An ambitious California bill would put the state in charge of controlling prices in the commercial healthcare market

Reporting from Sacramento —  In one of the most aggressive efforts in the nation to curb soaring healthcare spending, a new California measure would put the state in charge of setting prices for hospital stays, doctor’s visits and most other medical services covered by commercial insurers.

The bill, backed by labor unions and consumer groups, is certain to rouse fierce opposition from physicians and hospitals, setting the stage for a brawl between some of the Capitol’s top lobbying heavyweights. Proponents also face friction on the left from advocates of single-payer healthcare, who espouse an alternate vision of how to overhaul the state’s healthcare.

Despite the political hurdles, an effort to rein in prices is tantalizing for policymakers, as healthcare costs gobble up more of state budgets, employers’ bottom lines and workers’ paychecks.

“It’s quite bold,” said Kristof Stremikis, director of market analysis with the nonprofit California Health Care Foundation. “I’m not surprised that a proposal like this has been put forward. I don’t think many people would disagree with the assertion that healthcare costs in the state are far too high.”

The measure, which will be unveiled at a news conference Monday, would establish a commission that would set rates for healthcare services based off what the government pays for such services under Medicare.

The commission, which would be an independent state entity, would determine the rates for all services covered by commercial health plans, including those offered by employers to their workers and those sold in the individual marketplace. Public health programs, including Medicare and Medicaid, would not be affected by those price caps.

The proposal takes some inspiration from the model established by Maryland, in which the state sets the prices paid by all payers — including insurance companies and public healthcare programs — for hospital services.

Assemblyman Ash Kalra (D-San Jose), who is carrying Assembly Bill 3087, said the measure marks a shift in the healthcare debate, from maximizing insurance coverage to addressing the cost of care.

“Access must be coupled with affordability,” Kalra said. “Just having access to healthcare by itself doesn’t mean you’re going to get the healthcare you need.”

But opponents counter that capping prices could inhibit patients’ ability to get care by driving doctors out of the state and hospitals to scale back services.

Dr. Theodore M. Mazer, a San Diego ear, nose and throat specialist who is president of the California Medical Assn., called the bill a “poorly conceived, unprecedented threat to patient access to health care.”

“This dangerously flawed legislation would result in government-sanctioned rationing of care and higher out-of-pocket costs for patients,” Mazer said in a statement. “It would also likely cause an exodus of practicing physicians, which would exacerbate our physician shortage and make California unattractive to new physician recruits.”

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Driving the measure is the country’s escalating healthcare spending, which is by far the highest in the world. The United States spends about 18% of its gross domestic product on healthcare, nearly doubling the average of other advanced industrialized nations, according to the Organization for Economic Cooperation and Development. Although U.S. spending on public programs is generally on par with other nations, spending in the private sector outpaces similar countries. Numerous studies have found high prices are to blame for that widening gulf.

“We know what’s driving this cost. It’s actually not utilization; it’s not going to the doctor too much,” Stremikis said. “It’s the prices we’re paying for individual services.”

Economists point to several reasons for the climbing prices, including inflation, expensive new technologies and an aging population that costs more to treat.

More significantly, consolidation among hospital systems and physician groups have led to fewer providers taking up more concentration in the healthcare market, giving them leverage to negotiate higher prices with health plans, unions and other purchasers.

Californians have felt the sting of high costs. From 2002 to 2016, premiums for those who get insurance through their employer have gone up more than 240%, according to the California Health Care Foundation. Overall inflation went up about 40% during that time.

Some health economists caution that getting the government involved in setting prices is a complicated proposition.

“I’m not a big fan of government rate regulation,” said Glenn Melnick, a professor of healthcare finance at USC. “It makes all the decisions on behalf of consumers. Once you set prices, you indirectly set levels of quality, service, waiting time — everything else is driven by that price decision.”

The bill’s sponsors say their proposal has built in flexibility to the cost controls by setting up an appeals process, allowing healthcare providers to contest a decision by the commission if they can prove it would cause financial hardship.

“It’s not that you can’t charge over the benchmark, it’s that you have to justify why,” said Anthony Wright, executive director of Health Access California, a consumer advocacy group.

Dietmar Grellmann, a senior vice president with the California Hospital Assn., called the appeals process “an empty promise.”

“The whole purpose of this bill is to reduce payments to hospitals,” Grellman said. “No matter what happens, they’re taking money out of the system. All the appeals process would do is adjust the amount of losses.”

The measure also would require the commission to track all health expenditures in the state and set a goal for those costs in the future. That approach, known as “global budgeting,” would allow the state to keep track of overall spending and intervene if that trajectory seems too high.

“A commission looking at costs, looking at what drives it, looking at who the actors are — you can call out people [responsible for high prices],” said Richard Scheffler, a health economist with UC Berkeley. “That could be very, very powerful.”

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The bill has been embraced by some of the state’s biggest labor groups, including the California Labor Federation. Union organizers say growing healthcare costs dominate contract negotiations with their employers and cut into the take-home pay their workers receive.

“It’s the big elephant in the room. Between the workers and the employer, we throw proposals back and forth about healthcare: How much are you going to cover? How much are we going to cover?” said Nick Javier, a server at the Westin St. Francis hotel in San Francisco and a member of Unite Here, the hotel workers’ union.

But healthcare providers signaled intense opposition, arguing the plan would fundamentally upend medical care in the state.

Grellman, of the hospital association, said that by not addressing Medi-Cal and Medicaid, the proposal amounts to “tinker[ing] around the edges.”

“You’ve got this wobbly table that is going to continue to wobble,” Grellman said. “It’s not a comprehensive solution. The comprehensive solution probably needs to include Congress.”

The California Assn. of Health Plans said it was reviewing the plan, but said it has opposed price regulations in the past, including a 2014 ballot initiative that would have given the state insurance commissioner power to block rate hikes that were deemed excessive.

“Remember that voters soundly rejected rate regulation four years ago when they defeated Proposition 45 by a 59-to-41 [percent] vote — because they know that government price controls do more harm than good when it comes to keeping costs down and providing access to healthcare,” said Charles Bacchi, the group’s president.

The proposal also faces skepticism from advocates of single payer, who mounted a vigorous effort to push universal state-financed healthcare last year. That bill, Senate Bill 562, was shelved in the Assembly.

Stephanie Roberson, director of government relations for the California Nurses Assn., said the new measure was a “piecemeal approach” that is philosophically at odds with the drastic overhaul of SB 562, which the union sponsored.

“The sponsors and the author are going to incur the same wrath from the insurers, from hospitals and others as they would with single payer, so why not move forward on a solution that would fundamentally solve this problem?” Roberson said.

Further complicating the effort is timing: By unveiling the bill in April, supporters have little more than four months to mount a major legislative push. Still, proponents insist they have girded for battle.

“When they tell us it’s a big fight — you’re damn right it’s a big fight,” said Roxanne Sanchez, president of SEIU California. “But if we don’t have it, we’re going to be extinct anyway. Our households can’t afford it.”

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