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California is weighing stiff penalties for hospitals and other healthcare entities that don’t stay under state spending limits, potentially levying hundreds of millions of dollars in fines if these providers don’t take steps to rein in rising healthcare costs.
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If the state Office of Health Care Affordability adopts the fines next week, hospitals, medical groups, insurers, and others could face penalties that amount to as much as 125% of the total they spend above the state’s annual growth targets.
The penalty proposal comes after healthcare entities in California were asked to limit growth by 3.5% last year and ramp down to 3% by 2029. Seven hospitals that state officials consider particularly expensive face even smaller growth targets: 1.8% in 2026, dropping to 1.6% by 2029.
Consumer advocates argue that state financial deterrents are critical to bring relief to millions of Californians struggling with high insurance premiums and out-of-pocket expenses. Hospitals accounted for 40% of the increase in U.S. health spending from 2022 to 2024, compared with 11% from retail prescription drugs. But adding teeth to those targets sets up a fight with the powerful hospital industry, which has a pending lawsuit challenging the spending limits as unreasonable. Hospitals warned that they will cut back on vital services, including in emergency rooms, obstetrics, and behavioral health.
Healthcare industry representatives said the state affordability office hasn’t accounted for year-to-year volatility or other factors beyond the industry’s control, such as rising minimum wages, state earthquake retrofit requirements, and expensive new drugs.
“They’re building the plane while flying it,” said Ben Johnson, group vice president for financial policy at the California Hospital Association. “We know improvements in affordability are needed, but we have serious questions about how and about what the unintended consequences could be under OHCA’s rather stringent approaches.”
When calculating penalties, California regulators would consider various factors, including a healthcare entity’s financial situation, its market impact, and the gravity and number of offenses, according to a board presentation in June. And entities would first be given opportunities to implement performance improvement plans to bring their spending into line before penalties are imposed. For those that don’t comply, the board is considering penalties of $10,000 a day or a flat $500,000.
The penalties, which the affordability office’s eight-member board is required by state law to adopt, are slated for discussion, and a potential vote, at the board’s Aug. 26 meeting. The soonest healthcare providers would be subject to penalties is 2028, because it’s expected it will take two years to collect and publicly report spending data to measure against the 2026 targets. The state is still collecting data on how entities performed against the 2025 targets, which aren’t enforceable, according to Andrew DiLuccia, a spokesperson for the California Department of Health Care Access and Information.
California is one of at least eight states that have set spending targets as part of an expanding effort to curb soaring healthcare spending across the nation. Connecticut, Massachusetts, Oregon, and Rhode Island have also authorized the use of some type of financial penalty. The specifics of each vary widely, although so far no state has applied them.
A survey last year by the California Health Care Foundation found that 4 out of 10 state residents said they had medical debt, and 6 in 10 reported that they or a family member had skipped or delayed medical care in the previous 12 months because of cost. Nationwide, about half of adults say it is difficult to afford healthcare costs.
After Rosalyn Book got stiches on her chin, the elementary school teacher received a $15,000 ER bill from a local hospital, despite having insurance. Many teachers in her district leave because they can’t afford the cost of healthcare and insurance premiums, she said.
“The healthcare charges are just insanity, and what we get as patients for the care, it’s not the best either,” said Book, president of the Monterey Bay Teachers Association. “If you’re a working, regular individual in terms of how much you make, the cost of living and especially the healthcare is just not doable.”
Meanwhile, hospitals are warning there’s a risk of more closures. According to Yale University’s Health Care Affordability Lab, 17 hospitals have closed in the state since 2016, compared with only six openings.
