Rising spending tests the limits of state cost growth oversight

Modern Healthcare – Tuesday, April 1, 2025
By Alex Kacik

An increasing number of states are setting healthcare cost growth targets to control spending, but critics question whether those policies can adequately curb costs.

Around a dozen states have implemented or are considering policies designed to track healthcare spending trends and reduce cost growth. State officials continue to add data sources and enforcement tools to strengthen cost growth benchmarks. However, economists argue those programs do not have the regulatory teeth to meaningfully slow spending growth.

Inflation-adjusted national health spending increased 3.6% in 2023 from the previous year, according to KFF data. Rising healthcare costs require employers to pay higher premiums, depressing wages. Patients delay or forgo care as coverage becomes less affordable.

Healthcare spending had slowed through the COVID-19 pandemic as utilization plummeted. But over the past two years, cost growth has picked back up, reaching around 8% in several states as people resumed care and providers charged higher prices, benchmark administrators said.

Much of that recent growth stemmed from both utilization and price increases across hospital outpatient departments and pharmacy sectors. Spending is rising along with the use of high-cost glucagon-like peptide-1 agonists, or GLP-1s, state overseers said.

“Contract negotiations between providers and payers are tough, inflationary pressure is building and spending is going up,” Rhode Island Health Insurance Commissioner Cory King said. “Whether that is persistent or a short-term aberration remains to be seen, but transparency into healthcare spending gives you a sense from a policy perspective if you need to use existing regulatory tools or ask legislatures to create one.”

Nine states set targets for cost growth. Massachusetts was the first to establish a benchmark in 2012, and Oregon, Rhode Island, Connecticut, Delaware, Vermont, New Jersey, Washington and California followed.

States including Minnesota and Indiana have taken the first steps toward a cost growth benchmark by setting up offices of healthcare affordability and task forces that compile data, analysis and policy recommendations.

“We know other states are looking at similar initiatives,” said Sarah Bartlemann, who helps manage the Oregon Health Authority’s cost growth target. “Whether states are considering an affordability board or primary care spending targets, there is growing interest in addressing healthcare costs.”

States with these programs typically use data from all-payer claims databases and other sources to aggregate average cost growth for hospitals and insurers, broken out by sectors, including inpatient and outpatient care, and payers, such as Medicaid and commercial insurers. Officials use the data to try to rein in unnecessary spending and craft policy recommendations.

States say their programs are working.

Cost growth oversight limits spending while creating a more transparent system that allows policymakers to craft more impactful legislation, state overseers said.

Massachusetts’ cost growth fell below the national average in eight years spanning 2012 to 2023. Annual average insurance premium growth was 7.3% in the 12 years prior to the benchmark’s implementation, after which the growth rate fell to 4%.

“We are moving in the right direction and this policy initiative changed our trajectory, even if we need to continue to add more tools,” said David Seltz, executive director of the Massachusetts Health Policy Commission, which sets and manages the benchmark.

Some policy experts are concerned that the data sources and methodology used to set cost growth targets do not provide a realistic picture of spending trends.

Cost growth benchmarks typically aggregate all payers, even though commercial spending growth is expected to outpace Medicare and Medicaid. Lumping together Medicare, Medicaid and commercial insurer data could deflate spending trends, said Glenn Melnick, a health economist at the University of Southern California.

“Merging Medicare and Medicaid data into one bucket is not the right way to do it,” he said. “There is very little control over Medicare, so states should strip that out.”

Academics are also concerned potential penalties linked to cost growth benchmarks are not substantial enough to incentivize providers or insurers to limit spending. Many of these policies are voluntary and have no enforcement mechanism to ensure provider compliance, said Roslyn Murray, assistant professor of health policy at Brown University.

“These policies have no teeth,” she said. “When penalties have been issued, which has been infrequent, they are negligible for these hospitals and health systems.”

State officials are still experimenting with enforcement. Several states with benchmark policies use performance improvement plans that require health systems that have continued to exceed cost growth targets to curb spending.

The Massachusetts Health Policy Commission instituted the first performance improvement plan in 2022, ordering Mass General Brigham to cut costs. The maximum fine for not complying was only $500,000, which was a fraction of the Boston-based nonprofit health system’s annual revenue.

Still, commissioners said the process was effective and productive.

“It created an opportunity for a real exchange between the Health Policy Commission and the largest health system in the state,” Seltz said. “We identified their pricing as one of the drivers of their spending growth, so the plan included price reductions.”

The performance improvement plan for the system led to $176.7 million in cost reductions that included lowering prices, more judicious use of MRI scans, fewer avoidable hospitalizations and readmissions, and shifting more low-acuity care from academic medical centers to community hospitals, Seltz added.

Mass General Brigham said in a statement it is continuing to focus on cost savings while improving access to care.

The Health Policy Commission is looking for more tools, and pushed for legislation to try to strengthen transparency and oversight, which passed in January and will go into effect next year. Under the new law, the commission will have an office dedicated to pharmacy cost growth spending analysis, as well as the authority to review the cost implications of a broader range of healthcare transactions that involve corporate investors.

Escalating financial penalties rather than a capped fine is another way Massachusetts could strengthen oversight, Seltz said.

Oregon bases fines on a sliding scale that matches the size of an organization. The state has yet to test out that enforcement tool, but others may take up the idea.

“We borrowed the performance improvement plan process from Massachusetts, and Massachusetts might be looking to borrow our financial penalty policy from us,” Bartlemann said.

All states borrow oversight policies from each other, she added.

Rhode Island has a cost growth benchmark and affordability initiative that allows state regulators to cap hospital price growth through the Office of the Health Insurance Commissioner. Insurance commissioners have strong incentives to operate these programs, particularly as commercial spending growth tends to outpace other sectors, King said.

“We have a credible threat that if a benchmark isn’t achieved, we would take regulatory action to bring down costs,” he said. “Other state insurance departments should take a greater interest in these types of programs.”

However, states aren’t aiming to limit all healthcare sectors. Cost growth programs typically have carve-outs for certain historically underfunded services, such as behavioral health and primary care, to incentivize investment.

Connecticut, for instance, set a 10% primary care spending growth target for 2025, well above its 2.9% benchmark across all services. The state also has quality benchmark measures.

“In many states, there are tremendous constraints on primary care workforce and access, and we’re seeing similar trends in Connecticut,” said Alex Reger, director of the healthcare benchmark initiative at the Connecticut Office of Health Strategy. “We need the cost growth, quality and primary care spending benchmarks to work together to reallocate dollars to historically underfunded areas like primary care.”

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