This piece is part of a series highlighting Commercial Sector Prices policy wins in the states. Read the first, about Colorado, here.
At a Glance
California passed legislation creating a new Office of Health Care Affordability (OHCA) that will be charged with setting and enforcing targets for health care cost growth in the state. California joins a group of states already using cost growth benchmarks — a cost-containment strategy that limits how much a state’s health care spending can grow each year.
California’s approach is the most comprehensive to date. A key feature of the law is its strong enforcement mechanism: If doctors and hospitals exceed the benchmark OHCA sets, OHCA has the authority and discretion to levy penalty fines commensurate with the amount providers exceeded by. In other words, the state could require doctors and hospitals to pay back all amounts in excess of the benchmark.
Why it Matters
California’s approach to health care cost containment builds on the model Massachusetts implemented over a decade ago. Since then, eight other states have implemented cost growth benchmarks, but only one state has held a hospital accountable for significantly contributing to high state-wide costs to date (Massachusetts). Last year, Oregon was the first state to add financial penalties for non-adherence to their cost growth benchmark law, which was the strongest enforcement mechanism for a cost growth benchmark at the time. Building off of that, California’s model uses even stricter financial penalties.
One of the other key features is California’s ability to set multiple benchmarks tailored to different regions and health care sectors. This powerful tool will establish a clearer picture of the doctors, hospitals, health care sectors, or geographic regions that are specifically driving cost growth in the state. With an increased ability to track cost growth at these different levels, OHCA will be better equipped to hold entities accountable. California can also use this tool to advance health equity. Because California is such a large and diverse state, a one-size fits-all approach to per capita cost growth leaves opportunities on the table to tailor metrics to the range of markets within the state and could expose struggling health care entities, like rural or safety net providers, to unintended consequences.
All of this is a great example of how states are building off of each other — California from Oregon, Oregon from Massachusetts.
As health care costs continue to grow, so too does support for policies aimed at addressing excessive commercial prices. Labor, employers, consumers, and health insurance plans all came together to support the California OHCA legislation, and each partner was critical to successful passage. California’s coalition demonstrates the broad and diverse support backing policies to lower prices.
On the Ground
The prices paid to health care providers, like hospitals, are the leading driver of health care costs for commercial insurance. Six of the top 10 highest-priced health systems in the United States operate in California. On average, commercial prices in California are 285% of Medicare, with some hospitals charging 450% more than what Medicare pays for the same service. These high prices show up in higher premiums paid by consumers and businesses and higher out-of-pocket costs for patients.
Policymakers are now in the planning stage for standing up the OHCA. The OHCA governing board will be comprised of appointed experts; industry representatives and entities subject to the benchmark (health insurers and providers, respectively) cannot serve on the board. The specific mechanism that the OHCA will use to collect penalty funds and return those excess costs to consumers and purchasers is still being determined.
The Work Ahead
California’s policy limits the growth of costs, so the new law will not lower prices that are already excessively high — it will only limit their growth going forward. Enforcing benchmark-style policies has been a challenge for the other states using them, which has limited how well they are able to slow cost growth. California’s strict financial penalties could help the state avoid this enforcement issue. How the state decides to implement this law will be critical for determining how effective it is.
- Enforcement is key to whether policies aimed at containing high health care costs and limiting excessive provider prices are effective.
- States continue to experiment with policies that address health care costs by building on and strengthening the policies adopted by other states. These efforts and the lessons learned can also help inform future federal efforts for addressing rising health care costs.
- There is broad and diverse stakeholder support for this type of policy — patients, large employers, small business owners, labor, plans, and even some providers reached agreement and supported this approach.