Video + story: Hsiao says hybrid single-payer is best option for Vermont

William Hsiao

Editor’s note: Anne Galloway contributed to this report. Video of Hsiao’s presentation and a press conference with Senate president pro tem John Campbell and Speaker of the House Shap Smith are at the end of this report. More information was added to this story at 5:30 a.m., and again at 10:15 a.m. on Jan. 20, 2011.

The very day the U.S. House of Representatives declared last year’s health care bill excessive and voted to repeal it, Vermont’s Legislature heard – and seemed to welcome – a report declaring that the new law did not go far enough, and that Vermont should establish a unique “public-private single payer system” to “show the way forward for the rest of the United States.”

The concurrence was no doubt mere coincidence, but Vermont’s apparent determination to go its own way is not. If state lawmakers and Gov. Peter Shumlin, who campaigned on a single payer system, enact such a plan, Vermont would indeed be in the vanguard.

Though some in the Capitol were wary of the recommendations from Harvard economist William V. Hsiao, and no one endorsed every detail of his draft proposal (including an 11 percent payroll tax on employers and a 4.5 percent payroll tax on employees), Democratic and Republican lawmakers agreed that a major transformation of the state’s health insurance system was likely to pass the Legislature, and that it would go at least in the general direction of Hsiao’s report.

Hsiao says his single payer plan, designed to provide coverage to every Vermonter while reducing health care costs for most of them, would reduce eight to 12 percent of health care costs immediately (once implemented in 2015) and an additional 12 percent to 14 percent over time. In addition, he says it will help to create 5,000 new jobs because it will enable businesses that are burdened by health care costs to expand.

If Vermont adopted the hybrid single payer system he proposes, Hsiao said the state’s projected absolute savings over time would be $490 million in 2015; $1.35 billion in 2019; and $2.1 billion in 2024. (The margin of error for these estimates is 15 percent.) The savings would be used to provide coverage for uninsured and underinsured Vermonters, and would be invested in primary care services.

Whether the hybrid public-private plan would make Vermont the national model envisioned by Hsiao and Gov. Peter Shumlin, or saddle the state with an unworkable system out of synch with the rest of the country, remains unknown, and no doubt will be debated over the next few months.

But while some Republicans doubted Hsiao’s claim that switching to “a uniform rate and payment structure,” for health financing would make Vermont both healthier and richer, there was surprisingly little outright hostility and rejection of the hybrid single payer plan, radical though it may be from a national perspective.

The general sentiment seemed to be that something was likely to pass, and that an interest group has a better chance of influencing the final product if it did not trash the basic proposal from the get-go.

Even the private insurance companies, many of whose policy-holders would presumably be diverted to the new “single pipe” which would channel all payments to doctors and hospitals through set rates for procedures cautiously welcomed Hsiao’s proposal.

“It’s not keeping me up at night,” said Bill Little, the Vermont vice president for MVP Health Care, who said that under the plan his company might be able to offer supplemental coverage to Vermonters covered by the single-payer plan, including Medicare patients. The Hsiao plan would not affect Medicare coverage.

Blue Cross and Blue Shield, the state’s largest private insurer, issued a statement pledging to work with lawmakers “as they evaluate various approaches to health care reform.” The “Blues,” as a non-profit with a long history in the state, see the possibility of becoming an integral part of the proposed new system, which isn’t designed to be administered by state government. Under Hsiao’s plan, private companies could compete in a bidding process to provide health care and administrative services.

“If there’s a single payer system, we’d like to be the single payer,” said Leigh Tofferi, the Blue Cross-Blue Shield lobbyist in the Legislature.

Though anything can happen in the legislative session, the consensus that a health care bill would pass rested to some extent on the apparent support, in an overwhelmingly Democratic Legislature, from Shumlin, House Speaker Shap Smith, Senate President Pro Tem John Campbell, and the chairs of the health committees in both houses.

Smith said he was not bothered by the complication that though the new plan is scheduled to go into effect in 2014, right now federal law would not allow Vermont to make such extensive changes until 2017 and even then only with waivers from the Department of Health and Human Services. Hsiao points to 15 major barriers to reform, including waivers for Medicare, Medicaid, the employment self-insurance law known as ERISA and the Patient Protection and Affordable Care Act. (The law U.S. House Representatives voted to repeal today.)

It would not be unprecedented, the Speaker said, for the Legislature to enact “a plan to be implemented over a course of years,” based on some kind of “trigger mechanism” in which provisions would become active as federal law permitted.

Perhaps the most negative reaction came from The Associated Industries of Vermont, whose spokesperson, Bill Driscoll, said his organization was “fairly skeptical” that the plan would really reduce costs “on a sustainable basis.”

As several lawmakers pointed out, the report’s release was just the beginning of a long process, and despite the support from the Democratic majority for the general concept, many of the specifics face opposition from politically powerful interests.

As Hsiao acknowledged, much of the burden for financing the plan would be borne by specialist physicians, some small businesses, and affluent two-earner couples, all of whom are adept at public relations and political infighting.

The Shumlin administration has already started writing a bill, which will be submitted to the Legislature in the coming weeks. Lawmakers will then vet the bill in the committees of jurisdiction in the House and Senate. In the meantime, Hsiao is taking public comment on his draft proposal, and he will present a final report on Feb. 17 after he has incorporated changes proposed by stakeholders and others.

The question is: Will the administration incorporate Hsiao’s report whole cloth into the bill it proposes to the Legislature? Probably not. Anya Rader Wallack, a health care policy expert who is spearheading Shumlin’s reform efforts in Vermont, said the Hsiao report will “heavily influence” the legislation. She said it’s “too early to tell,” for example, if Shumlin will propose a payroll tax.

“You’ll see some of our ideas in the bill,” Wallack said, which will be a roadmap for how the state gets from “here to there.”

Wallack said the report wasn’t finished until 3 a.m. on Tuesday, and she didn’t receive a final draft until today. At the “30,000 foot level,” she said conceptually some of the recommendations, such as a uniform payment system — across-the-board rates for medical treatments, procedures, visits and hospital stays — makes sense, but “what that means exactly” is anyone’s guess at this point. She agreed with Hsiao’s assessment that the current payment methods, in which health care providers are remunerated on a “fee-for-service” basis, makes the existing payment structure “chaotic.”

“You’d be hard-pressed to find someone who thought the best way to pay for medical care is through fee for service,” Wallack said.

Last summer, the Vermont Health Care Reform Commission hired Hsiao to devise three different health care reform plans. He was charged with finding a way to contain costs, giving all Vermonters equal access to medical care and establishing a system in which medical providers can share information about their patients more efficiently.

Hsiao, an internationally renowned economist from the Harvard School of Public Health, designed three health care reform plans: a government run single-payer system (Option 1), a public option (Option 2), in which health insurers compete for patients through exchanges, and Option 3, a.k.a. the economist’s free choice.

Hsiao recommended Option 3, which he presented to lawmakers as a public-private hybrid single payer plan.

In the months leading up to the release of the report, Hsiao and his team of 20 specialists analyzed existing data from state agencies in order to get a snapshot of the cost effectiveness of the state’s system.

The findings were grim. They found waste, fraud and abuse; skyrocketing costs; and profound inequities between Vermonters who have good jobs with benefits and low-wage workers who pay a disproportionate share of their incomes toward health care costs.

Health care expenditures are likely to grow by $1 billion from 2010 through 2012, according to state data, and unless Vermont takes steps to reform its system, the number of state residents who are uninsured or underinsured would continue to remain high even after the federal Patient Protection and Affordable Care Act goes into effect. Fifteen percent of Vermonters would continue to lack adequate medical coverage and would spend a high percentage of their household budgets on insurance; 32,000 of the state’s residents would remain uninsured under the PPACA.

Against this backdrop, Hsiao and his team of 20 specialists ran the numbers on all three reform concepts. In his report, Hsiao rejects the public option for two reasons: It doesn’t save nearly as much money as the two single payer systems, and it doesn’t provide medical coverage for all Vermonters.

Hsiao’s Option 3, which is based on a public-private partnership, would provide the two crucial elements of a single payer system – a common benefits package for all Vermonters and a uniform payment program for all health care providers. The uniform payment program is a cost containment exercise in which a single rate is set for procedures, treatments and hospital stays. Under such a system, all payments would be administered through “one pipe.”

That single pipe concept sounds simple, but it’s one of the keys to the kingdom. Without it, the state will continue to see “chaotic conditions,” like the state has now, Hsiao said, in which providers all charge different rates for procedures, office visits, and the like. The result is cost shifting — or increases in rates to Vermonters who are paying for insurance.

The hybrid has another, not-to-be-underestimated saving grace: It doesn’t come with the political baggage of a government-run system, according to the report.

Does the hybrid plan meet the definition of single-payer system? It depends on where you’re sitting. “Single payer is like beauty, it’s in the eye of the beholder,” Hsiao said. “For our work we must define it precisely.”

Dr. Deb Richter, a longtime advocate for single payer (she’s been lobbying the Legislature for 22 years), said a government administered system “makes the most sense in terms of good policy,” but the system doesn’t have to be controlled by the government to be effective.

Richter describes Option 3 as a “hybrid of good policy and politics from Dr. Hsiao’s point of view.”

Under Hsiao’s version of single payer, all Vermonters would have insurance coverage and the system would be administered by private entity that would bid on the project every two years. The system would be paid for through an 11 percent payroll tax (split between the employer and employee, at one point estimated at a 30-70 split, but the number would be determined by the Legislature), federal Medicaid funding and savings achieved through a cost-containment system that would create a single pricing system for procedures, treatments and hospital stays. The payroll taxes would provide for less than half of the money needed to fund the system, according to Hsiao. Low-wage workers, their employers and Vermonters who receive non-wage income would be exempt from the payroll tax.

Medicare benefits would not change, though whoever wins the contract for administering payments to providers would also handle payments to providers for the federally subsidized program for Vermonters age 65 and older. Nursing home and home health care are not included in Hsiao’s hybrid plan.

The cost of health care for employers and employees would be 17.5 percent of payroll in 2015, under the Patient Protection and Affordable Care Act, according to an analysis by Hsiao’s team. If the state enacted a payroll tax to support a single payer system, it would be 14.5 percent in 2015.

If Vermont adopted the hybrid single payer system he proposes, Hsiao said the state’s projected absolute savings over time would be $490 million in 2015; $1.35 billion in 2019; and $2.1 billion in 2024. (The margin of error for these estimates is 15 percent.)

An independent commission would oversee the system to ensure that it is accountable to patients and taxpayers.

If Hsiao’s recommendations are implemented in 2015; the savings would be immediate and substantial, according to the report. Vermonters would save $1.35 billion in 2019. Some of that money — $50 million — would be used to support incentives for primary care nurses, doctors and community health care communities. The system would also provide coverage for 32,000 uninsured Vermonters and better access to care for underinsured residents.

Hsiao identified 15 “major fiscal, legal, institutional, political and operational barriers” to meeting the goals set under Act 128, including ERISA, the federal law governing corporate self-insurance, in addition to four other federal waivers.

One of the slides Hsiao invited his audience to think of an analogous image – a painting of a hiker viewing a miles-away mountain in the distance. Achieving single-payer is every bit as ambitious, he said.

In a committee hearing, Sen. Kevin Mullin, R-Rutland, asked whether Hsiao had considered an in-migration of sick patients to Vermont as a result of the new system, and questioned there should be a “lockbox” on Vermont residency.

Hsiao said his team looked at the historic record and determined that in the past there has not been an influx of new residents to the state when new benefits – such as the Vermont Health Access Program and Dr. Dynasaur – were introduced. Hsiao said Vermont’s existing benefit rules for residency are sufficient.

Rep. Mary Morrisey, D-Bennington, asked Hsiao how the payroll and provider patient systems would work when Vermonters seek care out of state. (About 20 percent of Vermonters use medical providers in New Hampshire, Massachusetts and New York, Hsiao said – though the bulk of those patients seek treatment at Dartmouth-Hitchcock Medical Center in Lebanon, N.H.)

Hsiao said the single-payer administrative organization would still pay Dartmouth-Hitchcock. “We expect the single-payer organization will negotiate more effective rates with Dartmouth-Hitchcock because it will represent all of Vermont,” Hsiao said.

What would the system look like for big companies, say IBM?

Hsiao said the payroll tax would cost substantially less for large employers than the insurance premiums companies offer. Corporations could continue offering wrap around plans or supplemental insurance, to workers if they choose, to match the plans already in place, or they could ask employees to pick up the single-payer insurance. Under the latter scenario, the difference would free up capital to expand businesses, hire more workers and pay existing employees higher salaries, Hsiao said.

For many small companies that don’t already pay health insurance, the payroll tax will be a new burden, Hsiao said.

Winners and losers

Who benefits? Hsiao says the winners are the 47,000 uninsured Vermonters, as well as the state’s many underinsured residents who pay a disproportionate percentage of their income toward health care costs, large businesses and their employees, and most primary physicians.

Under his hybrid plan, all Vermonters would have access to an “essential benefits package” that would cover more than 87 percent of medical care and 77 percent of drug expenses. There would be small co-pays for doctors’ visits, but no deductibles. Hsiao said deductibles discourage patients from getting the routine care they need to catch untreated diseases early on.

Hsiao said the payroll tax will be less expensive than the current insurance system for most employees and businesses. Here’s an exception: In cases where both spouses in a household have insurance, and can choose one plan over another, both would pay the payroll tax.

Who bears the burden of the new system? Private health insurance companies. Under Hsiao’s plan there would be room for only one administrative entity for the hybrid single payer system.

Hsiao said that MVP and Cigna, two major out-of-state insurers who do business in Vermont, could have provide supplemental care to Vermonters who want enhanced plans that provide more services than the “essential” benefit. BlueCross BlueShield could carve out a niche if it wins a bid for the contract to manage claims.

Sales, marketing and underwriting personnel would no longer be needed to promote insurance products in the new system. Administrative staff at hospitals and clinics who provide billing and insurance reimbursement services would also be likely eliminated in the brave new world of single payer.

The uniform payment rate for physicians could also put a squeeze on medical specialists.

Employers who do not now offer health insurance for workers would be required to contribute through a payroll tax. About 30 percent of small businesses provide insurance benefits to employees, according to the report.

How teachers union and state workers’ unions will be affected by the change remains to be seen. Joel Cook, of the Vermont-NEA, said he supports the idea of separating insurance from employment. “We’re not afraid of it,” he said.

Sen. Randy Brock, R-Grand Isle, Franklin County, said that he doesn’t see how supplemental insurance policies reduce costs. “Does this imply single payer includes a level of benefit that doesn’t match what people have now?” Brock asked.

The senator also questioned the idea of creating a single pipeline for payments. “That further removes consumers” from the cost of treatments, Brock said.

In addition, Brock said the hybrid single payer approach would further accelerate the monopolization of the system by giving one insurer the contract to administer the program.

Stakeholders, including the unions, providers, business leaders and insurers will be meeting with Hsiao and Shumlin administration officials in a series of private meetings at the Department of Banking, Insurance, Securities and Health Care Administration offices today.