused federal grant funding on rural hospital operations, federal funding of abortions, and transparency of federally funded research. Bishop will next testify before the Senate Budget Committee on March 5, and both committees must vote on his nomination before it heads to the Senate floor.
Senate HELP Committee Advances Secretary of Labor Nominee Chavez-DeRemer. In a 14 – 9 vote, the Senate Health, Education, Labor, and Pensions (HELP) Committee advanced the nomination of Lori Chavez-DeRemer as secretary of labor to the full Senate. Sens. Hassan (D-NH), Hickenlooper (D-CO), and Kaine (D-VA) voted yes, and Sen. Paul (R-KY) joined the remaining Democrats to vote no. Chavez-DeRemer previously represented Oregon’s fifth district in the House, and Sen. Paul expressed concern about her cosponsorship of a bill that would have made unionization easier. The US Department of Labor shares jurisdiction over certain healthcare issues with HHS, including the Affordable Care Act, the Health Insurance Portability and Accountability Act, and employer-sponsored insurance. A vote is expected next week on the Senate floor, where Chavez-DeRemer could continue to receive bipartisan support.
House Energy & Commerce Committee Advances Oversight Plan. During the markup, members discussed the committee’s oversight and authorization plan for the 119th Congress. Each House committee must submit such a plan to the House Administration and Oversight and Government Reform Committees by March 1. The plan states that the Energy & Commerce Committee will conduct oversight of federal agencies’ efforts on biological threat preparedness and response, ensure cost transparency in Medicare and Medicaid, examine the cost of chronic diseases, and examine government cybersecurity initiatives.
The markup became quite contentious, with Democrats offering numerous amendments that would require the committee to study the impact of any cuts to Medicaid and federal research funding, examine layoffs at HHS, and assess the US Food and Drug Administration’s leadership on vaccine development and safety. All amendments offered by Democrats were rejected along party lines.
House Energy & Commerce Health Subcommittee Holds Hearing on PBM Reform. There was strong bipartisan support during the hearing for PBM reform. However, Democrats expressed frustration that such policies were already fully debated in the 118th Congress and included in the December 2024 bipartisan healthcare package that was ultimately dropped from the year-end continuing resolution. Republicans indicated that they would like to investigate fraud and abuse within the drug supply chain and examine the PBM rebate model, and they noted concern about how PBMs harm independent pharmacies. Democrats also referenced the $880 billion in savings directed at the Energy & Commerce Committee in the House budget resolution, noting their concern over any cuts to Medicaid.
Senate Aging Committee Examines the Opioid Epidemic. The hearing focused on opioid use disorder’s impact on older Americans and featured a panel of local law enforcement and elected officials, caregivers, and subject matter experts. Witnesses recommended a variety of policy solutions, including taking a stronger law enforcement approach against drug dealers, increasing access to treatments such as medication-assisted therapy, and eliminating the Medicaid inmate exclusion. Democrats noted that decreasing Medicaid funding would impact access to and coverage of substance use disorder treatment, while Republicans focused on strengthening border security to prevent opioid use disorder.
ADMINISTRATION
President Trump Issues Healthcare Price Transparency EO. The EO, Making America Healthy Again by Empowering Patients with Clear, Accurate, and Actionable Healthcare Pricing Information, aims to build on the first Trump administration’s efforts to increase the transparency of healthcare prices. It specifically references a 2019 Trump EO and subsequent regulations that required hospitals and plans to publicly disclose negotiated prices. The Biden administration expanded on those regulations, but there have been reports of hospital non-compliance.
Differing from previous hospital price transparency requirements, the 2025 EO states that prices should be “actual prices” and not estimates. This EO directs the US Departments of the Treasury, Labor, and HHS to “rapidly implement and enforce” healthcare price transparency regulations within 90 days, including by:
Requiring disclosure of prices of items and services, not estimates;
Issuing updated guidance or proposed regulatory action to ensure pricing information is standardized and comparable across hospitals and plans; and
Issuing guidance or proposed regulatory action to update enforcement policies designed to ensure compliance.
A fact sheet can be found here.
Trump Administration Issues Memo Requiring Agencies to Submit Federal RIF Plans. The memo comes in response to President Trump’s February 13 EO, “Implementing the President’s ‘Department of Government Efficiency’ Workforce Optimization Initiative.” The memo directs federal agencies to initiate large-scale RIFs and submit an agency RIF and reorganization plan (ARRP) as phase one of the initiative by March 13. The memo notes that ARRPs should seek to achieve:
Better service for the American people;
Increased productivity;
A significant reduction in the number of full-time-equivalent positions;
A reduced real estate footprint; and
A reduced budget outline.
Phase two of the initiative will focus on creating more productive, efficient agency operations. Agencies must submit a phase two plan by April 14, with implementation by September 30. Agencies or components that provide direct services to citizens (such as Social Security, Medicare, and veteran’s healthcare, according to the memo) are not to implement any proposed ARRPs until the OMB and Office of Personnel Management certify that the plans will have a positive effect on the delivery of such services.
HHS Issues Policy Statement on Notice-and-Comment Rulemaking. The Administrative Procedure Act (APA) exempts certain rules from formal notice-and-comment rulemaking, including rules regarding “public property, loans, grants, benefits, or contracts.” Despite this exemption, past guidance (known as the Richardson Waiver) encouraged greater public participation and directed government agencies to still use the more formal rulemaking process for this category of rules. HHS issued a new policy statement on February 28, stating that it will rescind the Richardson Waiver, and “matters relating to agency management or personnel or to public property, loans, grants, benefits, or contracts, are exempt from the notice and comment procedures of 5 U.S.C. 553, except as otherwise required by law. Agencies and offices of the Department have discretion to apply notice and comment procedures to these matters but are not required to do so, except as otherwise required by law.” The scope of the rules that could be impacted by this change are not easily defined, even under caselaw, and would need to be reconciled against other statutes and legal requirements that may still require notice-and-comment rulemaking.
QUICK HITS
Senate Judiciary Committee Advances the HALT Fentanyl Act with Bipartisan Vote. The HALT Fentanyl Act, S. 331, would permanently classify fentanyl-related substances as schedule I controlled substances, align penalties for offenses involving these substances with those for fentanyl analogues, establish a new registration process for certain research, and make other changes to research registration requirements. The legislation, which passed the House with bipartisan support in early February, advanced from the committee by a vote of 16 – 6.
Energy & Commerce Committee Privacy Working Group Issues RFI. The newly formed working group is exploring the potential creation of a federal comprehensive data privacy and security framework. The request for information (RFI) focuses on artificial intelligence, data security, enforcement, and existing privacy frameworks. Responses are due by April 7.
MACPAC Holds February 2025 Meeting. The Medicaid and CHIP Payment and Access Commission (MACPAC) meeting included discussion on transitions of care for children and youth with special healthcare needs, hospital supplemental and directed payments, self-directed home- and community-based services, access to opioid use disorder medications, Section 1115 substance use disorder demonstrations, prior authorization, healthcare for children in foster care, and access to residential care for children and youth with behavioral health needs.
CMS Announces Medicare Drug Price Negotiation Program Public Engagement Events. The events, held from April 16 to 30, will allow patients, clinicians, caregivers, and consumer and patient organizations to share input for the second cycle of Medicare drug price negotiations. More information can be found here. Read about the drug selection process in an infographic here.
Congressional Democrats Raise Concerns Over HHS Layoffs. Senate Finance Committee Ranking Member Wyden (D-OR) and Senate HELP Committee Ranking Member Sanders (I-VT) sent a letter to HHS expressing concern over the layoffs of probationary employees working on organ transplantation modernization efforts. House Energy & Commerce Committee Ranking Member Pallone (D-NJ) and Health Subcommittee Ranking Member DeGette (D-CO) raised concerns over the impact of layoffs at the Centers for Disease Control and Prevention, National Institutes of Health (NIH), and Food and Drug Administration (FDA).
HHS OIG Report Finds Increased Medicare Part D Spending for Weight Loss Drugs. From 2019 to 2023, spending increased by 364% for 10 medications, including anti-obesity medications such as Ozempic, that are covered as type 2 diabetes treatments. The report follows a proposed rule from the Biden administration that would allow Medicare Part D to cover certain anti-obesity medications for weight loss purposes; it remains unclear whether the policy will be finalized under the current administration.
NEXT WEEK’S DIAGNOSIS
Congress will be in session next week. With a budget resolution passed in both chambers and next steps in flux, discussion will likely shift to funding the government, which must be addressed by March 14 in order to avoid a government shutdown. The Senate will continue to hold nomination hearings. On March 5, the Senate HELP Committee will hold its hearing for NIH director nominee Jay Bhattacharya, and the Senate Budget Committee will hold its hearing for OMB deputy director nominee Dan Bishop. On March 6, Senate HELP will hold its hearing for FDA commissioner nominee Martin Makary. President Trump will give the joint address of his second term to Congress on March 4. The Medicare Payment Advisory Commission will meet March 6 and 7.
Trump Administration Issues Executive Order Prioritizing Hospital Price Transparency Enforcement
On February 25, 2025, President Donald Trump issued an Executive Order titled “Making America Healthy Again by Empowering Patients with Clear, Accurate, and Actionable Healthcare Pricing Information” (the 2025 Order). The 2025 Order directs federal agencies to take various actions to prioritize enforcement of healthcare price transparency requirements for hospitals and health plans “to support a more competitive, innovative, affordable, and higher quality healthcare system.”
Price Transparency Rules Background
The 2025 Order follows a 2019 Executive Order issued by then-President Trump titled “Executive Order on Improving Price and Quality Transparency in American Healthcare to Put Patients First” (the Price Transparency Order). That 2019 Price Transparency Order resulted in the adoption of regulations commonly called the Hospital Price Transparency Rules. Those Rules, in pertinent part, require hospitals to maintain a consumer-friendly display of pricing information for up to 300 shoppable services and a machine-readable file with negotiated rates for every single service the hospital provides. Read our previous analysis of the 2019 Price Transparency Order here, and our analysis of a 2024 OIG audit of hospital compliance with the Price Transparency Rules here.
2025 Price Transparency Executive Order Requirements
The 2025 Order now tasks the Departments of Treasury, Labor, and Health and Human Services with taking “all necessary and appropriate action” to implement and enforce the Hospital Price Transparency Rules because “hospitals and health plans were not adequately held to account when their price transparency data was incomplete or not even posted at all.”
Specifically, within 90 days of the 2025 Order, the federal agencies must:
(a) require the disclosure of the actual prices of items and services, not estimates;
(b) issue updated guidance or proposed regulatory action ensuring pricing information is standardized andeasily comparable across hospitals and health plans; and
(c) issue guidance or proposed regulatory action updating enforcement policies designed to ensurecompliance with the transparent reporting of complete, accurate, and meaningful data.
Notably, the phrase “actual prices of items and services” is not defined in the Order, and the express rebuke of pricing “estimates” appears to run counter to the approach taken under the No Surprises Act regulations (requiring the provision of good faith estimates) and certain state laws that require health care providers to furnish estimates to patients upon request. Whether and to what extent the agencies define these terms in subsequent guidance and/or rulemaking will be essential for health care organizations to monitor.
Takeaways for Health Care Organizations
Prior to the 2025 Order, the Centers for Medicaid and Medicare Services (CMS) had already issued civil monetary penalties for non-compliance with the Hospital Price Transparency Rules, and the 2025 Order appears intended to ramp up that type of enforcement action.
Hospitals, health plans, and providers should expect further guidance and enforcement information from these federal agencies during the 90-day period, which ends May 26, 2025. Regardless, health care organizations would be well-advised to review their price transparency processes and information available for consumers, as well as their policies to prepare for closer scrutiny of pricing disclosure practices. Additional information about the current Hospital Price Transparency Rules is available from CMS here.
GAO’s Updated High-Risk List Still Includes EPA’s Process for Assessing and Controlling Toxic Chemicals
On February 25, 2025, the U.S. Government Accountability Office (GAO) issued a report entitled High-Risk Series: Heightened Attention Could Save Billions More and Improve Government Efficiency and Effectiveness, “highlight[ing] 38 areas across the federal government that are seriously vulnerable to waste, fraud, abuse, and mismanagement or that are in need of transformation.” The category “Seizing Opportunities to Better Protect Public Health and Reduce Risk” lists high-risk areas focused on addressing critical weaknesses in public health efforts, including “ensuring the Environmental Protection Agency [(EPA)] provides more timely reviews of potentially toxic chemicals before they are introduced into commercial production and widespread public use.” GAO’s report includes an overview of “Transforming EPA’s Process for Assessing and Managing Chemical Risks,” noting that EPA “needs to address capacity issues to more effectively assess and manage chemicals posing risks to human health and the environment.” GAO added this issue to its High-Risk List in 2009 because EPA had not developed sufficient risk information to limit exposure to chemicals that may pose a risk to human health and because of issues with the Integrated Risk Information System’s (IRIS) Program. Since then, the Toxic Substances Control Act (TSCA) was amended in 2016 by the Frank R. Lautenberg Chemical Safety for the 21st Century Act, prompting EPA to change its approach to assessing and managing chemicals. Similarly, the Office of Research and Development (ORD) “is more effectively using its portfolio of toxic chemical assessment products — which include IRIS and other chemical assessments like Provisional Peer-Reviewed Toxicity Values — to provide a range of risk assessments informing EPA’s decision-making on the protection of public health and the environment.” GAO states that given the changes to these programs, it is evaluating EPA’s work managing chemical risks through a single combined rating and will no longer assess the IRIS Program and TSCA implementation separately.
GAO’s rating is unchanged since the last update, finding that all five criteria still need attention:
Leadership commitment (partially met): Since 2023, EPA leadership has continued to demonstrate a strong commitment to implementing its TSCA responsibilities, including seeking resources to address outstanding program needs. According to former President Biden’s fiscal year 2025 request, these additional resources are essential for EPA to complete existing chemical risk evaluations within the statutory timeframe and modernize information technology (IT) systems supporting the TSCA program. EPA leadership and officials in ORD overseeing the IRIS Program have not increased resources or examined workforce needs for either the program or across EPA, however.
Capacity (partially met): The Office of Chemical Safety and Pollution Prevention (OCSPP) and IRIS Program officials reported a lack of capacity to carry out their work effectively, but both have taken steps to identify needed resources. According to EPA, among the 1,163 premanufacture notice (PMN) reviews completed between 2017 and 2022, EPA typically made its determination within the initial 90-day review period less than ten percent of the time. According to GAO, EPA specifically completed these reviews in 181 days or more between 53 and 90 percent of the time. GAO states that the OCSPP Assistant Administrator “stated that although EPA has prioritized resources for its new chemicals program, the agency will continue to struggle for as long as the budgetary constraints persist. Moreover, senior managers in OCSPP’s New Chemicals Division [(NCD)] told us the division lacks expertise and resources to assess the sufficiency of its existing evidence-building capacity or to identify actions to maintain or enhance that capacity.”
Action plan (partially met): The IRIS Program and OCSPP’s NCD have conducted strategic planning activities. IRIS Program staff included in their April 2024 resource analysis the Program’s plans for preparing various types of chemical assessments relying on current budget and human resources. NCD drafted a strategic plan in August 2024 that includes five goals related to the New Chemicals Program and identifies metrics and strategies for achieving each goal. GAO notes that it found that NCD “did not follow key practices for effectively assessing, building, or using evidence for its planning activities,” however.
Monitoring (partially met): The IRIS Program’s April 2024 resource analysis included metrics to track the Program’s progress in meeting user needs for chemical assessments. The IRIS Program improved its monitoring processes by implementing changes to the Program’s chemical nomination surveys in 2022 and to the way that survey was carried out. GAO states that it found that OCSPP’s NCD did not follow key practices for effectively assessing, building, or using evidence for its activities, however. It found NCD had not completed foundational planning actions, such as preparing its draft strategic plan in final.
Demonstrated progress (partially met): The IRIS Program has made progress in carrying out its chemical assessment activities. EPA has made progress in implementing its PFAS Strategic Roadmap, as well. OCSPP continues to face challenges in carrying out its responsibility to make determinations on new chemical reviews within the 90-day review period, however. According to GAO, EPA stated that it is committed to improving the efficiency and transparency of its New Chemicals Program and has launched related process improvements, such as finalizing updates to the regulations that govern new chemical reviews.
GAO concludes that attention is needed to resources (budgetary and staffing), strategic planning, and monitoring to make progress in this high-risk area. According to GAO, as of January 2025, three recommendations related to assessing and managing chemical risks remain open, including the following focused on OCSPP’s planning and assessment efforts:
OCSPP should develop a process and timeline to align fully its workforce planning efforts for implementing TSCA chemical review responsibilities with workforce planning principles;
OCSPP’s NCD should, as it prepares its strategic plan in final, address relevant key practices for managing and assessing the New Chemicals Program, including involving stakeholders and identifying resources; and
OCSPP’s NCD should implement a systematic process for aligning its performance management approach with key management and assessment practices.
New York Amends the Warehouse Worker Injury Reduction Act
On February 14, 2025, New York Governor Kathy Hochul signed into law amendments to the New York Warehouse Worker Injury Reduction Act (A2432/S808).
Quick Hits
Employers are required to comply with all aspects of the law by the June 1, 2025, effective date.
The definition of “musculoskeletal injuries and disorders” was replaced by “work-related musculoskeletal disorders,” making it clear that the musculoskeletal disorder must be work-related.
The amendment expands who is qualified to conduct the worksite evaluation.
Employee input is required in worksite evaluations.
Expanded Definitions
The amendments expand the definition of “musculoskeletal injuries” to now cover “work-related musculoskeletal disorders” affecting “the muscles, nerves, tendons, ligaments, joints, cartilage of the body’s musculoskeletal system including the muscles, nerves, tendons, ligaments, joints, cartilage and spinal discs of the upper and lower limbs, neck, shoulders, and back.”
Specifically, the amended definition covers “work-related conditions,” such as injuries, illnesses, or disorders that:
are caused by exposures while working that either significantly cause or contribute to the resulting condition or that exacerbate a preexisting condition;
are caused by ergonomic risk factors, including, but not limited to, “rapid pace, forceful exertions, extreme or static postures, repetitive motions, direct pressure, contact stress, vibration or cold temperatures;” or
do not occur because of workplace accidents, such as slips, trips, and falls.
The amendment also uses the term “competent person” to expand the category of qualified individuals who can draft a worksite evaluation. A “competent person” is anyone “capable of performing a job hazard assessment to identify and assess existing and predictable ergonomic risk factors” that may cause or contribute to musculoskeletal disorders. The term “competent person” is not limited to ergonomists, but also includes industrial hygienists, certified safety professionals, or other health and safety professionals who are academically qualified or possess extensive knowledge and training in managing workplace injury risks.
Injury Reduction Programs
Covered employers are still required by the law to implement an injury reduction program to minimize the risk of work-related musculoskeletal disorders. Employers must ensure not only that every job, process, or operation of work activity is covered (or a representative number thereof), but also that every shift is covered as well.
Worksite Evaluations
Prior to the amendment, worksite evaluations were required only to “obtain recommendations” from workers, whereas now they “shall incorporate input” from workers “either directly or through an employee-led workplace safety committee.” This suggests that employee input must be expressly recorded in the written worksite evaluation that is required in any injury reduction program.
The amendment also removes the requirement that a certified ergonomist evaluate the worksite and replaces the evaluator with a competent person. The competent person is responsible for identifying risk factors, including “rapid pace, forceful exertions, extreme or static postures, repetitive motions, direct pressure, contact stress, vibration, or cold temperatures” that may or could cause work-related musculoskeletal disorders. Existing, active workplace safety committees formed through collective bargaining may also review or conduct worksite evaluations, so long as the committee is maintained “in conjunction with an injury prevention program that fully complies with the federal Occupational Safety and Health Act.”
A board-certified ergonomist is required to review the written worksite evaluation when either an employee-led workplace safety committee files a written request to the employer “based upon a material concern related to the findings of a competent person,” or, in the absence of an active employee-led workplace safety committee, when “any employee-led committee makes a formal recommendation based upon a material concern” related to the worksite evaluation findings.
On-Site Treatment
The amendment clarifies that the on-site treatment requirements under the law are not limited to medical offices or first aid stations but rather any location staffing medical professionals that treat warehouse workers “for symptoms of work-related musculoskeletal disorders.”
Key Takeaways
The amendment follows New York’s focus on workplace safety in specific industries. Recently, Governor Hochul signed into law amendments to the Retail Worker Safety Act, and the New York Assembly introduced Assembly Bill (A) No. 4936, proposing new workplace violence prevention duties for public employers.
With the law’s June 1, 2025, effective date quickly approaching, covered employers may want to consider drafting their injury reduction programs now.
Medicare Payment Model Trends and Economic Drivers – Awaiting Direction from Trump Administration
The Medicare program continues to face long term financial pressures associated with inflationary effects on health care costs and the growing wave of aging baby boomers. The Medicare Trust Fund, which is often viewed as a foil for health care affordability, has long faced a proverbial financing question. The fund covers Medicare Part A services, including inpatient hospital services and hospice care and skilled nursing services following a hospital stay. Projected solvency risks of the fund improved with the passage of the Affordable Care Act of 2010 (ACA), which, among other things, reduced Medicare payments to Medicare Advantage Organizations and implemented medical loss ratios. However, the fund faced acute short term solvency risks between 2018 to 2023. The fund is currently expected to be depleted in 2036.[1]
Under that economic drop back, the past two decades have seen incredible growth in value-based care reimbursement arrangements, including the rapid growth of the Medicare Shared Savings Program (MSSP) following passage of the ACA, the development of the Center for Medicare and Medicaid Innovation (CMMI) under the Centers for Medicare & Medicaid Services (CMS), and development of narrower alternative payment models (APMs) tested by the CMMI in subsequent years (such as the soon-to-be expiring Accountable Care Organization Realizing Equity, Access, and Community Health (ACO REACH) Model and the latest episode-based payment model Transforming Episode Accountability Model (TEAM)). Those payment models have improved quality and efficiency of care, while reducing overall cost to the Medicare program.
Indeed, on the heels of those early economic successes, CMS under the Biden Administration set a goal that by 2030 all Medicare fee-for-service beneficiaries with Medicare Parts A and Part B and a vast majority of Medicaid beneficiaries will be in an accountable care relationship for quality and total cost of care.[2] That transition is expected to generate large savings which could shore up the Fund. CMS reported 2.1BN in net savings under the Medicare Shared Savings Program in 2023.[3] Further, Medicare Advantage enrollment is shifting in this direction – as of September 2024, 50.5% of people enrolled in Medicare were participating in a Part C Medicare Advantage Program, up from 39% in 2019.[4]
The payment models package several features and innovations, but generally seek to support the “quadruple aim” – a modification of the “triple aim”, which was highly publicized during the passage of the ACA, to address provider satisfaction. One recent evolution from that policy underpinning is the expansion of population health initiatives to address health inequities.
In recent years, CMS has elevated awareness of the health inequities as a way to address systemic health disparities found in underserviced communities with shared characteristics (e.g., disability or race). Drawing on a substantial body of evidence, CMS has linked health equity with those health disparities in underserved communities which are impacted by preventable health conditions more frequently or severely than individuals outside of those communities. Beginning in 2023, CMS offered health equity adjustments under the Medicare Shared Savings Program to encourage providers to serve and improve care for underserved populations or dually eligible beneficiaries.[5] Beginning in 2025, CMMI offered accountable care organizations (ACOs) participating in the ACO REACH Model a benchmark adjustment for health equity tied to socioeconomic data for specific regions.
Relatedly, CMS has increasingly been recognizing the importance of providing coverage for non-medical aspects of health care services to reduce health inequities. CMS has encouraged providers to address social determinants of health (SDOH) and the specific health-related social needs (HRSN) that impact individuals to promote better health outcomes. For example, from its outset, CMMI’s Enhancing Oncology Model actively incorporated SDOH by requiring participants to screen for HRSNs, report patient demographic data (e.g., race, ethnicity, language, gender identify), and develop plans to implement evidence-based strategies to address health equity gaps in assigned patient populations.
While Dr. Mehmet Oz, the current nominee to lead CMS, is a staunch advocate of Medicare Advantage, it is unclear how the new Trump Administration will view and react to these trends as it retakes the helm at CMS. However, we would expect CMS to consider the economic back drop under which these trends evolved and the resulting data showing that total expenditures for the Medicare Program can be reduced without sacrificing coverage or quality. The payment models – whether the MSSP and CMMI-initiated APMs – are implemented by CMS under contractual arrangements with private insurers, ACOs and health care providers and frequently operate on calendar year periods. Accordingly, we anticipate meaningful changes will be delayed to 2026, giving stakeholders time to prepare.
[1] 2024 Annual Report, Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds (May 6, 2024) at https://www.cms.gov/oact/tr/2024 (also noting that the assets of the fund were $208.8 billion at the start of 2024, which was only expected to cover 50% of the anticipated spend in 2024, failing the trustee’s recommended minimum of 100%).
[2] Chiquita Brooks-LaSure and Daniel Tsai, A Strategic Vision for Medicaid and the Children’s Health Insurance Program (CHIP), Health Affairs (November 16, 2021) at https://www.healthaffairs.org/content/forefront/strategic-vision-medicaid-and-children-s-health-insurance-program-chip.
[3] Press Release: Medicare Shared Savings Program Continues to Deliver Meaningful Savings and High-Quality Health Care, Centers for Medicare & Medicaid Services (Oct. 29, 2024) at https://www.cms.gov/newsroom/press-releases/medicare-shared-savings-program-continues-deliver-meaningful-savings-and-high-quality-health-care (lasted accessed Feb. 8, 2025).
[4] 2024 Annual Report, of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds (May 6, 2024) at https://www.cms.gov/oact/tr/2024; Medicare Advantage 2020 Spotlight: First Look, Kaiser Family Foundation (October 2019) at https://files.kff.org/attachment/Data-Note-Medicare-Advantage-2020-Spotlight-First-Look.
[5] Press Release: Medicare Shared Savings Program Saves Medicare More Than $1.6 Billion in 2021 and Continues to Deliver High-quality Care, Health and Human Services (Aug. 30, 2022) at https://www.hhs.gov/about/news/2022/08/30/medicare-shared-savings-program-saves-medicare-more-than-1-6-billion-in-2021-and-continues-to-deliver-high-quality-care.html.
A Regulatory Haze of Uncertainty Continues as the Clock Ticks Toward Phase One of FDA’s LDT Final Rule
Clinical laboratories still face uncertainty and the difficult decision of whether to start the work needed to comply with the with Phase 1 expectations under FDA’s Laboratory Developed Tests Final Rule (the “LDT Final Rule”), which remain set to go into effect on May 6, 2025.
To be sure, the shift in priorities of the new administration has kept the health care industry on its toes for the last few weeks, especially as the leadership and messaging of the Department of Health and Human Services (“HHS”) has started to come into sharper focus. The theme of ‘deregulation’, particularly when it comes to the activities of the Food and Drug Administration (“FDA”), has sparked interest and discussion among stakeholders in the life sciences industry – including clinical laboratories that are weighing how to approach the upcoming May 6 deadline for compliance.
We discussed the details of the LDT Final Rule in a previous Insight, explaining that as of the May 6, 2025 Phase 1 deadline FDA will expect all laboratories that manufacture LDTs to comply with medical device reporting (“MDR”) requirements, correction and removal reporting requirements, and quality system (“QS”) requirements regarding complaint files.
As is often the case with a major regulatory landscape change, the LDT Final Rule has been subject to scrutiny and legal challenges since its publication in May 2024. Perhaps the most watched of these is the ongoing litigation in which the American Clinical Laboratories Association (“ACLA”) and the Association for Molecular Pathology (“AMP”) have challenged the FDA’s authority to regulate LDTs by way of the LDT Final Rule. The presiding federal district court just heard arguments on the parties cross-motions for summary judgment, and noted a decision on those motions would be issued soon, likely before the Phase 1 deadline. The outcome will have significant implications for labs in the U.S.
In addition to the ongoing litigation, there is a growing possibility that FDA could be instructed, whether by Congress or by leadership at HHS, to retract the LDT Final Rule or delay the implementation of Phase 1. Of note, during the previous Trump administration there was resistance to FDA’s authority to regulate LDTs, in that HHS publicly required continued enforcement discretion for LDTs during the beginning of the COVID-19 pandemic. Now, with the touted theme of deregulation and public calls by trade associations like ACLA to mitigate the impact of the LDT Final Rule, there is a chance that HHS under the new Trump administration could take a similar approach. All of this is coupled with currently mounting pressure on all federal agencies to reduce spending and regulatory oversight, which may make it increasingly difficult for FDA to enforce the rule as originally written.
Nonetheless, unless there is a definitive ruling that the LDT Final Rule is retracted, or that its implementation is delayed, laboratories developing LDTs remain subject to the Final Rule’s Phase 1 requirements at this time. Arguably, even if the outcome results in removal, delay, or a change to the LDT Final Rule, the political cycle could flip again with reinvigorated efforts to bring more regulation around LDTs, whether through Congress or again through the rulemaking process.
EBG will continue to monitor these developments closely, as well as the forthcoming court ruling, and any potential administrative actions that could significantly reshape the regulatory landscape for LDTs.
The Why Behind the HHS Proposed Security Rule Updates
In this week’s installment of our blog series on the U.S. Department of Health and Human Services’ (HHS) HIPAA Security Rule updates in its January 6 Notice of Proposed Rulemaking (NPRM), we are exploring the justifications for the proposed updates to the Security Rule. Last week’s post on the updates related to Vulnerability Management, Incident Response & Contingency Plans can be found here.
Background
Throughout this series, we have discussed updates to various aspects of the Security Rule and explored how HHS seeks to implement new security requirements and implementation specifications for regulated entities. This week, we discuss the justifications behind HHS’s move and the challenges entities face in complying with the existing rule.
Justifications
HHS discussed multiple reasons for this Security Rule update, and a few are discussed below:
Importance of Strong Security Posture of Regulated Entities – The preamble to the NPRM posits that the increase in use of certified electronic health records (80% of physicians’ offices and 96% of hospitals as of 2021) fundamentally shifted the landscape of healthcare delivery. As a result, the security posture of regulated entities must be updated to accommodate such advancement. As treatment is increasingly provided electronically, the additional volume of sensitive patient information to protect continues to grow.
Increase Cybersecurity Incident Risks – HHS cites the heightened risk to patient safety during cybersecurity incidents and ransomware attacks as a key reason for these updates. The current state of the healthcare delivery system is propelled by deep digital connectivity as prompted by the HITECH and 21st Century Cures Act. If this system is connected but insecure, the connectivity could compromise patient safety, subjecting patients to unnecessary risk and forcing them to bear unaffordable personal costs. During a cybersecurity incident, patients’ health, and potentially their lives, may be at risk where such an incident creates impediments to the provision of healthcare. Serious consequences can result from interference with the operations of a critical medical device or obstructions to the administrative or clinical operations of a regulated entity, such as preventing the scheduling of appointments or viewing of an individual’s health history.
The Healthcare Industry Could Benefit from Centralized Security Standards Due to Inconsistent Implementation of Current Voluntary Standards – Despite the proliferation of voluntary cybersecurity standards, industry guidelines, and best practices, HHS found that many regulated entities have been slow to strengthen their security measures to protect ePHI and their information systems. HHS also noted that recent case law, including University of Texas M.D. Anderson Cancer Center v. HHS, has not accurately set forth the steps regulated entities must take to adequately protect the confidentiality, integrity, and availability of ePHI, as required by the statute. In that case, the Fifth Circuit vacated HIPAA penalties against MD Anderson, ruling that HHS acted arbitrarily and capriciously under the Administrative Procedure Act. The court found that MD Anderson met its obligations by implementing an encryption mechanism for ePHI. HHS disagrees with whether the encryption mechanism was sufficient and asserted its authority under HIPAA to mandate strengthened security standards for ePHI. This ruling and lack of adoption of the voluntary cybersecurity standards by regulated entities has led to inconsistencies in the implementation of the Security Rule at regulated entities and providing clearer and mandatory standards were noted justifications for these revisions.
Takeaways
In 2021, Congress amended the HITECH Act, requiring HHS to assess whether an entity followed recognized cybersecurity practices in line with HHS guidance over the prior 12 months to qualify for HIPAA penalty reductions. In response to this requirement, HHS could have taken the approach of acknowledging recognized frameworks that offer robust safeguards to clarify expectations, enhance the overall security posture of covered entities, and reduce compliance gaps. While HHS refers to NIST frameworks in discussions on security, it has not formally recognized any specific frameworks to qualify for this so called “safe harbor” incentive. Instead, HHS uses this NPRM to embark on a more prescriptive approach to the substantive rule based on its evaluation of various frameworks.
HHS maintains that these Security Rule updates still allow for flexibility and scalability in its implementation. However, the revisions would limit the flexibility and raise the standards for protection beyond what was deemed acceptable in the past Security Rule iterations. Given that the Security Rule’s standard of “reasonable and appropriate” safeguards must account for cost, size, complexity, and capabilities, the more prescriptive proposals in the NPRM and lack of addressable requirements present a heavy burden — especially on smaller providers.
Whether these Security Rule revisions become finalized in the current form, a revised form, or at all remains an open item for the healthcare industry. Notably, the NPRM was published under the Xavier Becerra administration at HHS and prior to the confirmation of Robert F. Kennedy, Jr. as the new secretary of HHS. The current administration has not provided comment on its plans related to this NPRM, but we will continue to watch this as the March 7, 2025, deadline for public comment is inching closer.
Stay tuned to this series as our next and final blogpost on the NPRM will consider how HHS views the application of artificial intelligence and other emerging technologies under the HHS Security Rule.
Please visit the HIPAA Security Rule NPRM and the HHS Fact Sheet for additional resources.
Listen to this post
Examining Group Health Coverage Alternatives for Small Employers
Small employers have long struggled to offer comprehensive major medical coverage to their workers and families, mainly due to underwriting hurdles. Groups with fewer than 50 employees are often confined to state small group market plans, which can be costly. Even slightly larger groups, underwritten based on their own claims history, still face a significant lack of transparency. As a result, many of these employers are exploring alternative solutions, such as association-style plans, group medical stop-loss arrangements, level-funded products, and individual coverage Health Reimbursement Arrangements.
This Special Report delves into the challenges small employers face and the various options they can consider to provide group health coverage.
Access the report.
This Week in 340B: February 18 – 24, 2025
Find this week’s updates on 340B litigation to help you stay in the know on how 340B cases are developing across the country. Each week we comb through the dockets of more than 50 340B cases to provide you with a quick summary of relevant updates from the prior week in this industry-shaping body of litigation.
Issues at Stake: Contract Pharmacy; HRSA Audit Process; Rebate Model; Other
In one Health Resources and Services Administration (HRSA) audit process case, the government filed a memorandum in support of the government’s motion to dismiss.
In a case by a drug manufacture challenging a state law, the government filed a motion for judgment on the pleadings and the parties filed a joint motion for an amended protective order.In a Freedom of Information Act (FOIA) case, the government filed a response to a motion to strike the government’s motion for summary judgment.In a suit by a 340B covered entity against HRSA, the covered entity filed a notice of voluntary dismissal without prejudice.
In an appealed case challenging a proposed state law governing contract pharmacy arrangements, the appellees filed their opening brief.
A 340B covered entity filed a complaint against HRSA to challenge HRSA’s decision to allow a manufacturer’s audit.
In five cases against HRSA alleging that HRSA unlawfully refused to approve drug manufacturers’ proposed rebate models:
In four such cases, drug manufacturers filed a joint opposition to a motion to intervene and the intervenors filed a reply in support of their motion to intervene.
In one such case, the intervenors filed a reply in support of their motion to intervene.
In one such case, the plaintiff filed a motion for summary judgment.
Nadine Tejadilla also contributed to this article.
New Challenges Loom for OSHA and OSHRC Amid Quorum Issues, Potential ALJ Removals, and Recent Supreme Court Jurisprudence
“The Times They Are a-Changin’” isn’t just a Bob Dylan song title—it is also a fairly accurate description of what has been happening in the arena of the Occupational Safety and Health Administration (OSHA) and the Occupational Safety and Health Review Commission (OSHRC) since early 2023.
Quick Hits
OSHRC, an independent federal agency that resolves disputes between employers and OSHA, has lacked a quorum on its three-person panel since April 2023, leaving pending cases unresolved. The current term of the Review Commission’s only member expires on April 27, 2025.
The Supreme Court’s Loper Bright Enterprises v. Raimondo and SEC v. Jarkesy decisions regarding administrative agencies’ statutory interpretations and adjudication processes may impact OSHA enforcement and OSHRC adjudicative procedures.
The Office of the Solicitor General recently announced that it would no longer defend certain protections for administrative law judges. This position could create opportunities for employers to challenge the authority of OSHRC ALJs.
Background on OSHRC
OSHRC is an independent agency that reviews and resolves disputes between employers and OSHA. OSHRC was created by Section 12 of the Occupational Safety and Health Act of 1970 (OSH Act). It is a three-person panel that requires two members to have a quorum. Without a quorum, OSHRC cannot act, though a quorum is not required to select a case for review.
OSHRC’s members are appointed by the president, subject to the advice and consent of the U.S. Senate. A contest of a citation is heard by one of OSHRC’s administrative law judges (ALJs). The ALJ’s decision becomes final within thirty days unless an OSHRC commissioner designates the case to be heard at the Commission level. If the case is not so designated, the employer can seek further review in one of the federal courts of appeal.
Since April 2023, OSHRC has not had a quorum, and as a result, the thirty cases pending review have remained in limbo—some for as long as four years. Until it has a quorum, those cases will remain in their current status without adjudication. The term for the one remaining member of OSHRC, Cynthia L. Attwood, expires on April 27, 2025.
Recent Supreme Court Jurisprudence Related to Administrative Agency Authority
At the end of the Supreme Court of the United States’ 2023–2024 term, the Court issued decisions in Loper Bright Enterprises v. Raimondo and SEC v. Jarkesy that significantly altered the landscape associated with administrative actions, including OSHA citations and subsequent litigation.
Loper Bright reversed decades of so-called Chevron deference to federal administrative agencies’ interpretations of ambiguous statutes, and Loper Bright’s reasoning can reasonably be expected to form the basis for challenges to OSHA’s application of Section 5(a)(1) of the OSH Act, also known as the General Duty Clause, among other applications. Jarkesy related to the constitutionality of the process for adjudication of administrative matters by the SEC and is proving to be the basis of a number of challenges to various administrative adjudicative bodies function, including the manner in which OSHA citations are adjudicated. One such example is Judge Sim Lake’s order enjoining the adjudication of citations by OSHRC ALJs.
The DOJ Weighs In on ALJs
In what appears to be an opening for even further challenges, on February 20, 2025, the U.S Department of Justice’s (DOJ) Office of the Solicitor General issued correspondence to Senator Charles E. Grassley (R-IA) concerning multilayer restrictions on the removal of administrative judges.
In that correspondence, Acting Solicitor General Sarah M. Harris stated that “the Department of Justice has concluded that the multiple layers of removal restrictions for administrative law judges (ALJs) in 5 U.S.C. 1202(d) and 7521(a) violate the Constitution, that the Department will no longer defend them in court, and that the Department has taken that position in ongoing litigation” (referencing a matter pending in the Third Circuit Court of Appeals).
The letter continued, stating:
In Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010), the Supreme Court determined that granting “multilayer protection from removal” to executive officers “is contrary to Article II’s vesting of the executive power in the President.” Id. at 484. The President may not “be restricted in his ability to remove a principal [executive] officer, who is in turn restricted in his ability to remove an inferior [executive] officer.” Ibid.
A federal statute provides that a federal agency may remove an ALJ “only for good cause established and determined by the Merit Systems Protection Board on the record after opportunity for hearing before the Board.” 5 U.S.C. 7521(a). Another statute provides that a member of the Board “may be removed by the President only for inefficiency, neglect of duty, or malfeasance in office.” 5 U.S.C. 1202(d). Consistent with the Supreme Court’s decision in Free Enterprise Fund, the Department has determined that those statutory provisions violate Article II by restricting the President’s ability to remove principal executive officers, who are in turn restricted in their ability to remove inferior executive officers.
Looking Ahead
Clearly, the new position espoused by the Office of the Solicitor General creates new opportunities for employers facing OSHA citations to challenge the process by which those citations are adjudicated. Most narrowly interpreted, this changed position offers employers an opportunity to challenge the ALJs appointed to hear their cases as being unconstitutional due to the multiple layers of protection afforded them. On a broader scale, this new position might give employers the opportunity to challenge the entirety of the OSH Act, or at least Section 12.
Whatever path employers take, it seems a near certainty that OSHA and employers will face a whole new world in the near future when it comes to their interactions and any issued or pending citations.