Editor’s note: This is the third in a three-part analysis of the Shumlin administration’s plans for a single-payer health care system.
When we looked at Democratic Gov. Peter Shumlin’s health reform initiative on its second birthday, it seemed to be pretty much on track. The Legislature has established the health insurance exchange and has set up the government machinery to manage the delivery and payment system statewide.
We’ve also seen, however, that two of the toughest jobs — integrating the doctors and hospitals who provide the care and devising a different way to pay them — are under way, but by no means solved. The toughest nut of all, building a tax system to pay for it, is scarcely on the horizon.
Given this reality, it is worth looking at the public reaction to health care reform proposals. In a poll conducted by Castleton Polling Institute for WCAX, WDEV and Vermont Business Magazine, 48 percent supported the idea of a publicly financed health care system. Thirty-six percent of the 600 Vermonters polled said they opposed a single-payer plan. A survey taken earlier this year by the Shumlin administration showed that 75 percent of Vermonters would be interested in learning about the health insurance exchange that is scheduled to begin in 2014.
In addition, reform proposals in 2011 and 2012 were supported by large margins in both the Vermont House and Senate, which have Democratic majorities.
The initial positive public response, however, could be somewhat deceptive. The first major health reform effort in Vermont, in 1995, had at least as much support in the Legislature, but foundered in the end because both legislators and the public fled from the complexities of raising the money.
This time around, opponents have been working to undercut the effort from the beginning. Who are they, and what kind of a case do they make? And how valid is it?
The two focal points for the opposition so far are the web and the media, along with the halls of the Legislature.
The most common complaint is that Shumlin pushed the completion date for the financing structure for single payer out past November of this year, when he will be up for re-election. That is a violation of the principle of transparency, many have said. State Sen. Randy Brock, the Franklin County Republican who will challenge Shumlin this fall, pushed a bill in the last legislative session to force the governor to move the disclosure date to September. The provision failed.
The Shumlin administration argued that it made sense to start with the exchange since implementing single payer would lie some years down the road, but there was obvious political value in putting off the most difficult financing questions until after November.
Brock’s apparent intent is to make the gubernatorial election a referendum on single payer health care reform as he has used the issue as a cornerstone of his campaign.
At its core, the argument to cast health care reform as a bad idea seems to be that if the government does it, it must be bad. It is an attack on “freedom.” Support for single payer is a “social experiment” and an unhealthy desire for “free care.” This note was sounded regularly on the website Vermont Tiger.
It would seem that the two sides are at impasse, but on one point, opponents of single payer and proponents agree: The current system is not sustainable.
The United States spent 6.6 percent of its gross national product in 1966, the year Congress enacted Medicare and Medicaid for the elderly and the poor. The national figure is now around 18 percent. Health care expenditures in Vermont are 20 percent of total state spending.
Getting the inflation rate in health care costs down near the underlying rate of inflation would be an accomplishment of historic proportions, and hideously difficult.
The lowdown on costs
It is difficult to follow the debate on the costs and financial benefits without understanding a key fact that underlies the discussion. The report by professor William Hsiao, which was the starting point for the reform process in Vermont, is a dead letter.
Hsiao designed a complete single-payer system whose centerpiece was a payroll tax that would provide a major part of the funding for the program. His early estimates in February 2011 showed that the tax would be 12.5 percent in 2015 and 11.6 percent in 2019, including a 3 percent employee contribution.
As soon as the payroll tax proposal surfaced, employers all over the state used it to project their health insurance costs in the future. Some found that their costs would go up, a disturbing development, given that Shumlin repeatedly assured the business community that, at a minimum, they would not get hurt by his reform effort.
The Hsiao plan immediately headed for a back shelf and the Shumlin design team began to build its own system from scratch. That system could include a payroll tax, officials say, but there is no way now to tell what it would be. The only certain thing is that it can’t be the Hsiao number. There was no formal funeral for Hsiao and his report, however. So the payroll tax figures continue to to be cited, as do his calculations on how much the proposed system would save.
One of the most detailed efforts to assess the cost issue so far has been made by Tom Pelham, who held important finance posts in the administrations of Govs. Howard Dean and Jim Douglas. Pelham weighed in on health reform in a Burlington Free Press op-ed piece earlier this spring.
Pelham was one of a minority of critics who acknowledged that the exchange concept in the federal reform program could be highly beneficial. “A robust government regulated health care ‘exchange’ in the mold envisioned by President Barack Obama is a good idea,” he wrote. “Ending health care cost shifts that drive insurance rates is a good idea … global budgets for regional health care oligarchies is also a good idea.”
“… It is of deep concern that proponents of massive changes to our health care system now acknowledge that the half billion dollar savings in Vermont’s health care cost is not on the horizon and that many businesses will be harmed in the meantime. … If those cornerstone savings are not achievable, should the whole (reform program) be questioned and revisited?”
Pelham bases his opposition case on the Hsiao report’s assertion that Vermont could save $500 million in its first year of operation. Shumlin often cites this figure when discussing his reform initiative. Pelham links that to a statement by Steve Kimbell, commissioner of the Department of Financial Regulation, that the costs in the system won’t actually drop, but that the rate of increase will slow. Pelham implies that this disjunction amounts to a bait-and-switch by the governor and that, he argues, threatens the state’s financial integrity and ultimately its favorable bond rating.
“Whatever the cause,” he wrote, “it is of deep concern that proponents of massive changes to our health care system now acknowledge that the half billion dollar savings in Vermont’s health care cost is not on the horizon and that many businesses will be harmed in the meantime.
“If those cornerstone savings are not achievable,” he concludes, “should the whole (reform program) be questioned and revisited?”
There are several issues wrapped up in this argument. One is how you calculate “savings” and what you mean by savings in the first year of operation. The second is whether the core of the Shumlin effort — building a new payment mechanism for providers and restructuring the delivery system — have the potential to contain costs in the future.
On the first question, there seems little question about the benefit of what’s been done so far in the reform effort. The Green Mountain Care Board has ordered hospital budgets to be capped at 3.75 percent increases for the fiscal year beginning in October. The comparable inflation rate for the first decade of the millennium was roughly 10 percent. The percentage difference between the two inflation rates is roughly $125 million.
If 2014 is the first year of operation, you could add to that the federal subsidies that will come through the insurance exchange, estimated by Hsiao at $200 million to $400 million per year.
Health policy experts in the United States have been trying to figure out how to get costs under control since the mid-1970s. They tried everything from rate setting to an alphabet soup of both state and federal mechanisms to get that done. Everyone failed, as evidenced by the steady growth of costs at multiples of underlying inflation. Hospitals in Vermont more than doubled their budgets between 2000 and 2009. Going back to that inflation track would stack hundreds of millions of dollars in new costs on to a state which already pays 20 percent of its gross state product on health care.
Payment reform and system restructuring are the keys to cost containment. John Brumsted of Fletcher Allen Health Care, Paul Harrington of the Vermont State Medical Society, Betsy Bishop of the Vermont Chamber of Commerce, the spokespeople for Vermont Blue Cross and Blue Shield and MVP — all have strongly endorsed these twin goals.
Abandoning that effort now would leave Vermont with no credible options once the economy reignites and the subsidies from the exchange (a federal, not state reform element) feeds tens of thousands of new patients into the system.
The exchange and the exclusivity question
Perhaps the most vocal critic of the exclusivity feature of the exchange is Jeffrey Wennberg, the executive director of Vermonters for Health Care Freedom, an advocacy group opposed to single payer. In a piece in the Burlington Free Press, he argued that the ban on small group insurance outside the exchange ran counter to what the rest of the country is doing and is contrary to federal law.
Federal law, he wrote, “requires the creation of exchanges and every other state in the nation is making theirs voluntary. Indeed, the (federal law) appears to require the continued existence of off-Exchange plans …”
The National Conference of State Legislatures says that as of May, 12 states have established exchanges. Of those, all but Vermont have permitted sales outside the exchange. The other 38 have taken no action yet.
As for the claim that closed exchanges are banned by federal law, Clifford Peterson, general counsel for the Department of Financial Regulation, said that the Vermont version does not contravene federal law. “Mr. Wennberg is misreading (the law),” he said.
Robin Lunge, director of health care reform for the Shumlin administration, said that at a conference among state and federal officials, state Sen. Vincent Illuzzi asked about closed exchanges and was told that issue was up to the states.
The Wilton model
A different tack is the claim by Wendy Wilton, Rutland city treasurer and the Republican candidate for state treasurer, that the Shumlin single-payer plan would increase costs so much that it would bankrupt the state. She based this conclusion on a model she built, using a payroll tax of 14 percent and applying it to the budget in 2014. She also adopted an average annual inflation rate of 7.5 percent from 2014 to 2018.
Her model shows a hospital budget of $2.852 billion in 2014 rising to $3.54 billion, on average. If the output of her model were accurate, the Shumlin reform initiative would fall of its own financial weight.
The problem is her underlying assumptions are faulty.
The Shumlin team could design a payroll tax, but there is no chance it could be higher than the Hsiao rates, which were high enough that Shumlin killed them on arrival.
Likewise, Wilton’s inflation rate is much higher than consumer price index projections. The U.S. inflation rate now is about 2.7 percent; Wilton says inflation will be 7.5 percent in the coming years.
Wilton says she is not opposed to reform, that she is in fact in favor of it. “I just want it to be out in the open,” she said. “I have asked people to look at my model and tell me if they disagree with it. Nobody has done it.”
The Shumlin administration has not responded to Wilton’s assertions.
The Wilton model may get much closer attention in the state treasurer campaign, which may also likely become a referendum on single payer.
The role of the associations
An important issue in the exchange is the role of what are known as “associations” — entities like chambers of commerce, labor unions and the like. Associations now can act as middlemen of sorts, assembling groups of small employers and arranging health insurance for the pools formed by their employees. A major contention in the health reform debate has been that forcing all the small group carriers into the exchange would disrupt that pattern and in the process impose unaffordable cost increases onto some employers.
The associations have argued that there are more than cost implications here, that the Shumlin strategy threatens to interfere with the way that many small companies now operate.
One of the proponents of this point of view is Betsy Bishop, president of the Vermont Chamber of Commerce, who has testified on health care reform over the last year or so. The Chamber, she said, supports the major components of Shumlin’s initiative.
“Cost containment should be a major part of the solution …,” she told lawmakers. “These efforts should include the continuation of the Blueprint for Health, payment reform, delivery system reform and the creation of an affordable essential benefit package. I commend you for that focus.”
Bishop did not endorse a single-payer system as the end step for the process, but her major focus was on the operations of the exchange. And she and other advocates had considerable success in gaining modifications to the original Shumlin design for that element.
“There are lots of ramifications. If you increase salaries to make up for the employees share in the exchange, you may have tax and fairness problems. Some employees will qualify for subsidies, but others may not. Do you raise salaries for everybody, or just some? … these issues affect company loyalty and competitiveness.”
The governor and the Legislature agreed to add a less rich level, a “bronze plan” to the original three proposed by the administration. The associations also advocated for multiple carriers in the exchange, which it will now have. In addition, they succeeded in getting lawmakers and the administration to keep the employee limit at 50 instead of 100 in the opening stages of the program.
Bishop and other advocates did not prevail, however, on the exclusivity of the exchange, and Bishop contends that is a mistake that will make life harder in the fall of 2013 for many small employers who now offer insurance to their employees.
She acknowledged that an employer might escape a big cost increase by letting his or her employees go to the exchange as individuals, but that would seriously disrupt the internal dynamics of many companies.
“There are lots of ramifications,” she said. “If you increase salaries to make up for the employees share in the exchange, you may have tax and fairness problems. Some employees will qualify for subsidies, but others may not. Do you raise salaries for everybody, or just some? … these issues affect company loyalty and competitiveness.”
If the exchange apparatus collapses at the national level, Bishop said, then long-term relationships with insurance carriers will have been lost.
There is some merit to this view, but the same carriers that operate in the state now — Vermont Blue Cross and Blue Shield and MVP — will be in the exchange, and if the exchange were to collapse, those insurers wouldn’t leave the state, sources say.
The most important consideration on this issue is the off-setting benefits. One of those is the size of the exchange pool. The more people that are in the pool, the wider the health care costs can be spread, and the larger the number of people in the exchange, the more federal reimbursement that will come to the state.
The high end of the $200 million to $400 million Hsiao estimate adds up to as much as 20 percent of the hospital budgets of some $2 billion this year.
The most far-reaching effect, however, will be the first move to decouple health care costs from employment. People may be skittish about that, but virtually every analysis of the health care cost travails of the United States since World War II traces their origin to the accident of job-connected health care payment. Still, advocates like Bishop and others could be right that some small employers will pay a price for reform. The question is whether it is worth it.
This survey does not cover every argument against the Shumlin initiative. There is no way, for example, to refute the ideological position that government should have no role in health care reform. But the most significant shortcoming in the opponents’ case is that they have offered no credible alternative at a time when costs are spiraling out of control.