A new California rule tries to lower health care costs. Here’s how it works

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You won’t notice it right away, but a new California state agency took a major step this week in curbing seemingly out-of-control health care costs.

The Office of Health Care Affordability approved states’ first cap on health care spending increases, capping growth at 3 percent by 2029. That means hospitals, doctors and insurers health will have to find ways to cut costs to prevent annual per capita spending from exceeding the goal Between 2015 and 2020, per capita health care spending in California grew by more than 5% each year, according to federal data.

A board appointed by Gov. Gavin Newsom and the Legislature approved the new regulations on a 6-1 vote Wednesday.

Health and Human Services Secretary Dr. Mark Ghaly, who chairs the board, said the regulations recognize that Californians struggle every day to pay for health care and that the state has a role to play in helping them.

We have a place to make sure it’s more affordable, Ghaly said.

Hospitals, doctors and insurers fought the regulations for months, arguing that rising inflation and labor costs would make the goal impossible to achieve. An earlier proposal would have been more aggressive in containing costs. The final version gives the industry time to control spending.

Ghaly said he is confident that health care leaders will be able to find solutions to meet the new goal. When that happens, it will be great for Californians.

How it works?

Rising health care spending often translates into higher out-of-pocket costs for consumers in the form of premiums, deductibles and co-pays. The annual spending benchmark would require health care providers to limit spending growth to 3.5% next year, declining to 3% in 2029. Providers, including hospitals, physician groups and health insurers they will have to submit spending data to the state to show they are complying. with the cap

The affordability office also has authority to enforce sanctions, including performance improvement plans and fines, on organizations that exceed the benchmark. It will not apply sanctions until 2029.

Rep. Jim Wood, a Ukiah Democrat, at the meeting urged the board to send a clear message to Californians that the state takes accessibility seriously. Wood spearheaded the legislation that created the office in 2022.

It’s not an exaggeration to say that people are deciding whether to put food on the table or get their medicine, Wood said. This is not an exercise. This is an effort to impact the real life experiences of the people of California.

How will providers reduce healthcare costs?

Ultimately, it depends on the healthcare organizations.

The board expects healthcare organizations to crack down on inefficient and wasteful healthcare spending, such as administrative inefficiency and redundant or poorly coordinated testing. But he doesn’t want to discourage spending on primary care and behavioral health. The Office of Affordability will monitor spending in these areas to ensure that organizations do not reduce services or access to preventive care.

Will Californians See Cheaper Health Care?

Yes, but you might not like it.

The growth cap is not a mandate for suppliers to lower prices. Californians won’t pay less for health insurance next year than they did this year. For those who can no longer afford health care — some estimates put the number at more than 50 percent of Californians — the cap won’t bring any immediate relief.

The purpose of the cap is to prevent future prices from rising out of control. This year, health insurance premiums on the states’ Affordable Care Act Exchange rose an average of 9.6% statewide with double-digit increases in many regions. Personal health spending soared 60% between 2010 and 2020, reaching $405 billion, according to federal data. That’s $10,299 per person. Household health care spending has also grown twice as fast as wages, according to the Kaiser Family Foundation.

In an effort to recognize how many Californians cannot afford health care, the affordability office tied the cap to average annual growth in household income, which has historically been about 3 percent over the past two decades.

Will California succeed?

California is not the first state to try to reduce health care costs. Eight other states have similar cost benchmarks, though California is one of the more aggressive targets.

Massachusetts, the first state to set a health spending benchmark, has largely met its target growth rate of 3.6% over the past 10 years.

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