What can we afford? Considerations for aligning Office of Health Care Affordability spending target with Californians’ ability to afford increases

Executive summary

The California Office of Health Care Affordability (OHCA) will establish statewide and sectoral health care spending targets with the goal of achieving a more sustainable per capita rate of spending growth on health care provided by a range of health care entities including but not limited to hospitals, medical groups, health plans, and fully integrated delivery systems. Total health care expenditures will be compared against the spending target and a progressive enforcement process will begin in 2028.

California law outlines certain requirements for determining the statewide spending target, but the specifics of the methodology will be decided by the OHCA board in consultation with staff and with input from the advisory committee and the public. This policy brief discusses one major question the OHCA board will consider in determining the methodology for the statewide spending target: which economic indicator or combination of indicators will be used in setting the target?

Five economic indicators that could be used as the basis of a spending target are evaluated: growth in median wages, median household income, Consumer Price Index (CPI), gross state product per capita (GSP), and potential gross state product (PGSP, a forecasted measure of the long-run growth in the economy). These reflect the range of possible economic indicators described in state law, and, with the exception of CPI, these indicators have been used by health care cost commissions in other states.

The advantages and disadvantages of each economic indicator can be summarized as follows:

• Median wage and median household income growth are the best proxies for consumers’ ability to afford health care spending increases, while GSP per capita and PGSP are the best proxies for state and local governments’ ability to absorb health care spending increases using general funds which originate from broad-based taxes. CPI growth is a poor proxy for both consumers’ and governments’ ability to afford health care because it reflects changes in prices, not changes in resources available.
• A spending target set using growth in median wages, household income, or CPI would be likely to slow spending more than a target using GSP, based on historical spending trends in California over the last two decades. From 2002 to 2021, average annual CPI growth in California was 2.55%, median wage growth was 2.81%, median household income growth was 2.83%, and GSP growth per capita was 3.92%. Historical trends for California PGSP are not available.
• Data showing historical California growth rates for each economic indicator is readily available with a limited time lag for all indicators except PGSP. California-specific projections were only found for CPI-W, but projections should be possible to obtain for the other indicators.
• Historical data for all economic indicators show significant volatility from year-to-year, even when a rolling three-year average is used. To make a target more stable, OHCA may consider using long-term projections for the relevant economic indicators or historical averages that cover a long time period such as 20 years. These are approaches taken by other state health care cost commissions.
• Looking ahead to the possibility of geographic targets in the future, regional data availability could be an additional consideration. Historical data that could be aggregated by Covered California region is readily available for growth in median wages, household income, and GSP per capita, but not for CPI or PGSP.

In determining a methodology for setting the statewide target, a key question for the board will be how much weight to give to each of the two main goals: improving consumers’ ability to afford health care and slowing spending growth for government and other sources of spending. Some board members have expressed an interest in centering consumer affordability in implementation decisions.

When considering the goal of improved consumer affordability, it is important to keep in mind a couple of factors related to job-based coverage, which remains the most common source of coverage in California. First, growth in premiums and out-of-pocket costs can have a range of negative consequences for households with job-based coverage including higher worker premium contributions and higher out-of-pocket costs, which can in turn threaten financial security and access to care. Rising health care costs can also lead to lower wages; since employer premium contributions are an important part of workers’ overall compensation, there is a tradeoff between employer premium contributions and wages paid. Secondly, the financing of the worker share of job-based coverage is regressive, meaning that low-income households pay a significantly higher share of income on premiums and out-of-pocket costs than higher-income households.

We recommend that:

• If the board seeks to prioritize consumers’ ability to afford health care spending growth, it should consider using median wage growth or median household income growth in setting the spending target.
• If the board seeks to proportionally address the affordability of health care for consumers and their employers on the one hand and state and local governments on the other hand, it should consider setting the spending target based on a blend of median wages or median household income, weighted 80%, and GSP per capita or PGSP, weighted 20%. This weighting would reflect the approximate proportion of California-based health care expenditures paid by households/employers and state/local governments respectively.
• Prioritizing consumer affordability would not mean that state and local governments’ interest in slowing health care spending growth would be disregarded. State and local governments’ budgets would also benefit from the lower spending target that would be set if median wage growth or median household income growth was the focus.

Read the full report.