How a new California agency aims to cap your health care costs

In summary

California’s new Office of Health Care Affordability has a mandate to control price increases. It’s proposing a target that’s among the most aggressive in America.

A new state office charged with controlling the rising cost of health care in California is moving toward one of the most aggressive goals in the nation, aiming to cap cost increases to 3% a year.

You might not notice right away if the Office of Health Care Affordability commits to the tentative goal it released last month and takes steps to enforce it. But, over time, experts say the cap on price increases could make a difference in how much Californians pay for health care.

“A 3.0% target places California on the path of a more sustainable, affordable, and equitable health care system, slowing the trajectory of growth and improving affordability for all,” the office wrote in its recommendation. 

The agency’s announcement immediately drew criticism from health care industry representatives who called it “unrealistic” and “arbitrary.” They contend it could harm patients by reducing access to care if health providers watching their spending end up reducing services.

Meanwhile, consumer advocates and health economists characterized it as a good first step in the state’s effort to control costs.

Gov. Gavin Newsom established the office through a provision in the 2022 state budget. Its job is to collect health expenditure data from providers and insurers, analyze it and set limits on spending for the industry.

Eight other states have cost benchmarks. At 3%, California’s would be one of the more stringent caps — third only to Connecticut and Nevada.

California’s proposed target would allow health care prices and spending to increase, but at a slower rate than in recent years. Between 2015 and 2020, per capita health spending grew each year an average of 5.2%, outpacing wages, according to the Office of Health Care Affordability.

Health spending in California reached $405 billion in 2020 — that’s $10,299 per person, according to federal data. This includes what private insurers, public programs and individuals pay for direct services and goods, such as hospital and physician care, prescription drugs and medical devices. It does not include the administrative costs of insurance or public health funding. 

The office plans to roll out one statewide cap but may eventually create regional and sector-specific targets. Officials said they came up with the 3% figure because that is how much the annual median household income has changed on average over the last 20 years. 

“Most importantly, tying to historical median household income growth signals that health care spending should not grow faster than the income of California families,” Vishaal Pegany, deputy director of the Office of Health Care Affordability, said during the most recent board meeting. 

Providers and entities that fail to meet the proposed benchmark could have to make improvements or face financial penalties. They would not be punished in the program’s first year.

The state’s health care affordability board is scheduled to continue discussions this month and has until June 1 to approve a cost target that would go into effect in 2025 and last through 2029. 

No instant savings on health care costs

Many Californians are struggling with health care costs. Four in 10 Californians have medical debt, according to the California Health Care Foundation.

Data show that people are spending more of their income on health care. A recently published study by the UC Berkeley Labor Center found that costs like deductibles are becoming more common. In 2002, 33% of private sector workers enrolled in coverage through their job had a deductible. By 2022, 77% of workers did. 

The size of those deductibles has grown exponentially. Between 2002 and 2022, deductibles for a single person plan grew 380%, or an average of 8.7% every year, researchers found. Deductibles for family plans grew 332%, or 7.8% annually.

Consumers will probably not feel a difference immediately because the state’s plan is to slow the growth of health spending and not necessarily reduce it.

But over time, it could make a difference. Glenn Melnick, a health economist at the University of Southern California, gives this example: “If I have to pay 25% of my (health insurance) premium, let’s say I get it from work, if my premium goes up more slowly, my contribution will be less.”

“What if this target had been in place for the last 10 years?” he said. 

California providers criticize cap

Representatives for hospitals and doctors caution that basing the spending cap solely on household income rather than taking into account what it costs them to provide care could result in less access and poorer quality of care for patients. 

They argue the proposed cap doesn’t take into account things providers have no control over, such as general inflation, rising pharmaceutical costs and natural increases in spending driven by the state’s aging population. 

“[The office’s] proposed target entirely ignores the drivers of health care spending. In doing so, it would force health care providers to significantly cut back on the care they provide or face penalties,” wrote Ben Johnson, vice president of policy at the California Hospital Association, in a letter to the board. 

Some industry representatives noted specific access issues, such as narrow provider networks and long wait times, are already a top concern for the public.  “A 3% target put in place for five years seems likely to result in wait times increasing,” Janice Rocco, chief of staff at the California Medical Association, said during the board’s recent meeting. 

Dr. Richard Pan, a Sacramento pediatrician and former state senator who sits on the health care affordability board, said that for the state’s plan to truly work, the office and board will have to nail down the methodology behind the spending target so that industry groups have confidence in it. 

“We still have some time; these things need to be thought out,” Pan said. “Not everyone has to agree, but it has to be credible to the people that have to implement it.”

Melnick of USC said the industry’s argument that a cost-growth target would harm health access and quality is already an issue with today’s spending levels.

“A lot of people put off care because they can’t afford it,” he said. “That’s an access and quality impact.”

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.

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