A relatively new and little-known state agency has taken the first steps toward imposing fines on hospitals that it claims are charging too much, but will more price controls really fix a system in which government mandates and restrictions have already substantially raised healthcare prices?
The California Office of Health Care Affordability was established in 2022 in an attempt to address the high costs in the healthcare industry, including hospitals, health insurers and physicians groups. In 2024, the agency established a spending target that would cap the growth in healthcare spending to 3.5%, phasing down to 3% by 2029. The spending targets are even lower for a small number of particularly “high cost” hospitals.
If only the state government would abide by its own rules and adhere to a 3% spending growth cap!
The office’s board made news recently when
The office’s board made news recently when it approved a framework to imposepenaltiesof up to 125% of the amount over this limit, which could potentially translate to hundreds of millions of dollars. The fines would go into effect starting in 2028.
Not surprisingly, the healthcare industry has strongly pushed back on these restrictions. The hospital industry has filed a lawsuit. After all, they argue, many cost drivers are out of their control. General inflation alone could easily surpass the spending target, not to mention rising pharmaceutical costs and the natural cost increases associated with an aging population that is consuming more healthcare services.
“[The office’s] proposed target entirely ignores the drivers of healthcare spending,” Ben Johnson, then-vice president of policy at the California Hospital Association, wrote in a letter to the state’s healthcare affordability board in 2024, as reported byCalMatters. “In doing so, it would force healthcare providers to significantly cut back on the care they provide or face penalties.”
The state has only made matters worse
The state has only made matters worse. In recent years, California has imposed a minimum wage of up to $25 an hour (and thereafter adjusted for inflation each year) for workers in healthcare facilities. This even includes positions not directly related to healthcare, such as hospital gift shop cashiers and janitors. Hospitals have also been struggling to meet a2030 seismic retrofit deadline. While such earthquake safety measures may be necessary, they do not come without substantial costs, which must ultimately be paid, in part, by consumers.
In June, the Legislature passed, and Gov. Gavin Newsom signed, Senate Bill 125, which imposes a tax on health insurers. Of course, like other additional expenditures, these taxes are primarily passed on to consumers in the form of higher rates. In addition, California has expanded Medi-Cal, the state’s Medicaid program, meaning that the additional people covered under the program must be subsidized through, you guessed it, higher insurance costs paid by other (unsubsidized) health insurance consumers.
Then there are the market distortions caused by the federal system, with laws that mandate insurance coverage for minor and routine services, encourage healthcare to be provided by insurance obtained through employers and provide inadequate (and oftentimes delayed) reimbursement rates to physicians through Medicare and Medicaid, which together account forapproximately 40% of national healthcare spending.
The bureaucratization of medicine has driven many doctors
The bureaucratization of medicine has driven many doctors to leave the field altogether, and forced others to drastically reduce the time allotted for patient interaction and hire additional employees just to deal with the increased paperwork, detailed insurance coding and compliance measures.
Then there is the rampant fraud in the system. The Centers for Medicare and Medicaid Services justannouncedthat an anti-fraud effort had resulted in the cancellation of approximately 315,000 fraudulent or improper enrollments, covering more than 760,000 people, in the federal health insurance marketplace. This is expected to result in savings of $2.2 billion in taxpayer-funded subsidies.
Writer, investment advisor and two-time Libertarian presidential candidate Harry Brownewrotethat the government has a history of “causing problems and then running to the rescue in education, healthcare, charity, farming, business and most other areas of society. Government is good at one thing: It knows how to break your legs, hand you a crutch and say, ‘See, if it weren’t for the government, you wouldn’t be able to walk.’”
As with other industries, from fast food
As with other industries, from fast food to automobile manufacturing to telecommunications, the way to obtain the highest-quality goods and services for the lowest prices is by enhancing competition through free markets. Piling on more restrictions, taxes, penalties and other cost increases on top of previous government restrictions will only further erode both the affordability and quality of healthcare.
Adam Summers is a columnist, economist, and public policy analyst and a former editorial writer for the Orange County Register / Southern California News Group. He is also editor and coauthor of“Beyond Homeless: Good Intentions, Bad Outcomes, Transformative Solutions.”
