Editor’s note: This commentary is by Richard Slusky of South Burlington. He is a retired CEO of 28 years of Mt. Ascutney Hospital and Health Center, retired director of payment reform for the Green Mountain Care Board. Slusky has served on boards and committees of the Vermont Hospital Association and the American Hospital Association. He currently serves on the Vermont Information Technology board of directors, and is a lifetime fellow in the American College of Health Care Executives.
[L]ast weeks an article in VTDigger on 2017 hospital revenues is one of those good news/bad news stories.
The good news is that, according to the Vermont Association of Hospitals and Health Systems, statewide, hospitals’ net patient revenue increased by 2.8 percent from fiscal 2016 to fiscal 2107. That’s significantly lower than annual increases of nearly 9 percent a decade ago.
The bad news is that the University of Vermont Health Network hospitals (UVM, Central Vermont and Porter medical centers) FY 2017 net patient revenues were collectively $43.8 million over the budgets that were approved by the Green Mountain Care Board in August 2016. It should be noted that the other 11 hospitals in Vermont were, collectively, $20.1 million under their revenue budgets for that same time period. The net result is that the hospital system, as a whole, was $23.7 million or 1 percent, over budget for the year.
In the article, Dr. John Brumsted, UVM Health Network’s president and chief executive officer, reportedly said that increased hospital utilization was the main driver behind higher revenues: “What that reflects is 4 percent more people showed up than we predicted … and they were sicker, and they stayed longer,” Brumsted said. But the primary reason hospitals are seeing increased patient numbers is “because we’re getting older,” Brumsted said. “The big driver here is increased Medicare utilization, and I think that’s just the older population.”
Under a traditional fee-for-service payment model, Dr. Brumsted’s explanation makes sense. If people are getting older and sicker, they will use more services, will be hospitalized more often, and will generate more charges and more revenues for the hospitals. However, if Dr. Brumsted’s explanation is valid, why did the state’s 11 other hospitals generate $20.1million less revenue than expected? Shouldn’t we be as much concerned that Gifford Medical Center’s revenue was $3.5 million under budget; that North Country was $4.5 million under budget; and that Springfield Hospital was $7.1 million under budget? Those are big numbers for relatively small hospitals that could affect their viability in the future. However, that’s not the point I want to make here.
The point I would like to make is that under a fully reformed, value-based, health care payment model, as Vermont has defined it, nearly 90 percent of hospital payments from Medicare, Medicaid and commercial payers would have been set in advance, based upon predetermined annual hospital budgets (global budgets). This means that each hospital’s budget would have been firmly set at the beginning of their fiscal year, and that regardless of the volume of services they provided during the year (with exceptions for catastrophic circumstances), the budgeted amount is what they would be paid by the payers. That payment model, if adequately enforced in FY 2017, would have saved the state almost $24 million and would have protected our smaller hospitals from deficits they will be hard-pressed to sustain over time.
There are several reasons for structuring payments this way:
• As noted above, global budgets provide hospitals with a greater degree of certainty regarding the payments they will receive in any given year regardless of volume, and would be adjusted annually to account for cost of living increases and/or changes in services that the hospital might propose.
• Global budgets change the culture within the hospitals. Management would be incented financially to reduce unnecessary use of expensive services such as the emergency room, lab tests, imaging services and procedures that add cost but produce little added value for the patients and to explore alternative services that are less costly and add more value.
• For example, global budgets would incent hospitals to modify their business plans to invest more dollars in population health programs such as primary care medical homes to better coordinate care for people with chronic conditions, community-based programs that promote healthy diets, adequate housing, mental health care, drug education and treatment programs. Investments in these types of programs would help keep people out of the hospital and support them to live healthier and more productive lives. By investing in these community-based programs and thereby reducing the rate of costly hospitalizations, hospitals could actually increase their margins and improve the health of the populations they serve.
• Over time, the Green Mountain Care Board and/or the accountable care organization could also wring out inefficiencies and poor-quality services by using national standards of hospital costs and quality to produce publicly available reports that compare Vermont’s performance relative to national averages. They could also use this information to compare hospitals within Vermont to each other. Through this objective process, it would become more clear where costs can be wrung out of the system and which hospitals or other providers offer the most cost effective and high-quality services.
As a former hospital CEO in Vermont, I am firmly convinced that “how hospitals are paid matters.” Given the right financial incentives and a strong regulatory structure that enforces the rules, change will occur, costs will be constrained, and quality and access to care will improve. Today we have the structures in place to achieve a fully reformed health care system, but it is not clear that we have the administrative, legislative or regulatory will to pay the political and financial price to move these initiatives forward. As the saying goes, we are stuck with one foot on a burning dock and one foot on a boat that is sailing away. That’s not a comfortable position for anyone to be in. We need to make the choice. Do we stay on the burning dock or do we commit ourselves to sail into what we expect will be calmer waters?
We need to make that choice now!
