California weighs penalties for healthcare providers that don't rein in costs

California is considering imposing significant penalties on healthcare providers that fail to control costs. These penalties could reach up to 125% of the amount spent over state annual growth targets. The proposal comes after healthcare entities were asked to limit growth by 3.5% last year, with targets dropping to 3% by 2029. Seven hospitals that are deemed particularly expensive must cut growth to 1.8% in 2026, dropping to 1.6% by 2029.

Consumer advocates believe that financial penalties are crucial to alleviate the financial burden on millions of Californians struggling with high medical expenses. Hospitals currently account for 40% of the increase in U.S. health spending from 2022 to 2024, compared to 11% from retail prescription drugs. However, the powerful hospital industry has filed a lawsuit challenging the spending limits as unreasonable, warning that they may reduce vital services, including emergency room care, obstetrics, and mental health services.

The California Hospital Association argues that the state affordability office has not taken into account factors beyond the industry's control, such as rising minimum wages, earthquake retrofit requirements, and expensive new drugs. When calculating penalties, California regulators would take into account a healthcare entity's financial situation, market impact, and the severity of its offenses.

Entities would first receive a chance to implement performance improvement plans before penalties are imposed. The state's eight-member board is set to vote on the penalties at its Aug. 26 meeting. Healthcare providers would not face penalties until 2028, as it is expected to take two years to collect and report spending data to measure against the 2026 targets.