California’s Office of Health Care Affordability (OHCA) is moving beyond broader policy-setting and into direct intervention at the provider level — a shift all hospitals and health systems across the state should take seriously. In summary, California just set strict cost growth caps for select hospitals — and all providers should be paying attention.
On April 22, 2025, the Board voted unanimously to impose specific cost growth caps on seven hospitals identified as disproportionately expensive based on a detailed pricing analysis. These facilities, concentrated in regions like the Bay Area and Monterey Bay, must limit their annual cost growth to no more than 1.8% starting in 2026, decreasing further to 1.6% by 2029. Hospitals that fail to meet these targets could face financial penalties (as noted below, enforcement mechanisms are still under development).
This action builds on OHCA’s broader statutory mission under the Health Care Quality and Affordability Act: promoting affordability by regulating both industrywide spending and material transactions. See Cal. Health & Safety Code § 127500 et seq. Although much early attention focused on OHCA’s transaction review authority, as we have previously discussed in our blog, “California: AB 1415 and Expanded OHCA Oversight — What Providers, MSOs, and Investors Need to Know,” the real core of its mandate has always been to curb unsustainable health care cost growth across the state.
According to Board materials, the seven hospitals were selected based on a combination of:
- Net patient revenue,
- Prices paid by commercial insurers compared to Medicare, and
- Other cost and market benchmarks.
Originally, 11 hospitals were under consideration, but after provider feedback and improvement submissions, the Board finalized the list at seven. Enforcement mechanisms — including potential penalties for noncompliance — are still being developed, with further discussions planned for upcoming Board meetings.
Hospitals subject to the new targets argue that the caps are unrealistic given rising labor and equipment costs and warn that service reductions may result. However, OHCA officials emphasized that controlling cost growth is critical to maintaining affordability for consumers and protecting public payers like Medi-Cal.
Why it matters for all hospitals:
This decision makes clear that OHCA’s work is now actively regulating provider cost trends. Even organizations not yet directly targeted should be monitoring their pricing and cost growth closely. The methodologies OHCA used in this action could easily be applied more broadly in future enforcement rounds.
Health care providers in California should prepare for an environment where cost growth is no longer just a financial concern — it is a regulatory compliance issue, subject to direct scrutiny and enforcement.
Foley is here to help you address the short and long-term impacts in the wake of regulatory changes. We have the resources to help you navigate these and other important legal considerations related to business operations and industry-specific issues. Please reach out to the authors, your Foley relationship partner, or to our Health Care Practice Group and Health Care & Life Sciences Sector with any questions.
