California is implementing a health care cost growth target to limit how quickly medical spending increases for hospitals, health plans, and provider organizations. Managed by the Office of Health Care Affordability (OHCA), the program sets a statewide growth rate of 3.5% for 2025, which will gradually decrease to 3.0% by 2029, with the first enforceable year beginning in 2026.
The initiative follows a period of significant spending divergence. Between 2002 and 2021, medical costs per person in California grew by 163%, while wages increased by only 69% and household income rose by 72%. This gap created an affordability crisis for residents relying on individual market or employer-based insurance plans.
State officials identified the primary drivers of these costs as steady price increases from physician organizations and hospitals. These price hikes were not associated with improvements in efficiency or quality of care. These costs are typically passed to consumers through higher deductibles, copays, and monthly insurance premiums.
The OHCA was established in 2022 after negotiations between the state administration, the Legislature, and healthcare stakeholders. The agency’s mandate is to slow the growth of these expenditures without compromising the quality of medical services provided to patients.
What is the OHCA cost growth target and how is it measured?
The cost growth target is a regulatory limit on the annual increase in total spending per person for healthcare entities. Unlike inflation or GDP metrics, the OHCA board tied this target to median household income growth over the last 20 years. This approach ensures that healthcare spending does not consume an increasingly larger share of a family’s budget.
The target measures “total per-person health care spending,” which includes two primary categories: spending on medical care and health plan administrative costs and profits. Specifically, it tracks payments for physician services, hospital care, and prescription drugs, as well as patient out-of-pocket costs and insurer profits.
The target applies across the entire healthcare ecosystem, including insurers, medical groups, and hospital systems. Hospitals are a central focus because they represent the largest share of healthcare spending and often possess the negotiating power to demand higher payments from health plans. Consequently, the Board set a 3.5% limit for all hospitals, while implementing a lower growth limit for seven specific high-cost hospitals that already exhibit very high spending levels.
How does the program lower medical bills for consumers?
By capping the rate at which providers and insurers can increase spending, the state aims to flatten the steep trajectory of insurance premiums and deductibles. Currently, total healthcare spending in California is rising at a rate of 6%. Reducing this growth to 3.5% puts downward pressure on the costs that directly affect patients.
Medical costs typically constitute 80% of insurance premiums. When the OHCA limits the growth of these underlying costs, it limits the ability of insurers to raise premiums for the end consumer. This creates a “guardrail” that prevents the disproportionate cost growth seen in previous decades, where some hospital systems maintained profit margins exceeding those of major corporations like Delta Air Lines, Disney, or Target.
Healthcare entities maintain flexibility in how they achieve these targets, allowing them to find internal efficiencies or renegotiate contracts to stay within the mandated growth percentage.
How does California’s approach compare to other states?
California is one of eight states that have developed programs to address healthcare cost growth. Massachusetts pioneered this model in 2012. While Massachusetts saw initial success in containing costs and maintaining quality, the program’s effectiveness declined over time due to weak enforcement.
California’s model incorporates lessons from these other states by implementing stronger enforcement provisions. This includes administrative penalties that are commensurate with an entity’s failure to meet the target. Additionally, California avoids the mistake of focusing too narrowly on individual services.
Instead, the OHCA uses a comprehensive measurement system. For hospitals, it measures the combination of inpatient and outpatient spending. For insurers, it tracks spending separately across three distinct segments: Commercial, Medicare, and Medi-Cal/Medicare. This allows the state to identify the actual drivers of cost growth rather than treating all healthcare spending as a single block.
The program’s timeline is structured for a gradual transition. The 3.5% target for 2025 serves as a benchmark, moving toward a 3.0% target by 2029. Because the first enforceable year is 2026, providers and insurers have a window to adjust their financial operations to meet the new standards.
The next official phase of the program involves the transition into the first enforceable year in 2026. Stakeholders and consumers can monitor official updates and board meetings through the Office of Health Care Affordability website.
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