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.
Ana B. Ibarra, CalMatters
