California recently joined a growing number of states aiming to slow the growing cost of health care by establishing spending caps. California is now the ninth state to set spending caps after Massachusetts established the first policy in 2013. Other states with health care spending caps include Oregon, Maryland, Connecticut, Massachusetts, Nevada, New Jersey, Rhode Island, and Washington. Delaware is poised to enact its own policy as well. Such policies could adversely impact access to care and adversely impact the financial viability of hospitals.

What are spending caps?

Spending caps enacted by these states aim to control the rising costs of health care by setting limits, often called “targets,” on the growth rate of health care charges. The California rule will apply to health care entities, health plans, provider organizations with 25 or more physicians, and hospitals. The spending caps will go into effect in CY 2026 with a rate cap of 3.5% and incrementally decrease to 3% by 2029. These rates are similar to other rates seen in AHPA states: in 2021, Oregon implemented a spending cap of 3.4% and in 2014, Maryland set their spending cap at 3.58%.

The California Hospital Association (CHA) warned that the 3% cap would set health care payors and providers to fail. In a letter to the California Office of Health Care Affordability, the CHA argued for a minimum 5.3% spending cap. The 5.3% cap would have accounted for economy-wide inflation, rising costs associated with an aging population, the intense labor demand, and recent policies enacted raising the minimum wage for health care workers and record-breaking investments in Medi-Cal – the state’s Medicaid program. Penalties for exceeding the spending caps could include requiring explanations at public meetings, imposing performance improvement plans, and possibly even assessing financial penalties.

Do Spending Growth Caps Work?

According to a recent study by Fitch Ratings, spending caps put hospitals at a disadvantage as many are still working to stabilize post-COVID-19. In recent years, a number of states have exceeded, some significantly so, their state-mandated spending caps due to high inflation and labor demands driving up hospital expenses. In general, the report shows that these spending caps limit the ability of hospitals to adapt to different circumstances or evolving market conditions. The rise of labor and medication costs, paired with inflation, also make it more difficult for hospitals to meet the spending caps. Another study also concluded that spending caps have the potential for creating savings but can also result in patient harm if not designed well.