New California rule aims to limit health care cost increases to 3% annually

SACRAMENTO, California — California doctors, hospitals and health insurers will be limited to annual price increases of 3% starting in 2029 under a new rule that state regulators approved Wednesday in the latest effort to control the ever-rising costs of medical care in the United States.

The money Californians spend on health care has increased by about 5.4% every year for the past two decades. Democrats who control California’s government say that’s too much, especially since most people’s incomes rose only 3% each year over that same period.

The 3% cap, approved Wednesday by the Health Care Affordability Board, would be phased in over five years, starting with 3.5% in 2025. Board members said the cap likely wouldn’t be lifted until the end of this decade will be maintained.

A new state agency, the Office of Health Care Affordability, will collect data to enforce the rule. Providers who do not comply with this may be fined.

“We want to be aggressive,” said CEO Dr. Mark Ghaly, while acknowledging that the cap “really translates into a major challenge” for the health care industry.

The vote is just the beginning of the process. Regulators will later decide how the cost target will be applied across the state’s various health care sectors. And enforcement will be progressive, with several opportunities for providers to avoid fines.

California’s health care industry has supported the idea of ​​a statewide cost target, but argued that a 3% cap is too low and will be nearly impossible to meet. In December, the Center for Medicare and Medicaid Services said the cost of practicing medicine in the United States would rise 4.6% this year alone.

The board based the target on the average annual change in median household income in California between 2002 and 2022, which was 3%. Dr. Tanya W. Spirtos, president of the California Medical Association, which represents physicians, wrote a letter to the board noting that this number is “artificially low” because it includes the years of the Great Recession, when incomes fell dramatically. She said a better gauge would be to look at the past decade, when median household income rose an average of 4.1% per year.

Hospitals claim that much of what they charge is beyond their control. More than half of hospital costs are employee salaries, many of which are set through collective bargaining agreements with unions. Additionally, a new state law taking effect this year will gradually increase the minimum wage for health care workers to $25 per hour.

More than half of California’s 425 hospitals are losing money, and many rural facilities are at risk of closing — prompting the state Legislature to approve an emergency loan program last year.

Carmela Coyle, president and CEO of the California Hospital Association, said when it comes to hospital finances, “the fat is already gone.” She said hospitals regularly perform complex procedures that save lives, including quadruple bypass surgery.

“We are fooling ourselves if we think it is cheap or can be done cheaper,” she said.

According to the Centers for Medicare, healthcare spending in the United States has more than doubled over the past two decades, reaching $4.5 trillion in 2022. & Medicaid services. Eight other states have set statewide cost targets for their health care industries. What makes the limit different in California, experts say, is both the staggering size of the state’s health care industry and the plan to enforce the limit with fines.

Healthcare providers could exceed the limit if they have a good reason to do so, including giving health care workers raises. These issues remain to be worked out and will be considered on a case-by-case basis.

California has dramatically expanded access to health insurance in recent years, including using taxpayer dollars to offer deep discounts to some middle-income earners and providing free coverage to all low-income adults regardless of immigration status. State lawmakers have resisted more ambitious measures, including a single-payer system.

“Making quality health care affordable is a top priority for our government,” Democratic Gov. Gavin Newsom said in a statement from his office. “This action is a critical first step forward in our efforts to control the excessive costs of health care and make health care more affordable.”

Wednesday’s vote was the state’s first attempt to address California’s health care spending, which reached $405 billion in 2020, or $10,299 per person — the 22nd highest in the country. Yet the costs for people who take out health insurance through their work have risen enormously. In 2006, only 6% of California workers had a deductible of $1,000 or more. In 2020 this was 54%.

“We currently have a system where the incentives are not about getting the most cost-efficient service,” said Anthony Wright, executive director of Health Access California, which advised the board on the new cost cap. “This is an attempt to get that incentive in a market that is more about getting bigger than getting better.”