How California can stop making health insurance more expensive

California families will soon pay more for health insurance than for a new car.

Average premiums for employer-sponsored family coverage are expected to top $30,000 in 2027. Between 2022 and 2025, they climbed 24% — nearly twice the rate of inflation.

No single factor explains California's soaring insurance premiums. But state officials can tackle several of the forces pushing them higher, including hospital-driven consolidation of the healthcare market, opaque prescription-drug middlemen, and taxes that make private coverage more expensive.

Absent action from Sacramento, employers will be forced to hold down wages, raise prices, reduce hiring, shift more costs onto workers, and offer less generous coverage. Employers may write the checks for health insurance, but workers ultimately pay through lower wages, while consumers bear the cost through higher prices.

The biggest obstacle to competition is hospital-driven consolidation.

Large health systems have spent years acquiring competing hospitals, independent physician practices, ambulatory surgery centers, and outpatient clinics. As competition declines, insurers have less leverage when negotiating reimbursement rates. Dominant hospital systems can therefore demand higher prices — costs that ultimately show up in insurance premiums.

Hospital employment of physicians has surged over the past decade. Nationwide, nearly six in ten physicians now work for hospitals, up from fewer than three in ten in 2012. The trend has been particularly pronounced in the West.

Those changes have consequences for premiums. One study found that premiums were 12% higher in markets with both high levels of hospital consolidation and extensive hospital ownership of physician practices.

California can begin restoring competition by targeting contract provisions that prevent insurers from steering patients toward lower-cost facilities or excluding hospitals from their networks.

Greater price transparency would reinforce those efforts.

Hospitals know exactly what insurers pay. Employers and patients usually don't. Requiring hospitals to disclose negotiated rates in a standardized, comparable format would allow employers, insurers, and patients to identify lower-cost providers — and force higher-priced hospitals to compete more aggressively on price.

This is not merely theoretical. One study found that negotiated prices fell 5.1% for surgical procedures and 9.1% for radiology services after prices became publicly available. Lower hospital prices reduce insurers' claims costs, which are the biggest driver of future premiums.

The federal government has issued multiple rules ordering hospitals to disclose their prices. It's long past time for hospitals to follow those rules.

Competition is also lacking in the prescription-drug supply chain.

The three largest pharmacy benefit managers process roughly 80% of U.S. prescriptions. Yet their rebate agreements and affiliated pharmacies often allow them to make more money when patients receive higher-priced medicines than when they receive lower-cost alternatives. That's the opposite of the incentive employers and health plans think they're paying for.

Those distorted incentives are not hypothetical. A Federal Trade Commission investigation found that the largest PBMs' affiliated pharmacies generated billions of dollars in revenue above benchmark acquisition costs on specialty generic drugs.

To its credit, California has begun addressing this problem. Its recently enacted PBM law bans spread pricing — the practice of charging a health plan more for a drug than the PBM pays the pharmacy — and requires manufacturer rebates to be passed through to health plans. It also limits PBMs' ability to steer patients toward affiliated pharmacies.

Now California has to make those reforms actually deliver savings. Regulators should require health plans to show how passed-through rebates reduce premiums or patients' costs at the pharmacy counter. They should also prohibit PBM compensation tied to a medicine's list price or rebate size, which can reward middlemen for favoring more expensive drugs.

Sacramento should stop tacking on new costs, too.

The state's newly approved tax increase on private health plans is intended to help finance Medi-Cal. Insurers have warned that they'll fold those costs directly into premiums. The California Association of Health Plans estimates that it could add roughly $100 per covered person — or $400 for a family of four — if federal officials approve it.

Taxing private coverage to finance public coverage does not make healthcare more affordable. It merely transfers more of the burden to employers and ultimately employees already struggling with steep increases.

California families are on track to pay more than $30,000 a year for health coverage. Sacramento cannot control every force driving premiums higher. But it can curb hospital market power, ensure PBM savings reach employers and patients, and stop adding new costs to private coverage.

Those steps would not make insurance cheap overnight. They would make the market more competitive — and premiums more affordable.

Sally C. Pipes is President, CEO, and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute. Her latest book is "The World's Medicine Chest: How America Achieved Pharmaceutical Supremacy – and How to Keep It" (Encounter 2025).

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