The Shumlin administration’s health care reform plan, which galvanized lawmakers in the last legislative session, has receded from public view. The legislators, bureaucrats, hurrying advocates, the press, the gawkers—all have left the Statehouse. Gov. Peter Shumlin has gone back to his Pavilion office. A visitor’s footsteps now echo in the halls of our political cathedral. There are plenty of empty tables in the cafeteria.
The quiet is deceptive, however, for the heavy lifting of the reform initiative is now under way. The next major step will be the establishment of the 2012 budgets for the state’s 14 hospitals. These budgets will be submitted to the Department of Banking Insurance Securities and Health Care Administration by July 1, and the commissioner, Steve Kimbell, will render a decision by mid-August or so. The budgets will take effect Oct. 1.
About the Author
Hamilton Davis is a veteran Vermont journalist. He was the managing editor of the Burlington Free Press in the 1970s. He is also the author of Mocking Justice: Vermont’s Biggest Drug Scandal, and two chapters of the book, Howard Dean: A Citizen’s Guide to the Man Who Would Be President.
Davis has been studying health care reform in Vermont and the United States for 30 years. In the early 1980s, he produced a long television documentary on John Wennberg’s small area variation work in Vermont; he subsequently extended this research to several other states, including Maine, Massachusetts, Iowa, and California.
In the late 1980s, Davis served as chairman of the former Hospital Data Council, and in 1988 to 1990, he was special counsel to former Gov. Madeleine Kunin for health policy. As a member of the Vermont House of Representatives, he was a conferee on Vermont’s first health care reform bill; he also served on the late Gov. Richard Snelling’s blue ribbon commission on health care reform. In the mid-1990s, he was a member of the senior management team that directed the integration of the Medical Center Hospital of Vermont, University Health Center and the UVM medical college into Fletcher Allen Health Care.
This is the second in a series of stories by Hamilton E. Davis that examines the Shumlin administration’s single-payer health care plan. Read part one: Long road ahead for single-payer health care system.
The significance of the budgets for Shumlin’s single-payer initiative lies in the reality that universal coverage under a single-payer cannot survive in an environment where health care costs rise by three to five times the underlying rate of inflation as they have in Vermont year after year. The average annual increase for hospital budgets for the years between 2000 and 2009 was 8.4 percent; most hospital budgets more than doubled over that decade.
BISHCA can use its regulatory power to materially bend this cost curve, but it is very difficult to do so. Circumstances have conspired, however, to make BISHCA’s job in the current cycle much easier than anticipated. According to Mike Davis, director of Hospital Regulatory Operations for BISHCA, hospital inflation dropped from 7.5 percent in 2009 to 5.1 percent in 2010 and by 4.9 percent from actual expenditures in 2010 to the 2011 budgets, which are in effect now.
This neck-snapping slowdown almost certainly would have been impossible to achieve with regulation alone. So, how did it happen?
It’s impossible to determine precisely what drove this drop in spending, but there are some obvious suspects. The first is the 2008 recession that ravaged the U.S. economy, and in the process markedly reduced the demand for medical services. You might want that operation to fix your shoulder, but if money is short and even your job seems shaky, well, maybe the shoulder can wait.
The second likely factor was Act 128, which was passed by the Legislature in the 2010 session. The legislation jump-started the reform movement by authorizing the single-payer study by the Harvard professor William Hsaio. That same statute established an inflation cap for the hospitals of 4.5 percent for the 2011 budget and 4 percent for the 2012 figures. In addition to the actual statutory language, the fact that health care reform was in the air probably acted as a goad to the hospitals to cut back significantly. These downward pressures are still in place, so the likelihood is that the 4 percent target in the current cycle is well within reach.
Just because budgets are lining up doesn’t mean that BISHCA doesn’t have anything to do this summer. Under Act 128, Kimbell has the authority to rein in what appears to be excessive spending in a line item of a hospital’s budget. BISHCA could also try to gain some savings by cutting back on what looks like overutilization in the system. Utilization in hospitals in places like Rutland, Bennington and Springfield has been significantly higher than the state averages for many years. We’ll return to this issue later, but given everything else on its plate it may not be worth the effort for BISHCA to grind that excess out now.
BISHCA, in sum, has caught a terrific break on cost containment in this budget cycle. Does that mean the cost inflation problem is solved? Unfortunately not. The Green Mountain Care Board will have to deal with the cost inflation issue once the economy recovers enough to generate significant new demand and a new single-payer system generates even greater demand from the roughly one-third of Vermonters who are now either uninsured or underinsured.
The board, which will be formed later this summer, will assume the current BISHCA functions, including cost control as well as overall management of the system. There is no way to tell whether inflation pressures will reignite in the 2013 budget cycle or even farther out, but historical trends indicate they will increase again with demand.
A central piece of evidence that we can examine is the most recent reform effort in the mid-1990s. From 1966, when the federal government began paying for health care for the elderly (Medicare) and the poor (Medicaid), until now, the total cost of our system rose from just over 6 percent of the gross national product to the current level of about 17 percent. (In Vermont, health care spending represents 18.8 percent of the state’s total economic output.)
The track of that increase was not a straight line. In 1994, the cost curve moderated significantly, not because of government action but because the whole health care industry anticipated that the reimbursement system would be shifted from fee-for-service to capitated care, in which health maintenance organizations would take responsibility for the total care of cohorts of patients for a single price.
The buzzword in the industry was “fixed revenue environment.” The response in Burlington to that development was the formation of Fletcher Allen Health Care through the merger of the Medical Center Hospital of Vermont and the dozen or so doctor practice groups contained in University Health Centers and the partial integration of the whole with the University of Vermont College of Medicine.
The dean of the College of Medicine at that time, Dr. John Frymoyer, was named the chief executive officer of the new Fletcher Allen Health Care and everybody in the organization worked directly for him, from the most senior physicians down to Harold, the guy who ran the parking lot. Only the tightest, most efficient organization was considered capable of steering a big health care system into a capitated world.
As it happened, the HMO movement never really took hold; there are still HMOs, but almost no real capitation, which meant that fee-for-service reimbursement continued to function as the engine of inflation in the system. By 1997, the rate of cost increase in the U.S. system was back to its pre-1994 track, and that rate of increase has been with us ever since. Or at least to 2009, when it dove steeply again.
In 2002, the journal Health Affairs published a study titled The Sad History of Health Care Cost Containment as Told in One Chart, showing that changes in the health care environment have periodically driven dips in the inflation, which give policy makers hope about sustainable costs and almost immediately dash those hopes.
Keep in mind that the chart does not show health care costs per se, it shows the rate of cost increases, which briefly dip to negative percentages, and then quickly re-ascend to between 7 percent and 9 percent levels. The events that drove these dips were the advent of Medicare and Medicaid in the mid-1960s, federal wage and price controls in the early 1970s, a voluntary effort about 1980, and the threat of managed care in the mid-1990s, which we discussed above.
So, we can expect inflationary pressures to rise again, although we don’t know when. If a single-payer system is to succeed in Vermont, those pressures will have to be contained. The designers and managers of the system may stay ahead of the curve by developing a risk-sharing or capitated reimbursement model to replace fee-for-service before the costs surge again.
If costs rise sooner, the board will have access to much tougher cost containment tools in Act 48—the new single-payer law — which explicitly empowers the board to ratchet down costs on the grounds that the public cannot afford them. Section 3 of the act states, as a principle:
“Overall health care costs must be contained, and growth in health care spending in Vermont must balance the health care needs of the population with the ability to pay for such care.”(Emphasis added.)
That language may not sound that profound, but it really is. Affordability may have been implicit in the legislation that has enabled BISHCAs budget management for the last 15 years, but in practice, regulators have tended to approve expenditures that a hospital could show would benefit its patients.
Given the significant drop in the 2010 and 2011 budgets, and the strong likelihood that the trend will continue into the 2012 figures, the system is remarkably close to sustainable now. If the underlying inflation in the overall economy is running at 3.6 percent, then a system cap of 4 percent is pretty reasonable. We won’t see those budgets for a couple of more weeks, but the Fletcher Allen board recently approved a 2012 budget whose net patient revenue figure is just 4.028 percent above the current year’s budget. Since Fletcher Allen amounts to nearly half the total traffic in the hospital system the Act 48 target looks like a cinch.
As we’ve suggested, cost pressures are virtually certain to come roaring back sometime out in the future. But for now the Shumlinites can kick back and enjoy it.
