California is weighing stiff penalties for hospitals and other healthcare entities that don\u2019t stay under state spending limits, potentially levying hundreds of millions of dollars in fines if these providers don\u2019t take steps to rein in rising healthcare costs.<\/p>\n
If the state Office of Health Care Affordability adopts the fines next week, hospitals, medical groups, insurers, and others could face penalties that amount to as much as 125% of the total they spend above the state\u2019s annual growth targets.<\/p>\n
The penalty proposal comes after healthcare entities in California were asked to limit growth by 3.5% last year and ramp down to 3% by 2029. Seven hospitals that state officials consider particularly expensive face even smaller growth targets: 1.8% in 2026, dropping to 1.6% by 2029.<\/p>\n
Consumer advocates argue that state financial deterrents are critical to bring relief to millions of Californians struggling with high insurance premiums and out-of-pocket expenses. Hospitals accounted for 40% of the increase<\/a> in U.S. health spending from 2022 to 2024, compared with 11% from retail prescription drugs. But adding teeth to those targets sets up a fight with the powerful hospital industry, which has a pending lawsuit<\/a> challenging the spending limits as unreasonable. Hospitals warned that they will cut back on vital services, including in emergency rooms, obstetrics, and behavioral health.<\/p>\n Healthcare industry representatives said the state affordability office hasn\u2019t accounted for year-to-year volatility or other factors beyond the industry\u2019s control, such as rising minimum wages, state earthquake retrofit requirements, and expensive new drugs.<\/p>\n \u201cThey\u2019re building the plane while flying it,\u201d said Ben Johnson, group vice president for financial policy at the California Hospital Association. \u201cWe know improvements in affordability are needed, but we have serious questions about how and about what the unintended consequences could be under OHCA\u2019s rather stringent approaches.\u201d<\/p>\n When calculating penalties, California regulators would consider various factors, including a healthcare entity\u2019s financial situation, its market impact, and the gravity and number of offenses, according to a board presentation<\/a> in June. And entities would first be given opportunities to implement performance improvement plans to bring their spending into line before penalties are imposed. For those that don\u2019t comply, the board is considering penalties of $10,000 a day or a flat $500,000.<\/p>\n The penalties, which the affordability office\u2019s eight-member board is required by state law<\/a> to adopt, are slated for discussion, and a potential vote, at the board\u2019s Aug. 26 meeting<\/a>. The soonest healthcare providers would be subject to penalties is 2028, because it\u2019s expected it will take two years to collect and publicly report spending data to measure against the 2026 targets. The state is still collecting data on how entities performed against the 2025 targets, which aren\u2019t enforceable, according to Andrew DiLuccia, a spokesperson for the California Department of Health Care Access and Information.<\/p>\n States Set Targets<\/strong><\/p>\n California is one of at least eight states that have set spending targets as part of an expanding effort to curb soaring healthcare spending across the nation. Connecticut, Massachusetts, Oregon, and Rhode Island have also authorized the use of some type of financial penalty. The specifics of each vary widely, although so far no state has applied them.<\/p>\n A survey last year<\/a> by the California Health Care Foundation found that 4 out of 10 state residents said they had medical debt, and 6 in 10 reported that they or a family member had skipped or delayed medical care in the previous 12 months because of cost. Nationwide, about half of adults<\/a> say it is difficult to afford healthcare costs.<\/p>\n After Rosalyn Book got stiches on her chin, the elementary school teacher received a $15,000 ER bill from a local hospital, despite having insurance. Many teachers in her district leave because they can\u2019t afford the cost of healthcare and insurance premiums, she said.<\/p>\n \u201cThe healthcare charges are just insanity, and what we get as patients for the care, it\u2019s not the best either,\u201d said Book, president of the Monterey Bay Teachers Association. \u201cIf you\u2019re a working, regular individual in terms of how much you make, the cost of living and especially the healthcare is just not doable.\u201d<\/p>\n Meanwhile, hospitals are warning there\u2019s a risk of more closures. According to Yale University\u2019s Health Care Affordability Lab<\/a>, 17 hospitals have closed in the state since 2016, compared with only six openings.<\/p>\n Hospitals and other healthcare providers have said the proposed multimillion-dollar penalties are too steep and could destabilize their operations at a time when they\u2019re facing funding challenges, including massive federal cuts to Medicaid, the end of enhanced federal subsidies for Affordable Care Act plans, and a sharp rise in uninsured patients. The One Big Beautiful Bill Act, passed by congressional Republicans and signed by President Donald Trump last summer, is expected to reduce federal Medicaid spending by more than $900 billion<\/a> \u2014 including by $30 billion<\/a> in California \u2014 and increase the rolls of the uninsured in the U.S. by 10 million people<\/a> over a decade.<\/p>\n Johnson said hospitals raise prices on commercial payers to offset the expense of treating uninsured patients, as well as patients on Medicaid and Medicare, which can reimburse care providers at rates that fall short of treatment costs.<\/p>\n In addition, said Anete Millers, vice president of legal and regulatory affairs at the California Association of Health Plans, tax increases on managed-care plans recently approved by state legislators<\/a> to offset federal Medicaid cuts will force plans to increase their prices for consumers.<\/p>\n \u201cSome spending pressures originate outside of the control of health plans and are the result of public policy decisions rather than underlying changes in healthcare utilization or efficiency,\u201d she told the affordability office\u2019s board at the June meeting<\/a>.<\/p>\n Kristof Stremikis, the director of market analysis and insight at the nonprofit California Health Care Foundation, acknowledged that external forces can drive costs but said that plenty of unnecessary spending is within the healthcare system\u2019s control, such as administrative waste and duplicative tests and procedures. Almost 25%<\/a> of U.S. healthcare spending is considered wasteful, according to research published in JAMA<\/a>.<\/p>\n Elizabeth Mitchell, a former Office of Health Care Affordability board member whose term ended in May, agreed.<\/p>\n \u201cEvery business has external challenges,\u201d she said. \u201cThe hospital industry has not taken accountability to actually manage costs. I have heard those excuses for decades, and at some point, they have to make changes.\u201d<\/p>\n First Step To Bring Down Costs<\/strong><\/p>\n An analysis<\/a> of five states with cost growth benchmarks, published in June, found that some have succeeded in modestly slowing healthcare spending, particularly those with enforcement mechanisms. However, spending growth in most states has still exceeded the targets<\/a> set.\u00a0<\/p>\n Jeremy Vandehey, a consultant with the Peterson-Milbank Program for Sustainable Health Care Costs, said setting benchmarks and collecting data to analyze which entities meet them is only a first step. Armed with information about what and who is driving up costs, states are more empowered to take additional action, such as imposing penalties or regulating prices, to bring down costs, he said.<\/p>\n \u201cI don\u2019t think anybody in any state is declaring victory on healthcare costs, but I wouldn\u2019t say that that means the programs are a failure,\u201d Vandehey said. \u201cIn all of these states, there\u2019s much more robust conversations happening about, OK, we haven\u2019t solved our cost crisis, so we need additional action.\u201d<\/p>\n KFF Health News<\/a> is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF\u2014an independent source of health policy research, polling, and journalism. Learn more about KFF<\/a>.<\/em><\/p>\n This article<\/a> first appeared on KFF Health News<\/a> and is republished here under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License<\/a>.<\/p>","protected":false},"excerpt":{"rendered":" California is weighing stiff penalties for hospitals and other healthcare entities that don\u2019t stay under state spending limits, potentially levying hundreds of millions of dollars in fines if these providers don\u2019t take steps to rein in rising healthcare costs. 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