A growing number of states are implementing healthcare cost controls to curb excess spending among providers and payers.
Several states have established programs for annual cost growth benchmarks, setting spending limits based on economic measures such as gross state product, wage growth or median household income. However, some regulators are taking this tactic a step further and giving teeth to the benchmarks with price caps and penalties.
Most recently, California’s Office of Health Care Affordability voted to discipline healthcare groups for exceeding state-imposed growth targets with penalties up to 125% of the amount overspent. Noncompliant providers and payers will also face penalties if they fail to establish and implement acceptable performance improvement plans.
“Enforcement is progressive and data‑driven,” the California Department of Health Care Access and Information said in a statement. “OHCA aims to improve affordability while safeguarding access, quality, equity and the long‑term stability of California’s health workforce.”
Here’s a look at how various states are responding to rapidly rising healthcare costs.
Which states?
Eight states have established cost growth targets: California, Connecticut, Delaware, Massachusetts, New Jersey, Oregon, Rhode Island and Washington. Massachusetts was the first state to do so in 2012.
States such as Indiana and Washington are looking to implement price caps for certain services and payer types.
How are growth targets enforced?
Enforcement measures range from performance improvement plans and transparent reporting to steep penalties.
In Massachusetts, the Health Policy Commission has authority to require a performance improvement plan if a healthcare group’s spending exceeds the state’s growth target. The commission in 2022 voted to issue a performance improvement plan to Boston-based Mass General Brigham, which had exceeded the target for several years prior.
“We’re starting to see states move more granular and try to get down at more of the provider level,” said Jeremy Vandehey, a consultant for the Peterson-Milbank Program for Sustainable Health Care Costs.
Penalties are another option. The Massachusetts commission can levy penalties up to $500,000 as a last resort if an improvement plan is not properly implemented.
In Connecticut, officials can request corrective action plans starting in 2029 if a provider exceeds the growth target. The state can also require a provider to implement a community investment project valued at no more than $400,000.
Some states also rely on data reporting and price transparency to curb spending.
Where do price caps fit in?
States can use cost growth targets as the foundation for additional guardrails such as price caps.
Delaware Gov. Matt Meyer (D) signed legislation in July capping prices for hospital procedures at 250% of the Medicare rate by 2033 for the state employee and fully insured commercial plans, with exemptions for hospitals that adopt multipayer, value-based care arrangements. The new law also requires state-regulated insurers to spend at least 11.5% of their medical costs on primary care.
Others go straight to price caps. For example, Indiana’s Office of Budget and Management plans to complete a study by the end of the year to determine a statewide average based on commercial inpatient and outpatient prices. Nonprofit health systems will be required to align their aggregate prices with the average.
What works best?
There are pros and cons with each tactic.
Setting a growth target gives state regulators a broader view of healthcare cost trends by building data infrastructure, but it can be difficult to enforce and could delay more direct approaches such as price caps.
Price caps often yield quicker results, but states risk squeezing the balloon and shifting the problem to another part of the healthcare sector.
Performance improvement plans address specific issues with healthcare groups, but they may not guarantee long-term results.
Is it working?
Yes and no.
None of the seven states with an established growth target in 2023 stayed below the threshold, according to a Health Affairs report from consulting firm Bailit Health and a former program officer at private foundation Milbank Memorial Fund.
However, growth targets that encourage stronger enforcement actions are in themselves a success, said Michael Bailit, president of the consulting firm, which works with public agencies and private purchasers to improve healthcare system performance.
Cost growth programs were associated with a 2% reduction in total medical expenditure growth from 2010 to 2020, and programs with enforcement actions or payment reforms were more likely to see results, according to a JAMA study co-authored by researchers at the University of California, Los Angeles and other institutions.
What do provider groups say?
A spokesperson for the Connecticut Hospital Association said the group is encouraged by recent efforts to curb costs and thinks corrective action plans can offer insight into why a healthcare provider may be struggling to meet the target.
Brian Frazee, president and CEO at the Delaware Healthcare Association, said the state’s new law gives providers flexibility in how they address overspending and a manageable multiyear runway to meet the 250% Medicare threshold.
“The hospitals in Delaware have really stepped up on these collaborative solutions,” Frazee said. “But it’s going to take all healthcare sectors for us to truly solve healthcare affordability.”
He noted the constraints will be challenging as federal healthcare cuts go into effect next year.
Dover, Delaware-based Bayhealth said in a statement the system is concerned about how the law will impact access to care, workforce recruitment and the ability to invest in services and facilities.