(Editor’s note: Hamilton E. Davis is VTDigger’s health care columnist.)
[M]y last two columns — the first on Sen. Dick McCormack’s injured arm, the second on a bill by Sen. Tim Ashe to place a notification requirement on acquisition by hospitals of individual doctor practices — brought a tsunami of comments, many of them critical.
One of the themes linking the comments is a reaction to recent moves in the Vermont health reform movement around what is called the all-payer model and the advent of an accountable care organization as the central organizing principle in the proposed shift of the way health care is paid for in the state.
To take the second first: The whole ACO issue is widely misunderstood, in my view, so this is a try for an analogy that gets at the core of the issue.
The current delivery system in Vermont consists of 14 hospitals that together employ around 70 percent of the doctors in the state, along with a smallish number of free-standing specialists and a large number of independent primary care doctors.
There are some ties between these entities, but they mostly operate as separate companies. They are paid on a fee-for-service basis: If doctors or hospitals do something, they get paid. If not, they don’t. This reimbursement system is considered by the health policy community to be the engine for unsustainable cost inflation.
A favorite meme of Green Mountain Care Board Chair Al Gobeille is that fee-for-service is like a time-and-materials contract in the private sector: If you want to build a garage and you enter into a time-and-materials contract with no total price named, it will take a looooooonnng time to build your now wildly expensive garage. Changing that dynamic is at the center of the Vermont reform effort, beginning with the basic reform law passed by the Legislature in 2011 and continuing today.
The alternative to fee-for-service financing is block financing, or capitation, which means that doctors and hospitals get paid a single price for delivering the health care needed by a block of patients. Given that patients can move from doctor to doctor and hospital to hospital, there is no way to get to a single price without tying the various units together.
Hence the ACO. The format for an ACO was established in federal law as part of the Affordable Care Act, or Obamacare. The essence of it was to waive federal antitrust prohibitions against price fixing. The best analogy I can think of to render this clearly is that Obamacare has designed an ACO to come as close as possible to the way private enterprise works, without requiring full ownership of all the production elements by a single company.
Think about Toyota, for example. Building cars is obviously different from caring for patients in many ways, but at the level of business organization they can be essentially the same. Toyota’s goal is to make a car that works efficiently and reliably at a cost the customer can afford.
Toyota is organized to do just that: It has tens of thousands of employees, working in hundreds of job categories, from corporate big shots and scientists and engineers, to skilled tradesmen like machinists, to guys who use air wrenches on production lines. All these people have to be recruited and trained and paid a wage that keeps them coming to work every day.
The key thing, however, is that while their jobs are very different — the engineer solving heat transfer equations on the cylinders has nothing to do with the designer picking the paint colors — they all have to focus on the single goal: a high-quality car at an affordable price. An error, a glitch, anywhere at any time, has to be fixed immediately, if not sooner, because everybody in the company is affected.
The health care system as it is now constituted is the polar opposite. It’s time and materials. If transferred to the Toyota world, it would be like a customer paying one price for a carburetor, where the carburetor guys would build as many carburetors as they wanted at whatever price they thought they could get, with no interest in whether the carburetor would work well with the other parts of the engine. The same dynamic would operate for the fuel pumps, the valve system and the transmission.
Not only would such a car cost the moon, but it would be prone to falling apart before the customer got it all the way off the lot.
The column on Dick McCormack’s arm is an example. Take a look at that.
The commenters who vigorously denigrate the whole ACO model never really talk about the consequence of passing on the ACO model. The consequence is sticking with a model — time and materials — that we have tried for 50 years and is a proven failure.
Moreover, some of the objections to the ACO model are just plain wrong. For example, the claim that the Green Mountain Care Board is going to push all the state’s providers into an ACO simply isn’t true. The board has no power whatsoever to force any provider into an ACO. The whole point of the ACO is for the providers themselves to set up and operate it, and to take risk for its quality and financial performance.
The statewide ACO called OneCare Vermont has been in place for the last four years and last year was named by the federal government as one of just a couple of dozen nationwide to lead the way to a capitated reimbursement system. The Green Mountain Care Board can regulate the ACO, but it cannot manage it. Which seems perfectly reasonable to me.
The board’s essential job is to represent Vermonters regarding how much they can afford to pay for health care as a total amount. That function takes the place of market discipline in the private sector. Critics may not like the idea, but I do not recall any one of them proposing any other way of getting at the affordability issue.
It is ironic that right about the time these issues were heating up, the Green Mountain Care Board found that nine of the state’s 14 hospitals went over their budget targets for net patient revenue — the amount they make from providing care — for the last fiscal year, which ended Sept. 30. No one should have been surprised at that: The main reason for the move to capitated reimbursement for health care is that every effort at fee setting or simple regulation since the mid-1960s has failed, from one end of the country to the other.
When the fiscal year 2016 budgets came in to the board last summer, it was clear they were spiking up sharply. That surprised the board, which has had a pretty good run on the strength of just regulation. The annual increases in net patient revenue ran at anywhere from 7 to 11 percent over the first decade of the millennium. For fiscal years 2011 and 2012, the Legislature itself imposed hard caps on these amounts — first 4.5 percent and then 4 percent.
Under Act 48, the Vermont reform law, the regulatory task was turned over to the new Green Mountain Care Board. The board misfired on the 2013 budgets, which ballooned back to 7 percent, but it did well on the fiscal 2014, 2015 and 2016 budgets. Now, however, the powerful forces of fee-for-service reimbursement are beginning to assert themselves.
Fee-for-service, aka time and materials, functions like a blowtorch under a teakettle. Moving to a capitated system can’t happen soon enough. The Green Mountain Care Board has done far better than anyone else has ever done in Vermont to get inflation under control. But the board is running out of regulatory gas.
The critics may be able to sink the statewide ACO, but they will just open the way for the system to return to the kind of inflation rates that have proven to be very damaging to the Vermont economy.
I hope this disquisition helps somewhat, anyway. There are other lingering issues raised by the commentariat. One is the role of the small ACOs and the role of independent physicians in the scheme of things going forward. I’ll devote the next column to that question.
