OHCA Basics: Cost Growth Target - Health Access
Why California Created a Health Care Cost Growth Program Over the past two decades, health care costs have risen faster than wages and household income in California. From 2002 to 2021, medical costs grew by 163% per person, while wages only grew by 69% and household income by 72%. i This made health care increasingly unaffordable, […]
Why California Created a Health Care Cost Growth ProgramOver the past two decades, health care costs have risen faster than wages and household income in California. From 2002 to 2021, medical costs grew by 163% per person, while wages only grew by 69% and household income by 72%. iThis made health care increasingly unaffordable, especially for those with employer-based or individual market plans. The primary driver of the rising health costs is the steady increase in the prices charged by hospitals and physician organizations, and these increases aren’t associated with improved quality or efficiency. iiWhen hospitals and physician organizations charge more, those costs get directly passed on to consumers as higher insurance premiums, deductibles, and other out of pocket costs. California had no guardrails to prevent disproportionate cost growth; hospitals and health systems have been able to raise prices substantially while maintaining profit margins that exceeded those of major corporations such as Delta Air Lines, Disney, or Target. iiiRecognizing that unchecked price growth was creating a health care affordability crisis, and following years of negotiation between the state Legislature, the Administration, and health care stakeholders such as Health Access, the Office of Health Care Affordability (OHCA) was created in 2022 to slow the growth of health care costs without impacting quality. Figure 1. Cost Growth Target Would Cut Premium Growth Nearly in HalfWhat is a Cost Growth Target?The cost growth target sets a limit to how quickly health plans, provider organizations and hospitals can increase spending per year. After hearing from both health consumer groups and the health care industry, the board that oversees OHCA set a statewide growth rate at 3. 5% for 2025 that will gradually decrease to 3. 0% by 2029. The first enforceable year is 2026. The target measures the total dollars a health care entity spends on patient care, including payments made by health plans and insurers, payments made by members and administrative costs and profits. This creates a consistent measurement to assess whether spending is increasing at a rate above Californians’ household income. Table 1. What is Included in the Spending Growth Target?Total Per-Person Health Care SpendingSpending on Medical CareHealth Plan Administrative Costs and ProfitsPayments for hospital care, physician services, and prescription drugsivPatient out-of-pocket costsHealth plan administrative costsHealth plan profitsThe cost growth target applies to all major parts of the health care systems: health plans, insurers, medical groups, and hospital systems. It sets a limit on how fast their total spending on patient care can grow each year. Hospitals are a major focus because they make up the single largest share of health care spending, and many have enough negotiating power to demand higher payments from health plans. Because of their outsized role in overall spending, the Board set a 3. 5% growth limit for all hospitals, with a lower limit for seven high-cost hospitals that already have very high spending. OHCA analyzes the total dollars spent by the health care system on patient care to see whether its spending is growing faster than the target. How Do Cost Growth Targets Lower Costs for Consumers?Slowing the growth rate of health care spending helps keep premiums, deductibles, and medical bills from rising quicker than Californians’ wages. This flattens out the steep increases in health care costs, making care more affordable for families, employers, and the state over time. Health care entities have flexibility in how they meet the target. Right now, total health care spending is rising at a rate of 6%. Medical costs make up 80% of insurance premiums, so limiting cost growth to 3. 5%—including for hospitals and physician groups—will put downward pressure on the rising costs of premiums, deductibles and copays for consumers. How Did OHCA Choose the 3–3. 5% Cost Growth Target?It took the OHCA Board more than a year of public deliberation to set the cost growth target. Throughout the process, the OHCA Board considered academic findings, national best practices, and input from hundreds of stakeholders before setting the target—all in public meetings consistent with the Bagley-Keene Open Meetings law. To make sure the target reflects what consumers can afford, the OHCA Board tied the target to the median household income growth over the last 20 years. Health care spending has been rising faster than what people earn, so linking the two ensures that spending doesn’t continue to take up larger shares of consumers’ budgets. OHCA did not use inflation or GDP because those measures don’t reflect affordability. Inflation analyzes prices of goods like food and housing, and GDP measures the overall economy, neither of those explain whether families can keep up with rising health care costs. v,viHousehold income is a direct measure of what consumers can actually pay. Eventually, under this new target, health care costs will align with what consumers can actually afford. How Does California Compare to Other States?Eight states now have a program that addresses health care cost growth. Massachusetts was the first to develop a target program in 2012 and has seen initial improvements in cost containment and quality. However, success has decreased over time due to weak enforcement provisions. viiCalifornia has learned from other programs and has developed stronger enforcement provisions, including administrative penalties that are commensurate with an entity’s failure to meet the target. Other states found that focusing too narrowly on individual services or payer segments does not allow the program to understand the real drivers of the cost growth. California built on these lessons and developed a cost growth target program which, for hospitals, measures the combination of inpatient and outpatient services of hospital spending, and for insurers and health plans, measures spending separately for Medicare, Medi-Cal/Medicare and Commercial. OHCA places California as a national leader in its efforts to contain health care cost growth and reduce wasteful spending. By setting a target aligned with consumers’ household income, the program slows the growth of medical costs that continue to drive up premiums, deductibles and out-of-pocket costs. This will ultimately stabilize premiums for Californians. EndnotesLucia, L. , Dietz, M. , Challenor, T. (2023, September 9). What Can We Afford? Aligning Office of Health Care Affordability spending target with Californians’ ability to afford 24 increases. UC Berkeley Labor CenterCalifornia Health Care Foundation and RAND Corporation. (2020, January 22). Getting to Affordability: Spending Trends and Waste in California’s Health Care System. U. S. House Committee on Ways and Means. (2024, May 23). Full Committee Hearing with Health System CEOs. Includes administrative costs and profits for health care providers. Department of Health Care Access and Information. (2023, September 19). Health Care Affordability Board Meeting. Lucia, L. , Dietz, M. , Challenor, T. (2023, September 9). What Can We Afford? Aligning Office of Health Care Affordability spending target with Californians’ ability to afford increases. UC Berkeley Labor Center. Lipson, D. , Orfield, C. , Machta, R. , Kenney, O. , Ruane, K. , Wrobel, M. , & Gerovich, S. (2022, October). The Massachusetts health care cost growth benchmark and accountability mechanisms: stakeholder perspectives. Mathematica.