Strategies
A hospital price growth cap limits how much hospital prices can grow each year. States may tie this cap to an economic indicator such as the Consumer Price Index to ensure that hospital prices do not grow faster than other sectors of the economy.
States can implement hospital price growth caps through three approaches of increasing scope. The narrowest approach leverages state purchasing power by applying price growth caps to the state employee health plan. Alternatively, states can use their insurance rate review authority to implement a price growth cap across the fully insured commercial insurance market, following Rhode Island’s model. The third and broadest approach involves using regulatory authority to set limits on hospital rate increases across all payers. Hospital price growth caps can be implemented independently or combined with other hospital pricing policies such as hospital price caps.
By directly limiting hospital price increases, price growth caps can effectively constrain commercial market spending growth. The magnitude of this impact depends on the level of the price growth cap, how broadly it is applied, and whether this strategy is implemented independently or combined with another approach, such as a hospital price cap.
The Commonwealth Fund implementation guide, Limiting the Rate of Growth in Provider Prices, provides a roadmap for states preparing to implement a price growth cap.
| Question | Answers |
|---|---|
| How should the state apply a hospital price growth cap? | Price growth caps can be applied narrowly to a specific segment of the insurance market, such as the state health employee plan by leveraging state purchasing power, more broadly across the fully insured commercial market through insurance market regulation, or comprehensively across all hospitals through provider regulation. |
| What authority is needed to establish a price growth cap? | If a state chooses to use purchasing power with the state employee health plan, it can use existing contracting authority to set reimbursement terms. To implement price growth caps via insurance regulation, states likely need new legislative authority. States can seek to amend their existing rate review authority to (1) add public interest and/or affordability standards, (2) authorize regulators to approve, disapprove, or modify proposed premium changes, and (3) authorize regulators to consider carrier compliance with a hospital price growth cap when making rate review decisions. States can also use insurance regulation to require compliance with payment growth caps in insurers’ contracts with hospitals. This pathway applies only to fully insured plans and relies on voluntary insurer action for self-insured plans. The broadest approach requires new legislative authority to regulate provider prices, which enables application of price growth caps to the entire commercial market. |
| Which services should be subject to the growth cap? | Price growth caps typically apply to all hospital services, which maximizes savings and prevents hospitals from shifting price increases to uncapped services. However, states could use more targeted approaches, such as focusing on high-cost or high-growth services, although this limits savings and creates gaming opportunities. Within covered services, states must decide whether to apply price growth caps in aggregate – allowing hospitals flexibility to increase prices more on some services if overall average growth in prices stays within limits – or uniformly across all individual services. |
| Which hospitals should be accountable? | States must decide whether to apply price growth caps universally or exempt certain hospital categories, weighing administrative simplicity and comprehensive savings against targeted relief for certain providers. States could comprehensively apply the caps to all hospitals, or could exempt hospitals based on designation (e.g., rural, critical access, sole community), financial metrics (e.g., operating margins below a certain threshold), or service mission (e.g., safety-net facilities serving a high proportion of Medicaid-enrolled or uninsured individuals). States could conduct hospital financial analyses to understand hospitals’ financial health and help determine if an exemption or transition period may be needed for certain hospitals, recognizing that some hospitals are financially robust, while others are not. Additional considerations for any exemptions or variations include the precedent it creates for hospitals and providers to lobby for special treatment, the associated complexity involved with evaluating exemption requests, and the overall complexity with administering a policy with multiple accommodations. |
| At what value should the hospital price growth cap be set? | Price growth caps can be tied to external benchmarks like CPI or set at a fixed maximum growth rate. For states with an existing statewide cost growth target, the hospital price growth cap could be set to the cost growth target value or below it to account for anticipated utilization growth. The choice of benchmark signals whether the state aims to align hospital price growth with general inflation or another indicator. States implementing this strategy should consider potential consequences for hospitals’ financial stability. The cap should be set at a level that allows hospitals to cover legitimate cost increases while preventing excessive price growth. States can analyze current hospital margins, cost structures, and financial positions to understand how different cap levels might affect hospitals’ ability to provide high-quality care. |
| How can the state mitigate the potential risk of exacerbating existing hospital price variation? | Because growth caps apply as percentages, they can perpetuate existing price disparities – uniform growth gaps allow high-priced hospitals to maintain and even widen their absolute dollar advantage over lower-priced competitors. To address this, states can consider baseline hospital price levels when setting the price growth cap. If there is wide price variation in baseline prices across hospitals, states can use differentiated caps that have more stringent limits for high-priced providers and more generous allowances for low-priced providers, thereby gradually reducing disparities in pricing. |
Price Growth Cap
The Rhode Island Office of the Health Insurance Commissioner (OHIC) is statutorily authorized to protect consumer interests and advance the public welfare. Using this authority, OHIC implemented affordability standards – a comprehensive regulatory framework that sets requirements to lower costs and improve quality – for all commercial health insurers in the state. As part of the standards, the State limits the average annual price increases for both inpatient and outpatient hospital services within each insurer-provider contract to the Consumer Price Index plus 1%. OHIC enforces this price growth cap through its insurance rate review process, which allows the Commissioner to review, and in some cases disapprove or modify, proposed health insurance premium increases. Specifically, OHIC considers compliance with the price growth cap when making rate review decisions. OHIC also performs periodic market conduct examinations to monitor compliance with the growth cap and other affordability standards by reviewing carrier-hospital contracts and other supporting documentation.
An independent study found that implementation of the affordability standards was associated with a $55, or 5.8%, net decrease in quarterly total health care spending per commercially insured enrollee in Rhode Island, compared to a similar group of commercially insured adults in other states. While Rhode Island’s affordability standards only apply to the fully insured market segment, they have generated spillover effects in the self-insured market as insurers have applied similar negotiating approaches across both market segments.
Price Growth Cap
In 2021, Delaware’s Office of Value-based Health Care Delivery developed provisional affordability standards modeled after Rhode Island’s approach. The Delaware General Assembly subsequently codified these affordability standards in statute, which include a rate filing requirement that limits commercial insurers’ aggregate unit price growth for nonprofessional services, including inpatient hospital, outpatient hospital, and other medical services. First implemented in 2022, the price growth cap is currently established at the greater of 2% or CPI plus 1%, effective from 2024-2026.
Price Growth Target
California passed comprehensive health care affordability legislation in 2022, which includes establishing a Health Care Affordability Board within a newly created Office of Health Care Affordability. The Board is charged with establishing statewide and health care sector specific cost growth targets, among other duties. In 2024, the Board voted to establish a statewide cost growth target for health plans, hospitals, and large physician organizations based on historical median household income growth, set at 3.5% in 2025 and phasing down to 3% by 2029. In 2025, the Board identified seven hospitals as high-cost hospitals and adjusted the target for these facilities to 1.8% in 2026, 1.7% in 2027 and 2028, and 1.6% in 2029. The State has authority to enforce compliance via performance improvement plans and assessment of administrative penalties.
Price Growth Cap
Under its authority to review Vermont hospital budgets, the Green Mountain Care Board caps hospitals’ commercial price increases. In its guidance to hospitals for developing their fiscal year 2026 budgets, the Green Mountain Care Board set a benchmark of 3.0% as the maximum commercial reimbursement rate increase; its budget decisions for that year were at or below this maximum, applied at the payer contract level. The Green Mountain Care Board has historically approached enforcement on a hospital-by-hospital basis following the end of the budget year; past enforcement actions have included decreases to the subsequent year’s commercial prices.