Health Care

Cost containment: The ultimate health care reform effort

Editor’s note: Hamilton E. Davis is a columnist for VTDigger.

[A]fter four and a half years, the most critical issue in health care reform — how to contain costs in the delivery system — is now coming to a head.

The action is taking place on three fronts: the Green Mountain Care Board in Vermont; OneCare Vermont, a group of doctors and hospitals in Vermont and nearby New Hampshire; and Washington, D.C., where the federal government is hoping that Vermont can help find a way to a sustainable system. And the deal, as they say, is going down now.

It’s important to recall first that while cost containment is critical to reform, it is only half of Gov. Peter Shumlin’s original single payer plan that was passed by the Legislature in 2011. The vision that animated Shumlin’s single payer reform plan had two main parts. The first was to contain costs in the delivery system; the second was to break the link between employment and health insurance by shifting the total financing of the system to the state and federal tax base. The second target died last December when the governor decided the financing was not feasible.

The focus has shifted entirely to controlling costs in the doctor-hospital system, which is essential to making the health care system sustainable, or affordable to the public, year in and year out. That goal has eluded state and federal policy makers for 40 years.

Before heading into the policy swamp, it might be helpful to envision what lies on the other side. In other words, what would a fully sustainable system look like?

Ideally, it would come as close as possible to the supply and demand discipline that makes all real markets work. The Green Mountain Care Board, which has been assigned the problem by the Legislature, would decide how much Vermonters can afford to pay for health care. At the same time, representatives of the state’s doctors and hospitals would determine what resources they need to deliver high quality to the people of the state. The board and the system representatives would then negotiate an agreement acceptable to both, at which point the medical system would be responsible for the quality and cost performance of their system. That’s the ideal.

What lies between the situation that exists today and the ideal is a swamp of gnarly details and tensions among the players — in short, the demons that plague the effort to recast a fifth of the state’s economy that deals with the health, and, in fact, the lives and deaths of Vermonters. The action is difficult to follow so I have developed a series of maps, or sketches that I hope will make it easier. The first lays out the ideal.

Ham chart 1 10062015

As I have said, that is the ideal and we are nowhere near that yet. What we do have is four years of regulatory action by the Green Mountain Care Board. Over that time the board has controlled hospital budgets as well as private insurance premiums; and the board has had considerable success, cutting annual inflation rates for health care spending to about half the historical rates.

But regulation will only go so far: rendering costs sustainable year in and year out will require that the delivery system itself be recast so as to shift the payment from fee-for-service, which encourages overuse, to some sort of block financing for groups of Vermonters. It will also require the elements of the system, individual hospitals and doctors, to cooperate rather than compete with one another. Only a system along these lines will permit doctors and hospitals to take responsibility for the cost and quality of the Vermont system.

Ham chart 2 10062015

Vermont pays for its health care system with money from the state and federal governments on the one hand and by private insurance and self-insured and out-of-pocket payments by individuals on the other. The responsibility for controlling payment rates has been assigned by the Legislature to the Green Mountain Care Board. In essence that means deciding what the people of Vermont can afford to pay for health care.

That money would then go to doctors and hospitals. In ideal terms, the distribution of funds would be decided by the facilities and people in the delivery system itself. The entity that would perform that function is called an accountable care organization (ACO). I will get into the ACO issue in depth below, but for now just think of it as a piece of machinery that represents doctors and hospitals and is empowered to negotiate with the board for what it thinks the providers need and distribute the money in the most efficient way possible.

The Green Mountain Care Board would demand that the care delivered be of high quality and is adequate to serve all Vermonters. But the board would not micromanage the system. While the board has tremendous regulatory powers, and more human and financial resources than any such body in health care in Vermont’s history, it nevertheless has to deal with this implacable reality: No government structure can actually manage a health care delivery system.


Here is where the money that funds the current system comes from.

Ham chart 3 10062015

The figures come from the Green Mountain Care Board’s expenditure analysis for fiscal year 2013, the latest available. The numbers apply to all Vermonters; that takes into account some anomalies, such as that a piece of UVM Medical Center’s revenues come from New York state, and the fact that about 40 percent of Dartmouth-Hitchcock’s revenue comes from treating Vermonters, although the New Hampshire facility isn’t subject to Vermont’s regulatory process.

Ham chart 4 10062015

The diagram above captures the essence of the board’s current regulatory dilemma: the state has the power to manage the flow of money from three of the four sources — Medicaid, whose rates are set by the state; and private insurance and self-insured employers and out-of-pocket payments by individuals, which the Green Mountain Care Board can manage by establishing hospital budgets and private insurance rates.

What Vermont has no control over is Medicare. The state is seeking a waiver from the federal government to manage the flow of dollars from Medicare. That’s because the current way the money flows to Vermont hospitals and doctors is absurdly complex. Medicare pays one set of rates, Medicaid another. The private insurance industry pays providers differently for the same services and those payments are kept secret.

Making sense of this mare’s nest is critical to reform. You can’t have a sustainable system if nobody knows who pays how much to whom and for what.

If the board gets a Medicare waiver, which it expects in the near future, then it would have what it calls an “all-payer model,” which means that it could begin to channel all the sources of funds into one stream. There are two reasons for that.

One is to be able regulate the costs in the entire system effectively, on its own. The second is to encourage the ACO, aka the doctors and hospitals, to make contracts with payers in which the providers take risk. A risk contract is one in which the ACO agrees to take care of a block of patients for a certain price. If the ACO gets the job done for less, it can keep all or a portion of the savings. If it exceeds the price, the ACO members must make up all or some of the overage themselves.

There is a strong consensus in the health policy community that providers must take a financial risk if costs are to be sustainable over time. That proposition lies at the heart of the Vermont reform design that is established by Act 48, the health care reform legislation passed in 2011.

The Medicare waiver sought by the Green Mountain Care Board would package a blanket exception to all of the relevant statutes, especially those on price-fixing and antitrust, that now stand in the way of risk contracts in the state’s delivery system. The board, on its own, could not get into risk contracts, and its hope is that a single ACO will be able to integrate enough doctors and hospitals in the system to do that.

The board has rate setting authority under Act 48, but it has not used it. If the development of an effective ACO stalls, the board could build a rate setting capability. If the board gets its waiver, it can blend the Medicare funds with the rest of the fund sources, then apply its rate setting capability to what would remain a fee-for-service payment system. And such a thrust could be effective, given that the way the funds are distributed now is so irrational.

Intensive discussions and negotiations between the Green Mountain Care Board, supported by the governor’s office and federal Medicare officials, have been going on for months around the Medicare waiver. Al Gobeille, the chair of the Green Mountain Care Board, has been increasingly optimistic that the waiver will come through, and soon, probably some time in October.

The all-payer waiver would place Vermont at the forefront of health care reform in the United States. The only similar structure, one that has been developing over some decades, is in place in Maryland. And the Vermont system promises to be more far-reaching than Maryland’s. The Maryland system, for example, only has a waiver for hospital services, as opposed to the Vermont design, which calls for including both hospitals and doctors.

The second front: Cooperation, not competition

The second front in cost containment, the development of an ACO that could take financial risk, is already well advanced in Vermont. Just a few days ago, the state’s largest ACO was invited by the federal government to be an early adopter to an advanced form of ACO.

The idea of an ACO is widely misunderstood, or not understood at all, so it is worth going back to the basic concept. Recall that the goal at the far side of the swamp is to move away from fee-for-service reimbursement, which encourages overuse and fragmentation, and thus low quality care.

If a patient, call her Sally, wakes up feeling poorly, she might call her primary care doctor. If her doctor can solve Sally’s problem, she will. And the cost will be minimal. If not, then Sally enters the world of specialty doctors, and hospitals, moving up the complexity ladder and in the process incurring exponentially higher costs.

In order for this process to be as efficient as possible, these treatment sites have to be coordinated, sharing information and decision making, rather than competing with one another. If at every step, a doctor or hospital can make more money by doing something rather than not doing something, the odds are that will happen.

The concept of the ACO was developed in the federal Affordable Care Act (Obamacare) to meet this need. One of the most important problems the ACO concept solves is to waive federal antitrust laws that prohibit price fixing by competing elements in a business field. Cooperation, not competition, is the touchstone of an integrated delivery system.

Ham chart 5 10062015

Irrespective of how the ACO situation works out over the next several months, the regulatory structure could not possibly take the ideal form set out above. There will have to be joint management of the system by an ACO and the Green Mountain Care Board. The ACO will be able to sign risk contracts to care for big blocks of patients for a negotiated price.

The Green Mountain Care Board will manage that process to ensure both that costs are contained and that the care is adequate in volume and high in quality. At the same time, however, the board will have to regulate the costs that are incurred on a fee-for-service basis for those units of the delivery system that are not part of the ACO risk contracts.

There are now three ACOs operating in Vermont, but only one of them has the size and integration necessary to get to the underlying rationale for the structure, which is to enable doctors and hospitals to take financial responsibility for the whole continuum of care. That is OneCare Vermont, a consortium that includes the University of Vermont’s health care network, the Dartmouth-Hitchcock system in New Hampshire and most of the smaller community hospitals in Vermont.

There are two other ACOs. One is called Community Health Accountable Care (CHAC), which includes most of the federally qualified health centers (FQHCs) in the state. An FQHC is a group of primary care doctors who get some financial help from the federal government so as to ensure the availability of care in underserved areas.

The second is called Health First, a group of some small doctor groups as well as individuals. Some of the Health First members are primary care doctors, others are specialists.

Neither of the two small ACOs is anywhere near big enough to function as an important cog in the development of risk contracts, so they are not relevant in that sense. The small ACOs would not be involved in risk contracts, but their members could be. That is the reason why all three ACOs have signed a memorandum of understanding that Vermont can only have one ACO going forward.

That is not to say, however, that the small ACOs are not important in the delivery system itself; they are. Moreover, they are very important as the whole issue of health reform goes forward. Part of that is structural — the ACO program gives a central role to primary care; beyond that, independent physicians play a very important role in the politics of the delivery system.

The whole question of the ACO, in other words, is vital to the ability of Vermont to get to a sustainable position. What we know now is that OneCare Vermont is on the cutting edge by virtue of its selection to participate in the federal government’s next iteration of the ACO strategy.

We also know, however, that the way the new system is structured over the next few months will be critical to Vermont’s effort to get to the goals on the horizon. It is a very gnarly problem, however, and we won’t be able to get through the swamp unless we can solve it.

Finding a path through the swamp will be the subject of the next column.

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Hamilton E. Davis

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