Proposed 0.7 percent payroll tax would boost Medicaid

Gov. Peter Shumlin delivers his budget address at the Statehouse on Thursday, Jan. 15, 2015. Photo by John Herrick/VTDigger

Gov. Peter Shumlin delivers his budget address at the Statehouse on Thursday, Jan. 15, 2015. Photo by John Herrick/VTDigger

Single payer might be off the table, but health care still topped the agenda in Gov. Peter Shumlin’s third-term budget address Thursday.

The governor is proposing a 0.7 percent payroll tax, which would generate roughly $86 million a year, in order to increase Medicaid payments to doctors and hospitals. The boost would push reimbursements up to the level of Medicare, which pays at a higher rate, and to pay for other initiatives intended to strengthen Vermont’s health care system.

The purpose of the plan is to make health coverage more affordable and set the table for more aggressive reforms in the future, Shumlin said.

“Many of you share my disappointment that we will not achieve at this time the grand vision of Green Mountain Care. If we adopt the package I’ve just set out, we will achieve a significant and meaningful part of the goal we set for ourselves in in Act 48,” Shumlin said.

Currently, Medicaid pays doctors and hospitals 60 percent of what medical services cost, while Medicare pays closer to 80 percent, according to figures from the Green Mountain Care Board.

Underpayments from those government programs are problematic because doctors and hospitals have to make up their losses from insurance companies and self-insured employers — a cycle known as the “cost shift.” Increasing health care providers’ Medicaid income is intended to allow private insurance companies and self-insured employers to negotiate lower rates with providers. That, in turn, is expected to lower premiums. The increased payments are also intended to encourage providers to treat the program’s growing number of beneficiaries.

To make sure that happens, the state will rely on the Green Mountain Care Board to regulate the outcome through its insurance rate and hospital budget-setting processes.

Administration officials said they have assurances from the board’s chairman, Al Gobeille, and Blue Cross Blue Shield of Vermont, the state’s largest private insurer, that they will commit to lowering premiums in 2016. Large, self-insured employers will have more leverage to negotiate with providers as well, but how they use those savings will be up to them.

The payroll tax would take effect Jan. 1, 2016, to sync it with the insurance plan year. The tax would generate six months of revenue in the 2016 fiscal year, a total of $41.4 million. Vermont can use that money to draw down a federal Medicaid match worth $44.5 million. In a full budget year the tax would generate roughly $86 million, plus a federal match.

The payroll tax revenue isn’t a “Trojan Horse,” administration officials said, and can’t be raised to plug holes in the General Fund as the money would be dedicated to the Health Care Resources Fund.

Shumlin wants to put $55 million of the payroll tax revenue toward increasing Medicaid payments. That won’t eliminate the cost shift, which results from both Medicaid and Medicare underpaying. The cost shift was valued at $150.8 million in 2012, the last full year with complete data, but administration officials say it’s a critical first step toward broader health reform.

The Affordable Care Act has expanded Medicaid eligibility to higher income levels and the program covers 185,000 Vermonters as of October 2014, an increase of 20,000 people, according to the administration. The $55 million includes $25 million for increased payments and $30 million to cover expanded Medicaid rolls, officials said.

The other $27.8 million will be used to increase payments to physician practices that participate in Vermont’s Blueprint for Health primary care management program; increase subsidies for out-of-pocket costs on the exchange; increase the Green Mountain Care Board’s budget, and support the administration’s pursuit of a federal all-payer waiver.

“Our Blueprint medical homes and community teams have effectively increased social services for the sickest and most needy Vermonters on Medicaid, and it reduced the medical need of people with private insurance,” Shumlin said.

“Today, its future is at risk because participating providers haven’t seen an increase since the program was launched … my proposal fixes this by more than doubling payments to Medicaid’s Blueprint providers,” he said. The increase would cost $4.5 million.

Boosting the subsidies for out-of-pocket costs on the state’s health exchange would cost $2 million.

The all-payer waiver will let Vermont determine how, and at what rate, Medicare pays doctors and hospitals, thereby allowing the state to incorporate Medicare into payment and delivery reforms already underway for Medicaid and commercial insurance.

“We must push full steam ahead to become the first state to move from the fee for service payments system by pursuing our all-payer waiver from the federal government with all vigor,” Shumlin said.

To support payment and delivery reform, Shumlin called for increased authority for the Green Mountain Care Board, including the ability to open investigations, to align health care technology investments — through budgetary control of the public-private Vermont Information Technology leaders — and the power to approve payments and delivery models.

“The board faces a difficult challenge since national health care costs are expected to grow more than 6 percent annually by 2019,” Shumlin said. The board’s cost containment efforts have held growth at between 2.7 percent and 3.3 percent over the past two years.

House Speaker Shap Smith supports higher reimbursement rates for Medicaid and he said the payroll tax “addresses that issue.”

“To the extent that we can draw down as much money as the governor suggested and drive it right into a reduction in the insurance premiums I think it’s one of the fairer ways we can think about this issue,” Smith said. “If we move in this direction it’s going to be incredibly important that we have the regulatory tools that any money raised goes directly into the reduction in premiums. If we can’t show that, it’s going to be almost impossible to move forward with the payroll tax.”

Rep. Bill Lippert, D-Hinesburg, said he is pleased the governor is still committed to making health care affordable for Vermonters despite having had to back away from public financing. “I know there is a lot of interest in taking a significant step forward,” Lippert said.

Sen. John Campbell, D-Windsor, says some businesses could save money with the governor’s plan, while others could be hurt by the payroll tax. Many companies that dropped insurance coverage and gave raises to employees who went into the health exchange could feel as though they have been penalized.

Health reform proponents had a lukewarm response to Shumlin’s proposal.

Peter Sterling, the executive director of Vermont Leads, a health care reform advocacy group, said the governor didn’t go far enough to make sure low-income Vermonters have access to health care.

Many aspects of the proposal are steps that had to be taken, such as the $30 million in state money to cover people new to Medicaid. Several expressed skepticism that the package would meaningfully reduce private insurance premiums in 2016.

Deb Richter, a long proponent of single payer, says the payroll tax could be a vehicle for single payer in the future. “It could be the camel’s nose under the tent,” Richter said.

But advocates also said the new 0.7 percent payroll tax dedicated to health care costs could pave the way for a publicly financed system in the future.

“It certainly would open the door to that,” Sterling said.

For now, Richter says the governor is taking some necessary steps toward addressing the cost shift, but she worries that hospitals will be the main beneficiaries. As long as the bulk of it goes to primary care, “that’s a good thing.”

“I think we can go much further this session than just what the governor proposed this session,” Richter said. She hopes to pursue a publicly funded primary care coverage for all Vermonters, which she says would boost compensation for doctors, reduce administrative costs and ultimately reduce costs across the system. Private insurance would cover everything else.

Republicans said they support the governor’s plan to address the cost shift, but not how he plans to pay for it. House Minority Leader Rep. Don Turner, R-Milton, said he believes the Legislature can find the $41 million in state money required to fund the administration’s health care proposal by trimming spending in other areas.

Editor’s note: Anne Galloway contributed to this report.

Morgan True

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  • The Governor’s proposals for the GMCB increases government control of health care, continues the steady march towards rationing of health care for Vermont seniors and taxes employers with false promises of lower premiums.

    • Walter Carpenter

      “towards rationing of health care for Vermont seniors and taxes employers with false promises of lower premiums.”

      Exactly how does it ration care for Vermont seniors? If anything, it is at least a start (though a small one) to help the problem of rationing for everyone else.

  • Scott Woodward

    The Governor’s idea to combat the cost-shift has intuitive appeal, but skeptics are right to be concerned about whether and how much savings would be reflected in private premiums. The recently published Rand report questions the existence of the cost-shift (pp. 64-65) and if it does exist the extent to which providers and insurers will renegotiate. Vermont’s health care market fits the description of the uncompetitive market discussed by the Rand report, as well as a 2013 VT Digger article,

    Personally, I’d like to see some changes in claims reporting requirements if this tax goes forward. The GMCB needs better data to isolate and monitor the cost-shift and requiring better and richer claims data would help. This should get baked into proposed legislation because otherwise we’re just paying more to providers without truly knowing how much it’s doing to reduce the cost-shift.

  • john sampson

    In the end, raising taxes on small businesses will continue to hurt the Vermont economy. The State needs to create economic corridors, in all corners of the state, where business can thrive. This can be done in an eco-friendly manner. The current administration continues to make the State an unfriendly place for those of us who have small businesses. As Ms. Johnston points out it is unlikely that true savings will be passed on to any of us who pay premiums for their workers.

    The governor needs to look at wasteful spending at Hospitals. My local hospital has over 9 vice-presidents and a myriad of unnecessary administrative processes. Ask the hospitals to cut their budgets by 3 percent per year….not from care given but from unnecessary IT and other infrastructure spending. Please encourage true competition in the market place and drive costs down!

    • Scott Woodward


      You are right to raise the issue of wasteful spending, though it might be better labeled (for now) as “unknown” spending. For example, an August 2014 GMCB Price Variance Report identified that 57% of the price variation between hospitals for surgical visits can’t be explained, presumably not even by the cost-shift. If we’re going to ask Vermonter’s to pay for an increase in the payroll tax, then it would be incumbent on the GMCB to demand better explanations and better information from hospitals on why there is such high variance for many medical services. We need some confidence that we really will see savings from the additional revenue.

      • Todd Morris

        Scott, let’s be clear. It’s not “Vermonters” who would be asked to pay the payroll tax. It is employers, regardless of profitability who would be asked to fix the problem. The vast majority of Vermonters who receive paychecks would not be asked to contribute more, regardless of income. That is unfair and has predictable negative consequences to economic growth. Can we just stop looking at employers to constantly pay more. Don’t employers already do their share by providing jobs with wages and benefits?

    • Walter Carpenter

      “Ask the hospitals to cut their budgets by 3 percent per year”

      The GMCB has already been doing this. And since when has competition driven costs down? It might for a while, but this while does not last. I do agree with the wasteful spending in hospitals and other institutions, with their nine vice presidents, and so on, though this alone is not going to make access more affordable for those rationed out of it by costs.

  • Karen McCauliffe

    Since the ACA expansion of Medicaid, it has increased the number of Vermonters on Medicaid by 57,705, according to the site, not just 20,000 that the administration stated for this article.

    Yes, the Medicaid program now covers about 185,000 Vermonters or about 30% of the population, but it is a 57,705 increase. If the administration thinks it is only a 20,000 increase then perhaps their calculations are way off. According to the quote from this article, the Medicaid “program covers 185,000 Vermonters as of October 2014, an increase of 20,000 people, according to the administration. The $55 million includes $25 million for increased payments and $30 million to cover expanded Medicaid rolls, officials said.”

    Is the $30 million to cover the expanded Medicaid rolls adequate, considering the administration states the roll has increased by 20,000 where the site says the roll has increased by 57,705?

  • J. Scott Cameron

    So, Governor Shumlin proposes to address the cost shifting resulting from inadequate Medicaid payments (which shift/increase health costs from government plans like medicaid and medicare and increase costs for working people with private insurance) by increasing the payroll taxes paid by these same working people. What a deal. All this does is cut out the middleman and take the working person’s money directly from his or her paycheck. And it won’t stop the cost shift anyway, since at best medicaid will pay 80% of the true cost of care.

    The real problem (from a cost/tax standpoint anyway) is that a couple years ago Vermont accepted time-limited federal incentive payments to greatly expand medicaid. That was good for some of our citizens, who gained medical coverage. But the federal incentives have now dried up, and Vermont taxpayers must now pay the cost of continuing the program. We have about 121,000 people in the state now covered by Medicaid. That’s about 20% of the population. Is this sustainable or just another cruel joke?

    One can agree or disagree about the expansion of our Medicaid population and coverage. One thing that cannot be disputed is that our politicians made the decision to expand without a financial plan in place for the time when the federal dollars were withdrawn. Now the Governor has a plan. A new payroll tax which will hurt the working poor more than anyone else. Will it be enough? No one can say.

    • Karen McCauliffe

      J Scott, Actually now about 30% of Vermont’s population is on Medicaid. Morgan True mentions the 185,000 Vermonters on Medicaid as of Oct 2014, in this Vermont Digger article. Divide 185,000 by Vermont’s population and you get 30%.

      Also a recent Vermont Biz article that I read states that another 5,037 are now on Medicaid with the recent Health Connect enrollment figures for Jan. 2015. So Vermont’s Medicaid enrollment figure may be over 190,000.

      You are correct that this payroll tax will not stop the cost shift particularly as Vermont’s numbers are still growing for Medicaid and Medicare.

      Medicare also underpays,creating a cost shift to private payers as well. This is compounded by the fact that Vermont is rapidly aging (currently second oldest state) and by 2030 is expected to have over 25% of its population on Medicare. Currently it is about 17%. And both of these groups, particularly Medicare are high cost consumers of health care, compared to privately insured individuals.

      • Willem Post

        How many are traditional Medicaid and how many are Child Health Insurance Plan, CHIP?

        Maximizing enrollment for both will drive payments through the roof, as eligibility requirements were relaxed.

        No wonder Shumlin needs a 0.7% payroll tax and fed matching funds to pay for the rapidly increasing cost.

        It is easy to set up a programs. Finding funds to pay for them is difficult.

        Here are some relevant numbers:

        Shumlin seeks a 0.7% payroll tax to raise $82.8 million to bring Medicaid payments from 60% actuarial value (silver level, per ACA) to 80% AV (gold level, per ACA), the same as Medicare, so doctors and hospitals, the providers, have less reason to ration care, turn away patients, complain about being underpaid, and shift costs to the bills of other patients.

        NOTE: 90% AV is platinum level. State and local employees usually have 90% ++ AV coverage. To offer that to all Vermonters, as Single-Payer attempted to do, would bankrupt Vermont.

        – A household consists of one or more people. Vermont’s nominal median household income was $52,578 in 2013; it was $52,250 for the US.
        – A family consists of 2 or more people. Vermont’s nominal median family income was $68,382 in 2013; it was $64,030 for the US.
        – Vermont’s COL index is about 120, the US = 100. Vermont’s nominal median household and family incomes would need to be significantly higher to equal US incomes.

        NOTE: If a family with 2 children has 2 earners, say a teacher and a carpenter, its PAYROLL income may total $100,000, 0.7% of that would be $700/year. The 0.7% payroll tax, taken out of your pay similar to FICA taxes, is just for starters, as more and more people will be enrolled in Medicaid! Vermont has tens of thousands of such families.

        The federal government would provide $89 million of matching Medicaid funds. In the first year, the $82.8 million in new taxes + $89 million in federal match = $171.8 million would go into the Healthcare Resources Fund. In subsequent years, it likely will be much more. About $100 million for Medicaid and $50 million for Medicare were cost-shifted in 2012. Those higher bills usually are paid for by insurance companies, which raise their premiums to recover their higher costs.

        The ACA expanded Medicaid eligibility to higher income levels, covered 181,000 Vermonters, about 20,000 more than before ACA. About $50 million will be used to pay more to providers of Medicaid services and about $60 million will be used to pay for expanded Medicaid rolls, a total of $110 million of increased Medicaid payments for the first year. About $55 million will be used to:

        – Increase payments to providers who participate in Vermont’s Blue Print for Health.
        – Increase subsidies for out of pocket costs on the exchange.
        – Increase the budget of the Green Mountain Care Board.
        – Support Vermont’s pursuit of an All-Payer federal waiver.

        It is not clear by how much the above 0.7% payroll, etc., will reduce the $150 million of 2012 cost shifting (higher in subsequent years). As cost shifting is a very small percentage of total premiums paid by Vermonters not on Medicare and Medicaid, there could be only a very minor reduction of their insurance premiums, or only a very minor reduction of their rate of increase.

  • Scott Woodward

    There is significant disagreement about whether providers do in fact cost-shift to private premiums. The recent Rand report (pp. 64-65) questions it and so does a recent Ph.D. paper out of Notre Dame (in one category of Medicaid, not across the board). Like every story, there are three sides.

    Rand report:

    Notre Dame paper:

    To whatever extent the cost-shift is real in Vermont, I think there are two things that must be done:

    1.) use it as an opportunity to increase competition by reimbursing smaller providers more than larger provides so they have more bargaining power with insurance providers. The top 5 hospitals in Vermont have 62.5% of the cost-shift dollars and if they are mostly the ones reimbursed, then their bargaining power, which is already strong, does nothing but get stronger.

    2.) Ensure that the cost-shift is measurable, and not just the aggregate under-payment cost-shift, but the true shift to private premiums, down to the dollar. I have yet to see a detailed report that shows the actual cost-shift to private premiums. There should be no unenforceable promises of private premium reductions.

  • Joyce Hottenstein

    As a provider I can tell you raising the reimbursement is not enough of an incentive to make me want to participate. The no show rate for medicaid patients is atrocious, keeping other patients from getting in to be seen. Their copay is so low its a joke. Their is no personal responsibility aside from paying their premium which may or may not be paid because through the exchange they are allowed 90 days and the last 60 are up to the provider to recover if they are truly uninsured. Nothing about this tax addresses the issues of why our healthcare costs to increase. The tax is another way to get more money into the coffers, so it can be reassigned at a later date. Just like free market has its ups and downs so does government funding. At least in the free market you get more of a choice.

  • Nicole Wilson

    Wouldn’t it be great if the Joint Fiscal Office (JFO) were required to go back to ALL laws over the past 10 years where some sort of “assessment” or “surcharge” was passed and report on the total dollars collected? I mean, look at the initial “Employer Assessment” for the funding of Catamount Health (Act 191), all the way to those in Act 48 or any passed last session. Fees like the Claims Surcharge that all insurance carriers, including pharmacy managers (and ahem, the self-insured State Employee’s Health Plan) are required to pay on a quarterly basis. Or those that fund the public-private VITL group. I would love for JFO to determine how much have we already paid in 0.9% here and 1.9% there… add them all up to see how much money has been paid to the State in some manner by employers, insurance companies, physicians and hospitals to fund “… other initiatives to strengthen Vermont’s health care system.” I think the true picture on why insurance rates are so high, or why the costs of providing healthcare include so many “things” that have nothing to do with the patient outcome, might surprise those not associated with healthcare in some way.

    So here we have just one more (potential) assessment/fee/fine/surcharge. I can tell you from the viewpoint of a small private physician practice, which in itself is a dying breed; charging a 0.7% payroll tax so that the Medicaid reimbursement can be increased sounds a bit like cannibalism. The saddest part, which is virtually unknown/ignored by those who will be voting on this latest tax is that right now there are services that Medicaid will actually pay at a higher rate than we receive from either Medicare OR BCBS.

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