California would control healthcare prices for privately insured under new legislation

A new bill introduced in California’s state legislature would put the state in charge of setting rates for medical services covered by private insurers, setting up a battle between consumer groups and the lobbyists for the healthcare industry.

The Los Angeles Times explains that the bill would set up a state rate-setting commission that would base its prices off Medicare—which physicians and hospital often complain pays less than commercial insurance. It would cover everything from hospitalizations to office visits in plans offered by employers and those sold on the individual market.

The bill’s sponsor, California Assemblyman Ash Kalra, a Democrat from San Jose, said the aim is to shift the conversation on healthcare from expanding coverage to limiting the cost of care. To Theodore Mazer, MD, president of the California Medical Association, the legislation is a “poorly conceived, unprecedented threat to patient access to healthcare” that would drive physicians out of the state, raise out-of-pocket costs and result in “government-sanctioned rationing of care.”

The bill does include an appeals process for providers to justify charging above the state-set rates, but California Hospital Association senior vice president Dietmar Grellman dismissed that as “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 proposal is modeled off Maryland’s “global budgeting” program, which has exceeded CMS targets on limiting growth in hospital revenue and Medicare expenditures while also meeting quality improvement goals on reducing the rate of hospital-acquired infections. Other studies, however, have shown it hasn’t changed utilization of services or reduced spending at rural hospitals.

California’s proposal would go beyond Maryland’s project by covering all services included in private insurance plans, rather than hospital inpatient, outpatient and emergency department services. While health economists are split on whether rate-setting by the government will negatively affect quality or service, there’s little argument that such an entity would have a major impact on rising prices for care in California.

“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, PHD, a health economist with the University of California, Berkeley. “That could be very, very powerful.”

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