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California Approves First-in-the Nation Cap on Health Industry Spending Increases

The California Office of Health Care Affordability has instituted the nation's first state cap on health industry spending increases, aiming to limit annual growth to 3% by 2029. This regulation requires the health care industry, including doctors, hospitals, and insurance plans, to find ways to reduce costs to meet this cap. Historically, per capita health spending in California grew by over 5% from 2015 to 2020. The cap will be introduced gradually, starting with a 3.5% increase in 2025, 3.2% in 2027 and 2028, and finally reaching the 3% cap in 2029. The Office of Health Care Affordability will enforce the cap and can fine non-compliant providers, though enforcement is expected to start later in the decade. The initial phases of the cap's implementation involve regulators deciding how to apply the cost targets across different healthcare sectors. Board Chair Dr. Mark Ghaly acknowledged the significant challenge this cap presents, despite the health care industry's general support for cost control measures. However, industry stakeholders believe the 3% target is unreasonably low and difficult to achieve, especially considering the Center for Medicare and Medicaid Services (CMS) projects a 4.6% increase in the cost to practice medicine in 2024 alone. The 3% cap is based on the average annual change in median household income in California from 2002 to 2022, a period that includes the Great Recession, leading some to argue that this figure is artificially low. They suggest using the past decade's average annual increase of 4.1% in median household income as a more realistic benchmark. Furthermore, some healthcare costs are beyond providers' control, such as salaries for healthcare workers, which are influenced by collective bargaining agreements and state minimum wage laws. Carmela Coyle, president and CEO of the California Hospital Association, highlighted that hospitals have already made significant cuts and that further reductions could jeopardize the ability to perform essential, life-saving procedures. The outcome of California's initiative to control healthcare spending will be closely observed to see if it sets a precedent for other states. Click here for article.

  • Phased Implementation: The cap will be introduced incrementally, with a 3.5% increase in 2025, 3.2% in 2027-2028, and a full 3% cap in 2029.

  • Industry Opposition: While supportive of cost control, the health care industry argues that the 3% target is too stringent and difficult to meet, especially with CMS projecting a 4.6% increase in medical practice costs for 2024.

  • Calculation Concerns: The 3% cap is based on median household income changes from 2002 to 2022, including the Great Recession, leading some to argue it is unrealistically low and suggesting a 4.1% benchmark from the past decade instead.

  • Uncontrollable Costs: Factors such as healthcare worker salaries, influenced by collective bargaining and state minimum wage laws, complicate efforts to meet the cap, with industry leaders stressing that hospitals have little room left for cuts without compromising essential services.

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