As we previewed last year regarding SB 184 and the establishment of the California Office of Health Care Affordability (OHCA), California now has taken a significant regulatory step aimed at restraining growth in health care costs. On April 24, 2024, OHCA’s board (the “Board”) voted to implement its long anticipated statewide health care cost target, beginning with a 3.5% cap on spending growth in 2025 and decreasing in the following years. As with OHCA’s cost and market impact review (CMIR) reporting regime,[1] this cap will apply to “health care entities,” which include providers such as hospitals, facilities, outpatient clinics, large physician groups and clinical laboratories, payors and fully integrated delivery systems.

Background on Cost Targets

California joins several other states that have implemented a health care cost growth cap or target law, including Connecticut, Delaware, Massachusetts, Nevada, New Jersey, Oregon, Rhode Island, and Washington.[2] In these states, cost-growth targets or caps have ranged from 2.8% to 5.1%.[3]

As a general matter, the cost growth cap model functions as a percentage cap for year-over-year growth tied to certain economic indicators, such as total state domestic product, inflation or median family income. California’s cost target is based on the average growth rate of median family income from 2002 to 2022, with the idea that “health care spending should not grow faster than the incomes of California families.”[4]

OHCA originally proposed starting with a 3% cost target based on median family income, but following comments from industry stakeholders, the cost target approved by the Board provides a glide path approach that gradually reaches 3% over a five year period. See the table below for particular targets established for certain years.

Enforcement

Consistent with the framework set in SB 184, OHCA’s enacting legislation, the cost target for 2025 is non-enforceable. For years 2026 and after, however, OHCA will have the authority to take enforcement action against health care entities that exceed the boundary of the target. Enforcement measures available to OHCA include compelling noncompliant entities to give an explanation at public meetings, requiring the implementation performance improvement plans, and/or assessing administrative penalties.

SB 184 makes payor data on health care expenditures the primary source of data relating to cost growth, and payors will be required to submit data on total heath care expenditures starting on September 1, 2024. Nevertheless, OHCA has the authority to collect data as needed from additional sources, including other state agencies (including the Department of Health Care Services and the Department of Managed Health Care) as well as health care providers.

What’s Next?

The statewide cost target is just one cost target that OHCA is responsible for implementing. In the coming years, OHCA will develop non-statewide targets, which will include sector specific targets, and potentially geographical targets and targets associated with individual health care entities. In the meantime, we will keep our readers posted on any important activity and developments related to OHCA’s new cost target regime, including any trends related to data collection and enforcement.

FOOTNOTES

[1] See our blog on the final CMIR regulations promulgated by OHCA: The Stage is Set: California Finalizes OHCA regulations Requiring Notice and Review of Material Healthcare Transaction in 2024.

[2] Health Care Cost Commissions: How Eight States Address Cost Growth, California Health Care Foundation (Apr. 22, 2022), https://www.chcf.org/publication/cost-commissions-eight-states-address-cost-growth/.

[3] State Health Care Cost Growth Target Values & Performance Reports, Milbank Memorial Fund (Apr. 9, 2024), https://www.milbank.org/news/state-health-care-cost-growth-target-values/.

[4] Statewide Health Care Spending Target Approval is Key Step Toward Improving Health Care Affordability for Californians, California Department of Health Care Access and Information (Apr. 24, 2024), https://hcai.ca.gov/statewide-health-care-spending-target-approval-is-key-step-towards-improving-health-care-affordability-for-californians/.