This story was originally published by CalMatters. Sign up for their newsletters.
Year after year Californians watch their health bills increase faster than their wages — for some, to the point where care becomes unaffordable. Four years ago, the state created an office to curb that trend. Now, the California Office of Health Care Affordability is gaining new power to control costs.
Its board last week adopted penalties for hospitals, physician groups and insurers that exceed state spending caps — among the strictest in the country.
Under the approved framework, violators will pay up to 125% of the amount they spend over the limit. Currently the state caps annual spending growth at 3.5%, dropping to 3% in 2029. Certain hospitals deemed “high cost” face even stricter limits.
Over the last decade, health spending grew by an average of 6% a year.
The soonest hospitals can face fines is 2028. In October, the state will release enforcement guidelines.
State officials say the penalties are a last resort. Providers who miss spending targets will first get technical assistance and go through a performance improvement plan; fines apply only if they violate that plan. The framework gives the office discretion to set penalties anywhere from 0% to 125% of the overage, depending on individual 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 the UC Berkeley’s School of Public Health and a member of the office’s advisory committee.
Hospitals and others protest
Hospital executives are the most vocal critics. That’s because the Office of Health Care Affordability narrowed in on hospitals as “a high-impact area to improve efficiency and affordability.” Hospitals account for about a third of healthcare spending.
But hospitals say some of their spending is out of their hands. Barry Arbuckle, executive chairman at MemorialCare health system and a member of the office’s advisory committee, says hospitals have little control over costs related to labor, seismic related construction, and pharmaceuticals.
“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 told CalMatters.
Arbuckle ran Long Beach Memorial’s spending data for 2022-23 through the state’s penalty formula. Had the rules been in effect then, he estimated the hospital could have faced a $27 million fine. “That’s just beyond belief,” he said.
Industry groups also object to the amount of discretion the office has, calling the 0%-to-125% penalty range too broad. And they warn the caps could hurt patients.
“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, a hospital in Fremont, told board members last week.
Washington Health is one of seven hospitals deemed particularly “high cost” by the Office of Health Care Affordability. These hospitals have stricter annual growth limits – their spending growth is currently capped at 1.8%, dropping to 1.6% by 2029.
The California Hospital Association sued last year to block the spending caps. The association argued that the office “only focused on capping hospital spending, without ensuring its cost targets would not harm patients or the availability of hospital services,” as required by statute. In the lawsuit, hospitals say that health insurers began negotiating reimbursement rates based on the office’s spending cap rather than the actual cost of care. That suit is still pending in the San Francisco County Superior Court.
Hospitals are also asking for more clarity on how the office will weigh outside cost pressures, including a likely rise in uncompensated care for uninsured patients as federal healthcare cuts take effect. These cuts combined with state changes are projected to nearly double California’s uninsured rate — a shift that could push more people into emergency rooms.
The California Association of Health Plans, which represents insurers, raised similar concerns in a statement, pointing to recent changes in a tax the state charges private health plans.
“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.”
Getting serious about healthcare costs
Board members said the state’s affordability crisis demands urgent action.
Nearly 60% of Californians report skipping or delaying care because they can’t afford it, and four in 10 carry medical debt. Rising premiums are also pushing more people to drop their health plans altogether.
Eight other states have also adopted health spending benchmarks, but because most don’t enforce them, research shows that they have not made a difference in hospital prices or premiums.
“There has to be a penalty framework that is meaningful,” said Christine Eibner, a senior principal economist at the think tank RAND. “If it’s too small or if it’s not enforced, then it wouldn’t be enough motivation.”
Experts caution that relief will take time. Shortell said many hospitals likely won’t meet the state’s spending limits in the first year, with real progress emerging only when the state and industry adjust 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.”
Consumers are hungry for relief. Claudia Garcia, a San Francisco hotel worker and mother of two, has gone on strike over health insurance because she can’t go without it – her son has severe asthma, and needs his inhaler and medication refills.
Garcia belongs to Unite Here, the hotel and restaurant workers’ union. Unions have been a forceful voice for controlling health spending because these costs, they argue, eat into potential wage increases. That’s backed up by UC Berkeley Labor Center research, which shows that when employers spend more on premiums, they spend less on raises.
“We should not have to fight every year just for our healthcare,” Garcia said. She hopes that if the state can control health costs, maybe her union can pivot to fighting for higher pay.
Beth Capell, a lobbyist with the consumer advocacy group Health Access California, said the goal is not to punish struggling providers.
“It is not our goal to bankrupt a small rural hospital,” Capell told the board last week. “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.”
Supported by the California Health Care Foundation (CHCF), which works to ensure that people have access to the care they need, when they need it, at a price they can afford. Visit www.chcf.org to learn more.
