Proposed Office of Health Care Affordability: An important step towards addressing the health care cost problem for California workers

Laurel Lucia

This is the ninth post in the Labor Center’s blog series “Rising Health Care Costs in California: A Worker Issue.”

Earlier in this blog series my co-authors and I highlighted the ways in which rising health care costs in California are a worker issue. Job-based coverage premiums have grown rapidly while wages remained flat, a problem that is particularly difficult for low-income workers and their families. Deductibles have become more common in California over the last decade and high out-of-pocket costs have contributed to poor access to care and financial hardship. Rising health care costs can also impede wage growth. The research evidence suggests that these health care cost problems are driven much more by the prices we pay for insurance and care than the amount of care we use. Over the last year, the COVID-19 pandemic further highlighted the importance of addressing California workers’ health care affordability concerns.

Congress recently took an important step to protect consumers from surprise medical billing, addressing a significant health care problem for many in California. However, California workers cannot wait for further federal action on the broader cost problems and state policymakers have a range of options to consider in addressing rising health care costs. The state could do a major overhaul of how we pay for and provide access to health care services, such as adopting a unified financing system as is currently being examined the Healthy California for All Commission. The state could also take steps to address health care costs issues within the framework of our current fragmented system, such as addressing health care industry consolidation and anti-competitive behavior, which play a significant role in driving high prices. This blog post focuses on one policy idea currently being considered by state policymakers – creating an Office of Health Care Affordability.

Office of Health Care Affordability

State policymakers are considering creating a new Office of Health Care Affordability within the Office of Statewide Health Planning and Development (OSHPD). Other states have cost commissions that monitor spending and set targets for various segments of the health care industry including Massachusetts (all spending by all payers), Maryland (hospital spending), Oregon (health insurance premiums and Medicaid spending), and Rhode Island (insurance premiums).

This proposal would establish a systematic, data-driven, and focused approach to monitoring and addressing cost trends, with a built-in process for accountability. This would represent a significant shift from our existing system in which no single state agency is responsible for monitoring health care cost trends across job-based coverage, the individual market, Medicare, and Medi-Cal. This proposal is comprehensive in that the Office would monitor cost trends for a range of health care spending including spending on health insurance premiums, hospital care, physician care, and prescription drugs.

The Office would be responsible for collecting data from health care entities on the total cost of care; analyzing health care cost trends and drivers of health care spending including but not limited to consolidation, market power, and market failures; reporting trends and holding public meetings; setting cost targets; providing support to health care entities to meet those targets; and enforcing targets through a progressive enforcement process beginning in 2026. As the goal of the Office is to reduce health care costs while also promoting quality, equity, and the stability of the health care workforce, the Office would monitor all of these facets of the state’s health care system. The Office would also be charged with promoting value-based purchasing, promoting systemwide investment in primary care and behavioral health care, making recommendations for administrative simplification, and recommending other approaches for controlling cost growth.

Potential savings to California workers

This proposal has the potential to yield tens of billion dollars in savings to California workers with job-based coverage over a 10-year period, as outlined below. The Office would monitor costs across all payers but this blog post focuses on costs for Californians with job-based coverage because of the focus of this blog series, and also given that health care spending per enrollee has grown fastest for private insurance.

The Office would set health care cost growth targets at or below an established economic indicator reflecting the broader economy and labor market. It will be important that the Office undertake a rigorous analytic and decision-making process to choose an appropriate target. As examples of how much the trends for various economic indicators can vary, GDP grew by 4.1% annually on average in 2013 through 2018, compared to 1.5% average annual growth in CPI-U growth and 2.4% annual growth in average private sector hourly wages. Spending growth targets in other states with cost commissions are currently in the range of 3.1% to 3.6%. In this post, I use GDP as one example of an economic indicator that could serve as the basis for the targets. The actual level of savings will depend on the cost target set by the Office.

Workers with job-based coverage and their employers will spend an estimated $158 billion on premiums and out-of-pocket costs in 2021. As discussed in an earlier blog, employer contributions to premiums ultimately come out of workers’ pockets as they are part of workers’ total compensation. If spending on job-based coverage premiums and out-of-pocket costs grows at the rates projected by the Center for Medicare and Medicaid Services, combined spending will reach $206 billion by 2034. By comparison, job-based coverage spending would be $198 billion in 2034 if spending growth slows to the equivalent of GDP growth starting in 2025, the first year of spending for which enforcement would apply. (All estimates in this post are shown in 2021 dollars.)

Over a 10-year period, workers would save $42 billion if the full savings associated with slower cost growth are passed through to them. That is equivalent to $4,290 per household with job-based coverage on average.

This example illustrates how California workers with job-based coverage and their families will see meaningful financial relief if the state creates an Office of Health Care Affordability that is able to successfully help to bend the cost curve and if those savings are passed through to workers. Two aspects of implementation are particularly important in ensuring a positive impact of this policy for workers. First, the Office should closely monitor trends to ensure that any reduction in cost growth is reflected in how much workers and their employers are paying for job-based coverage premiums and out-of-pocket expenses. Second, it will be important that the Office successfully monitors the effects of the cost targets on health care workforce stability, high-quality jobs, and training needs of health care workers and that the Office adjusts the targets or its approaches as needed to ensure that the health care workforce is strengthened by this proposal.

Projected growth rates

  2021 2022 2023 2024 2025 2026 and beyond
Job-based coverage premium spending 3.5% 4.3% 4.4% 4.3% 5.0% 4.9%
Household out-of-pocket spending 4.0% 4.2% 4.3% 4.3% 4.2% 4.3%
GDP 4.2% 4.5% 4.4% 4.6% 4.5% 4.4%