Pelham: Dangers on the road to single payer

Editor’s note: This op-ed is by Tom Pelham, who served as finance commissioner in the Dean administration, an elected State Representative and member of the House Appropriations Committee and Tax Commissioner in the Douglas administration.

Risky Business: Calls for caution such as Mike Bertrand’s should not be pushed aside as we reach for comprehensive health care reform. Like many Vermonters, I’m from the “trust but verify” school of public management. I’m hopeful that the current effort will lead to real and needed reforms. Given the extensive analytical and political capital being invested in fixing our byzantine health care system, we might arrive at a common sense framework Vermonters can embrace. That’s my hope anyway. I do understand, however, it’s a high wire act and of a scale that can also utterly destroy Vermont’s very favorable fiscal footing and bond rating nurtured over the past 20 years. Bad things do happen. Just look at California, Wisconsin, Rhode Island, the federal government, and Vermont at the end of the Kunin era, among others.

Assuming full responsibility for Vermont’s health care system by state government is risky business for both state government and the Vermont economy. To illustrate the order of magnitude, Professor William Hsiao’s measure of Vermont’s healthcare costs at $5 billion equates to about 19% of Vermont’s $26.9 billion Gross State Product (GSP) and is virtually equal to the current state budget. A misstep or two and Vermonters could be looking at Humpty Dumpty after the fall.

I worry about two things:

The message from the Legislature is clear; education cost containment is not a priority.

First, the legislature’s recent track record on fiscal matters: The Hsiao Report holds that $580 million in efficiencies from Vermont’s $5 billion health care system can be found in the very first year of his preferred plan. That’s 11.6 percent in efficiencies and 15 times greater than the fiscal 2011 “Challenges for Change” target of $38 million in “efficiencies” which many legislators could not embrace. While some legislators promote the Hsiao solution on the one hand, they can’t find on the other the will to support Gov. Peter Shumlin’s $4.832 billion budget, which calls for just 2 percent in reductions now that federal ARRA funds have dried up. Notably, the governor’s proposal is still $670 million higher than the pre-recession 2008 budget of $4.162 billion. (You can find these numbers here, on Page 28.)

Further, in comparison to healthcare, the Education Fund is a mere $1.34 billion in expenditures. Yet, the Challenge for Change targets have been abandoned and legislative inaction is driving the fund toward deficit, forcing property taxes up even as the number of pupils declines significantly. Look at line 27 in the Joint Fiscal Office’s Education Outlook where one sees by fiscal 2013, just 16 months from now, the fund’s $29 million Rainy Day Reserve is fully depleted, absent stiff property tax increases. The primary cause for this potential depletion and property tax increase can be found on line 4.b., where the governor proposes to extract $23.2 million each year from the General Fund transfer to the Education Fund. Such an extraction is fine by me as long as a plan exists to protect taxpayers from a cost shift by controlling education costs. Unfortunately, no plan exists. To the contrary, the Legislature just repealed the requirement that the Vermont Blue Ribbon Tax Structure Commission recommend reforms to our education funding system and last week the House repealed the “two vote” approach to school budgets. The message from the Legislature is clear; education cost containment is not a priority.

A 2 percent savings can be responsibly found in the 2012 state budget in line with Shumlin’s proposal, especially given the budget’s 5.8 percent annual growth trajectory between fiscal 2008 and 2011. Yet advocates, with some sympathetic enablers in the media, readily frame the governor’s proposal in the context of “protecting our most vulnerable.” Let’s have a reality check of the “protecting the most vulnerable” perspective.

Not all 150,000 Vermonters (about one in four) covered by Medicaid are among “the most vulnerable,” especially considering that Medicare covers those over 65. Not all the 70 percent or 120,000 Vermont homeowners receiving income sensitivity are among the most vulnerable. (I know this as I had to comply with a law and sign thousands of checks for millions of dollars to homeowners who clearly could afford to pay their own property taxes.) Not all the 250 school districts and 62 supervisory unions sponsoring the best-in-the-nation, pupil-teacher ratio of 10 to 1 (the national average is 15.3 to 1) nor the overlapping five statewide and 12 regional affordable housing organizations are among our “most vulnerable.”

Responsible savings are achievable if legislators have the courage to look beyond the constant din of advocacy from the sacred cows of the status quo. If legislators lack the conviction to preach sustainability to the current lobbyists camped in the Statehouse halls today, why should we think legislators can sustainably manage another $5 billion in healthcare costs tomorrow?

Secondly, I worry about who’s in charge: Track records are important. Key figures in the Shumlin administration include Steve Kimbell and Liz Bankowski. Kimbell was the director of state planning early in the Kunin administration and is now the commissioner of BISHCA with a primary role in health care reform. Bankowski was Kunin’s chief of staff and is now the transition chief and behind-the-scenes-guru for Shumlin. From 1986 to 1990, state general fund spending grew from $386.7 million to $589.1 million – an incredible rate of 11.1 percent annually. These increases left Vermonters with a $65 million deficit which traumatized the state budget until 1997.

Hopefully these folks learn from experience and are intent upon not repeating history.

Both Governors Howard Dean and Jim Douglas frustrated liberals with their fiscal moderation but were well received overall by Vermonters from the beginning to the end of their tenures. For Kunin, the reverse was true.

Further, Rep. Mark Larson, now chairman of the House Committee on Healthcare, was a key leader of the House Appropriations Committee while the state budget grew from 2008 through 2011 by over $770 million, leaving the current $176 million shortfall and claiming all along (including during the veto override) that the legislature actually cut the budget. As Mike Bertrand’s article cited above notes, these agents of change leading the charge for health care reform have to date ducked all inquiries about how the proposed new health care system will be funded.

The Perfect Storm: For Shumlin, a perfect storm hits the Fifth Floor, should he allow the Legislature to raise taxes rather than trim spending; to raise property taxes rather than contain education spending; and to pass and commit Vermonters to a “trust me now, I’ll bill you later” approach to health care reform. Shumlin need look no further than recent history as to the probable outcome.

Both Governors Howard Dean and Jim Douglas frustrated liberals with their fiscal moderation but were well received overall by Vermonters from the beginning to the end of their tenures. For Kunin, the reverse was true. Becker polling in December, 1985, found Vermonters viewed Kunin favorably by 76 percent. But, by June, 1990, she was underwater at 43 percent and by August, 1991 was down to 39 percemt. In a trial heat for Congress against Bernie Sanders and Peter Smith, she polled only 17 percent of the vote. Failure to prudently manage the state’s fiscal affairs certainly played a primary role in this deterioration.

At the end of this session, Shumlin can enforce fiscal discipline. When push comes to shove, his friends in the House and Senate will not override his desired budget, but will allow him to lay claim to the more moderate middle as did Dean and Douglas. As for health care, he must be transparent and show Vermonters the money that Hsiao tells us can be saved. Here’s one suggestion.

In preparation for the fiscal 2011 budget, a Tiger Team reviewed in some detail Vermont’s Medicaid spending profile in fiscal 2009. The report documents $1.057 billion in direct Medicaid expenditures plus another $36.6 million in Medicaid administrative costs for fiscal 2009. These costs comprise a large portion of Vermont’s healthcare spending from which efficiencies are expected.

To add credibility to the $580 million claim of efficiencies in the Hsiao report assuming the implementation of Option 3, show Vermonters specifically where proportional savings of plus or minus 11.6 percent ($126 million) can be achieved relative to the known and detailed expenditures for fiscal 2009 now residing in Vermont’s Medicaid accounting system. These savings should be presented by provider and in relation to the five key sources of savings in the Hsiao report: Administrative, Reduced Fraud and Abuse, Shift to Integrated Delivery System, Medical Malpractice Reform, and Public-Private Management Structure.

In doing this, two goals are accomplished. Relative to health care reform, Vermonters can be more assured that the practical application of Hsiao’s approach is valid as Bertrand puts it, “in the real world.” Secondly, such an effort will provide the Legislature with near term recommendations to reduce the fiscal 2012 and 2013 Medicaid budget, helping the governor meet his budget goals through efficiencies while protecting the most vulnerable and without raising taxes.

Risky Business and The Perfect Storm were entertaining movies, but should be avoided as scripts for health care reform that shape Vermont’s fiscal and political future.


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