California Regulators Just Approved New Rule to Cap Health Care Costs. Here's How It Works

You won’t notice it right away, but a new California state agency took a major step this week toward reining in the seemingly uncontrollable costs of health care.

The Office of Health Care Affordability approved the state’s first cap on health industry spending increases, limiting growth to 3% by 2029. This means that hospitals, doctors and health insurers will need to find ways to cut costs to prevent annual per capita spending from exceeding the target. Between 2015 and 2020, per capita health spending in California grew more than 5% each year, according to federal data.

A board appointed by Gov. Gavin Newsom and the Legislature on Wednesday approved the new regulations in a 6–1 vote.

Health and Human Services Secretary Dr. Mark Ghaly, who chairs the board, said the regulations recognize that Californians are struggling every day to pay for health care and that the state has a role in helping them.

“We have a place in making sure it becomes more affordable,” Ghaly said.

Hospitals, doctors and insurers battled over the regulations for months, arguing that rising inflation and labor costs would make the target impossible to achieve. An earlier proposal would have moved more aggressively to cap costs. The final version gives the industry time to rein in spending.

Ghaly said he is confident that health care industry leaders will be able to find solutions to meet the new target. “When that happens, it’s going to be great for Californians.”

How does it work?

Increased health spending most often translates to higher out-of-pocket costs for consumers through premiums, deductibles and copays. The annual spending benchmark would require health care providers to limit spending growth to 3.5% next year, decreasing to 3% by 2029. Providers — including hospitals, doctors groups and health insurers — must submit spending data to the state to demonstrate that they comply with the cap.

The affordability office also has the authority to enforce penalties, including performance improvement plans and fines, for organizations that exceed the benchmark. It will not enforce penalties until 2029.

Assemblymember Jim Wood, a Democrat from Ukiah, at the meeting, urged the board to send a clear message to Californians that the state is taking affordability seriously. Wood spearheaded the legislation that created the office in 2022.

“It is not an exaggeration to say that people are deciding whether to get food on the table or get their medicines,” Wood said. “This is not an exercise. This is an effort to impact the real-life experiences of people in California.”

How will providers lower health care costs?

Ultimately, it’s up to the health care organizations.

The board hopes health care organizations will crack down on inefficient and wasteful health spending, such as administrative inefficiency and redundant or poorly coordinated testing. But it doesn’t want to discourage spending on primary care and behavioral health. The affordability office will monitor spending in those areas to ensure organizations do not reduce services or access to preventative care.

Will Californians see cheaper health care?

Yes, but it may not feel like it.

The growth cap is not a mandate for providers to lower prices. Californians will not pay less for health insurance next year than they did this year. For those who already can’t afford health care — some estimates peg that number at more than 50% of Californians — the cap won’t bring any immediate relief.

The goal of the cap is to prevent future prices from increasing uncontrollably. This year, health insurance premiums on the state’s Affordable Care Act Exchange increased by 9.6% statewide, with double-digit increases in many regions. Personal health care spending shot up 60% between 2010 and 2020, reaching $405 billion, according to federal data. That’s $10,299 per person. Household health spending has also grown twice as fast as wages, according to the Kaiser Family Foundation.

In an effort to recognize how many Californians can’t pay for health care, the affordability office tied the cap to the average annual median household income growth, which has historically been about 3% over the past two decades.

Will California succeed?

California is not the first state to try to lower health care costs. Eight other states have similar cost benchmarks, although California’s is one of the more aggressive targets.

Massachusetts, the first state to set a health spending benchmark, has largely met its target growth rate of 3.6% over the past 10 years.

However, in recent years, with the impact of the COVID-19 pandemic, states have found it harder to contain costs. Connecticut, Delaware and Massachusetts significantly surpassed their spending targets between 2020 and 2021 primarily because of increased health care use, according to a report by the policy journal Health Affairs.

Who opposed the spending cap?

Former state Sen. Dr. Richard Pan was the sole no-vote on the new regulations, arguing that the state needed to recognize how changing population needs, such as aging, would affect future health care spending.

Pan and groups representing hospitals and doctors have argued that the state should have set a more “realistic” target rather than one most organizations will fail to achieve.

In a letter to the board, the California Hospital Association proposed a 6.3% target for 2025 and urged state regulators to consider how inflation, aging and a new law that raises the state minimum wage for health care workers would drive up costs. Association President Carmela Coyle said in a statement after the vote that the new regulations will worsen access to care as organizations are forced to make cuts.

“The office is charged by law to do more than limit spending,” Coyle said. “It’s imperative that the board analyze the impact of its decision on patients and create a process to reconsider future targets to protect access to equitable, quality care for every Californian.”

The California Association of Health Plans, representing most insurers, and the California Medical Association, representing doctors, voiced support for the phased-in 3% target this week but have previously pushed the affordability office to consider other options.

“Adopting a 3% health care spending growth target, which most physician practices and health care entities will be unable to meet, will negatively impact access to health care for Californians,” medical association President Dr. Tanya Spirtos wrote ahead of the vote.

Who supported the health spending cap?

The new regulations are largely supported by unions, employers and consumer advocates. Supporters turned up in force at the vote to give examples of how housekeepers, bartenders, teachers, carpenters, nurses and other workers cannot afford health care even with insurance and frequently forgo raises to pay for ever-growing medical spending.

“Consumers, particularly people of color, are burdened by record medical debt and are making daily choices between health care, housing, and food,” said Kiran Savage-Sangwan, executive director of the California Pan-Ethnic Health Network, at the meeting. “If we want a different outcome, we need to change the incentives in our system.”

Anthony Wright, executive director of Health Access California, said the new spending target was “long-awaited, but welcome news for Californians.”

“California consumers, patients and payers have been screaming for years about the cost,” Wright said. “This will provide some downward pressure on what has been ever-increasing hikes in our health care 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.