Will California Criminalize PPOs?

California would use Medicare rates as a floor for determining base amounts for providers and Medicare Advantage rates to set payments to health plans. Providers and health plans would be allowed to appeal for a higher amount based upon outstanding factors.

Assembly Bill 3087- California Health Care Price Relief Act – Assembly Member Ash Kalra

Article Referred by Harvey Billig, M.D.


The high cost of health care is unsustainable and the state must take meaningful action to contain these costs, which are ultimately paid by individual consumers and employers, both public and private.

With the goal of containing costs, improving quality, and reducing disparities, the Health Care Price Relief Act, AB 3087, would establish an independent Health Care Cost, Quality and Equity Commission to set reasonable base amounts hospitals, doctors, and other providers of health care can collect from payers. The Commission’s would use Medicare rates as a floor for determining base amounts for providers and Medicare Advantage rates to set payments to health plans. Providers and health plans would be allowed to appeal for a higher amount based upon outstanding factors.


While California has made major strides in providing access to health care and promoting quality care, the cost of health care remains unaffordable for many working Californians and is a significant burden among public and private employers.

In California, premiums for employer-sponsored health insurance increased 234% from 2002-2016 , and 83% of premium increases in the fully-insured large group market in 2017 was due to price inflation. There are also more public funds being used to cover the cost of health care – CalPERS spends over $8 billion annually and has experienced double digit premium increases over the last two years.

Health care spending in the United States far outpaces other industrialized countries – 18% of U.S. GDP is spent on health care, twice as much when compared with other countries. Based on the last two years of health insurance rate filing data, hospital costs and physician services represent an overwhelming proportion of the overall projected premium dollar – 75% of the project 2018 premium dollar.

Disparities among costs for similar procedures are stark. An MRI in the United States has an average price of $1,119, while the same procedure is $130 in Spain. A hospital stay averages $5220 in the U.S., while it’s $765 in Australia. Bypass surgery in the U.S. is an average of $78,318 versus only $24,059 in the UK. And a knee replacement averages $29,067 in the U.S. while the same procedure would be $17,112 in Switzerland and only $6757 in Spain.

Americans use significantly less health care services than people in other industrialized countries – physician visits and hospital admissions – yet spending is greater due to higher prices. Despite higher spending, Americans have worse health outcomes, including shorter life expectancy and greater prevalence of chronic conditions.

The rates that hospitals and doctors charge vary widely and do not necessarily always correlate with the quality of care a person received. In fact, studies show that hospitals and providers in a consolidated health care market charge significantly higher prices. A 2018 UC Berkeley study found that in California, average in-patient procedure prices were 79% in highly concentrated markets than in areas with more competition. Average physician prices in concentrated markets were 35% to 65% higher. Hospital prices in Northern California, which has a highly consolidated health care, were 70% higher than in Southern California, and were still much higher even after controlling for cost difference, such as wages.

These high costs result in expensive health plans, where a basic HMO plan through CalPERS can cost $2,000 a month. Assuming employers pay 80% of the cost at $20,000 per year, the worker’s share is over $400 per month. A typical worker making $40,000 per year after taxes takes home about $2,500 per month, leaving just $2,000 for housing, groceries, utilities, and other expenses for daily living.

Medicare has been setting health care rates for decades and has a transparent, public formula for setting reimbursement rates for doctors, hospitals and other health care settings. Maryland and West Virginia have taken action to lower the prices paid to hospitals, rather than just reduce the use of health care services and Vermont and Massachusetts are using global budgets.

For example, Maryland has had a Commission set inpatient hospital prices since they passed a law in 1971. As a result, Maryland has “by far the lowest hospital price markups in the country.”


Establishing an independent Health Care Cost, Quality and Equity Commission, under AB 3087, to set the prices paid to hospitals, doctors, and other providers of health care services will address the root cause of health care unaffordability without sacrificing quality.

Commission members shall be appointed by the Governor, Speaker of the Assembly, and President pro tempore of the Senate, in addition to the Health and Human Services Agency Secretary and CalPERS representative as ex-officio members.

The Commission shall establish an advisory committee, which includes representatives of different sectors of the health care industry, purchasers, CalPERS, and consumer groups. The Commission will be charged with taking testimony and public comment to establish prices for doctors and hospitals as a percentage of Medicare, with Medicare as a floor. The Commission will use Medicare Advantage as the benchmark for payments to health plans and insurers. Benchmarking prices to rates based on Medicare creates a simple yet competitive, transparent, and public system of pricing that will lower the costs and save money by reducing the administrative cost of negotiating and tracking different prices.

All payers – employers, workers, and other consumers of health care – will realize the immediate benefit of paying less for health care through lower premiums, co-pays, and deductibles.

Health care providers would also benefit from this new system through administrative savings and less hassle keeping track of what to charge different payers. There will also be recognition of capitated health care through setting rates similar to Medicare Advantage, which can provide incentives for efficiencies and better care management.

Innovative, regional differences and other justified factors will be allowed to appeal for higher rates set by the Commission through a fair and transparent process overseen by an Administrative Law Judge. Health care is a right, and the biggest barrier to achieving that goal is the sky-rocketing cost of health care we all pay. AB 3087 will take meaningful and achievable steps towards that goal.


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Contact: Ryan Guillen, Legislative Director, Ryan.Guillen@asm.ca.gov (916) 319-2027