Health care costs keep rising. A new California agency aims to fix that (2024)

In 2017, a rare viral infection hospitalized Bernadette Moordigian for three weeks and paralyzed her for nearly nine months. Although she had health insurance, the hospital sent her an $80,000 bill. She appealed and got financial aid but was still on the hook for $10,000.

In 2018, Shelly Tsai, a lawyer with Neighborhood Legal Services Los Angeles, took on a client who opted to give birth at home with a midwife. Insurance wouldn’t foot the $8,000 bill despite it costing three times less than a hospital birth.

Last year, Laila Dellapasqua reduced her family’s health insurance coverage yet again as premiums increased. Collectively their yearly deductibles are more than $31,000.

Stories like these three are increasingly common. California and the country are in the midst of a health care affordability crisis. The Golden State has taken a multi-pronged approach in its effort to get a grip on skyrocketing costs — its latest effort being a new Office of Health Care Affordability whose job will be to investigate the causes behind price increases and hold health industry players accountable.

In California and nationally, the most cited reason for people being uninsured or underinsured is cost. Even those with robust insurance sometimes struggle to afford hospital bills and their medication. Some take extreme measures, such as rationing their dosages or traveling south of the border for more affordable care. Half of Californians skipped or postponed medical care in 2021 because of costs, according to a California Health Care Foundation report.

“For all the talk of inflation in the last year, if gas prices went up the same rate as health care prices over the last couple of decades, we wouldn’t be seeing $5 to $6 a gallon, we’d be seeing $30 to $40 a gallon,” said Anthony Wright, executive director of Health Access California, a consumer rights group. “What is raising people’s concerns about inflation these days has been the case for health care for decades.”

The recently approved state budget includes $30 million to create the office, whose key responsibility will be to set and enforce limits on cost growth for the industry, including hospitals, health insurers and physician groups.

The office has been years in the making, with industry representatives, legislators and Gov. Gavin Newsom haggling over specifics. In its final form, it will be seated in the Department of Health Care Access and Information and led by department director Elizabeth Landsberg.

“We absolutely will be shining a light specifically on how much of the health care dollar that’s coming out of people’s pocket — that’s putting a strain on their family budget — how much of that is going to administrative costs and profits,” Landsberg said.

However, the office’s work won’t translate into instant savings for people nor immediately eliminate stories like Moordigian’s or Dellapasqua’s. Expectations should be tempered, Landsberg said.

The office isn’t necessarily aiming to reduce costs, but rather to slow the rate of growth of those costs. “Which may not feel that great to consumers who already feel like they’re paying too much, but we have got to get the costs under control, and we think this will absolutely have a meaningful impact,” Landsberg said.

Limiting cost growth and enforcement

Household health spending has grown twice as fast as wages, and medical inflation is 1.5 times greater than general inflation, according to the Kaiser Family Foundation. State spending on Health and Human Services, which encompasses Medi-Cal, the health program for low-income people, makes up nearly one-third of the state budget. And health insurance premiums and deductibles have steadily increased for Californians in the past decade, equaling 10.5% of the median household income in 2020, according to the Commonwealth Fund, a health care think tank.

“Bottom line, health care is too expensive, its growth rate is unsustainable and we have to do something,” said Assemblymember Jim Wood, a Santa Rosa Democrat, who was involved in negotiations to establish the office.

The Office of Health Care Affordability is attempting to tackle the root of the issue: Providers can charge patients virtually any amount they want with no incentive to lower prices.

“Whenever we’ve tried to make health care more affordable, we’ve done it by increasing subsidies, but that’s not doing anything about the underlying cause,” said Gary Cohen, a former Obama Administration advisor and principal with Health Management Associates, a health care consulting group. Cohen previously led Blue Shield of California’s negotiations on the formation of the office as vice president of government affairs.

In California, the Office of Health Care Affordability will be responsible for examining the health care market as a whole. Currently, three departments and the Office of the Attorney General oversee parts of the system separately. The fragmentation often results in industry players blaming each other for rising costs. The new office plans to identify the primary drivers of cost increases, including individual facilities with above-average prices.

It will collect data on expenditures, including doctor’s visits, hospital care, medication, and medical supplies. The data is expected to help identify how much is going toward an entity’s administrative costs and profits.

An eight-member appointed advisory board will set limits on cost growth for different sectors and regions. Any entity that exceeds limits and shows no improvement may face financial penalties.

States have limited power when it comes to regulating the pharmaceutical industry, so drug companies will not be subject to the office’s cost targets. However, the office will analyze the role drug manufacturers are having on overall health care spending, Landsberg said. In one effort to cut drug costs, the Newsom administration is also working on producing its own line of generic drugs, starting with insulin.

Eight other states have created similar health care affordability offices with moderate success. Between 2017 and 2020, Massachusetts, which created the first office, saw health care costs exceed its growth limits in two of the four years. California’s office will have the toughest enforcement mechanisms, Landsberg said.

“The (enforcement) teeth are important just to convey what a critical initiative this is, and that if parties aren’t able to comply, then the state will have the ability to take action,” Landsberg said.

Landsberg will be responsible for enforcing the limits on cost growth with a variety of tools at her disposal, ranging from requiring violators to submit performance improvement plans to levying fines. Advocates and researchers are counting on the office’s ability to create price transparency and bring more competition to the health marketplace.

“If you look at other parts of our economy that are market-driven but where there is competition, consumers are the ones that determine what the prices are. They make tradeoffs for service, quality, access,” said Glenn Melnick, health economics expert from the University of Southern California’s Sol Price School of Public Policy. “The problem is, our health care system is far from that model.”

The office will also conduct reviews of mergers and acquisitions that have remained unregulated in California.

Behind the scenes

Getting to this point was a hard-won battle, albeit a savvy political move by several players in the health care industry.

In 2014, a California ballot initiative aimed at regulating health insurance rates narrowly failed. Three years later, a state bill to establish a single-payer health system was shelved without a hearing. Earlier this year, another single-payer bill died without a vote after contentious and impassioned hearings. Although those efforts failed, the powerful California Nurses Association, which sponsored the bills, said it remains committed to pushing single-payer forward.

For health care power brokers, the message was clear: Make health care more affordable or the government would do it for them.

“If in fact this commission can get the private system to perform in a way that is consumer friendly and provides access, over the long run it may very well obviate the need for single payer,” said Blue Shield President and CEO Paul Markovich.

Newsom, who had campaigned on implementing a single-payer system, was an early supporter of the office’s more moderate mechanisms. Deputy communications director Alex Stack said making health care more affordable and accessible was a “top priority” for the administration.

Newsom first introduced the Office of Health Care Affordability in his January 2020 budget proposal but it was sidelined by the pandemic. In 2021, Assemblymember Wood drafted legislation to detail the office’s role, but after legislators and industry officials failed to reach a deal, he announced that discussions would continue into this year.

“In order for this policy to be meaningful, it must include every stakeholder in health care, and they have all had an opinion about this office,” Wood said when he pulled his bill last September. “One amendment after another has been requested in an attempt to minimize the impact on them and shift the focus to other players in the health care system.”

Initial iterations of the proposal took a hardline stance on controlling the cost of medical goods and services by capping prices even lower than current prices. Instead, in its current form, industry officials and legislators compromised by having the office only target future cost growth.

“We proposed rate regulation and got pushback from industry,” Wright, with Health Access California, said. “(The office) was an attempt to try to do this in a different way with the same goal.”

Consumer advocates and health care economists say the office has the authority to make health care more affordable, but some of its power was undercut during negotiations. Earlier versions of the proposal mandated financial penalties. The version that passed says violations “may” result in penalties.

The California Medical Association, which lobbies for doctors, successfully pushed to get doctor groups consisting of less than 25 physicians exempted from the bill.

Association spokesperson Shannan Velayas said the group “worked to ensure the Office of Health Care Affordability proposal focuses primarily on those entities with enough market power to influence health care costs.”

Another lobby, the California Hospital Association, successfully asked that the office create a public commission of industry experts to advise the office. The lobby also insisted all industry players be subject to the office’s rules, with no exemptions.

“Our point of view has always been, this is an all-in proposition,” California Hospital Association spokesperson Jan Emerson-Shea said. “This can’t just be on the backs of hospitals.”

On the insurance side, Blue Shield of California was one of the first industry players at the table. Markovich said it was “very, very difficult” to get other insurers, hospitals and doctors to come to an agreement, and that difficulty underscores the need for this office’s work.

“There’s far too much inertia, resistance and parochialism in health care today. This office has the opportunity to inject a much-needed sense of urgency and accountability,” Markovich said.

How high costs play out for Californians

Moordigian — the Fresno resident with the $80,000 hospital bill — has a doctorate in clinical psychology and teaches part time at Fresno City College. But she doesn’t get health benefits as a part-timer.

Instead, Moordigian is enrolled in a plan through Covered California, the state’s health insurance marketplace. She only pays $1 a month after federal aid. The tradeoff is her deductible and annual out-of-pocket maximum are high, at $6,300 and $8,200, respectively. It’s the lowest coverage option available, but with rent and student loans eating away most of her take-home pay, it’s the only one she can afford.

Moordigian said she frequently skips doctors’ appointments or laboratory tests because of the cost. “Every time I go to the doctor I’m asking ‘Is this free? Is this included?’ and that’s a horrible way to receive care,” she said.

Dellapasqua, another community college adjunct professor, said one of her employers offers insurance through Kaiser Permanente, but the premium is more than $2,200 per paycheck.

“I would be working for free in order to have health insurance for my family of four,” Dellapasqua said. She chose a Covered California plan instead.

“I get anxiety every time it comes to open registration. What’s the cost? You know, is this going to work?” Dellapasqua said.

But even those with employer-sponsored insurance feel the burden of rising costs.

Tsai, the attorney with Neighborhood Legal Services, said a recent client was hospitalized twice for heart problems and had a $4,000 deductible. At the same time, his wife received a $10,000 medical bill. Even though he worked full time in a factory and had employer-based insurance, his family didn’t have the cash to pay for what wasn’t covered.

“What are you going to do, squeeze water out of a stone?” Tsai said.

Last year, the national average annual premium for workers was $7,739 for an individual and $22,221 for family coverage, according to the Kaiser Family Foundation. Much of the cost for increasing premiums has been swallowed by employers, but it gets passed down to employees anyway. When health costs increase, wages stagnate, said Laurel Lucia, director of health care at the UC Berkeley Labor Center.

“Many workers probably don’t realize that family premiums have exceeded $20,000 a year. To put that in perspective, that’s equivalent to the employer and the worker getting together each year and buying a new car every year,” Lucia said.

Labor union officials signed on as staunch supporters of the Office of Health Care Affordability early in negotiations, largely to tackle wage growth.

“When we get to the bargaining table, health care costs are the number one issue,” said Steve Smith, communications director for the California Labor Federation. “It’s awfully difficult to get wage gains when health care is eating up so much of overall compensation.”

The office has the potential to benefit both employers paying high premiums and workers struggling to make ends meet, said Bill Kramer, executive director for health policy at the Purchaser Business Group on Health, which represents employers. “This is not just a health care costs bill. This is really a jobs and wages bill.”