Can States Put The Brakes On Healthcare Spending?

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California plans to begin enforcing statewide healthcare spending targets in 2026, using public testimony, improvement plans and possible financial penalties for entities that miss them. Studies of state policies suggest spending benchmarks and price caps can reduce costs, but the effects on staffing, service use and different types of hospitals remain concerns.

California will begin enforcing healthcare spending targets in 2026, moving beyond a reporting-only phase as states test ways to slow rising medical costs. The policy could subject hospitals, insurers and other healthcare entities that miss targets to public testimony, improvement plans or financial penalties, while studies of similar state efforts point to possible savings as well as tradeoffs for care and hospital operations.

California’s Office of Health Care Affordability has set an annual target for statewide per-person healthcare spending growth since 2024. The target is 3.5% for 2025 and 2026, and is scheduled to fall to 3% by 2029. Seven hospitals identified as having especially high costs face a tighter target of 1.8% beginning in 2026. Entities were required to report against the 2025 target, but enforcement starts with the 2026 target.

Permitted responses to missed targets include requiring an entity to testify publicly, complete a performance improvement plan, or pay a financial penalty. The report says penalties are initially intended to correspond to the failure to meet a target and can increase for repeated or continuing noncompliance. California reported that statewide healthcare expenditures reached $409 billion in 2023. The authors estimate that cutting the growth rate by half a percentage point on that spending base would mean roughly $2 billion less spending in the first year; this is an illustrative estimate, not a reported outcome of the policy.

Other states are using different tools. Indiana, Vermont and Delaware enacted commercial hospital payment caps in 2025 and 2026, while Washington and New Mexico applied payment limits to state employee plans. States have also considered site-neutral payments and limits on facility fees. These measures are often grouped as caps, but they may constrain total spending growth, the rate of price increases, or the price level itself.

Savings Depend on How Caps Work

Healthcare spending targets and price caps matter because they can change what hospitals, insurers and patients pay, but the route to savings is not the same under every policy. A broad growth target covers spending increases caused by either higher prices or greater use of services. It gives providers and health plans more discretion over how to meet the limit, but the total alone cannot show whether an organization improved efficiency, treated more patients or reduced staffing and services.

A study of five states found that adopting cost-growth benchmark programs was associated with a 2% relative reduction in per-capita medical spending growth. That finding suggests benchmarks may slow growth, but it does not establish that any one state’s policy will produce the same result, or show by itself which changes produced the reduction. Results can also depend on inflation: a 2026 study found meeting state benchmarks during the 2022–23 inflation surge would have required real per-person health spending to fall by an average of 1.6% a year.

Price caps can focus more directly on hospital payments, but lower payments may have effects beyond the price charged. Evidence from Rhode Island points to lower relative prices and premiums, alongside lower hospital labor costs, including registered-nurse staffing and wages relative to comparison hospitals. For patients and policymakers, the central question is not only whether spending falls, but how savings are achieved and who bears the effects.

States Test Different Payment Limits

Rhode Island has limited hospital price growth in the fully insured commercial market since 2010. One evaluation found hospital prices were about 9% lower relative to comparison states over the study period. It also estimated that reductions in fully insured premiums resulting from the policy reached roughly $1,000 per member annually by 2022. A separate evaluation found reductions in hospital labor costs, including registered-nurse staffing and wages compared with hospitals in other states. These are study findings, not proof that every price limit will have the same outcomes.

Oregon uses a different approach for its state employee plan, limiting hospital facility payments to 200% of Medicare payments. One study found about $50 million in annual savings with little detectable change in hospital finances, operations or patient experience. Another found lower outpatient out-of-pocket spending per procedure but increased outpatient service use, which could offset some expected savings. The evidence illustrates why prices, patient use and total spending need to be considered together.

Price-level limits address the possibility that hospitals begin from very different price points. Delaware is moving toward caps tied to Medicare rates, following Indiana and Vermont, with a planned ceiling of 250% of Medicare for covered hospital services. Setting a cap also requires decisions about whether rural, teaching or safety-net hospitals need different treatment. At the federal level, the report identifies a tradeoff: national rules could reach more of the market, while state policies can be tailored to local conditions and tested in different forms.

“On a $409 billion spending base, reducing spending growth by half a percentage point would amount to roughly $2 billion less spending in the first year alone.”

— Dan Arnold, PhD, and Chris Whaley, PhD, the report’s authors

Effects Vary by Provider and Market

California’s enforcement outcomes are not yet known. The state is starting enforcement with its 2026 target, and the source report does not provide results showing how many entities will miss it, whether penalties will be imposed, or how spending and care will change in response. It is also unclear how the state will distinguish among price increases, changes in service volume and differences in patient needs when evaluating performance.

Research from other states offers evidence of possible savings and potential side effects, but the studies examine different policies, populations and time periods. The findings do not settle how a particular cap will affect staffing, access, hospital finances or patient experience elsewhere. Inflation and the starting level of hospital prices may also change how restrictive a target or cap is in practice.

The reach of state rules is another open issue. The report says the federal Employee Retirement Income Security Act, or ERISA, constrains states’ ability to regulate self-funded employer health plans. That means state policies may not apply uniformly across the insurance market. The source describes a possible federal role but reports no national rule or decision to replace state approaches.

California Begins Target Enforcement

The next immediate milestone is California’s enforcement of its 2026 target. The state may use public testimony, performance improvement plans or financial penalties for entities that fail to meet applicable requirements. The source report does not specify which entities will be subject to those actions or when any individual enforcement decision will be announced.

As the state and other governments apply their policies, the relevant evidence will include whether spending growth changes, how hospitals respond, and whether staffing, access or patient costs shift alongside payments. Future evaluations will help clarify whether savings come from lower prices, reduced use, operational changes or some combination. The broader policy debate—whether states should continue testing different approaches or the federal government should set more consistent rules—remains unresolved.

Key Questions

When does California start enforcing its healthcare spending target?

Enforcement begins with the 2026 target. Entities only had to meet reporting requirements for the 2025 target, according to the report.

What can happen if an entity misses California’s target?

The state may require an entity to testify publicly, complete a performance improvement plan or pay a financial penalty. The report says penalties may rise for repeated or continuing failures.

Have state spending targets been shown to reduce costs?

A study of five states found adoption of cost-growth benchmark programs was associated with a 2% relative reduction in per-capita medical spending growth. That result does not guarantee the same outcome in California or identify every effect on care and hospital operations.

How do spending targets differ from hospital price caps?

A spending target limits growth in total spending, which can reflect both prices and use of services. Price caps instead limit how quickly prices rise or set a ceiling on prices, such as a payment limit linked to Medicare rates.

Could lower hospital payments affect patient care?

The research summarized in the report found mixed results. Rhode Island evaluations found lower hospital labor costs relative to comparison hospitals, while an Oregon study found little detectable change in patient experience and another found increased outpatient use. Effects may differ by policy and market.

Source: rss