California health officials have taken a major step toward reining in medical costs, giving a state watchdog agency new authority to fine hospitals, physician groups and insurers that blow past spending limits designed to keep health care within reach for ordinary residents.
The California Office of Health Care Affordability, created four years ago as prices for medical care continued to outpace wage growth statewide, saw its governing board approve a penalty structure last week that ranks among the toughest of its kind in the nation.
Under the new rules, providers that exceed the state’s spending growth cap could be required to pay as much as 125% of the amount by which they went over. The current cap limits annual spending growth to 3.5%, a figure that will tighten to 3% by 2029. A handful of hospitals labeled “high cost” by the state face even tougher limits — currently 1.8%, dropping to 1.6% within a few years.
The stakes are significant given recent trends. Over the past decade, health care spending in California has climbed by an average of 6% annually, nearly double what the new caps will eventually allow.
Fines won’t hit until at least 2028, and the office plans to release detailed enforcement guidelines this October. State officials stress that financial penalties are meant to be a last resort. Hospitals or health plans that miss their targets will first receive technical assistance and be placed on a performance improvement plan; fines only kick in if they fail to follow through on that plan. Regulators have discretion to set penalties anywhere between zero and the full 125% cap, depending on the circumstances.
“The hope is that by imposing these penalties… we’ll begin to reduce the rate of growth of spending on healthcare to make it more affordable for Californians,” said Stephen Shortell, professor emeritus at UC Berkeley’s School of Public Health, who sits on the office’s advisory committee.
Pushback from hospitals
Hospital leaders have emerged as the fiercest critics of the plan, largely because the affordability office has zeroed in on hospitals as a prime target for savings. Hospital care represents roughly a third of all health spending nationwide.
Industry representatives argue that many of the costs driving up their budgets are largely outside their control. Barry Arbuckle, executive chairman of MemorialCare health system and another advisory committee member, pointed to labor costs, mandated seismic retrofitting construction, and skyrocketing drug prices as major cost drivers hospitals can’t simply cut.
“I’ve got drugs in my children’s hospital that are over $1 million a dose. Those are then passed through as hospital costs. So people think, ‘Oh, the hospital is really expensive.’ But the hospital has nothing to do with that drug cost,” Arbuckle said.
To illustrate his concern, Arbuckle ran Long Beach Memorial’s 2022-23 spending figures through the new penalty formula and calculated the hospital could have faced a fine of roughly $27 million had the rules already been in place. “That’s just beyond belief,” he said.
Hospital and insurance trade groups also object to how much latitude the office has been given, arguing the wide range between zero and 125% leaves too much uncertainty. They warn tighter spending limits could ultimately hurt the very patients the policy aims to help.
“Under the current growth targets, the primary way for hospitals to reduce costs is to reduce services and limit access,” Angus Cochran, chief of community support services at Washington Health in Fremont, told board members at last week’s meeting. Washington Health is among seven hospitals statewide that the office has designated as “high cost,” subjecting them to the strictest spending caps.
The California Hospital Association sued last year in an effort to block the caps altogether, arguing the state failed to verify that its cost targets wouldn’t compromise patient care or access to services, as required under the law establishing the office. The lawsuit also claims insurers have already begun basing reimbursement rates on the state’s spending targets rather than the actual cost of providing care. That case remains pending in San Francisco County Superior Court.
Hospitals are additionally seeking clearer guidance on how regulators will account for outside financial pressures — particularly an anticipated surge in uncompensated care as federal health care cuts take effect. Combined with state-level changes, those cuts are projected to nearly double California’s uninsured rate, a shift that could drive more people toward costly emergency room visits.
The California Association of Health Plans echoed similar worries, citing recent changes to a state tax levied on private insurers. “For this framework to succeed, it must distinguish between spending growth that can be addressed and spending growth driven by broader market and policy realities,” the group said in a statement. “Unfortunately, many critical questions were not answered, leaving great uncertainty and significant work ahead.”
A crisis demanding action
Despite the industry’s objections, board members say the severity of California’s affordability crisis leaves little room for delay.
Nearly 60% of Californians report skipping or postponing medical care because they simply can’t afford it, and roughly four in 10 residents carry some form of medical debt. Rising premiums are also prompting a growing number of people to drop health coverage entirely.
California isn’t alone in trying to rein in costs — seven other states have adopted similar spending benchmarks. But because most of those states don’t actually enforce their targets, research has found little evidence that the benchmarks have lowered hospital prices or insurance premiums.
“There has to be a penalty framework that is meaningful,” said Christine Eibner, a senior principal economist at the RAND Corporation. “If it’s too small or if it’s not enforced, then it wouldn’t be enough motivation.”
Even supporters caution that any relief for consumers will take time to materialize. Shortell predicted many hospitals will fall short of the new spending targets in the first year or two, with meaningful progress likely only after providers and regulators find ways to work together.
“This is getting from home plate to first base,” he said. “I would look to three or four years from now to begin to see this having some impact.”
For workers like Claudia Garcia, that timeline can’t come soon enough. Garcia, a San Francisco hotel employee and mother of two, has gone on strike over health coverage because her son’s severe asthma leaves the family with no choice but to keep paying for insurance, inhalers and medication refills.
Garcia is a member of Unite Here, the hospitality workers’ union, which has been among the loudest voices pushing for cost controls. Union leaders argue that rising health premiums eat directly into potential wage increases — a claim supported by research from the UC Berkeley Labor Center showing that as employers spend more on health benefits, they tend to spend less on raises.
“We should not have to fight every year just for our healthcare,” Garcia said, adding that she hopes state action on costs might eventually free her union to focus its bargaining power on higher pay instead.
Beth Capell, a lobbyist for the consumer advocacy group Health Access California, said the intent behind the penalties isn’t to punish hospitals that are already struggling financially.
“It is not our goal to bankrupt a small rural hospital,” Capell told board members. “But we are interested in penalties that will help to convince large, wealthy health systems and insurers that the state of California is serious about slowing the growth of healthcare costs.”
Original source: CalMatters
