This commentary is by James Hodge, who is a member of the board of trustees of Copley Hospital.
In a recent article, VTDigger reported on the lack of progress by two lead state agencies, the Green Mountain Care Board and the Agency of Human Services, in developing a consistent, workable hospital transformation plan.
The reason for the problem is simple. The approach the state is following will not work. The state wants to implement a top-down plan in which AHS coordinates all transformation projects across hospitals. I doubt any agency has the collective management skills, healthcare knowledge and detailed knowledge of each hospital to effectively execute such a plan. Central planning exercises have a long history of failure.
Instead, the state should pursue a two-step process. The first and most important step is to develop reference prices that reflect the true costs and values across services and hospitals. Reference prices are the rates relative to Medicare prices that insurance companies must pay on behalf of their clients. In order for the hospital system to work efficiently and to maximize the welfare of the state, the price of any service should reflect the value of the service. In addition, the price should equal the marginal cost of producing the service. Finally, the marginal cost for any given service should be the same across hospitals. This implies prices should be set to be the same across hospitals.
This is not true in today’s world. Today, prices for the same procedure or service vary wildly across hospitals. Often, the price for the same procedure may differ by a factor of five across hospitals. This imbalance is the root cause of many of Vermont’s problems. Often, smaller hospitals are only permitted to charge relatively low prices. As a result, these hospitals are struggling to stay afloat. At the same time, other hospitals, such as the University of Vermont Medical Center, have been allowed to charge high prices. They are being allowed to operate inefficiently, leading to extraordinary cost pressures for the hospitals and insurance companies that have to pay higher-than-appropriate rates.
This problem is recognized by the state and GMCB, which is working to develop a set of consistent prices. This work, while very difficult, is the key to the transformation project. The fundamental problem of high costs and related inefficiencies cannot be resolved until a better system of reference prices is put in place.
In the second step, the hospital will change how they operate in response to the new price incentives. As the prices and other incentives change, they will change the mix of services they provide. Some hospitals will grow, and others will be forced to scale back. The process will not be easy. It will take time for hospitals to figure out how best to transform their operations. While AHS should provide coordination and aid to the hospitals during this process, it should not try to do the jobs of the hospitals’ management and staff. AHS simply does not have enough knowledge to tell hospitals how to run their own institutions.
In a nutshell, no state agency has the expertise to run a state hospital system on a top-down basis. What the agencies can and should do is to provide the hospitals with the proper incentives and guidelines to operate in the most socially efficient manner possible. Then they should let the hospitals do the rest.
