California hospitals are suing over the state’s efforts to curb their spending

California hospitals filed a lawsuit against a state health regulator Wednesday, seeking to block rules meant to keep consumer health care costs from growing too quickly.

The state Office of Health Care Affordability sets limits on health care spending, capping the amount that a hospital’s spending can grow each year. The California Hospital Association argues that the rules are illegal and will result in layoffs and cuts in services, ultimately reducing access to care.

In a complaint filed in San Francisco County Superior Court, the hospital association argues that setting spending limits creates “arbitrary and irresponsible cost targets that single out hospitals.” The suit also contends that the rules “will severely disrupt … hospitals’ ability to provide comprehensive, high-quality services by starving them of the resources they need to perform their critical roles.”

A spokesman for the California Health and Human Services Agency, which oversees the affordability office, said the agency does not comment on pending litigation.

In 2022, state lawmakers created the affordability office with the goal of containing skyrocketing health care costs. More than half of Californians have reported skipping medical care because it costs too much, and 38% report carrying medical debt. In California, health care spending reached $405 billion in 2020 — or $10,299 per person — a 30% increase over five years.

The office’s appointed board, noting that median household income in California grows an average of 3% annually, set spending targets for hospitals and other providers that aim to match the rise in consumer income. The rules limit spending growth to 3.5% beginning in 2025, and then lower the cap to 3% annually, starting in four years.

Eight other states have targets similar to California’s rules. In California, hospitals and providers are required to submit spending data to the state to show compliance. Beginning in 2028, the state can enforce spending targets with performance improvement plans and fines.

The affordability board’s approval of the growth caps was contentious, with one board member saying the target was unrealistic.

Office’s regulators have since also reduced the limits further for seven hospitals, calling them “high-cost” for consumers. For these facilities, including Stanford Health Care in Palo Alto and Community Hospital of the Monterey Peninsula, regulators set spending growth targets of 1.8% in 2026 and 1.6% in four years.

“The spending caps set by politically appointed bureaucrats could force cuts that result in many Californians traveling farther for care, facing longer emergency room wait times, experiencing more overcrowding, and losing access to critical services like maternity care, cancer treatment, behavioral health services, and surgical care,” California Hospital Association president and CEO Carmela Coyle said in a statement.

In its suit, the association estimates that the state’s spending target will force 75% of its members to operate at a loss. The policy, the group argues, ignores the rising cost pressures on hospitals, including labor, pharmaceutical prices and a rapidly aging population. In addition, hospitals estimate that a federal spending law will result in billions in losses over the next 10 years, as federal funding and reimbursement for patient care is cut or reduced.

The statewide target also applies to large doctor groups and health insurers. The California Association of Health Plans, which represents insurers, responded to the hospital association’s lawsuit by saying the state cannot reach its goal of making health care more affordable “unless everyone is part of the solution.” The lawsuit, according to the group, “demonstrates [hospitals’] lack of commitment to the affordability that Californians urgently need.”

Consumer advocates who back the industry spending targets slammed the hospital association's lawsuit, calling it “outrageous.”

“For years, health care costs have vastly outpaced inflation and wage growth, with very little to show for it — our higher costs don’t translate to better quality of care, outcomes, equity, or access,” said Amanda McAllister, the executive director of the consumer group Health Access California. That’s why, she said, the state “very thoughtfully” created an affordability office and set rules to control the problem.

“This lawsuit is a blatant attempt to try to change the rules of the game after the fact because you don’t like the outcome,” she said.

Supported by the California Health Care Foundation (CHCF), which works to ensure that people have access to the care they need, when they need it, at a price they can afford. Visit www.chcf.org to learn more.

This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.