Can States Put the Brakes on Healthcare Spending?

This year, California is looking at a way to hold hospitals and insurers accountable for how fast healthcare spending grows. California accounts for roughly one out of every eight healthcare dollars spent nationally. By California’s own measure, statewide healthcare expenditures reached $409 billion in 2023.

At that scale, even small changes in the growth rate matter. 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.

What Is California Trying to Do?

Since 2024, California’s Office of Health Care Affordability has set an annual statewide healthcare spending target, with the goal of establishing shared expectations for reasonable spending growth in the state. The statewide target for per capita healthcare spending growth was set at 3.5% for 2025 and 2026, declining to 3% by 2029. Seven hospitals identified as having especially high costs face tighter targets beginning at 1.8% in 2026.

Healthcare entities only had to comply with reporting requirements for the 2025 target. Starting with 2026, the state will begin enforcing the target. Allowable enforcement actions include requiring the entity to testify publicly, to complete a performance improvement plan, or to pay financial penalties. Those financial penalties can be significant: “in amounts initially commensurate with the failure to meet the targets, and in escalating amounts for repeated or continuing failure to meet the targets.”

California is not alone. States are increasingly experimenting with direct limits on healthcare spending and prices. In 2025 and 2026, Indiana, Vermont, and Delaware enacted commercial hospital payment caps; Washington and New Mexico applied payment limits to state employee plans; and several states considered site-neutral payment rules and facility fee restrictions.

These recent state actions are often discussed together as “caps,” but they are not the same. Policymakers can limit total spending growth, limit how quickly prices rise, or they can cap prices at a particular level. Each approach offers a different path to savings — and each creates different risks and incentives.

Do Spending Targets Work?

A broad spending growth target like California’s focuses on the bottom line. Spending can rise because prices increase, because patients use more services, or both. A total spending target captures all those sources and gives health plans and providers flexibility over how to respond.

There is evidence that such benchmarks can slow spending. A recent study of five states found that adoption of cost growth benchmark programs was associated with a 2% relative reduction in per-capita medical spending growth. But their flexibility also makes them blunt. A hospital might exceed its target because it raised prices, treated more patients, or saw sicker patients. It could meet the target through efficiency — or by reducing staffing or services. The spending number alone cannot distinguish among those responses.

Inflation creates another complication. A 2026 study found that during the inflation surge of 2022 and 2023, meeting state spending benchmarks would have required real per-capita health spending to fall by an average of 1.6% per year. A target that seems reasonable during low inflation can become much tighter when wages and other input costs rise rapidly.

What Happens When States Limit Prices?

More targeted price controls have different strengths and weaknesses. Rhode Island has limited hospital price growth in the fully insured commercial market since 2010. One evaluation found the state’s hospitals had prices about 9% lower relative to comparison states over the study period, and that reductions in fully insured premiums resulting from the policy reached roughly $1,000 annually per member by 2022. But lower prices can put pressure elsewhere. A subsequent evaluation of Rhode Island’s policy found reductions in hospital labor costs, including lower registered-nurse staffing and wages relative to comparison hospitals.

Oregon illustrates a different tradeoff. Its state employee plan limits hospital facility payments at 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 that outpatient out-of-pocket spending per procedure fell while outpatient service use increased, potentially offsetting some of the expected savings.

Price-level caps address another weakness of growth limits: the starting point. If one hospital already charges twice as much as another, allowing both prices to rise at the same rate preserves that gap. Delaware is following in the footsteps of Indiana and Vermont by moving toward price level caps tied to Medicare rates, eventually reaching 250% of Medicare for covered hospital services. A level cap can reduce unusually high prices, but policymakers must decide where to set it and whether rural hospitals, teaching hospitals, safety-net providers, or others need different treatment.

Should Washington Set the Rules?

That leads to the broader policy question: should these experiments remain largely state-based, or should the federal government establish stricter national rules?

States can tailor policies to local markets and test different designs. But the Employee Retirement Income Security Act (ERISA) constrains states’ ability to regulate self-funded employer health plans, and a state-by-state approach can produce uneven reach and a patchwork of different rules. Federal policy could cover more of the market and create more consistent enforcement.

The tradeoff is uniformity. A national spending target or price ceiling would have to operate across markets with very different labor costs, provider supply, patient populations, and hospital finances. The more exceptions a federal rule makes for those differences, the less simple and uniform it becomes.

There is no single answer to the question of whether spending caps work. The more useful questions are what policymakers want to constrain — total spending, price growth, or price levels — and what changes elsewhere in the healthcare system when they do. California, Rhode Island, Oregon, Delaware, and other states are testing different answers. Their experience can help show not only whether spending falls, but how those savings are produced and what tradeoffs come with them. We’re looking forward to finding out the answers.