The California Office of Health Care Affordability recently approved the country’s first state cap on health industry spending increases, with a growth limit of 3% by 2029. This means that the health care industry – including doctors, hospitals, and health insurance plans – will need to find ways to cut their costs to prevent the annual per capita spending from exceeding the limit. For reference, per capita health spending in California grew by more than 5% from 2015 to 2020.
The 3% cap will be phased in over 5 years, with a 3.5% increase in 2025, a 3.2% increase in 2027-2028, and the full 3% cap in 2029. The Office of Health Care Affordability will be responsible for enforcing the cap and has the ability to levy fines on non-compliant providers, though the Health Care Affordability Board has noted that the cap likely won’t be enforced until the end of the decade, according to the Associated Press.
Currently, the process is just at the beginning phases and regulators still need to determine how the cost target will be applied across various health care sectors. “We want to be aggressive,” Board Chair Dr. Mark Ghaly said, while acknowledging that the cap “really translates into a major challenge” for the health care industry.
While the health care industry has been relatively supportive of the cost target concept, stakeholders believe the 3% target is too low and will be difficult, if not impossible, to meet. The difficulty will only be increased by the fact that the Center for Medicare and Medicaid Services (CMS) said late last year that the cost to practice medicine in the United States would increase by 4.6% in 2024 alone.
The 3% figure was calculated based on the average annual change in median household income in the State of California from 2002 to 2022. Dr. Tanya W. Spirtos, president of the California Medical Association, notes in a letter to the board that particular number is “artificially low” because it includes the years of the Great Recession, when income dropped dramatically. She felt a better gauge would be looking at just the past 10 years, when median household income increased by an average of 4.1% per year.
Additionally, thought must go into the fact that some of what is charged is outside of the control of the medical providers, including salaries for health care workers, which are often set through collective bargaining agreements with labor unions and are subject to state minimum wage laws.
Carmela Coyle, president and CEO of the California Hospital Association, said when it comes to hospital finances, “the fat is already gone” and that “we’re fooling ourselves if we think [performing life-saving procedures is] cheap or can be done less expensively.”
It will be interesting to see if other states follow suit with similar caps and whether California is ultimately successful in lowering health care spending in the state with the implementation of the 3% cap.