Aligning Health Cost Growth with Economic Growth Would Save Californians Billions

Illustration of medical first aid kit sitting on a pile of coins

As California emerges from a long winter dominated by COVID-19, policymakers are turning their attention to another public health crisis that has bedeviled the state for decades: unjustifiably high and rising health care costs.

This focus is especially timely given the shocking number of Californians forgoing care because of costs and getting sicker because of it. According to the most recent statewide survey of California residents conducted by the California Health Care Foundation and NORC, a national research organization, more than half of Californians say that in the last 12 months they took at least one action to delay, skip, or cut back on care because of cost. Of those who cut back on care because of cost, more than 40% say the steps they took made their health condition worse.

The costs that consumers face in the health system are often reflected in the premiums that they and their employers pay and the deductibles they must meet when visiting a doctor’s office or pharmacy. The rising burden this has placed on California families over the last decade has been dramatic and well-documented. While wage growth has barely kept pace with inflation, health insurance premiums for family coverage in the state increased at more than twice that rate. At the same time, deductibles increased almost four times faster than wages. Californians are now more worried about paying for health care than they are about affording housing, transportation, or any other basic need.

Our state will never be an affordable place to live and raise a family unless it confronts the problem of health care costs for consumers.

More Than $58 Billion a Year in Excess Health Costs

Fortunately, California has taken meaningful steps to expand health insurance coverage, increase subsidies, and limit out-of-pocket expenses in recent years. Further progress demands that we reduce systemwide expenditures for health services that do not make Californians any healthier. Eliminating these costs could save California workers and families $58 billion to $73 billion every year. Most experts agree that more than 20% of all health spending could be eliminated without harming access or quality. Lower systemwide spending would mean lower premiums and out-of-pocket expenses for consumers.

In other states taking steps to eliminate wasteful spending and provide relief to consumers, one increasingly popular tool is the establishment of enforceable systemwide and sectoral cost growth targets. Perhaps the best known of these efforts is administered by the Massachusetts Health Policy Commission, established in 2012 to set a total statewide growth target for health care costs and to monitor how much health systems and medical groups contribute to overall spending trends. More recently and closer to home, the Oregon Health Authority has been implementing a statewide growth benchmark for health care costs since 2019.

Cost commissions and growth targets are worth considering in California. We already have several detailed public and proprietary data sources that can help us understand spending trends within and across the system, and California’s Office of State Health Planning and Development is well on its way to implementing the state’s first comprehensive source of spending and utilization data.

While cost containment is hard work, there are numerous examples of California stakeholders coming together to adopt strategies that, for instance, reduce expensive and unnecessary cesarean sections, streamline quality measure reporting requirements, and align payment incentives for providers delivering high-value primary care services. Robust data and clear goals are key success factors in all these efforts, which could be further supported and advanced with a statewide cost commission.

Substantial Savings Possible

What type of savings might be possible if California sets and achieves a cost growth target like those we’re starting to see in other parts of the country? For illustrative purposes, the figure below shows the last five years of publicly available data on total health spending per Californian. Between 2009 and 2014, per capita growth in health care spending in California grew at a compounded annual growth rate of 4%, exceeding the 3.6% compounded annual growth in the state’s overall economy. Had California achieved health care cost growth in line with economic growth, consumers and taxpayers would have saved nearly $56 billion, or almost 5% of total health care spending in the period. This represents a meaningful and achievable portion of the staggering 20% to 25% of waste that experts have found in the system.

If 3.6% annual growth was set as the overall growth target for health spending, where might some of the savings have come from? Here again, expert consensus and the experience of other states provide insights. Other states have found substantial savings in simplifying administrative complexity for providers, addressing anticompetitive behavior among large systems, and ensuring adequate access to primary care and preventive care. There is ample evidence that these savings can be achieved without harming access or quality.

Setting an overall cost-growth target and using data to monitor and enforce that target is a worthy strategy to relieve the unsustainable burden on consumers of high and rising health care costs. As policymakers strive to make California an affordable place to live and raise a family, aligning growth in health care expenditures with overall economic growth is an important place to start.

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