California’s cap on health care costs is the nation’s strongest. But will patients notice?
CalMatters
Vickie Villegas had to pay $3,000 out-of-pocket every time she was treated for multiple sclerosis, a disease that attacks the central nervous system. Her doctor recommended she get treatments twice a year to keep the disease from worsening, but she couldn’t afford it, the Pasadena-area resident said.
“I just couldn’t keep up,” Villegas said. Her disease progressed, and she lost use of her left hand.
When an infection landed Estevan Rodriguez-Hernandez in the hospital for a week in 2020, his bill totaled more than $167,000. After insurance, Rodriguez-Hernandez owed $5,600, but the COVID-19 pandemic prevented him from working.
“I remember seeing that bill, and I talked to my mom and was like ‘I’m gonna go bankrupt,’” Rodriguez-Hernandez, who lives near Monterey, said.
Villegas’ and Rodrigeuz-Hernandez’ stories are all too common in California, where the average cost of health care is the third highest in the nation.
California is moving to address their needs with a new cap on health care cost increases that experts consider to be the most aggressive in the nation. The cap does not mean that bills that patients such as Villegas and Rodrigeuz-Hernandez are charged would go down. It aims to limit how much consumers pay over time by first constraining how much the health care industry spends. Research suggests up to 30% of health spending is wasted on overtreatment and administrative inefficiencies.
By 2029, California hospitals, doctors and insurers cannot increase spending by more than 3% annually. This means they will need to find ways to cut costs to keep from exceeding the target. If they do exceed it, state regulators with the Office of Health Care Affordability have the authority to levy fines and other penalties “commensurate with the failure of the health care entity to meet the target,” according to state law. The law also has guardrails preventing health care entities from saving money by reducing services.
The cap, which was set in April, is modeled on the work of eight other states, including Massachusetts, that have tried to curtail runaway health spending. California went further by allowing the state to compel public testimony from health care facilities, require performance improvement plans and impose unlimited financial penalties on businesses that exceed the cost cap.
Massachusetts, by contrast, has ordered just one performance improvement plan and it has not levied a fine on any health care provider since it created its own cost control target in 2012. It also has the ability to fine facilities that spend too much, but regulators there say penalties are too small to be meaningful. Health insurance premiums there have climbed 43%, outpacing wage growth over nine years.
“We felt like you need a stick. You need something to say ‘We’re serious. We’re going to set these targets, and you’re going to meet them,’” said Assemblymember Jim Wood, a Democrat from Ukiah who wrote the law that created California’s affordability board and spending cap.
State officials say the tougher approach could help patients see real savings. Last month, the Office of Health Care Affordability met in Monterey County, one of the most expensive health care markets in the state, to discuss affordability challenges.
“What happens in Monterey has ripples,” Dr. Mark Ghaly, California’s outgoing secretary of Health and Human Services, said at the meeting where board members discussed regulatory options for addressing market failures.
The state’s hospital and doctors lobbies opposed the cost control cap, saying it was unreasonable given inflation spikes over the past two years. They pushed for a higher benchmark, but the board held to 3.5% next year, which would ramp down to 3% by 2029. That number, board members said, reflects the average growth of median household income over the past 20 years, tying it directly to the consumer experience.
California Medical Association President Dr. Tanya Spirtos wrote in a letter to the board that “most physician practices and health care entities” will not meet the target, and that patient care would suffer.
Rodriguez-Hernandez, who faced the steep medical bill from his infection, spoke to the board last month and urged it to be tough with the industry. He works part time as a bartender in Monterey and part time as a community health advocate. He blew through his savings to pay rent and relied on a food bank for a time to cut costs after his hospital stay. It took him two years to pay off his medical bill. Today, he doesn’t have insurance.
Is it working in other states?
Much like California, Massachusetts is known for its world-class health care system bolstered by academic research centers. In 2012 it was also one of the most expensive places in the country to get care. Health advocates and lawmakers wanted to do something to make it more affordable.
“It can’t be that health care just has a blank check to grow as fast as it wants because we’re all paying for that, and the result is that more people then can’t afford to get the care that they need,” said David Seltz, executive director of the Massachusetts Health Policy Commission.
Lawmakers there came up with a strategy to rein in costs. They established the Health Policy Commission, which would set a growth target for the industry and publicize its progress. Initially it set a target of 3.6% annual growth rate. In the first five years, commercial spending on health care was estimated to be $7 billion less than it would have been without the regulations, according to an analysis by the Commonwealth Fund. Other states modeled their own health care cost control measures on the one in Massachusetts.
“That sentinel effect, that watchdog effect I do believe has changed market behavior,” Seltz said. “Is that enough? No.”
Consumers are still experiencing unaffordable cost increases, said Alex Sheff, senior director of policy and government relations at Health Care For All Massachusetts, a consumer advocacy organization.
The most recent annual report from the Health Policy Commission reveals spending on private health insurance outpaced general inflation and wage growth in 2021. For a family of four, out-of-pocket cost of deductibles, copays and premiums averaged $25,000. Nearly 43% of Massachusetts residents with private insurance are enrolled in high-deductible health plans, more than double the proportion enrolled 10 years ago when the state first started tackling costs.
Increasing prices, rather than greater health care usage, are the primary driver of spending increases, according to the report. Since 2017, total health care expenditures per capita have regularly exceeded the benchmark set by the state commission.
“When you see premiums continuing to grow at a faster rate and often at the same time out of pocket costs are going up…it suggests that consumers are not benefiting from all of the savings that the benchmark might be creating,” Sheff said.
Massachusetts needs more regulatory oversight and stricter penalties, Sheff said. Only one hospital has been reprimanded for excessive spending in the commission’s 12-year history, and the maximum fine that can be levied is $500,000, an amount Seltz characterized as “not a significant deterrent given the size and scale of these organizations.”
California, they say, has set itself up for more success in that regard.
Spending trends in California
Despite near universal health insurance coverage in California, more than half of residents still struggle to afford health care services, according to the California Health Care Foundation ’s most recent state survey. The reality of what that looks like has made its way directly to the state’s new affordability board.
Monterey County, in particular, has come under board scrutiny for unaffordable prices. For months, working-class families from Monterey have trekked to board meetings in Sacramento to decry the high cost of health care. Some employers pay for workers to see doctors outside of the county because it’s cheaper. Meanwhile, people like Rodriguez-Hernandez are plagued by the stress of medical debt.
“For people like us, $5,000 is a lot. A lot of working class people, we don’t have savings,” Rodriguez-Hernandez said.
Local advocacy efforts prompted the affordability board to conduct a review of the region and hold its most recent meeting on the peninsula.
Prices for the three primary hospitals in the county — Community Hospital of the Monterey Peninsula, Salinas Valley Memorial Hospital, and Natividad Medical Center — are substantially higher than the state average and average prices for Bay Area hospitals, according to a presentation from Christopher Whaley, a national expert on hospital pricing.
According to Covered California data, the average annual premium increase for plans in the region has exceeded 10% since the state implemented the Affordable Care Act marketplace. At the same time, the region tends to be healthier than most other areas of the state. Representatives from the California Public Employees’ Retirement System, which provides health insurance to about 1.5 million people, also told the board that high prices did not improve quality.
At least one hospital in Monterey has committed to reducing costs as a result of the public scrutiny. Montage Health, the parent company of Community Hospital of the Monterey Peninsula, said it would look for $50 million in cost reductions over the next two years.
“Montage Health is committed to continuing to work on ways to create efficiencies in care to improve affordability, while maintaining access to high-quality, local care for our community,” said Mindy Maschmeyer, director of marketing and communications for Montage Health, in a statement.
Natividad, the county’s safety net hospital, said in a statement that its services are “available to everyone every day, especially the vulnerable and underserved, regardless of ability to pay.”
Assessing market failures is one of the responsibilities of the affordability board, although it was unclear whether the board will take further action in Monterey. Dr. Ghaly, board chair, said during the recent meeting that state regulators need to better understand why prices are so high in California without improvements in quality.
“What are we getting out of what we’re paying for? This is a key question Californians probably ask every time they open up their paycheck. What do those (health insurance) dollars pay for?” Ghaly said.
Villegas, whose family started a GoFundMe in order for her to get a stem cell transplant in 2021, said her multiple sclerosis is better these days. In 2017, when she was diagnosed, Villegas said she was the primary breadwinner for her family and chose to prioritize paying for their mortgage and kids’ schooling.
“I’ve managed getting through this the best I can, but I don’t think that’s true for everyone. (Cost) is limiting people from receiving adequate care,” Villegas said.
Though it may take years for Californians to notice the benchmark in their expenses, Assemblymember Wood said he believes it will lower costs.
“It isn’t business as usual anymore, and I think that is upsetting to entities who just kind of like the way they’ve been doing things,” Wood said.
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This story was originally published by CalMatters and distributed through a partnership with The Associated Press.
