Looming Spending Cap Threatens Health-Care Availability

Having caused homeowner insurers to flee the state, it looks like the California Legislature is about to repeat its mistake, this time with health insurers.

California is poised to cap health care spending. A 3.5% spending cap starts next year and drops incrementally to 3% in 2029. Spending will be artificially limited by edicts from a new “Office of Health Care Affordability,” which the Legislature enacted in 2022.

Health care providers that fail to meet the spending caps may be punished with “administrative penalties in amounts initially commensurate with the failure to meet the targets, and in escalating amounts for repeated or continuing failure to meet the targets.”

This new agency is misnamed. It should be called the “Office of Impending Health Care Unavailability.”

Price controls always cause shortages. It’s only a question of when. As suppliers struggle with East German–style diktats like this one, they “may respond to such an economic situation by rationing supplies, decreasing production levels or lowering the quality of production, making the consumer pay extra for otherwise free elements of the good (features, options, etc.), and more.”

I saw this in Brazil in the 1980s. Inflation was rampant, so the government suddenly imposed price controls. In short order, goods disappeared off the shelves. I remember trying to find items at a pharmacy in Rio de Janeiro, but the shelves were largely empty.

Price regulation may sometimes be justified when the supplier is a monopoly, in which case price controls may be the lesser of two evils, or there is a grave but temporary emergency.

The California health-care market is not a monopoly. Aside from monopolies and times of war, I’m unaware of any price control that’s ever worked as lawmakers intended it to. Controls lead to scarcity and can cause higher prices than a free market would charge. We see this in California with rent control as well as with homeowner insurance. Health care will be next.

By contrast, California doesn’t try to cap gasoline prices, which is fortunate, or we’d see 1970s-style queues at gas stations. Its forbearance to do that may stem from legislators’ desire to keep gasoline prices as high as possible for environmental and other reasons, which the state facilitates through a number of policies.

Cynics might be forgiven for speculating that this spending cap is a roundabout way of creating a state-run health-care monopoly. So-called single-payer health insurance legislation always fails. So, what to do, since some legislators want a Canada-style system, even though that system is in a state of crisis and Canadians struggle to get health care?

The answer: create a regulatory agency so that legislators aren’t directly implicated if something goes wrong, and have it impose price controls on health care. Already, California faces a hospital crisis, and price controls will worsen it.

“More than half of California’s 425 hospitals are losing money, and many rural facilities are in danger of closing.” When enough hospitals go bankrupt, step in with the monopoly model. Mission accomplished.