Vermont Health Care Reform: The Basics

   The Vermont health care reform project was born in 2011 when the Legislature passed Act 48, the basic reform law. The various players--doctors, hospitals, legislators, advocates of all sorts, the state administration, the press--have talked and written about it at great length. Yet the subject remains opaque to all but a tiny priesthood of adepts, and even they almost never speak plainly about what is going on. The following is an attempt to clarify the whole tortuous mess.

by Hamilton E. Davis

   Why do we need it?
   Because costs are out of control. By costs, I mean the money we spend on doctors and hospitals to deliver medical care. There are other costs in the overall system, like paying for health insurance administration and the like, but the engine is spending on doctors and hospitals. In 1966, Vermont spent just over six percent of its gross state product on health care; now it spends 20 percent. No serious person thinks this trend can be allowed to continue.

   How do we fix it?
   The strategy that Vermont adopted in 2011 was three pronged: The first step aimed at slowing down cost inflation by traditional regulation. That function was to be carried out by a new, five-member body called the Green Mountain Care Board. At the outset, the Board would tell hospitals how much they could spend. The first year of that process was 2013, and while the Board got rolled by the hospitals that year, it brought inflation down in the following years from the seven-to-ten percent range to the four-to-five percent range.
  That helped, but it was still not sustainable. An acceptable inflation rate a level estimated at about three percent, which is the long-term increase in Vermonters' ability to pay.
   The second prong was to shift the reimbursement in the system from fee-for-service to capitation, in which a group of doctors and hospitals provide all the necessary care to a block of patients for a negotiated price. Such a shift required that the doctors and hospitals in the provider group cooperate with one another rather than competing. In the health policy field nationally, that strategy is considered essential, because 50 years of experience has shown that traditional regulation does not work. With capitation, doctors and hospitals take financial responsibility for the system they run.
   The third prong in the original Vermont plan was to shift the private sector health spending in the state away from insurance companies, individuals and self-insuring companies to the Vermont tax system. The understanding was that such a shift, about half the cost of acute care, could not take place until spending in the Vermont system was firmly under control, meaning that spending would be three percent or less year over year. Then-Gov. Peter Shumlin abandoned that leg of the stool in late 2014. Full government financing is dead for now, but there is nothing to prevent it from reconsideration if the costs are sustainable.

   Why not base reform on market forces?
    That question gets at the essence of the reform strategy. There are two core realities that are driving the reform process, and the inability, or unwillingness, of many of the players to deal with them go a long way toward explaining why the reform process has been so slow and difficult.
   The first reality is that delivery of acute health care is wildly variable. The inclination of doctors to order, or not order, tests like MRI; or to do a wide variety of surgical or medical procedures, can vary by two to five times; and years of research has shown that such variations cannot be explained by physical differences in the patients treated. The excess care delivered in the system both wastes money and constitutes poor quality.
   The second reality follows from the first. That reality is that the “cost” of health care services is not equal to the “price” for each episode, but the price times the volume of care. Whether a person is healthy or not, he or she pays the total cost for care, because it is spread across the population by state and federal taxes, and by insurance premiums on the private sector side. The critical consequence of that is that competition raises costs, it doesn’t lower them. In the health policy biz, it’s called “supplier-induced demand.”
    Both these themes are powerfully counterintuitive: when we go to the doctor and he or she says we need this, that or the other, it just seems to make sense that, in fact, we must need this, that or the other; as for competition, the idea that competition is necessary in an efficient economy is close to an American religion, right up there with motherhood and apple pie. Actually, motherhood and apple pie are second and third.
  This screed is supposed to be a summary of the essence, but the above is so critical that it calls for at least a few examples.

1.     For much of the 20th century, there were two community hospitals in St. Albans, Kerbs Memorial and St. Albans. Head-on competition every day. In 1974, the two hospitals merged. Then, total monopoly every day. Once competition went away, the cost-per-capita for hospital care in the St. Albans area dropped in half. That’s one divided by two. Fifty percent down. And it stayed there. In the early 1980s, I interviewed Dr. Francis Moore, a professor of surgery at Harvard Medical School and Chief of Surgery at Peter Bent Brigham Hospital in Boston. He occupied arguably the snootiest aerie in American medicine. When I told him about the St. Albans data, he said it was impossible; and that, even if it happened one year, it would surely reverse the next. He hadn’t seen the data.

2.     The most important scholar in this area over the last half century has been Dr. John Wennberg, originally from the University of Vermont College of Medicine and later at Dartmouth Medical School. Now retired, Wennberg developed the tools necessary to examine the patterns outlined above. One of his striking findings came in the comparison of costs of care in the Boston area to costs in New Haven, Conn. In Boston, three prestigious medical schools, Harvard, Tufts, Boston universities; prestigious hospitals all over town. The most over-bedded and over-doctored city on the planet. Ding dong competition every day. In New Haven, basically, there is just Yale-Haven Hospital. Yale is just as snooty as Harvard, but in New Haven, Yale rules the roost. Little to no competition, ding dong or otherwise. Wennberg’s finding: New Haven’s area cost per capita were half those in Boston. One over two, fifty percent. The New Haven dynamic can be seen in many other areas:  the Mayo Clinic in Rochester, Minn.; The University of Iowa in Iowa City; The University of Wisconsin Hospital in Madison; Dartmouth-Hitchcock in Hanover, N.H., and the University of Vermont Medical Center in Burlington. That pattern is common where you have a high-quality academic center in a relatively small area.

3.     My homely example: In a real market, if you want to buy a TV set, you might go to Costco, and see a set for $490; then Best Buy, where the price is $640 and some boutique place where it’s $925. Same TV. set. Pretty easy, eh? You order from Costo, and feel quite smug. If we now shift to the American health care “market,” however, Costco delivers eight sets, Best Buy delivers five and the boutique one. And you have to pay for what gets delivered because the supplier decides the volume…Your wallet just got hammered, like all our wallets have been hammered by health care costs for the last 50 years. The essential enabler of this process is fee-for-service reimbursement for doctors and hospitals. Rule of thumb: anybody that doesn’t get this doesn’t get health care.

4.     If you remain unconvinced, read Atul Gawande’s 2009 New Yorker article examining in detail the highly variable cost of expensive care between the Mayo Clinic in Minnesota and the Anderson system in McAllen, Texas. No serious health policy maven is going to argue with Gawande on this issue. The real question is what to do about it.

   What would the new system look like?
   In order to function efficiently, health care has to operate as closely as possible to a private sector company that has to produce a very technically complex product that satisfies rigorous quality requirements at a price the consumers can afford. The federal Obama care law sets out a way for health care units to accomplish that by joining together in something called an Accountable Care Organization (ACO). An ACO is a sort of baggy “company” that is managed by the doctors and hospitals themselves, without any one unit owning all the assets.
   Those units can’t compete with one another, any more than one section of a private company can compete with another. The guys who machine the cam shafts in a Toyota factory have to do so in a way that fits the overall design. If the cam shafts don’t mesh with the piston design, the car won’t run and the whole company is in deep trouble. The same thing is true of organizations making computers, or tractors or chain saws. Keeping people healthy is very complex and difficult in the best of circumstances; doing so without close coordination as patients move from one level of complexity to the next is ever so much more so. Is there an issue with management of an integrated system getting too much pricing power? Yes, which is why the Green Mountain Care Board has so much power to keep the lid on such an eventuality. In a big state, rich in health care assets, it might be possible to build ACOs that compete with one another. No such possibility exists in Vermont because there is only one source of the most expensive, most complex care. The same pattern holds in Iowa City, Madison and Hanover, as well as Burlington.

   How would the ACO work?
   The clearest way to demonstrate that is to look at the way the major ACO in Vermont is “taking risk” for the treatment of Medicaid patients in the northwest quadrant of Vermont. The ACO, called OneCare Vermont, negotiated a contract with the state Medicaid agency to deliver all the necessary care to 31,000 recipients that receive treatment at the University of Vermont Medical Center in Burlington, Northwestern Medical Center in St. Albans, Central Vermont Medical Center in Berlin, and Porter Medical Center in Middlebury, for a total price of $93 million. Central Vermont and Porter are part of the UVM health network; Northwestern is connected to the others by virtue of its participation in OneCare.
   Beginning last February, the state sent a check to OneCare for one twelfth of the agreed upon amount and OneCare sent a check for part of that to each of the four hospitals. All the care to the 31,000 recipients in the four hospitals has to be paid from that allocation. The critical point: 

There is no more money.

   There are a variety of details that go along with this structure, but the essence is plain enough. For the first time ever, the most important  part of  the health care system—hospitals and the doctors who practice there--are directly responsible for their own financial performance. In the biz, that form of reimbursement is known as capitation. It is the polar opposite of fee-for-service, and it is the only viable route to sustainable costs in Vermont’s health care delivery system, or in any other state’s delivery system, for that matter.
   The contract for roughly 20 percent of the Medicaid recipients in Vermont, while important, is still a relatively small piece of the state’s roughly 625,000 residents. However, OneCare and the state have signed an agreement to extend “risk contracts” to part of the Medicare population in the state beginning on Jan. 1, 2018. That will be a huge step. The Medicare population is the most politically important piece of health care puzzle. Medicare financing is the purview of the federal government, and the enthusiasm of the feds for the Vermont plan is the most important shift in the history of the issue in this state. As of the same date,  OneCare and Medicaid officials  plan to increase the number of Medicaid recipients under risk contracts from the current 31,000 level to around 100,000. And OneCare has talked to Vermont Blue Cross about risk contracts in the private sector. The OneCare budget for 2018 contemplates taking its total covered lives to roughly 135,000 four fold  increase.
   The Vermont performance so far has been sufficiently impressive that CMS, the federal Medicare and Medicare agency, has selected Vermont and OneCare to be “Next Generation” players who can lead the way to shifting reimbursement from fee-for-service to capitation; and to lead the integration of the delivery system sufficiently to carry that effort off. There are only 20 or 30 or so such “Next Gen” players out of hundreds of ACOs in the U.S., and even within that group Vermont leads because their structure involves both hospitals and doctors. CMS believes that if Vermont can wrestle costs into submission here the rest of the country could follow.

   Sounds good, any problems?
   Well, yes. Very serious problems, in fact. The principal one is that a big chunk, probably nearly half, of the primary care doctors in the state are either flatly opposed or are deeply ambivalent about reform. A second is that reform has lost its political leadership. The momentum that grew out of Peter Shumlin’s elections to the governorship in 2010 and 2012 began to erode in 2013 and has now vanished entirely.
   In the political vacuum that followed, the Vermont Senate went off on a pro fee-for-service tangent, lead by its new president pro tem, Tim Ashe, a Chittenden Democrat. In the absence of strong leadership from anywhere and with a new Speaker, Mitzi Johnson, the Vermont House wandered in circles to no visible effect.
  At the beginning of 2017, the Green Mountain Care Board lost its chairman, Al Gobeille, who left to run the Agency of Human Services (AHS) for the new Republican Governor, Phil Scott; another of the five-member body left the state. So the new Board drifted with just three members until a few weeks ago when the Governor named a new chair, former Republican State Sen. Kevin Mullin, and a new Board member, Maureen Usifer. The Board’s first act was to approve the construction of a stand-alone surgical center in Colchester, a terrible decision that, in effect, endorsed fee-for-service medicine and directly invited for-profit surgical player for the first time. There is no gainsaying the damage from that but it remains to be seen where the Board goes from here on.
   Mullin and Usifer are very new, but if they become strong players then the Board could assume the political leadership mantle.
   It us also uncertain what the Scott administration will do. Scott has two of the state’s most knowledgeable reform players in Gobeille, now Secretary of AHS, and Cory Gustafson, a former Blue Cross representative in the Legislature, who now serves as commissioner of the state'Medicaid agency. It is not clear yet what influence they will have on the Governor. Scott so far has been at best diffident about reform, and Jason Gibbs, his top aide, is considered to be an opponent.
   The executive branch will face a test in the next two to three months when it decides whether to provide funding to a group of primary care doctors that is committed to fee-for-service financing, and which has spent the last two years maneuvering against OneCare and reform. If the Medicaid agency spends its very-scarce money keeping the primary care group afloat, it and the Scott administration will lose their credibility with OneCare and the big hospitals, which are putting their financial futures at risk. The same thing is true for the Green Mountain Care Board. The Board isn’t directly involved in the primary care financing issue, but the members could weigh in on it, and if they support it, on top of their recent decision on for-profit surgery, then their credibility will go glimmering too....
   In short, very strong headwinds for health care reform. What we will see between now and Thanksgiving are answers to the following:

  • Where will the Scott administration come down on the choice between fee-for-service and capitation, competition or integration? Will Scott lead or just meander along?
  • Where will Kevin Mullin take the Green Mountain Care Board, and will Mullin be able to fill the leadership vacuum?
  • What role will the small community hospitals play in reform?
  • Will the non-hospital primary care doctors insist on a separate role for themselves, built on fee-for-service, or will they agree to integrate with the hospital system? And will the Scott administration support their efforts to operate as separate ACO?
  • How will the Fiscal Year 2018 hospital budgets affect the reform environment?

   These are just some of the issues shaping up now. In the health reform biz, the theory is clear. But in the political/policy world, the theory part is often the easiest part. It is the execution phase that is make or break. You can design the world's best automobile engine, but if you can't actually build it and make it work, all you end up with is a very expensive boat anchor. That is where we stand now with health care reform in Vermont. My own sense after watching the process since the early 1980s, is that the odds for full success run to just a little better than fifty-fifty.

   That assessment is based on my belief that all the players have to bring up their game, some of them by a a lot. The Scott administration has two of the best players in  the persons of Al Gobieille and Cory Gustafson. They have big jobs that extend beyond reform, but from the reform perspective both have been missing in action since January. Governor Phil Scott, meanwhile, has to decide whether to lead the parade or just wander along in its wake. The Legislature has to get real on the key issue of competition versus capitation. The Green Mountain Care Board has to get up to speed very quickly...all of these players assert that they support reform, they're in favor of it, they just love it, blah, blah, blah. The question is whether they play like they mean it.  And many of them don't.  

   The most immediate issue is how to manage the whole primary care doctor issue. That is very complex, but it's on the table right now. I'll look at that issue in my next post.  


New Green Mountain Care Board Flunks First Test

by Hamilton E. Davis

   The Green Mountain Care Board, under new leadership and operating in a transformed political environment compared to the last six years, has just faced its first serious test—whether to approve the construction by a small group of doctors of a stand-alone surgical center in Colchester. The Board failed the test, approving the center on a 4-1 vote, thereby dealing a body blow to health care reform in Vermont.
   In purely medical terms, the proposed Green Mountain Surgical Center would be marginal to the delivery system. It will have two operating rooms and four procedure rooms procedure rooms and will deliver care that is not complex enough to require a hospital.
   The significance of the decision lies in the fact that it rested on a choice between two diametrically opposed views on how to pursue reform in Vermont. The health care reform project adopted by the Legislature in 2011 was based on the proposition that getting health care costs under control could only be achieved by shifting payment to doctors and hospitals from fee-for-service to block financing or capitation. That shift, the consensus view in the health policy community,  requires that the various elements in the system be integrated and run on a cooperative basis.
   In the last couple of years, however, opposition to the reform project has arisen on multiple fronts, including a sizeable block of primary care doctors, a smaller group of independent physicians (comprising both primary care doctors and specialists), the Vermont Senate, and several of the smaller community hospitals in the state. All of these players pledge total fealty to “reform”, but their opposition coheres in support for a system built on doctors and hospitals competing with one another, and paid by fee-for-service. Hence the choice:

   Integration and capitation versus competition and fee-for-service.

   There are all sorts of problems with the fee-for-service route. The most important is that fee-for-service with competing as opposed to cooperating units is precisely the system that has been in place since the mid-1960s and which has driven health care costs into the stratosphere. An example: from 2000 to 2009, virtually every Vermont hospital doubled its budget, a blowtorch rate of increase that was clearly unsustainable. The Green Mountain Care Board managed to cut that rate significantly, but still not enough; only system integration and capitation can take us the rest of the way.
   A second major problem is that the Green Mountain Care Board has already signed an agreement with federal Medicare and Medicaid officials to begin moving Medicare recipients into an integrated system as of Jan. 1, 2018, less than six months from now.
   A third problem is that the Surgery Center decision introduces for-profit health care in Vermont, a thoroughly pernicious idea that has been rejected by Vermont state administrations of both parties for the last 40 years.
   A fourth problem is that free-standing surgical centers threaten every small hospital in the state. The current proposal has been cast as a way to challenge the preeminence of the University of Vermont Medical Center, which the opponents of reform have spent the last two years vilifying as the Great Satan. The idea that the Colchester facility will seriously shift the trajectory of the UVM system is just silly. But a surgi center could take out small struggling community hospitals, like Gifford, North Country, Springfield and Copley. A couple years ago in its budget hearing the then president of Copley Hospital told the Board:

   Without Mansfield Orthopedics, we don’t have a hospital.

   It doesn’t get any clearer than that. The finances of small hospitals usually rest on the facility squeezing out every dime it can from less-than-tertiary severity surgery. Payment for surgery cases usually consists of a professional fee to the surgeon and a facility fee to the hospital. A common question heard in the payment debate is why hospital-based physicians get paid a facility fee whereas stand-along doctors don’t. There’s actually a straight-forward answer to that:

   You need a facility fee because you need a facility.

   Meaning a hospital. Stand-alone, independent doctors are all well and good, but when your teenager runs a car into a tree at three in the morning, you need a hospital. And if you’re going to have a hospital, you’re going to have to pay for it.
   The Green Mountain Care Board tried to square the circle on this whole mess by attaching a laundry list of conditions to the permission. A major one was the requirement that the Surgical Center participate in the so-called All Payer Model, which is the framework for shifting Medicare recipients into an integrated system with capitated payments. The applicant has enthusiastically said it will do that.
   It is a complex issue, but the essence of the posture of the independent physicians is that they want just that—to remain independent, rather than putting up with the variety of constrains involved in being part of a larger enterprise. So, fitting the new structure into a fully integrated structure with a different payment system looks like a very long reach.
   And while the permission law provides for the type of conditions attached here, 40 years of experiences shows that the conditions in cases like this seldom have much, if any, effect. Once a facility is built and is operating, the chances that the Board would shut them down for reneging on a condition are vanishingly small. Getting that toothpaste back in the tube is very unlikely.
   Hence the conclusion about the quality of the decision. In my next posts, I’ll try to assess the situation with the newly constructed Green Mountain Care Board and the prospects for reform going forward.

OneCare Vermont Drives Forward Despite Headwinds

by Hamilton E. Davis

    OneCare Vermont, the state’s primary Accountable Care Organization, presented its 2018 budget to the Green Mountain Care Board last Friday, outlining a major expansion of the state’s health reform project to include seven hospitals, up from four, and a shift of nearly $800 million in health care spending from fee-for-service to “risk” contracts, or capitation. That would amount to about a third of the total $2.4 or so billion spent on acute medical care per year.
   OneCare is now operating a more limited program—a $93 million effort that serves 31,000 Medicaid recipients in the northwest quadrant of the state. As of Jan. 1, 2018, the OneCare budget calls for expanding the Medicaid project and extending capitation to a portion of the state’s Medicare population, as well as contracting for the same system if possible with Vermont Blue Cross and Blue Shield for some of its patients.
   The expanded effort would bring an estimated 137,000 Vermont residents into what are called “risk” contracts, in which OneCare and a payer—the state Medicaid Agency; the federal government, which manages Medicare; or Blue Cross for commercially insured Vermonters--negotiate a fixed price for a specific block of patients. If the doctors and hospitals providing the care bring the cost in below the target, they can keep some of it; if they go over the target, they have to pay for some of it themselves.
   The importance of the OneCare move lies in the fact that it is the first tangible step toward getting costs to a sustainable level in Vermont. Since 2013, the Green Mountain Care Board has cut the annual inflation rate in the state nearly in half through standard regulation; but even those lower rates are still nowhere near acceptable year over year.
   Both federal Obamacare and the basic health care reform law in Vermont are based on the proposition that successful reform depends on shifting payment to doc tors and hospitals from fee-for-service to capitation. That depends on integrating the currently atomized delivery system so that providers can deliver all the necessary care to blocks of patients for a single price. The vehicle for doing that is called an Accountable Care Organization (ACO).
   There are now two ACOs in Vermont, but one is very small and has no interest in taking risk contracts. OneCare Vermont includes a large majority of the medical assets in the state and is built specifically to take risk. Under federal law, risk contracts could not begin until Jan. 1 of this year. So, OneCare made its initial foray in the limited Medicaid project beginning in February.  The 2018 budget sets out the dimensions of first full year of the program, which will involve risk contracts for Medicaid, Medicare, and commercial insurance.
   The aim is to limit the annual increase in health care spending to 3.5 percent, about half the expected trajectory in the rest of the country. A second major thrust of the OneCare budget is to increase payments to primary care physicians, both within and without the OneCare organization itself. A piece of that assistance is continuance of the Blueprint program, which supports social services that enhance the efficacy of acute medical care, particularly that delivered by primary care doctors.
   Federal support for the Blueprint has been cancelled, but the Green Mountain Care Board negotiated an agreement with CMS (federal Medicare and Medicaid officials) to include nearly $8 million in Blueprint money in the base of the spending on Vermont Medicare recipients. A second component is a multi-faceted program to steer increased financial support to primary care physicians; the latter includes increased payments to doctors who take care of the sickest patients, and to the community support elements participate in that care. More about this below.                 
   The most critical part of the project now is the expansion to Medicare, an agreement that was worked out over the last two years between the Green Mountain Care Board’s then-chairman, Al Gobeille, and CMS. CMS has said that it hopes that Vermont’s development of an alternative payment model (the federal euphemism for moving fee-for-service to capitation, or block financing) can lead the country the promised land of sustainable costs. On its website, CMS had this to say about the project:

   The Vermont All-Payer ACO Model is an exciting advancement in CMS’ partnerships with states to accelerate delivery system reform. CMS has been partnering with Maryland since 2014 as part of the (effort) to shift hospital payments to global budgets that reward value over volume. The Vermont All-Payer Model builds on the Maryland All-Payer model by bringing statewide healthcare transformation beyond the hospital. This Model will provide valuable insight for other opportunities for CMS to participate in state-driven  all-payer payment and care delivery transformation.

   While the feds love the Vermont project, the reform project nonetheless still faces very heavy headwinds at home. The new Governor, Phil Scott, has been indifferent to it. The Legislature, especially the Senate, has been focused on trying to increase reimbursement for independent physicians, which requires sticking with fee-for-service reimbursement and the kind of competition among doctors and hospitals that has driven health care costs in Vermont from roughly six percent of the gross state product in the late 1960s to 20 percent today.
   The most intractable opposition, however, has come from elements of the primary care community. There are about 700 primary care doctors in the state. Of those, about 300 are employed by hospitals. There are about 275 in Federally Qualified Health Centers (FQHCs), which get extra payments from Medicare to support a primary care network; and possibly 30 to 40 in HealthFirst, the organization that represents independent physicians. The FQHCs are joined in an organization called Community Health Accountable Care (CHAC), most of whose units are opposed to risk contracts
   Primary care physicians have a critical role in reform because federal law posits that a person can’t be covered by an ACO unless he or she is referred there by a primary care physician. The effect of the primary care resistance, therefore, has been to limit OneCare’s writ to the northwest quadrant of the state and the southern tier, Bennington, Windham, Windsor counties. Those two sectors comprise a bit over 300,000 people, or about half the state’s population.  Still, it’s very patchy. A major hole is Rutland County, where the local FQHC will not join the reform effort, so the hospital in Rutland, the state’s second biggest, can’t participate.
   The eastern part of the state north of Springfield has no reform presence, nor does a swatch of the north central part of the state served by Copley and Gifford hospitals.
   Moreover, there are portions of the OneCare coverage that are soft. The four hospitals that serve the northwest quadrant—the UVM Medical Center, Northwestern Medical Center in St. Albans, Central Vermont Medical Center in Berlin and Porter Medical Center in Middlebury—appear solid. They are already participating in the Medicaid project.
   Of the three new hospitals that have asked to be included in the 2018 OneCare budget, Southwestern Vermont Medical Center in Bennington appears solid, given its size and the fact that it has its own primary care physicians. However, the two hospitals in the southeastern corner of the state—Brattleboro Memorial and Springfield—are less certain.
   They have said they wish to be considered in the consideration of the 2018 OneCare budget, but their ability to take risk is problematic because both are so dependent on Dartmouth-Hitchcock, the tertiary center that is just a short ride north on I-91. D-H. Although it is a founding owner of OneCare, Dartmouth is unwilling to take financial risk, apparently because of the serious budgetary difficulty it has experienced over the last couple of years.
   Brattleboro and Springfield are both smaller than Bennington, so they send relatively more patients to Dartmouth They could absorb all the financial performance risk for the 18,000 potential enrollees in their sector, but that would be challenging, so they can’t commit until fall.  
   A second soft spot is Burlington, where the Community Health Services of Burlington, an FQHC, is considered close to a decision to come into OneCare, but they haven’t done so yet. If they don’t, roughly 10,000 of the lives they serve would have to be taken out of the proposed 59,000 lives for risk contracts in Burlington and its suburbs.
   If all the soft spots were to withdraw before final decision making in the fall, the total of 137,000 lives contemplated in the OneCare budget would drop to just over 100,000, triple the number covered in the current year, but nonetheless a painful reduction.

Support for Primary Care

   OneCare has built a considerable array of financial supports for primary care doctors to encourage them to join the reform effort; it also plans to support to the kind of community services that aid in moving toward better population health. A first step was to build continued support for the Blueprint into the OneCare budget; that amounts to something over $7 million in 2018. For any FQHC’s that come in, OneCare will pay $3.50 per member for month for the lives they attribute to the ACO. Given that the average panel for a full-time primary doctor ranges from 1000 to 2000 patients, the additional income per year could run to $84,000, with no reduction in the enhanced reimbursement that flows from FQHC status. Independent primary care doctors would get the same benefit for participating.
   In addition, the OneCare budget contemplates an additional $15 to $25 per member per month to doctors caring for the most severely ill patients, up to 10 percent of their practice. OneCare would also contribute to those community social service organizations that enhance the health of the population by mitigating non-medical problems that contribute to illness. Their contribution is a particular concern of the Green Mountain Care Board.
   The fact remains, however, that CHAC remains a strong negative influence on OneCare’s efforts. At least one of its members, the FQHC in Richford that serves Franklin County, supports the OneCare project, but the FQHCs in places like Bennington and Rutland remain hostile. CHAC can be counted on to put all the pressure it can on the big FQHC in Burlington to stay out of the integration movement and stick with fee-for-service medicine, along with any other FQHC that considers joining OneCare.
   As for the Green Mountain Care Board, it will consider the OneCare budget in July. The Board has supported the movement toward integration on the one hand, but it has not put any pressure on CHAC to participate.
   So, OneCare is moving forward, but the headwinds persist. No one knows whether the Governor will take an interest in the reform issue, no one can say what impact the legislature will have on reform going forward, and no one yet can predict whether and how the Green Mountain Care Board will try to resolve the essential question of whether Vermont sticks with the fee-for-service-competition model, or shifts to integrated care with block financing.
   We will know a lot more about that by Thanksgiving.

Vermont State Government Wanders into the Weeds on Health Care Reform

by Hamilton E. Davis

   The Vermont Legislature is ensnarled in a struggle with Governor Phil Scott over how to pay for health care for the state’s school teachers, an end-of-the-session mud wrestling spectacle that is extraordinary even for players inclined to mud wrestling.  The total amount of money said to be involved is $26 million, which may or may not be accurate. In any event, the Legislature is headed into its third unnecessary week, with no agreement in sight.
   It is ironic that while the governor and the legislators were hardening into a stalemate, there were two other health care issues seething under the surface, one of them in the Legislature itself, the other at the other end of State Street in the meeting room of the Green Mountain Care Board. There was magical thinking to spare in all of this activity—nobody on the field was playing well, and some were just terrible.
   If you have to pick the worst performer, not an easy choice, it would have to be Phil Scott. Elected last November, Scott began his tenure by springing on the Legislature a demand that they completely rework how overall school budgets in the state be handled. He gave them, oh, a week to buy into this proposition. Some of the town budgets were on the way to the printer when Scott made his move. Naturally, it died.  
   His latest foray didn’t surface till sometime in late April, far too late to move a major new initiative through a Legislature trying to adjourn by early May. Achieving the goals of the teachers health insurance revamp is both technically and politically complex. Thrashing out those issues in a few weeks was simply not realistic; Scott might prevail on it, but the result is certain to be ugly.
   In my view, Scott’s most critical dereliction is his molasses-pace in filling the openings on the Green Mountain Care Board, the five-member body that now has just three members; one of the missing is a chairman. Scott had to have known by last Thanksgiving that he would ask Al Gobeille, then the Board chair, to run his Agency of Human Services, creating one of the openings. Yet Scott didn’t even submit his names to fill out the nominating commission for Board seats until March…those seats are still open.
   The governor has said he is close to making the appointments, but even then, the new members will take considerable time just to come up to speed on the very difficult choices facing the Board.
   Health care amounts to 20 percent of the whole Vermont economy and the Green Mountain Care Board is the entity charged with getting those costs under control, which includes a tortuously difficult reorganization of the doctor-hospital system in the state. The politest thing you can say about Scott’s performance here is that it is irresponsible. Which is puzzling, because Scott has a chance to take the lead on health care at no real cost to himself. The core reality is this:
   Today, Phil Scott is the only governor in the United States who has a significant piece of his Medicaid budget under control. And the only one who has an excellent opportunity to get his Medicare spending under control. He even has a shot at getting private sector spending close to or at a truly sustainable track.
   The reason for that conclusion is that OneCare Vermont, the main ACO in the state, has in place the infrastructure necessary to shift reimbursement from fee-for-service to capitation. OneCare is one of just a handful of so-called Next Generation ACOs that are authorized by the federal government to move a state’s Medicare (the elderly) population to the new financing model.
   OneCare has already taken responsibility for capping costs for 20 percent of the Medicaid (low income) population; OneCare began sending out the checks for that cohort in February. And OneCare and the state of Vermont have signed an agreement with the feds to extend the program to the Medicare population beginning next Jan. 1, a historic step that could be lost if health care reform doesn’t get competent political leadership from somewhere.
    Instead of building on the last six years of this reform work, Scott is handling health care like a man juggling a live hand grenade.

The Senate Campaign to Derail Reform

   Scott’s not alone in performing badly. There is the Vermont Senate, led by a new President Pro Tem, Sen. Tim Ashe, a Chittenden County Democrat. For the last two years or more, Ashe has run a campaign to focus health care reform on the fortunes of independent doctors. Ashe argues that the indie docs get paid less for a unit of care than doctors in a hospital, especially the UVM networks main facility, the Medical Center Hospital of Vermont. If the Legislature and the Green Mountain Care don’t repair this deficit, Ashe contends, then the system will be badly damaged, and costs will continue to grow unabated.
   A corollary theme is that the fault for the dysfunction in the first place lies with the UVM system. UVM has been “gobbling up” the little guys, buying them out so that the big guy won’t have any competition. And when a patient’s doctor moves from independent status to hospital staff, the patient’s co-payments and deductibles go up.
   All of this sounds perfectly reasonable, as long as you have no idea how health care actually works. Let’s count the ways:

1.     The first problem is that the number of independent doctors in the state is very small. There are somewhere between 1800 and 2,000 doctors in the state. I’ve never seen a credible number for total number of independents, but HealthFirst’s own membership runs to about 140 doctors, divided pretty evenly between primary care doctors and specialists.  The most important thing to know about HealthFirst, however, is that its members represent a tiny percentage of the total acute health  (excluding things like nursing homes and visiting nurses) spending of roughly $2.4 to 2.5 billion. Given that the vast bulk of health care spending is by hospitals, the HealthFirst share is minuscule, low single digits at most. These numbers demonstrate that Ashe’s claim that the independent doctors can force down system costs significantly is simply a fantasy. You can’t solve the problem of health cost inflation that has run out of control for more than 40 years by focusing on two percent of the budget and ignoring the other 98 percent.

2.     The most important problem with the Ashe campaign is that support for independent docs requires fee-for-service reimbursement, whereas the heart of the health care reform effort in Vermont is the shift to block financing, also known as capitation. With capitation, the co-payments and deductibles go away, as does the facilities fees charged by hospitals. In such a system, the whole medical structure is at risk for hitting its financial targets. The federal government has made Vermont the lead state in the country in this effort. And it’s nothing new: it was the core of Act 48, what passed in 2011. I have never heard a word come out of Ashe’s mouth to indicate he understands that, which is why I have labeled him “anti-reform.”

3.     The third problem with the Ashe campaign is that his effort to make the UVM system the villain is wrongheaded. UVM is, by orders of magnitude, the centerpiece of the Vermont delivery system; and its leadership is supplying the most important underpinning for the reform effort in the state. It is not gobbling up the small players; it is taking them in when they apply to come in. As for costs, the UVM system is one of the most cost efficient tertiary centers in the United States. And within Vermont, UVM delivers the cheapest care on a per capita, total cost of care basis. UVM has its problems, they’re just not the ones that Ashe and his compatriots claim. Its main problem is access—in other words, the UVM system is not too big, it’s too small.

      Ashe is the anti-reform leader in the Senate, and he has been single most important anti-reform force in the Legislature—the House has been a pretty passive player there--but that is not the only anti-reform element at work. In fact, it is not the most important player in that regard.
   The single biggest barrier to reform is the non-hospital-based primary care doctor community in the state. Acting on their behalf are two organizations—HealthFirst, which has roughly 70 primary care doctors, along with an equal number of specialists; and CHAC (Community Health Accountable Care) a consortium of FQHCs (Federally Qualified Health Centers) which comprise somewhere between 250 and 300 primary care physicians.
   I’ll begin with HealthFirst, because, although it is small, it is closely allied with the anti-reform elements of the Senate, and because of that tie have become a major player in the closing days of the Legislative session. In fact, the Ashe/HealthFirst campaign crested in the last couple of weeks when Sen. Michael Sirotkin, another Chittenden County Democrat, pushed end-of-the session legislation aimed at showing that UVM was responsible for health cost problems and attempting to crimp any further growth in its network.
    That effort apparently died when the House Health Care Committee finally caught on to the fact that the Sirotkin was using bogus numbers he got from HealthFirst as the basis for the whole effort.
   I will continue with that aspect of the situation in my next post, same time, same location. I will follow that up with an assessment of where CHAC stands today, how well the Green Mountain Care Board is performing; and finally, where OneCare Vermont stands in its effort to deliver capitated care to Vermont. At the conclusion, I’ll have some comments on the role of press coverage in the health care reform saga.

Wall Street Journal Begs to Differ

By Hamilton E. Davis

    One of the most persistent themes in the Vermont political ether is the Republican claim that the state is a bad place to do business. The tax climate is too onerous, so businesses leave; and there aren’t enough jobs for our young graduates, so they also have to leave. The problem, the GOP says, is the Democrat-dominated Legislature, which just spends and spends. They’re irresponsible, the whole lot of ‘em…
   The theme has been out there for years, and our new Republican Governor Phil Scott has made it a centerpiece of his administration. He commonly opens his press conferences by reciting three numbers: six, the number of Vermont employees who leave the state each day; three, the number of kids who drop out of our schools each day; and one, the number of babies born each day to opiate-addicted mothers. The only answer, he says, is rigid budget discipline.
   In the light of this political narrative, it was fascinating to read a report published last week by the Wall Street Journal examining the economies of the three northern New England states.  Maine, New Hampshire and Vermont all have very low levels of unemployment, yet they have significant structural problems with their economies.
   The central problem, however, isn’t the lack of jobs for our young people, the Journal said. The problem is that there aren’t enough people to fill the jobs that are there, or would be if workers were available.
   Low unemployment rates can pose a particular challenge for largely rural states that don’t have dynamic, big-city markets to attract young talent… A dearth of qualified job candidates caused Nate Beatty to move his growing tech company three years ago from Burlington, Vt., to New York City... In Vermont, (he) would struggle to find candidates to interview and also had difficulty luring young people from big cities. ‘There just aren’t enough people,’ he said. ‘It’s just a simple numbers problem.’ ”
   Another example cited in the Journal report: MyWebGrocer in Winooski uses about 150 tech savvy workers in Romania. The company serves a variety of food supply firms. The chief operating officer, Jerry Tarrant, co-founded the company 20 years ago, and the family has long ties to Vermont, but “Vermont is a particularly hard place in an already competitive market for tech workers,” he told the Journal.
   The same dynamic is at work in Maine and New Hampshire, the newspaper said, and the dynamic is not limited to tech workers, although both the Vermont examples happened to be. An example cited from New Hampshire involved a firm that hires large numbers of assembly line workers, typical blue-collar jobs.
  The story quotes the president of the Federal Reserve Bank of Boston as saying that the fragile labor situation in the northern states of the region poses an important threat:  ‘ “I would say that’s a big enough issue, they’re (many businesses) thinking of moving,’ “ he said.
  Okay, that sounds like too tight a labor market is a real threat to Vermont and its two neighboring states. Not a word in the whole piece about tax rates, or government spending proclivities. And it’s not as though the WSJ is some liberal rag.
   So, what should we derive from this article?
  As far as the lure of big city lights, there isn’t much any of the three states can do. Burlington tips the scales at just over 40,000 people; Manchester at about 110,000 and Portland at 66,000. Portland and Burlington are usually considered particularly attractive small cites, but there’s no way they can stack up against places like New York and Boston.
   As for rural areas, you have to like them for their own sakes: lovely scenery, often indifferent schools, patchy communications, cross-country skiing through winter woods. But as for getting enough potential employees there, the Journal and the Federal Reserves economists found, forget about it.
   So, it’s worth asking whether the Scott strategy is off the mark. He does talk about getting more money to education, which might produce more potentially hirable high school graduates, but in fact there is little or no new money or available. And even if there were, it is far from clear whether a little new money in schools would be adequate to deal with as tenacious a problem as the tight labor market.
   What does seem clear is that ascribing the issue itself to the tax policy of Democrats simply won’t wash.
    It also seems clear, however, that something like the Journal article is unlikely to have any serious impact on the quality of political debate in the state. In our brave new world of shattered newspapers, the flight of much of the Republican Party from responsibility, the weak response from Democrats, and the subordination of facts and the truth to partisan mud wrestling, an article like the one I’ve cited, will probably sink without a trace.

Did the Vermont Press Corps Save Robin Lunge's Seat?

by Hamilton E. Davis

   The health reform effort in Vermont has been moving more or less steadily ahead for the last six years, but I sometimes wonder how it survives, given the political follies it has to surmount. The latest case in point—the fiasco surrounding the appointment of Robin Lunge to the Green Mountain Care Board.
   Lunge was appointed to the Board late last year by then-governor Pete Shumlin and has been serving on the supposedly five-member Board since then. When the state Senate prepared to take up her confirmation recently, however, they couldn’t find the necessary paperwork.
  The Scott administration jumped on this glitch immediately; the rules allow for interim appointments, but such appointments vanish if the Senate adjourns in the following session without a confirmation vote. No paper work, no vote. Sorry about that, the Scotties said, but the governor would just have to start the appointment process over again.
  The effect of such a development would mean that Scott would be able to essentially build an entirely new Green Mountain Care Board to oversee a reform that he has shown absolutely no interest in and to which Scott’s staff, if not Scott himself, may be actively hostile to (more about this later). There are already two vacancies on the five-member Board—one of those is the Chair--and Scott can fill those positions any time he gets around to it. The Lunge seat, if vacated, would make that three and control. And board member Con Hogan’s term expires in September. The Hogan seat would make four Scott appointments.
   Nobody contends that Lunge is not extremely well qualified for the Board seat, nor that Shumlin had the right to appoint her, nor that he clearly intended to do so. But rules are the rules, the Scotties said. Sad.
   This construct began to unravel yesterday at Governor Phil Scott’s press conference, convened to tout his accomplishments in his first 100 days in office. The press corps, most of which ignores the substance of health care reform like it was a mutant form of quantum physics, tore into Scott on the Lunge issue. Pete Hirschfeld of Vermont Public Radio, Kyle Midura of WCAX, and Erin Mansfield of Vt. Digger led the inquisition, grilling Scott relentlessly. Didn’t he think she was qualified? Wasn’t it obvious that Shumlin intended to appoint her? What if the Senate just went ahead and voted to confirm her anyway?
   Scott in his aw shucks way just shook it off. “I just think it’s important that we follow the process,” he said. And that seemed to be that. Left to lawyers, there didn’t appear to leave any route to saving Lunge in the seat. That was certainly the position of Scott’s chief of staff Jason Gibbs and his lawyer, Jaye Pershing Johnson.
   The Vermont state house, however, is essentially a political rather than legal place and by afternoon the Scotties dream of mastery over health care reform began to go glimmering.
   Sen. Claire Ayer, chair of Health and Welfare told Terri Hallenbeck of Seven Days that the Senate would vote on the Lunge appointment, paperwork or not. And it then became clear that the frontal assault by an apparently united press corps had borne more fruit than it had appeared at the time.
   A question late in the Scott inquisition was whether Scott would accept a decision by the Senate to confirm Lunge, and he said he would. Voila. Ayer clearly had the support of the Senate leadership, particularly Senate President Pro Tem Tim Ashe and Judiciary chair Dick Sears. So, we can expect the Senate to vote on Lunge and if so, she will be confirmed by a large vote.
   The contretemps over the Lunge appointment seemed to me to illustrate an interesting characteristic of the Scott administration’s political personality. When Scott was slogging through his back-and-forth with the press, he said at one point that he didn’t want the Lunge seat to become a “partisan political” one.
   I, for one, believed him. I don’t think he cares one way or another whether Robin Lunge sits on the Green Mountain Care Board. He’s not a hard-edged political guy at all, which may be why the voters like him so much. But here is what I think is interesting:
   His staff is hard-edged as hell. They care deeply about winning these kinds of political battles. And in the long run, it is the staff that could define the trajectory of the Scott years.
   I am going to write more about the political implications of this. As far as health care reform is concerned, however, Scott still has control of the Board. He can already appoint two of the five members, including the chair. And he’ll get another appointment in September.
   Scott’s real views on health care reform, though, remain obscure, and the Lunge seat follies didn’t change that fact at all.

Did the Vermont Press Corps Save Robin Lunge's Seat?

by Hamilton E. Davis

   The health reform effort in Vermont has been moving more or less steadily ahead for the last six years, but I sometimes wonder how it survives, given the political follies it has to surmount. The latest case in point—the fiasco surrounding the appointment of Robin Lunge to the Green Mountain Care Board.
   Lunge was appointed to the Board late last year by then-governor Pete Shumlin and has been serving on the supposedly five-member Board since then. When the state Senate prepared to take up her confirmation recently, however, they couldn’t find the necessary paperwork.
  The Scott administration jumped on this glitch immediately; the rules allow for interim appointments, but such appointments vanish if the Senate adjourns in the following session without a confirmation vote. No paper work, no vote. Sorry about that, the Scotties said, but the governor would just have to start the appointment process over again.
  The effect of such a development would mean that Scott would be able to essentially build an entirely new Green Mountain Care Board to oversee a reform that he has shown absolutely no interest in and to which Scott’s staff, if not Scott himself, may be actively hostile to (more about this later). There are already two vacancies on the five-member Board—one of those is the Chair--and Scott can fill those positions any time he gets around to it. The Lunge seat, if vacated, would make that three and control. And board member Con Hogan’s term expires in September. The Hogan seat would make four Scott appointments.
   Nobody contends that Lunge is not extremely well qualified for the Board seat, nor that Shumlin had the right to appoint her, nor that he clearly intended to do so. But rules are the rules, the Scotties said. Sad.
   This construct began to unravel yesterday at Governor Phil Scott’s press conference, convened to tout his accomplishments in his first 100 days in office. The press corps, most of which ignores the substance of health care reform like it was a mutant form of quantum physics, tore into Scott on the Lunge issue. Pete Hirschfeld of Vermont Public Radio, Kyle Midura of WCAX, and Erin Mansfield of Vt. Digger led the inquisition, grilling Scott relentlessly. Didn’t he think she was qualified? Wasn’t it obvious that Shumlin intended to appoint her? What if the Senate just went ahead and voted to confirm her anyway?
   Scott in his aw shucks way just shook it off. “I just think it’s important that we follow the process,” he said. And that seemed to be that. Left to lawyers, there didn’t appear to leave any route to saving Lunge in the seat. That was certainly the position of Scott’s chief of staff Jason Gibbs and his lawyer, Jaye Pershing Johnson.
   The Vermont state house, however, is essentially a political rather than legal place and by afternoon the Scotties dream of mastery over health care reform began to go glimmering.
   Sen. Claire Ayer, chair of Health and Welfare told Terri Hallenbeck of Seven Days that the Senate would vote on the Lunge appointment, paperwork or not. And it then became clear that the frontal assault by an apparently united press corps had borne more fruit than it had appeared at the time.
   A question late in the Scott inquisition was whether Scott would accept a decision by the Senate to confirm Lunge, and he said he would. Voila. Ayer clearly had the support of the Senate leadership, particularly Senate President Pro Tem Tim Ashe and Judiciary chair Dick Sears. So, we can expect the Senate to vote on Lunge and if so, she will be confirmed by a large vote.
   The contretemps over the Lunge appointment seemed to me to illustrate an interesting characteristic of the Scott administration’s political personality. When Scott was slogging through his back-and-forth with the press, he said at one point that he didn’t want the Lunge seat to become a “partisan political” one.
   I, for one, believed him. I don’t think he cares one way or another whether Robin Lunge sits on the Green Mountain Care Board. He’s not a hard-edged political guy at all, which may be why the voters like him so much. But here is what I think is interesting:
   His staff is hard-edged as hell. They care deeply about winning these kinds of political battles. And in the long run, it is the staff that could define the trajectory of the Scott years.
   I am going to write more about the political implications of this. As far as health care reform is concerned, however, Scott still has control of the Board. He can already appoint two of the five members, including the chair. And he’ll get another appointment in September.
   Scott’s real views on health care reform, though, remain obscure, and the Lunge seat follies didn’t change that fact at all.

   This just in: The Vermont Senate is to vote on Robin Lunge on Friday

Richard Slusky's Take on Hospital Budgets

Note: The following commentary is by Richard Slusky, the former president of Mt. Ascutney Hospital in Windsor, Vermont, and a recently-retired member of the senior management of the Green Mountain Care Board.

                                                         by Richard Slusky

Hamilton Davis’ Vermont Journal Blog of April 1, 2017 is an important observation that needs careful consideration by the Green Mountain Care Board (GMCB).  The gist of the article is that five of the larger hospitals in the state exceeded their FY 2016 budget caps on Net Patient Revenue by over sixty million dollars.  The caps on individual hospital revenues are approved by the GMCB through an annual budget review process that, in fact, has had reasonably good success in moderating the increases in overall hospital system revenues over the past five years.

Unfortunately, as Ham notes in his journal, not all hospitals have been in compliance with their budgeted caps, particularly in FY 2015, and now in FY 2016.  Last year, the University of Vermont Medical Center was over its revenue cap by @$28million, but reached an agreement with the GMCB to use portions of that excess revenue to reduce future rate increases, and contribute several million dollars to community based programs in Chittenden County.  Other hospitals that had exceeded their budgets also agreed to reduce rate increases in their FY 2016 and 2017 budget filings.

The fact that the 2016 results show that the hospitals are continuing to generate revenues in excess of their budgeted caps is disappointing, but should also serve to remind us that in a fee for service environment, total revenue is a function of price times volume and that even if prices are controlled through rate reductions, volume is still a major factor in the generation of excess revenue.

Ham is probably correct in noting that the hospitals will provide the GMCB with a number of reasons and excuses why they exceeded their revenue targets in FY 2016.  They are very good at doing that, and often very convincing.  (In full disclosure, as a former Vermont hospital CEO for 28 years, I was very good at it also.) Regardless of the reasons and excuses for why this has continued to occur, the reality is that our health care system in Vermont is not sustainable when health care costs continue to increase annually at nearly two times the general inflation rate in the state and the country. 

In order to moderate the growth in health care costs the GMCB has placed revenue caps on hospitals since 2012; ACO Shared Savings programs were implemented in 2013; the State of Vermont entered into an All-Payer Model Agreement with CMS in 2016; and, in 2017, Medicaid entered into an agreement with the state’s largest Accountable Care Organization (OneCare) to pay a fixed amount to provide comprehensive health care services to thirty-three thousand Vermont Medicaid beneficiaries.  The intent of all of these initiatives is to move away from fee-for-service reimbursement, and to establish all-payer growth targets for Vermont health care expenditures that track more closely with anticipated economic growth in the state and nation.

In order for these actions to be successful, several things need to occur:

1.     The GMCB must be willing to enforce the targets that it has established in the hospital budget review process.  What that means is that:

a.      Excess revenues that hospitals generated in one fiscal year should not be incorporated into the hospitals’ base revenues for the next fiscal year;

b.      Rules should be established that clearly define the disposition of the excess revenue in any fiscal year.  Since it is difficult, if not impossible, to return revenue resulting from excess Medicare payments, that revenue might be used to invest in community health programs, more adequately fund primary care services, or fund the costs of transforming the current fragmented system into a more integrated system with value based payments.  In addition, excess revenues from Medicaid and Commercial Payers should be used to reduce future prices.  (It should be recognized that how these funds are distributed is not an exact science, and that some compromises and negotiations between the hospitals and the GMCB will be necessary.)  However, the overriding goals should be to moderate the annual growth of revenue and support the transformation away from a fee for service payment system.

c.     The GMCB should also promulgate and enforce penalties on the hospitals for repeated violations of the revenue caps over and above what is suggested above.

2.     The current plan is that the All-Payer Shared Savings Programs continue to be “upside only” through 2017, meaning that the participating hospitals and other providers bear no financial risk if they exceed the pre-determined expense targets.  These programs would then be transitioned to include some provider risk in 2018, and would ultimately be converted into fixed payment models in 2019 and beyond to meet growth targets of @3.5% per year.  The GMCB needs to develop the oversight and regulatory rules (in accordance with ACT 113) necessary to ensure that this goal is met.

3.     The DVHA (Medicaid) agreement with OneCare is an important first step in moving the state away from fee for service payments and toward fixed payments for comprehensive services provided to defined populations served by the ACO.  This agreement should serve as a model to be extended to commercial payers such as BC/BS and MVP and should be offered voluntarily to self-insured employer plans as well.

4.     The State and CMS must honor their commitments under the ALL-Payer Model Agreement to adequately fund the infrastructure costs needed to transform the payment systems, to meet expanded health information system requirements, and to build an integrated system of health care services in Vermont.  If the state budget cannot support this financial commitment for FY 2018, perhaps some portion of the FY 2016 excess hospital revenue could be used to temporarily fill the gap this year.  Ultimately, however, the state must find a way to meet its obligation to match the Federal dollars that have been committed under the All-Payer Model Agreement.

Transforming Vermont’s health care payment and delivery system to become more efficient and more affordable for Vermonters is no easy task, but that has been the intent of Vermont’s Legislature and its administrative leadership since ACT 48 was passed in 2011, and for many years before that.   In the past five years, much has been accomplished, and with the recent All-Payer Model Agreement and the Medicaid Agreement with OneCare, the formal structures for achieving the state’s goals are now in place.

In order to be successful from here on, everyone must do their part to fulfill their obligations.  The hospitals and other health care and community based providers must honor their commitments to the ACO, and the ACO must honor its commitments to its providers.  The hospitals must rein in their revenues and expenses and meet their annual budget targets.  The state legislature and administration must meet its financial obligations to reasonably fund the cost of this transformation. And the GMCB will need to exercise the necessary regulatory authority to ensure that the parties that they oversee and regulate meet their obligations.

We have the opportunity in Vermont to prove to the nation that health care costs can be contained, and that our health care system can be transformed to be more integrated and to become at least as much focused-on prevention and health as it is on treatment of disease.   Achievement of that goal will require collaboration, commitment, and sacrifice from us all.

Vermont Hospitals Blow Through Caps

by Hamilton E. Davis

   The Green Mountain Care Board accepted a staff report Thursday showing that eight of Vermont’s 14 hospitals had exceeded its spending cap for Fiscal Year 2016, which ended last Oct. 1. While the other six facilities came in under budget, they were all smaller facilities.
    The hospitals blowing through the cap account for 86 percent of the system’s $2.3 billion total spending for that year. The Board has summoned representatives of the six larger hospitals to appear before it Tuesday to explain the variances from the budgets. Scheduled to testify are the University of Vermont Medical Center, UVM’s sort-of-partner Central Vermont Medical Center in Berlin, Rutland Regional Medical Center, Northeastern Medical Center in St. Johnsbury, and Northwestern Medical Center in St. Albans.
   The Board opted to excuse two smaller institutions—North Country Hospital in Newport and Copley in Morrisville. According to Mike Davis, the Board’s finance chief, North Country wasn’t over the cap by much and its compliance with Board guidance has been good over the last few years. And Copley, whose budget was basically a shambles last year and is now under new leadership, rebuilt its budget as of last December and there hasn’t been time enough for those changes to take hold.
   On a system-wide basis, according to Davis, the hospitals exceeded the 3.4 percent growth cap by 2.6 percent, which amounted to $60.3 million. That figure did not include a total $10.5 million for the movement of independent doctors into the hospitals. Those doctors were not inside the Board’s regulatory structure, but were nevertheless getting paid for their services by federal and state governments and commercial insurers, so that at least part of the $10 million is a wash—it’s not new money to be paid by Vermonters.

The Actual Numbers

  These numbers include the physician transfers, but it doesn’t make a lot of difference. The pattern is clear enough. And what the pattern says is that plain old regulation isn’t strong enough to drive hospital cost inflation into the sustainable range.
  The inflation rate that Vermonters can afford to pay each year runs to just over three percent, or even less. And the inflation rate we’ve been living with is north of four percent per year, which isn’t one percent too high, but 33 percent too high.
   The three members of the Board (there are two vacancies) did not seem overly concerned about the final numbers for the last fiscal year. Con Hogan, for example, remarked that he felt good about the overall state of the overall state of the Vermont system. 
   There are at least three reasons for that. One is that the Vermont inflation rate is not yet sustainable, but it is lower than most of the rest of country, which is running at about six. A second is that spending for the first five months of the current fiscal year (FY2017) is tracking closely with the approved budgets; in fact, spending is running below budget by half a percent, whereas it was over by 1.1 percent at the this time last year. 
   By far the most important reason, in my view, is that Vermont is now embarked on the key to sustainable level reform, which is to shift reimbursement for health care from fee-for-service to capitation, about which more in a moment.  
   The immediate question, however, is what happens in the short term.
   Well, the Board will have to take the 2016 actuals and incorporate them into their determination of the FY 2018 budgets, which will take effect on Oct. 1 of this year. They have some obvious tools at hand. One is to calculate the extent to which the overspending has dropped to the budgeted bottom line, or profit in a non-profit system, and then order the institutions to cut its rates by that amount. That, in fact, is what they have done in the past.
   The real solution, however, lies not in more regulation, or tougher or better regulation, but in the move from fee-for-service reimbursement to block financing or capitation. That shift is already underway in the form of the capitation contract now in effect between state Medicaid officials and a four hospital cluster in northwestern Vermont.
   UVMMC, Central Vermont, Northwestern and Porter in Middlebury have agreed to deliver care to 31,000 Medicaid patients in that region for a set price per month. Each hospital gets a set payment each month for the target population—and that’s it.
   There isn’t any more money.
   That is the solution to the cost inflation problem, and the first iteration of the ultimate in reform is now underway in Vermont. The first checks went out for February.
   When the GMCB convenes Tuesday, they will spend a whole day listening to reasons, excuses, and rationalizations of all descriptions until their heads spin. Every single dime of inflation will be backed up by perfectly good reasons why it couldn’t be avoided. Vermont hospital CEOs and CFOs have been going through that exercise since the mid-1980s. and they are really good at it.
   The fact that shifting reimbursement and reorganizing the delivery system is the only way to cut that knot doesn’t mean that Vermont will actually follow through and do it. The health policy community from one end of the country to the other, and every hospital executive who doesn’t have his or her head under water, knows it is true.
   But that judgment doesn’t necessarily extend to our new Gov. Phil Scott, or to the Vermont Legislature, including its left as well as its right wing, or to the Vermont press corps, or to the public at large.
   I’ll explore that question in my next post.



On Health Care Reform: Calling Phil Scott

                                                           byHamilton E. Davis

   On the eve of its debut after five years of gestation, the Vermont health care reform project is has slid into a strange sort of limbo: technically it’s on track, but there appears to be no political leadership behind it at all.
   A major reason for that, of course, is that the father of the reform effort, former Governor Peter Shumlin, a Democrat, is gone and the new governor, the Republican Phil Scott, is just now getting his new administration into operation. Still, Scott has been extraordinarily disengaged about the reform project, especially given that it is the only credible route available to him to plug the single biggest hole in his state budget—Medicaid, the federal-state program that covers low income people.  
   It is true that Scott is permitting reform to go forward, when his national party and a significant chunk of Republicans in Vermont want no part of it. So, anything positive that Scott does is a plus. Still, there is no public indication yet that Scott really understands it, nor that he will do anything to support it. That is particularly disturbing, given that the reform project has been under construction since 2011 and is now underway.
   The inaugural step in the process was the contract between OneCare Vermont, a group of Vermont hospitals and doctors, to deliver care for 30,000 Medicaid recipients for an agreed-upon price per person. That shift, from paying for each episode of care (fee-for-service) to a per-person price (capitation) is the health policy community’s consensus answer to the 50-year-old problem of out-of-control costs in the American health care system.
   It works basically like this: The hospitals involved are the University of Vermont Medical Center in Burlington, Central Vermont Medical Center in Berlin, Northwestern Vermont Medical Center in St. Albans and Porter Medical Center in Middlebury. Also participating are a number of independent primary care doctors, as well as some stand-alone specialists.
   Each month, the state Medicaid agency will write a check for a month’s worth of care for the target population. The number for each provider can change over time, primarily because more or fewer Medicaid recipients will become eligible. There are some other operating details involved, but the essence is clear from the following example:
   On Feb. 3, the state Medicaid agency wrote a check for $5,057,828.05 to OneCare Vermont for February’s services to the target 30,000 recipients (Roughly a fifth of the total Medicaid population of 151,000) Of that amount, OneCare wrote checks in the amount of $4,796,639 to the four hospitals. The individual hospital figures were as follows:
   UVM Medical Center                                                        $2,724,008
   Central Vermont Medical Center                                     $938,797
   Northwestern Vermont Medical Center                          $794,140
   Porter Medical Center                                                      $339,694

   The single most important fact about health care reform in Vermont is this:
   The amounts listed above are all the money that the hospitals will get for that work. There won’t be any more money. That has never happened before in Vermont, or in the U.S.
   In a press conference shortly after taking office, Scott talked about this effort as though it was some kind of minor project he had inherited.  
   It’s just a pilot, he said several times. We’ll look at it for a year and if we don’t like it we’ll just dump it.
   Well, that posture doesn’t begin to make sense, except politically. In the first place, we’ll get to the go-forward point on the whole deal by mid-fall of this year. That will be when OneCare Vermont begins to finalize its 2018 pricing proposals for a broad expansion of the Medicaid project, as well as preparing to extend risk contracts with the federal government for Medicare—the federally financed program to cover the elderly.
   At that point, there will be roughly seven months of data available, nowhere near 12 months. And even 12 months is nowhere near time enough to begin to evaluate the project; it will take at least two to three years to do that. The most important factor, however, is that the only real alternative to the current path is to stick with what we have now. That structure has driven costs into the stratosphere over the last 40 years.
   So, the Scott posture appears far short of the political effort to keep reform moving. It isn’t possible, however, to be sure where he will go over the next several months. And there is a critical test coming up.
   The Green Mountain Care Board, which has done an excellent job holding back the cost tide for the last several years, is now at a critical junction. The five-member body has two vacancies, the most important of which is the chairmanship. The Board has had extraordinary leadership in the six years since its inception in 2011. The first chair was Anya Rader Wallack, a national class policy analyst who drew up the blueprints for the project. The second was Al Gobeille, a Burlington businessman who was named to the original Board as a member and who ascended to the chairmanship when Wallack left. Gobeille is still a major player, but his role now is as Secretary of the Agency of Human Services.
   The problem now is that the Board, the key manager in the whole health care reform project, is completely rudderless. Gobeille has been gone for two months, so no chair over that period. Plus, a second Board member, Betty Rambur, has also left. Scott has taken an inexcusably long time to move on this problem. The proximate cause was the need to fill a number of vacant positions on the nominating committee that must submit a list of nominees for Board positions to the Governor.
   The legislature got its nominees to the committee in a reasonable time, but Scott’s three members weren’t even named till a couple of weeks ago. The group held its organizational meeting on March 6. But with more than 40 applications for the two Board openings, it is likely to be at least another two months or more before the new members are in place.
   That fact places very heavy pressure on the Board as it transitions from pure regulation to both regulating hospital and overseeing the rebuilding of the delivery system itself. A system that runs basically on capitated financing functions very differently from one running on fee-for-service reimbursement.
   For example, the Board currently regulates individual hospital budgets, but it now will have to also regulate the budget of OneCare Vermont, the Accountable Care Organization that includes several of those hospitals. And just for good measure, it is necessary to factor in the retirement of Mike Davis, the finance chief of the Board, whose experience in health care financing extends back to the late 1980s…
   Having said all of that, Scott could recover much of the lost momentum if he can find—and persuade to serve—a highly credible chair for the Board. The only names that have floated through the political ether over the last few months are Paul Harrington, the head of the Vermont State Medical Society, and Shap Smith, the recently retired Speaker of the Vermont House.
   Harrington has told friends recently that he will not seek the post. Smith probably would take the job, and he would certainly be credible; but he is a Democrat and there is no way to tell how Scott would look at that fact. One key question is whether there might be a credible Republican for the job, but finding one would be hard.
   And even then the Governor will have to deal with the fact that the whole health care reform project is adrift in the Legislature, where there is already some talk about dumping the Board altogether and sending its functions back to the Department of Financial Regulation.
   A move like that would be extraordinarily stupid. If the reform project fails, the Legislature would lose the best chance it will ever have to get health care costs under control. In the current environment, however, who can rule out stupidity?

A Big First Step for Vermont Health Care Reform

by Hamilton E. Davis

   The State of Vermont took a giant step forward last week toward a major reform of its health care delivery system when it contracted with a coalition of hospitals and doctors to provide care to a piece of the Medicaid population for a set per-capita price.
   Shifting the reimbursement of acute health care from fee-for-service to capitated payments that puts doctors and hospitals at risk for the financial and quality performance of the system they run is the centerpiece of the health care reform law passed by the Vermont Legislature in 2011.
   Moreover, the reimbursement shift is considered by the national health policy community to be the only viable route to sustainable costs for the health care delivery system in the United States. That is the reason federal Medicare and Medicaid officials have selected Vermont to lead the reform effort in the U.S.; no other state is as far along the reform road.
   And the issue is certainly critical: Medicaid costs are a huge problem for every state budget and the costs of both Medicare and the federal share of Medicaid represent perhaps the most intractable element in the national budget.
   Having said that, the Vermont contract is a modest first step. Everyone involved describes the effort as a “pilot program” and Governor Phil Scott talks about it as if it’s a one-off experiment that Vermont can abandon in a year if we don’t like the results—more about this down in the story. In any event, the agreement looks like this:
   The contract is between OneCare Vermont, an Accountable Care Organization (ACO) established under the terms of federal law, and the Department of Vermont Health Access (DVHA), the state’s Medicaid agency. It covers 30,000 Medicaid recipients, about one fifth of the total 151,000 total covered by the program in the state. Care for the target population will be provided by four hospitals--The University of Vermont Medical Center in Burlington, Central Vermont Medical Center in Berlin, Northwestern Medical Center in St. Albans and Porter Medical Center in Middlebury—as well as some independent primary care practices.
    The total spending under the agreement runs to just under $93 million. Total spending for the entire population is estimated to be $453,000,000. (Note to reader: Be careful with the numbers that appear in some of the press coverage I have read, which is remarkably shallow, often misleading and in some cases simply wrong.) These numbers are built on the basis of actuarial analysis showing that, under the current fee-for-service system, the state would pay just over $3,000 per year for these enrollees.
   The first thing to note about this figure is that it does not include large chunks of service that Medicaid pays for now, and which it will continue to pay for. The biggest categories excluded are drug costs, long term care services, and payments to so-called Designated Agencies, particularly those dealing with drug and alcohol abuse and mental health. To get an idea of the effect of these carve outs compare the total state Medicaid cost of roughly $1.7 billion with the $453 million figure cited above.
   The key question about the deal, however, is simply this:
   How does the capitated reimbursement for the target population compare with what the state would pay under the current system of fee-for-service?
   The answer: a very small amount more. An analysis by the Wakely Consulting Group, the actuarial firm used by the state, shows that the state’s $93 million tab amounts to about $1.9 million more than the fee-for-service level. With the federal government paying 55 percent of the Medicaid cost, the added cost to Vermont is about  $855,000 more.
   So, how is that a good deal for the state?
   Well, it’s a good deal because for the first time since the advent of Medicaid in 1966, the state has a rein on hospital costs, the engine of cost inflation for health care in Vermont as well as everywhere else. Under the terms of the deal, the state will make a payment to OneCare, and OneCare will make monthly payments to the four hospitals.
   If the hospitals exceed their targets, they will have to pay for the overage themselves by up to three percent of the total. If the hospitals come in under the target, they can keep the savings amounting to up to three percent of the total. The bands in other words are from 97 percent on the downside. to 103 percent on the upside.
   An important factor in going to the new contract is that no one really knows exactly how it will work out. Considering the deal overall: it is pretty much a wash in the first year, but the risk is longest on the provider side. The reason why health care costs in the United States have soared so high in the U.S. is the cost of hospital care. In the decade from 2000 to 2009, for example, every hospital in Vermont doubled, or nearly doubled, its spending, with no significant increase in population. The population aged somewhat, but nowhere near enough to account for that kind of growth.
   The critical question is the trajectory of health care costs over the period of the reform horizon, from now until 2022. Some estimates for annual health care inflation have run as high as six percent. If that were the case, the roughly three percent growth cap established by the Green Mountain Care Board and enforced by the new capitation system would be a huge boon to the state’s budget. If national trends were closer to three percent, it would put very great pressure on the hospitals to grind the inefficiencies out of the system more rapidly.
   Also carrying considerable risk is OneCare Vermont, the ACO. OneCare will hand off just under 60 percent of the $93 million at risk to the four hospitals immediately. They don’t get more money if they overshoot their estimates.
    But the ACO itself will have to retain the risk for the remainder, which will have to go as fee-for-service payments to providers outside OneCare’s network. A Medicaid recipient, for example, could go to a doctor or hospital outside the network, and OneCare would have to pay for that.
   If the total of such payments exceeded amount ticketed for that category, OneCare would have to absorb the loss on its own. These issues have been parsed carefully by all of the three national-class actuaries involved in the contract negotiations—those for the state, OneCare itself, and the Green Mountain Care Board—and all have certified the estimates. But they are still just estimates.
   The above is just an outline of the contract entered into by Vermont and the block of Vermont providers. The agreement also includes provisions to ensure that the providers meet quality requirements; they can lose money if they don’t. There are also provisions for some incremental pay increases to free-standing primary care and other community providers.      
  The most important thing about the agreement is that it is a historic first step. That first step is always the hardest, but that doesn’t mean that there isn’t very difficult work ahead. The underlying question is how to integrate the elements in the system so as to optimize its quality and minimize its cost. Both are equally important, and getting there will be very hard. But Vermont is on its way.
   Some final points:
   While the contract is a vital step forward, the overall environment for health care reform in Vermont is very fragile.

  •    The new Republican governor, Phil Scott, is allowing the reform process to go on, but he is isn’t exactly leading any cheers for it. We’ll give it a year, he says regularly, and if we don’t like it we’ll get out. He is free to look at that way, and it certainly makes sense politically, given his party’s posture on health care reform.
       The most important thing he has done to move the reform project forward was turn the whole Human Services Agency, and health care reform with it, over to Al Gobeille, the former chair of the Green Mountain Care Board. Gobeille, now the Secretary of the agency, is the most knowledgeable member of Scott’s administration, and that counts for a lot.
       The idea that you can test fly this kind of restructuring of the delivery system in one year, however, is simply preposterous. It will take a minimum of four to six years to work the process through, almost certainly amending it along the way.
  • A second factor that has been but little remarked is the fact that Vermont has already signed an agreement with the federal government to do the same thing with the Medicare population next year that it is piloting with Medicaid. For both the Medicare and Medicaid population the kind of downward pressure on costs represented by reform is critical to the state and federal budgets.
       The state, and OneCare Vermont can withdraw from both agreements without penalty, but it is isn’t clear why they would be eager to. The reality underlying the whole issue is that nobody, Republican or Democrat, has any alternative way to attack the problem of cost inflation in health care.
  • A major source of political uncertainty for reform is the Vermont Legislature itself. After passing the basic legislation with overwhelming support in 2011, the Legislature lost much of its faith in reform following former Governor Peter Shumlin’s difficulties getting the federal Exchange running and then his abandonment of the financing side of the project.
       Where legislators stand now is anybody’s guess.

Pete Shumlin: Credit Where Credit is Due

by Hamilton E. Davis

   One of the conceits of the journalism trade is that its practice constitutes the “first rough draft of history.” That is true in important ways; simply constructing generally reliable reports on events is essential to the civilized functioning of society. When journalists begin to function as historians, however, the results are often much less satisfactory.
   For one thing, it’s much harder to do. The sheer lack of time means that the consequences of this action or that haven’t fully played out yet. The heat of contentious issues hasn’t receded enough to permit penetrating analysis. These problems are particularly acute in assessing the careers of important politicians.
   Case in point: Pete Shumlin, governor of Vermont from 2011 until a week or so ago.
   Shumlin was one of the most interesting and complex governors of the modern era. After a short tenure in the Vermont House, he got himself elected to the state Senate in 1992, and played a leading role in that body for most of two decades. He became minority leader soon after his election and in 1996 led the drive to achieve Democratic control of the upper chamber. In 1997 he became President Pro Tem and served in that capacity until 2002 when he ran unsuccessfully for Lieutentant Governor. Shumlin was out of office until 2006 when he won his old Senate Seat and got elected again as President Pro Tem.
   He ran for governor in 2010, and won two very difficult elections—a primary against four credible Democratic opponents, and then a very close race against a popular Republican Lieutenant Governor.
   The centerpiece of Shumlin’s platform in 2010 and of his tenure as the state’s chief executive was single payer health care reform. Early on he was also a strong advocate of closing Vermont Yankee, but there were also powerful outside forces acting on that issue, and those forces took Yankee out without a major struggle.
   The early stages of health care reform, meanwhile, went extremely well. Shumlin put a strong team in place, led by Anya Rader Wallack, a highly capable policy analyst; and Steve Kimbell, a veteran lobbyist who had unparalleled credibility in the Legislature and who took over the health care regulatory machinery. From a standing start in early 2011, the Shumlin team produced a ground-breaking reform bill that swept easily to passage in the Democratic-dominated legislature.
   Based on that performance, as well as public approval of the way he handled the recovery from the catastrophic floods and destruction of Hurricane Irene, Shumlin crushed a capable Republican in the 2012 gubernatorial election. The Republican, State Sen. Randy Brock, couldn’t crack 40 percent of the vote, the threshold of a serious effort.
   The whole thing began to go off the rails, however, when it became clear in 2013 that the Shumlin administration had botched the launch of the federally-financed insurance Exchange, a component of Obamacare. Shumlin made two serious miscalculations during that period.
   The first was his propensity to assure voters that getting his health care project up and running would be a cinch—no problem. The second was his failure to recognize and act on the fact that his management team at the Agency of Human Services had no capacity to cope with the technical complexities of getting the Exchange operating properly.
   It is important to understand that there is no direct connection between the Exchange and the Vermont reform project. The Exchange is simply an expansion of Medicaid, which has operated without major problems since 1966, 50 years. The Exchanges had problems in Vermont, and many other states, but they were essentially computer problems.
   The Vermont project was the ultimate attempt to remake the delivery of medical care: it aimed first at getting costs in the state’s health care system under control by shifting reimbursement from fee-for-service to capitation—block payments to a group of doctors and hospitals for delivering a full spectrum of care to a big group of patients. By agreeing to take such a block payment, the doctors and hospitals would, for the first time, take responsibility for the financial performance of their own system.
   The second goal of the Shumlin project was to eliminate the system of private insurance and self-financing by big employers and to shift the source of those funds to the state’s tax base. Roughly half the cost of health care now is paid by federal and state governments; the other half is private financing. A critical caveat in Shumlin’s original proposal was that the shift to full government financing could not take place until the costs in the state’s delivery system were reliably under control, fully sustainable year over year.
   I recite these factors simply to make the point that there is no necessary connection between the Exchanges and Shumlin’s project. You could have a state Exchange with no systemic reform at all. And you could have a fully-elaborated state reform project without an insurance Exchange.
   In the public mind, however, no such fine distinctions had any chance at all. In fact, there never appeared to be any such distinction in the minds of the Vermont legislature. In any event, the inability of the Shumlinites to get the Vermont Exchange up and running began to drain the health care reform project of its political momentum and Shumlin of his credibility, both as a manager and a political leader.
   The 2014 election completed that process. Shumlin very nearly lost to Scott Milne, a Republican candidate who had, in sharp contrast to Randy Brock, no credentials at all. Shumlin completed his own defenestration a month after the election when he pulled the plug on the whole financing side of the reform project. There was simply no credible way to shift north of two billion dollars to the state’s tax base.
   What tended to remain unremarked at the time was that the essential precondition to the shift—getting the costs in the system fully under control—had not been achieved. In fact, it wasn’t even close to achieved. The inflation rate in the system had been cut dramatically by straightforward regulation, but there was little visible progress on integrating the delivery system by changing the reimbursement structure.
    In fact, however, there was steady progress on integration; it just wasn’t visible to the public, the press or the legislature.
    By the date of his inauguration to a third term in January of 2015, therefore,  Shumlin’s political career had gone glimmering. He was a lame duck for a full two years, and he got basically nowhere over that period. Lt. Gov. Phil Scott began his move toward the governor’s chair, and the Democrats in the Legislature, deprived of strong leadership, began freelancing all over the place.

The Shumlin Legacy

   So, that was that for Peter Shumlin and we can now ask what he accomplished and how important was it.
   I believe his legacy is entirely limited to his health care initiative. In the financial management of the state, he was essentially a conservative, despite a lot of specious Republican yammering to the contrary. Over the last decade or so, the revenues available to state government have dropped markedly, meaning that there simply isn’t any serious money to play with. A powerful thread that runs through the governorships of Howard Dean, a Democrat, Jim Douglas, a Republican, and then Shumlin, is fiscal conservatism.
  That isn’t likely to change. The essence of Scott’s political posture is budget discipline. And it isn’t just Republicans. If you think that you can get some blue sky spending initiative by Jane Kitchell, the veteran Senate Appropriations chair, well, good luck with that. If you listen to the comments of the newly-elected House Speaker Mitzi Johnson, the message seems clear:
   There isn’t any money. If you have some big spending ideas, you can forget about it.
   So, the Shumlin legacy question rests on health care. When he abandoned the financing aspect of his single payer plan, Shumlin did more than just kill off his political career, he became the national poster boy for the failure of health care reform.
   In my view, that is a mistaken reading. The reality is that health care reform is in fact alive, if not particularly well at the current moment. The key to reform—shifting reimbursement in the delivery system from fee-for-service to capitation—has not been achieved, but it has made steady progress.
    The structure to do so is in place: in an agreement signed last summer, the state’s Accountable Care Organization (ACO) now contains nearly all the state’s hospital assets, and the bulk of the primary care doctors in the state, are now on board. The first actual “risk” contract is virtually complete. It involves an agreement by OneCare Vermont, the key ACO and the state’s Medicaid agency, to care for a block of Medicaid patients in the northwest quadrant of the state in return for a block-type payment.
   The period of that initial step will be 2017. By 2018, the program can be extended to the Medicare population. At present, the participants in the risk contract include the University of Vermont Medical Center, its partner, Central Vermont Medical Center; Porter Medical Center in Middlebury, which is in the process of aligning with the UVM system; and Northwestern Vermont Medical Center in St. Albans. That is just four hospitals, but their four county primary service area constitutes roughly half the state’s population. Within the next couple of years, nearly all of the rest of the delivery system is on track to come on board.
   It is true, of course, that no can predict the course of the Trump administration’s posture on the health care reform front. Even if the Trumpies wipe out the federally financed Exchanges, however, the Vermont movement toward integration of the system can continue. There could be a problem with the Obamacare anti-trust waivers, but if there is anything in Obamacare that is critical to save it is the anti-trust waiver, because payment reform is the only way to get costs under control. Plus, it doesn’t cost any money at all. Eliminating it would be extraordinarily stupid, even for the Trumpies.
   Credit for the current situation, with Vermont leading the country on getting a delivery system integrated and functioning on a financially sound basis, belongs to Pete Shumlin. He ran his winning campaigns on the issue; he put in place an unusually capable team to get it moving; he got the best single state statute on health care reform ever written in the United States adopted by a huge majority; and he basically kept it afloat for six years. Granted he failed to accomplish the financing side of the project, but the fact is that if the costs can get wrestled into sustainable shape, there would be nothing to prevent returning to the financing issue sometime in the future.
   Of course he didn’t do it alone; he had critical support in many quarters along the way. Moreover, there is no gainsaying the significant botches in bureaucratic management as well. But that is how the governor biz works. The guy at the top gets the credit and the blame. And the critical point to me is this:
   Without Pete Shumlin we wouldn’t have serious health care reform.
    We wouldn’t have Anya Rader Wallack’s ground breaking architecture in Act 48; we wouldn’t have Steve Kimbell coming back from his sheep farm to remake the regulatory bureaucracy; we wouldn’t have the Green Mountain Care Board, which has imposed the only effective cost restraint on the hospital system that we have achieved in more than 30 years of trying; we wouldn’t have Al Gobeille, the Board chair,  persuading the federal government that the Vermont plan could be a template for health care restructuring across the country.
   In practical terms, possibly most importantly, we wouldn’t have a new Republican governor who is willing to let the process go forward, in the face of hostility of much of his party.   
   If one accepts this reading, then how does it stack up against the performance of Vermont governors in the modern era? Quite well, it seems to me. I talked this issue over with Steve Terry, who has a long and distinguished career as a journalist and then corporate executive in Vermont. Steve isn’t responsible for my judgments, but he is the main source of the historical record.
   We agreed the onset of Vermont’s modern political trajectory began with the election of the Democrat Phil Hoff in 1962. Vermont in the first half of the 20th century was one of the most Republican states in the country.
   Hoff changed the whole environment for state government, Steve said, establishing the proposition that government could be a player in improving people’s lives. His signature policy initiative was the movement to union schools, which brought secondary education into the modern era. Hinesburg High School couldn’t begin to deliver the level of education offered today by Champlain Valley Union High School. The same is true for union schools across the state.
   How about the late Governor Dean Davis? Davis (no relation) was a conservative Republican, who ran for office in 1968 on the promise that he would be a prudent manager of the state’s finances. He is noted for two policy issues. One was the establishment of the state’s first sales tax. The second, however, was a landmark environmental program know as Act 250, which saved Vermont from the ravages of uncontrolled development. That law, passed in 1970, prevented the despoliation of the state’s landscape and placed Vermont at the forefront of the environmental movement in the United States.
   The achievements of Hoff and Davis, it seems to me, puts them at the top of the Vermont pantheon. How about some others? Richard Snelling, a Republican, was a highly competent manager, who had a good eye for bringing talented newcomers into state government. Madeleine Kunin, a Democrat, took her own crack at health care reform and put in place Doctor Dynasaur, a program to get medical care to children and pregnant women in the first trimester. Dynasaur filled a serious gap in medical services for a vulnerable population more than two decades, and is still part of the policy mix in the reform era.
   I know it is too early, but for me Shumlin belongs right up there at the top of the pantheon with Davis and Hoff. For sheer nerve and vision, remaking the health care system is as tough a challenge as one gets in government outside of civil war or an economic collapse such as the Great Depression.
   For one thing, it is hideously difficult technically. I have watched and participated in the process for more than 35 years and I have never seen anything quite like it. It has baffled the press and the legislature alike. Union schools and Act 250 were monumental political issues and success in those endeavors delivered huge benefits to the state. But both could be understood intellectually by a mildly promising seventh grader. Not so health care.
   No one can tell yet how health care reform will finally play out in Vermont. Perhaps it will all somehow just fade away. My view, however, is that the Shumlin effort will live on, if not in Vermont then somewhere else. His errors were serious, but not serious enough to derail the project. To me, that makes the Shumlin years memorable and important.
   Perhaps the real historians will give him credit for that.


Ashe Makes a Major Move

by Hamilton E. Davis

   The last few weeks have offered at least some surcease from the gut-wrenching tensions of a toxic political year. Donald Trump still prowls the land, of course, but at least he’s not in office yet, and perhaps Congressional Republicans can summon up enough political courage, modest intelligence and common decency to keep him in check.
   Vermont, meanwhile, has been an island of relative political tranquility. Phil Scott will be our new governor. He is a Republican, but he can fairly be described as the “un-Trump.” He can’t start a war, trade or otherwise, with China. And while he doesn’t have much of a state issue profile beyond budget discipline, he doesn’t have a mean bone in his body. He is even leaving the door open to continued progress on the health care reform project he is inheriting from Peter Shumlin.
   So it seems like a not-bad time to look forward to Vermont’s political environment as we approach the 2017 legislative session. A defining parameter is that Democrats still control both the House and Senate. They also hold the Congressional delegation and all the state-wide offices below governor. As governor, Scott can veto bills, and he controls the bureaucratic machinery of government so there is muscle on both sides, but the issue environment is very fluid.
   Budget issues will be important, as always, but there isn’t much running room there for anybody. Money is just too tight. The elementary and secondary school issue will continue to fester, and there will be some pressure to make progress on environmental issues like cleaning up Lake Champlain.
   By far the most important issue, however, is health care reform. I know that health care is my particular hobby horse, but I refuse to apologize for that. Vermonters spend one dollar in every five they earn on health care; and beyond money, their lives often literally depend on it. Barrels of digital ink have been spilled on it, but there have been some striking developments recently in that sandbox, one of which I want to discuss today.
   The news I have in mind is the decision by Sen. Tim Ashe, the Chittenden County Democrat who will take over that chamber in January as President Pro Tem, to hire Peter Sterling to be his legislative assistant. There is a remarkable paucity of staff in Vermont’s legislative structure, and staff issues almost never make news. In this case, Sterling is very important news indeed.
   The reason is that Sterling is far outside the normal pattern for this kind of job. These posts are normally—I am tempted to say always--filled by young, bright, inexperienced people who like politics and government and are looking for a place to get started. They don’t get paid much, and they pretty much do everything: answer the phone, get coffee, write press releases, offer advice to the boss, and soak up the political and legislative atmosphere.
   After this sort of apprenticeship, they move up at the first opportunity.  The pattern is evident in the Vermont State House today. For example, Rachel Feldman has served for the last few years as assistant to Phil Scott during his tenure as lieutenant governor. When Phil’s transition office opened, one of the first appointments to his gubernatorial staff was Rachel Feldman. Another: Dylan Giambatista spent a couple of sessions as assistant to House Speaker Shap Smith. With Smith retiring, Giambatista ran for Vermont House seat and won; he’ll take office for the first time in January.
   Sterling, by contrast, is not just experienced. He is one of the very best health policy experts in Vermont. When Steve Kimbell, who along with Anya Rader Wallach put the Shumlin health care reform team together in 2011, tried to recruit Sterling, Sterling declined. He opted instead to run his own reform advocacy group to support the Shumlin project. As everyone knows, Shumlin’s path toward reform was rocky indeed; but on several occasions when the Governor needed help persuading the public on some aspect or other, he called on Sterling to speak in its favor.
   A personal note: I have followed the health care reform issues in Vermont since the early 1980s, and if I had to find an SUV load of the most knowledgeable health policy experts in Vermont—say, seven or eight people—Sterling would be there.
   Sticking with the SUV analogy as a way to limn the policy landscape: The Scott administration will have Al Gobeille, the Secretary-to-be of the Agency of Human Services; the Green Mountain Care Board has Ena Backus, Gobeille’s current deputy; The Vermont Medical Society has Paul Harrington; the Vermont hospitals have Mike Del Trecco; and there are a handful of others, like Nolan Langweil at the Joint Fiscal office and Robin Lunge, newly appointed to the GMCB after five years as a key player on Shumlin’s team.
   Sterling can play on the same field as these experts.
   Okay, but what difference is that likely to make?
   Well, it could make a ton of difference because of the way Ashe is moving. To date, the Vermont Legislature has been at best a marginal player in health care reform. A very comprehensive bipartisan majority voted for the main health care reform bill in 2011, but its contributions have been minimal since then.
   Most legislators, even the ones with direct responsibility for health care, really don’t have a serious grip on the issue. That certainly applies to Ashe. I have written about that issue before, and I’ll do it again in more detail in the future. The essence of that judgment is Ashe’s expressed view that the secret to health care reform is to establish a system of independent physicians, as opposed to an integrated system where hospitals and physicians have to take financial risk.
   No serious player believes that, and I doubt that Sterling would risk his sterling reputation by propounding it.
   Why is Ashe’s view so important?
   The reason is that Ashe is clearly moving to take command of the whole Democratic policy apparatus. The Sterling appointment is the best evidence for that, especially in health care. Beyond that is the fact that the field ahead of him is wide open to an unusual degree.
   Consider: There will be a new Speaker of the House. Mitzi Johnson is a widely respected chairman of House Appropriations, but she has no policy chops on other issues, and certainly none on health care. Her early remarks to the press after her successful Speakership campaign have been mostly about process. I interviewed her about health care last year and she, very straightforwardly acknowledged that she didn’t know much about it. “The policy people have to worry about that,” she said when my questions began to get into detail.
    People who know her say Johnson is very smart, but she will have a tough time coping with Ashe in the normal House-Senate mud wrestling over issues. Ashe would have had a much harder time with the highly skilled Shap Smith as Speaker; and don’t even ask about former speaker Ralph Wright, who would have wiped the floor with Ashe.
   Meanwhile, Rep. Bill Lippert, the chair of the House health care committee, who made his bones in the House as chairman of Judiciary, has struggled for two years to get a clear view of the health reform hairball, without much success. There are some potentially strong players on the House committee—Shap Smith called Rep. Tim Briglin his “rookie of the year” when he named him to Lippert’s committee—but that committee won’t have Sterling sitting next door.
   There’s more: Ashe has a very strong base in the Senate. He could continue to serve as chairman of Senate Finance, which would leave him astride not just health care, but any issue that needs money.  And he has some critical personal support from Democratic Senators Jane Kitchell, chair of Senate Appropriations, and Dick Mazza, who functions as a sort of benign godfather in the upper chamber.
   A final note: While the political heat has barely cooled from the 2016 election, the fact is that politics never sleeps. So, it’s worth noting that if Ashe plays his cards well in the Senate he could become a dominating force in the Democratic Party statewide.
   Sue Minter got soundly beaten by Scott in the November election, and she has no obvious platform going forward. Dave Zuckerman will be a Democratic Lieutenant Governor, but it’s hard for a lite gov to maintain an issue profile when all you do is preside over the Senate.  The Attorney General-elect, T.J. Donovan, will almost certainly have a bright political future, but he won’t have anywhere near the policy and legislative exposure that Ashe will. ..
   It seems obvious from all of this that Ashe is making a determined move, but it’s fruitless at this point to speculate on its impact on either health care or statewide politics. His fortunes in the political arena are a complete wild card: no one has any idea of how well Scott will perform; nor is it possible to say much about other Democratic players. And it won’t be possible for quite some time.
   We won’t have to wait long, however, to assess his effect on health policy. If he stays on his independent physician track, that fact will soon be obvious and so will the inference that he is an opponent of serious health care reform. If he shifts course then he has a chance to become a very important player on the wide range of difficult decisions that lie ahead on the reshaping of the health care delivery system. 


Robinson Flew Too Close To The Sun

by Hamilton E. Davis

   About a month ago, Greg Robinson, the executive director of the Community Health Centers of Burlington, was fired by his Board, the latest manifestation of the turmoil in Vermont’s primary care community as it prepares to enter the new world of health care reform.
  A week ago, Robinson took his story to The Burlington Free Press. He said he had been “blindsided” by the Board’s action, which took place just five months after he took the top job; he added he had no idea why he had been dismissed. As evidence for that, he produced a series of e-mails from the Board chair, the substance of which was that the Board approved of his work and where he was taking the organization.
   As it happened, I had interviewed Robinson at some length before he got fired, and while I was surprised when it happened, there was no difficulty at all figuring out what had gone wrong. Robinson had a very ambitious plan to partner with HealthFirst, a group of independent physicians, and to build the combination of his group and HealthFirst into a very strong force in the health reform environment.
   His first problem was that there really wasn’t a path to that outcome. A second was that HealthFirst apparently realized that--even though Robinson didn’t--and was moving toward an accommodation with the main body of healthcare providers in the region. The third was that while Robinson had sold his plan to the Board, he hadn’t sold it to his doctors. So when the Community Health doctors sent a letter to the Board saying they had lost confidence in the leadership of the front office, Robinson was toast.
   The Robinson experience was just the latest indication of the huge stresses that have tied the primary care community in knots over the last year and a half. Indeed, it was uncanny the way events at the Community Health Centers mirrored those at Porter Medical Center in Middlebury a year or so earlier.
   The Porter Board spent a full year doing a national search for a new president for their hospital. They came up with a very-well-credentialed young executive named Lynn Boggs and they told Boggs that her job was to turn around a dangerous financial situation that threatened the hospital’s survival. Porter was losing several million dollars a year because they were paying some of their doctors more than the hospital could afford.
   When Boggs took office, she went right to work on the problem, informing the doctors that their pay would be cut, and she didn’t sugar coat the pill at all. The result: the doctors at Porter revolted and told the Board they would have choose between Boggs and the doctors. Result: Boggs was gone in six months or so.
   The reality is that if you have a company or any organization whose business is to deliver health care by doctors, and your doctors quit on you, then your business is gone. Medical care organizations all have boards and the boards are important, but the real power lies with the doctors. Boggs found that out in Middlebury, and now Robinson has discovered it in Burlington.

                                                   The Primary Care Conundrum

   The Burlington and Middlebury examples are just highlights of the way that health care reform is upending the long-standing relationship between primary care on the one hand the hospital and specialist elements of the overall system on the other. Primary care providers have always been the poor relations in the health care family.
   Obamacare itself, as well as the Vermont reform project, has conferred enormous new political power onto primary care providers. I have laid out this structure out in the last few blog posts on this web site. A summary thread goes like this: the key to health care reform is getting costs under control; the only way to get costs under control is to shift reimbursement from fee-for-service to block financing, or capitation; and the only way to do that is to integrate the disparate delivery units into a new type of organization called an Accountable Care Organization. (ACO).
   The linchpin in this mechanism is the Obamacare provision that the only way to move patients into an ACO is to have them referred there by a primary care physician. So, primary care doctors are in the process of becoming the gatekeepers of reform. You can’t even get started down the road to cost containment without “attributed lives” from primary care providers. There is a huge political difference between a poor relation and a gatekeeper and that fact has not escaped the notice of the primary care doctors themselves.
   So, for a year and a half or so, the primary care doctors have been trying to position themselves in the most advantageous way. It’s worth noting that there are about 700 primary care doctors in Vermont. (They are not the only such providers; nurse practioners and some others deliver primary care also, but the doctors are the centerpiece of the system.)
   Of the 700, roughly 300 are employed by hospitals and their fortunes are tied to their employers: if their hospital is part of an ACO, then the patients of the primary care doctors in that hospital are “attributed” to the ACO. (Some community hospitals are in the ACO, but will not get fully involved in reform in Vermont until 2018 or even 2019, but that is a wrinkle I’ll get to later).
   The second largest group are members of Federally Qualified Health Centers (FQHCs) that get some federal funding to ensure the availability of primary care in rural and lower income areas. Eight of the FQHCs, with a total of 44 sites across the state, have formed an organization called Community Health Accountable Care (CHAC) that is engaging in the reform project as a unit. CHAC has some 275 or more primary care docs. The Burlington health centers are an FQHC, but not part of CHAC.
   The third largest cluster of primary care docs are the 60 or so independents gathered together in a group called HealthFirst, which I mentioned earlier in the connection with the Robinson firing. There are some others that simply stand alone.
   The question for all the primary care docs is whether to join the state’s biggest ACO, which contains north of 90 percent of the medical assets. That ACO is called the Vermont Care Organization; it is fully integrated, which means that it can deliver primary care, secondary care in community hospitals and tertiary care in big academic medical centers like UVM’s medical center in Burlington or Dartmouth-Hitchcock in Hanover, N.H.
   Most, if not all, of the 300 hospital-employed doctors are already there; all but four of the state’s 14 hospitals joined the big ACO when it was founded a few years ago.  The 275 plus docs in CHAC maneuvered for more than a year in order to get the strongest possible role in the big ACO, but finally signed up last July. Once the integrated ACO, the Vermont Care Organization, finally merged with the FQHCs, the infrastructure necessary for reform was essentially in place.
   HealthFirst is the smallest of the doctor agglomerations: the membership varies, but over the last year it included about 60 primary care docs along with a handful of stand-alone specialists. What sets HealthFirst apart from other groups is the principle that its members are independent: HealthFirst, in other words, can’t commit them as a body to any course of action.
   Despite its small size and the fact that its essence stands in opposition to the proposition that integration of the delivery system is necessary to cost containment, HealthFirst has proven itself to be remarkably agile politically; it has punched well over its weight. I’ll look at that in more detail in a future post, but for today the important point is that important elements within HealthFirst have already signed up with the big ACO to deliver care to Medicaid patients in the state.
   The upshot of all that movement is that virtually all the medical assets in the state are at least nominally gathered into an ACO structure. (None of that, by the way, should be construed to mean reform is assured in Vermont. The election of Donald Trump to the presidency is an obvious wildcard. And even within the ACO structure, only some of the units are prepared to go directly to capitated contracts when the ACO goes live on Jan. 1, 2017.)
   The issue that apparently tripped up Greg Robinson at the Community Health Centers was in his effort to navigate through these treacherous waters. The Burlington-based organization is itself a Federally Qualified Health Center, but it remains one of the few, if only, such units not to join the other FQHCs, which have been acting as a unit.
   When Robinson took the job as CEO, his plan was to remain independent—that is, not to join any ACO--and further, to link up with HealthFirst to form a stand-alone block in dealing with reform. He proposed calling the cooperating units the Population Health Alliance.
   In addition to delivery primary acute care, Robinson aimed to be more than normally aggressive in dealing with population health by sending out staff members to schools, workplaces, and other gathering sites to persuade people to adopt healthier lifestyles as a way to get at health care costs. This vision attracted the allegiance of a small, but important primary care clinic called Good Health in South Burlington. The head of that group is Dr. Peter Gunther, who has already joined the Burlington centers, and who is scheduled to become the Centers chief medical officer.
   The problem with this vision was that it didn’t seem to mesh with the trajectory of health care reform, in Vermont to some extent, but mainly in the U.S. Federal Medicare and Medicaid officials, with bipartisan support in Congress (very rare), are moving to squeeze primary care doctors into ACOs by getting more money to primary care docs, but only those in integrated systems that can shift their basis of reimbursement away from fee-for-service.
   The Green Mountain Care Board, which has eschewed putting pressure on anyone to join an ACO, has also made it clear that the federal pressure to join such an organization will be the ultimate driver of the system. Al Gobeille, the GMCB chair, said in a dozen different forums and a dozen different ways in the last several months:
   There is no way the State of Vermont or the Green Mountain Care Board can protect providers from the federal effort to move delivery systems across the country toward integration.
    By mid-fall, these developments appeared to cohere in a way that would leave the Burlington Centers isolated in a world trending toward integration. That would be so even if Robinson could have pulled off the tie to HealthFirst; without HealthFirst, the Robinson plan would be dead on the launching pad…
   In the wake of the firing, Kim Anderson, the spokesperson for the Burlington Centers, said that the potential alliance with HealthFirst was “on hold.” She also declined to discuss the issue on the grounds that her organization does not comment on personnel matters.
   After Robinson went to the press, Anderson reiterated that the Burlington Centers would not discuss personnel matters. As for the issue of how the Centers might position themselves in the health reform landscape, however, Anderson said that her organization has established a committee to work on that question, but that it has not yet arrived at a recommendation.


Health Reform: More Why and a Start on How

by Hamilton E. Davis

   Okay, let’s go out on a limb here and assume that whoever reads this stuff accepts the proposition that we can’t get the cost of health care under control without shifting the way we pay for it. My sense is that the people who do accept it are in a minority, but it is also clear to me that they are the only ones that understand the problem. There is an ocean of carping about the reform enterprise, but there simply is no credible alternative path to sustainability.
   In a recent gathering of state health care officials in Washington, Mike Leavitt, a conservative Republican former governor of Utah, argued that fee for service reimbursement for health care is the “greatest single threat to the economic vitality of the United States.”
  There is a very powerful consensus among both Democrats and Republicans, Leavitt said, that moving health care financing to capitation is the only viable path to a sustainable future. A corollary principle is that coordinated care is better than uncoordinated care.
  He added that evidence for the bipartisan consensus on this issue was the 2015 passage of a federal law known as “MACRA” with full support of both parties in Congress. MACRA aims at forcing a shift away from fee-for-service to block financing and that kind of bipartisan agreement is almost unheard of in the toxic Washington environment.
   It is worth noting that the points made by Leavitt are foundation stones of Vermont’s reform effort as set forth in Act 48, the reform bill passed in 2011.   
   So, how might we go about it?
   The first step is to understand that the enterprise of modern medicine is radically different from that which prevailed 30, 40, 50 years ago. American medicine grew up as a cottage industry. A doctor gets training, hangs out a shingle and begins treating patients. Another doctor does the same thing, but there is no necessary connection between them. Hospitals are just boxes occupied by aggregations of doctors. There is no real connection between the boxes and even between the doctors within the boxes.
   Consider a patient at the Medical Center Hospital of Vermont, circa 1990—not that long ago. The patient has cancer of the spine, and he is undergoing surgery to save his life. As he lies there, he is attended by a neurosurgeon, an orthopaedic surgeon, a cancer specialist, an anesthesiologist, a radiologist (imaging), a pathologist, hospital employees such as nurses and technicians, and possibly others. Whatever it takes.
   Here’s the beauty part. Each one of those professional services was delivered by a separate company, with its own financial structures and fee schedules—five, six, seven separate companies. If we built cars like that, every car would cost half a million dollars, and a huge number of them would be falling apart before they got off the dealer’s lot.
   Modern medicine is orders of magnitude more complex than medicine was 30 or 40 years ago. It is also now hideously expensive. So, it is critical to understand that the delivery of medical care has to be integrated: doctors have to work together in coherent systems. Patients have to move smoothly and efficiently up and down the complexity ladder. They have to start with primary care, then move to community hospital and specialist care, then to tertiary centers for the most complex medical problems.
   An example for the need for this can be found in a piece I wrote for awhile back on Vermont Senator Dick McCormack’s arm.
   There has been some important integration.  The University of Vermont units merged in 1995; the Medical Center Hospital of Vermont joined with 11 physician practice groups to form Fletcher Allen Health Care. But taking the state as a whole, there is still nowhere near enough integration yet to make the system viable for cost performance or quality performance.


   The first problem is how to organize the system so that cooperation among elements of the delivery system is possible. The template for that is contained in the federal Affordable Care Act (ACA) Obamacare. The key element of Obamacare as it applies to the Vermont reform effort is the provision for something called an Accountable Care Organization (ACO).
   (I understand that President-elect Trump has pledged to repeal Obamacare, but that is an issue for the future.)
   Commercial companies in a genuine market succeed or fail depending on how well they deliver products or services that people need and want at a price they can afford. They are like any biological organisms that must adapt to their environments. Health care companies that operate independently of one another have proven, over the last 50 years, that they can’t do that.
   The most significant barrier to getting to a single price for the product—medical care for blocks of patients at the primary, community hospital and tertiary level—is the federal prohibitions against price fixing by competitors. If a person who lives in Rutland needs health care, he can get it from his primary care provider, or from Rutland Hospital, or from the UVM system or from Dartmouth-Hitchcock. What is the most cost and quality efficient way to do that?
   Obamacare permits the primary care doctor in Rutland, Rutland Hospital and UVM or Dartmouth to coordinate this process totally. It bypasses federal anti-trust law. If the primary care doctor and Rutland Hospital and UVM join an ACO, they can get this job done just as efficiently, or almost as efficiently, as Toyota can deal with a problem with the machining of its camshafts.
   That’s what an ACO can do. We now have a fully operative ACO in Vermont. The ACO is called the Vermont Care Organization (VCO). Sorry, but there is no surcease from an alphabet soup world. The VCO subsumes more than 90 percent of all the medical delivery resources in the state.  
   And it has all the resources and legal authority it needs to succeed. Which doesn’t guarantee that it will succeed. The people that run the Medicare and Medicaid programs in the United States believe that the Vermont program is the single best vehicle to get modern health care on a sustainable cost and quality track. But it has to get done in Vermont and that will be a very difficult thing.
   I will look at the All Payer Model, the next big problem, in the next episode.

Volume is the Key to Cost Control

By Hamilton E. Davis

   The central reason for the national consensus in support of health care reform is the explosive growth in medical delivery system costs since the mid-1960s, when the federal government instituted Medicare and Medicaid to pay for health care for the elderly and the poor.
   A few statistics: In 1966, Americans spent 6.6 percent of their annual output (the Gross National Product) on health care; now the figure is just short of 20 percent. In Vermont, hospitals doubled their spending from 2000 to 2009, with no appreciable increase in state population or improvement of health status.
    When Al Gobeille, the chair of the Green Mountain Care Board, talks about health care reform he often cites the following data:
   A typical bill for health insurance for a Vermont family of four with an income of $60,000 in 2015 would be $23,957, 38 percent of their gross income. If costs continue to grow at an historical rate their income would grow to $73,140 in 2025, whereas their health insurance bill would grow to $41,253 per year, 56 percent of their income.
   The above figures have been picked out of an ocean of data on the inflation of health care costs over the last half-century. The result is that no serious person thinks Vermonters or Americans generally can allow costs to continue to grow on their historical trend.
   The question is what to do about it.
   The first response to the cost explosion was conventional regulation, which was tried at both the state and national levels. If a doctor-hospital combination has been getting paid, say, $4,000 to take out an appendix, just tell them they can only increase that amount by so much a year. We now have roughly 40 years of experience to tell us that price regulation has been a total failure. A dreary parade of alphabet soup agencies, boards, government gizmos of all kinds — all failed to keep costs remotely within a reasonable range.
   By the 1980s, the health policy community figured out why. Most of the public, including most of the press, legislators and government boohoos of all kinds, are inclined to think of health care as a conventional market. A patient (consumer) goes to her doctor and purchases care in the same way she buys a television set, a car, or a bag of carrots at the farmers’ market.
   She decides what she wants and if the seller can deliver it at a price the consumer thinks is reasonable, they have a deal. If not the consumer walks away, and if too many consumers walk away, the supplier goes out of business.
   That is a conventional market and in such a market competition acts as a rein on costs.
   Health care is simply not a conventional market. One of the first to articulate that thesis was a Stanford University researcher who argued in the 1980s that the cost driver in health care was what he called supplier-induced demand. In a conventional market, the buyer creates the demand the producer supplies it, or meets the demand. In health care the doctor does both — he or she tells patients what they need and then they supply it. The effect is to shift the driver of system cost from unit price — how much is charged for an appendectomy, or heart surgery or to sew up a cut finger — to the volume of care. In a given population, the volume of care can and does vary dramatically.
    Example: A person who has a headache can go to the doctor and be treated on a sort of continuum. The doctor can prescribe two aspirin; or she can order an MRI to rule out the possibility of a brain cancer. Let’s say the charge in one place for an MRI is $900, and the charge in another is $1,200. The first is cheaper, right?
   Not necessarily. The doctors in the first place may order twice as many MRIs as the doctors in the $1,200 facility. In that case, the cost over a cohort of, say, 10,000 people in a hospital service area would be $72,000 for a utilization rate of 60 MRIs per capita, and $108,000 for a similar cohort in the supposedly cheaper location.
   Could such a disparity actually exist? It not only could, but does, all over Vermont and all over the United States. Doubters could check out resources such as the Dartmouth Health Atlas, which documents the variability in utilization rates in the U.S. The ability to understand the problem of cost inflation in health care, and further, to understand the reform movement in Vermont and in the country, rests absolutely on acceptance of this fundamental reality:
   The cost of health care isn’t determined by the unit cost, it is equal to the unit cost times the volume.
   If you can’t control costs without considering volume, then you really have no choice but to change the way you reimburse doctors, hospitals and other providers for the care they deliver. Which is precisely what the Vermont reform effort aims to do. It is also the course fixed on by the Centers for Medicare and Medicaid Services (CMS) for the country at large. Moreover, the elegance of the Vermont design is why CMS has selected Vermont to lead the way toward new framework for delivering health care.
   The buzzword to describe the Vermont project is the All-Payer Model, the infrastructure for which is now in place in the state. I’ll sketch out what that means in the next episode…

Health Care Reform Enters the Action Phase

by Hamilton E. Davis

   In the spring of 2011, the Vermont Legislatures set the state on a path to the most far-reaching health care reform project ever attempted here or in any other state. Last week, the state completed work on the final piece of architecture needed to make the plan a reality.
   It took five and a half years of grinding effort to reach last week’s milestone. Now comes implementation of the plan, and that effort promises to be even more difficult. Changing the way the state’s doctors, hospitals and other providers deliver more than $3.5 to $4.0 billion in health care to the Vermont population will require a fundamental change in the way that money flows to the providers, and that in turn will require a fundamental reorganization of the system itself.
   In other words, we are on the brink of a huge upheaval in the cultural and financial environment of our health care system.
   This upheaval will take place in an atmosphere fraught with a lack of understanding on the part of the public, the press and the legislature, and in fact, in much of the medical community itself. There is also an important block of more or less explicit opposition to health care reform in all of those elements in the state.
   A personal note: I have been following the reform effort since its inception in 2011, and it is the most complex issue of public policy I have seen in more than 50 years working in that particular vineyard. There will be a little hiatus in the frenzy now that the All Payer Model has been signed. In 10 days we will know who the new governor will be, not to mention who will be the new president.
   The biennial shift in government will be particularly far reaching in Vermont. We will get not just a new governor, but a new lieutenant governor. In the Legislature we will get a new House speaker, and a new Senate President Pro Tem, accompanied by at least some committee changes. The state bureaucracy will get a whole new leadership structure.   
   After that, we will have two months before the new Vermont Legislature takes office. And in that interregnum we will begin to see the way that health care reform will affect the organization and functioning of the health care delivery system itself.
   In the past, I have dealt with the myriad issues involved by writing very long articles that often covered multiple facets of the reform project. I am going to try something different now. I’m just going to start at the beginning and go forward to the current situation in smaller bites that I will publish as quickly as I can write them.
   I’ll start with the need for reform, and sketch the failures of the past. I’ll lay out the architecture of the Vermont plan and then deal with each aspect separately. I can only hope that these efforts will cohere sufficiently to give my readers a clear-enough picture of the project to make judgments about it.
  Hey, it worked for Dickens.
  First up: Why we need reform and how the Vermont plan was built to meet that need.

GMCB Gets Somewhat Tougher on Hospital Budgets

By Hamilton E. Davis

   The Green Mountain Care Board on Thursday ground some more money out of the proposed spending by Vermont hospitals, trimming here and there on the budgets for four of the hospitals that breached the Board’s cap of 3.4 percent inflation for the fiscal year that begins Oct. 1. Their methodology precluded an immediate determination of just how much money is involved; the Board’s finance chief, Mike Davis, will get the final figures by early next week.
   I set out the parameters for the four in a post yesterday entitled A Crummy Deal -- a proposal by the four hospitals to reduce their roughly $15 million total overage by 20 percent. Total spending for Fiscal Year 2017 in the 14-hospital system, will run to $2.4 billion.
   The offerings for cuts were worth a little over $3 million. The Board’s decisions, all reached by unanimous voice vote of the five-member panel, were as follows:

Southwestern Vermont Medical Center in Bennington:

   The Board with little discussion let the 20 percent offer stand for Southwestern. The members judged that the Bennington facility showed clear evidence of budget discipline over the last few years, and has to deal now with significant problems in that region.

Northwestern Vermont Medical Center in St. Albans:

   The Board was more critical of the budget performance by this hospital. The 20 percent offer for Northwestern amounted to a cut of $168,000 in the overage total of $836,000. The Board increased that by figure linked to the hospitals requested rate increase charged to insurance carrier(s). My guess is that the final order will amount to an increase in the cut by another couple of hundred thousand dollars. (I will look much more closely at Northwestern soon.)

The University of Vermont plus Central Vermont Medical Center:

   The decision for those two hospitals, which are now partners, but whose systems are not yet sufficiently integrated to permit consideration of a single budget, had their reductions increased from the offer of 20 percent to 30 percent. Neither Mike Davis nor the Board members could come up with a quick dollar estimate for the effect of that decision.

N.B. The Board formally approved the submitted budget of Copley Hospital in Morrisville, with the understanding that Copley, now under new management and with its budget pretty much of a total mess, will have to submit a revised budget within the next three months.

A Crummy Deal for the GMCB

By Hamilton E. Davis

   A few weeks ago, I wrote a piece about the Green Mountain Care Board’s summer of discontent. In the fifth year of their cost containment odyssey, the members got a bad rap from the press on their performance to date; and they confronted $2.42 billion in hospital budgets for the coming fiscal year, an increase of 5.0 percent over the current year, well above their target of 3.4 percent.
   On Thursday, the Board’s summer comes to its effective conclusion when it makes the final decisions on four hospitals whose budget proposals breached the target level. Over the last 10 days or so the landscape looks considerably different than it did in mid-summer: the “overage” in the system-wide proposals, for example, looks markedly less alarming than it did, running to roughly 3.7 percent, still over, but in the ballpark.
   At the same time, there continue to be significant challenges in budget management. The most serious involves the budgets of four of the hospitals that exceeded the target—The University of Vermont Medical Center; its partner, Central Vermont Medical Center in Berlin; Southwestern Vermont Medical Center in Bennington; and Northwestern Vermont Medical Center in St. Albans.
   Dealing with these budgets will require that the Board mature as a regulator. It has done pretty well on cost containment so far, but it needs to bring its game up considerably. For its job will become far more difficult beginning in 2017, when the first statewide integrated system goes live: managing 14 individual hospitals is hard enough; keeping a lid on the market power of a single unit that subsumes most of them will be incomparably harder

The Backstory

   The $2.42 billion total for the original 14 hospital submissions amounted to $114 million in new money compared the current year’s budgeted spending. The proposals are for the Fiscal Year 2017, which begins Oct. 1. That compares with $78 million in new money in the budgets for the current fiscal year.
   The budget target over the last three years has been 3.4 percent, and the hospitals have been mostly breaking through that level. In the FY 2015 nine hospitals were over; in the current submissions 10 of the 14 were over. So the results have been messy, and are uneasy making, although they are far better than the rest of the country.
   Moreover, the most recent analysis of this year’s budgets makes them look a lot better. The reason is that the Board’s policy is to exempt two types of spending from the cap target. The first is the acquisition by hospitals of independent practices in their area. Most of these are small primary care clinics or individuals, although some are independent specialists.
   The independent doctors are not now regulated, but the costs they generate are part of the cost of the overall system. On paper, therefore, bringing them inside of the regulated system does not actually cost Vermonters more than they are already paying. A total of $18.7 million is budgeted for doctor transfers.
   A second category set outside the cap by the Board is investments that advance the cause of health care reform. A total of $7.3 million is allocated to that category. If you subtract those two categories from the $114 million in new money, you get roughly $88 million. That drops the percent increase in the straight-face range, in the high threes.
   None of that means that hospital costs, let alone the costs of the non-hospital sector of the health care delivery system, are sustainable. They are not; they are not even that close. The theoretical ability of Vermonters to pay for annual inflation in the system runs to no more than three percent; and even that is pretty painful at a time when inflation is less than two percent.  
   The operative theory in the health policy biz is that sustainable costs can only be obtained by shifting from fee-for-service reimbursement to block financing that places doctors and hospitals at financial risk for the operating of the system. Even with so-called capitation reimbursement, however, we will still need very strong and determined regulation, given that Vermont is too small to accommodate competing health care systems.
   That brings us to Thursday’s action.

Is This a Good Deal?

   The crux of the regulation issue now involves four of the 14 hospitals that are over the budget cap. After allowable discounts, they look like this:

   UVM Medical Center: Budget $1.2 billion (1,175,237,274); overage  $2.2 million.

   Central Vermont Medical Center: Budget$193.2 million; overage $10.6 million.  

   Northwestern Vermont Medical Center: Budget $102.9 million; overage $835,592.

   Southwestern Vermont Medical Center: Budget $152.8; overage $2.1 million.                               

    In response to suggestions by the Board that the four hospitals consider this jointly, the financial officers of the four hospitals worked out a proposal to deal with the resolution of the overage problem as a group.
   Last Thursday, the group presented its proposal. Its spokesman was Todd Keating, the finance chief at UVM. Keating said that the group had resolved on the following deal: each hospital would deduct from its budget 20 percent of its overage figure. The total overage for the four facilities came to $15.8 million. The total reductions or “givebacks” amount to $3.2 million.
   Keating acknowledged that the group had picked the number so as to avoid any real pain for any of the hospitals.
   What should the Board think about this? Here is the way I look at it.
   If it’s thought of as a deal, the deal is terrible. Twenty cents on the dollar amounts to salvaging what you can from a financial train wreck. Moreover, there is a real problem with considering the hospitals as a unit in the current circumstances. The Board is trying mightily to foster the development of an integrated system, where hospitals take financial risk jointly for their economic performance.
   But they are not there yet—UVM is approaching a full merger with Central Vermont, but the hospitals in St. Albans and Bennington are fully outside that effort. Beyond that, circumstances at each of the four hospitals vary dramatically. Finally, there is a critical question for the Board itself: It has two roles to play here.
   One is to oversee the development of the integrated system; the second is to regulate the hospital budgets so as to protect Vermonters, who are paying the bills for them.
   Thus far, the Board has leaned in the direction of reorganization. Their regulatory performance thus far has been good, but not outstanding. And it’s time now, it seems to me, for it to establish its bona fides as a regulator. If it doesn’t do so now, it would auger badly for its ability to do so when matched against the market power of a fully integrated system.
   What might such a strategy look like?
   Here is a suggestion, taking each hospital separately. A qualitative question, but an important one in my view, is to consider both the particular circumstances of each hospital and the attitude of its management and board toward cost containment. So, by hospital:
   UVM is the center of the system; it delivers half the care offered across the state. Despite a drumbeat of political criticism about how it plays its role, it seems obvious to me that UVM is fully committed to reform, and is doing its best to shift its own trajectory and hence the trajectory of the whole system.
   The Burlington-based facility has argued to the Board that in the last couple of years, it has experienced a significant increase the volume of patients coming through its doors, and it seems obvious that is true. Part of that derives from the increased demand emanating from Obamacare’s Vermont Exchange.
   An important second factor is a wholly unexpected change in the performance of Dartmouth-Hitchcock Medical Center, the academic medical center in Hanover, just across the Connecticut River in New Hampshire. Forty percent of Dartmouth’s traffic is coming out of Vermont, including a large proportion of the most sophisticated and expensive care delivered east of the spine of the Green Mountains.
   Over the last year or so, there have been rumblings about problems in Hanover, and the situation burst into the open in the last couple weeks when Dartmouth  announced that it has been losing money and will lay off a big chunk of its employees.
   In support of its proposed budget,  UVM argues that, owing to the two reasons above, it needs a rebasing of the size of the patient population.
   I totally agree with that. On the other hand, the amount of money UVM is over, a measly $2 million in a budget of more than a billion dollars, is pocket change. It amounts to less than two tenths of one percent. For the flagship of the Vermont system to be over the Board’s target by an amount like that is ridiculous. The Board ought to act like a regulator here. UVM’s reduction ought to be 100 percent, and it shouldn’t even be a close decision.
  Central Vermont is a tougher nut to figure out. Its volumes have increased dramatically also, partly because of the developments at Dartmouth, but also because its partner UVM is keeping more moderately ill patients in Central Vermont rather than sending them to Burlington. That’s a very good thing and it augers well for the integrated system that is coming in 2017.
   On the other hand, the increase proposed by Central Vermont is absolutely huge—an 11.0 percent leap. When I first wrote about this I listed CVMC as 1.1 percent because it never occurred to me that anyone would produce something like an 11 percent jump in the current era.
   So, what to do? The Board needs to be at least a straight-faced regulator here. CVMC probably needs everything it plans to spend. But the real pain in this system is the pain suffered by the people of Vermont, and they deserve far more consideration than they have ever gotten before. CVMC can slow down and eat its increase in smaller bites. Its giveback should be at least 50 percent rather than 20; 75 percent would be better.  
   One thing the Board might keep in mind if it gets the squeebles about being tough is that there is no evidence in the budgets generally that managements are factoring in the prospect of significant improvements in efficiency that are the supposed rewards of going to an integrated system.
   Fiscal 2017 begins in a little over two weeks, but three of its four quarters will begin in January, when Vermont’s integrated system goes live. If the hospital chiefs scream about this pain—which is a long way from being acute—the Board could simply tell them: start rationalizing your system sooner rather than later, faster rather than slower.
   Northwestern Medical Center in St. Albans. This hospital in my view is different from the other three. Its management has been blithely ignoring the Board’s guidance for the last three years. According to the Board’s data system, Northwestern has gone over its budget in 2013, 2014 and 2015. And at the hearing where the four hospitals presented their joint proposal, the Northwestern representative lectured Al Gobeille, the board chair, to the effect that the Board should be encouraging even more spending at the hospital.
   The situation at Northwestern needs to be dealt with in much more detail, and I will do that this fall. But it seems critical to me that the hospital managements and boards need to be at least trying hard to wrestle costs under control. At Northwestern, they seem to be building their facility out as fast as possible. They need to get real in a hurry, and the Board ought to make them do so. Reduce by the total overage—100 percent. Give the whole $866,000 back.
   The opposite situation seems to obtain at Southwestern Vermont Medical Center. Its budget is $1.5 million over the cap, but it has faced difficult circumstances over the last few years. A hospital closing in nearby Massachusetts has dumped a whole new block of patients on the Bennington facility, and Southwestern has to deal with
   This background, it seems to me, justifies giving Southwestern what it thinks it needs. The Board has every right to expect that the hospital’s management will be a strong supporter of increased cost efficiency going forward.
   Although no one has said so explicitly, Todd Keating’s comments about the twenty-cents-on-the-dollar offer being at the real pain threshold, that threshold looks like it arises from the situation at Southwest, more than at the other three. Cutting that hospital by just 20 percent looks to me like the right thing to do.
   A concluding comment: As important as the actual numbers are, the posture of the Board is even more critical. Board members may be tempted to treat Thursday’s decision as a deal to be struck between equals. That would be a huge mistake. The hospitals and the Board are not equals. The Board is a regulator, not a party to some deal between equals. State law empowers the Board to set the budgets for hospitals.
   The Board can’t be unreasonable and it has the equal responsibility to make sure that Vermonters get the health care they need, but their single most important task is to set the parameters for what Vermonters can afford to pay. They need to assert that prerogative more decisively than they have in the past.
   Now is a great time to do it. If not now, when?

The GMCB: The Summer of Their Discontent

by Hamilton E. Davis

      July through early August is usually a quiet time in the policy world. Legislators are concentrating on parades. Lobbyists, advocates, and the few news reporters left have trouble finding people to talk to. It’s time for the beach, the backyard, and the deck. In the health policy biz, however, early to mid-summer is the hinge of the year.
   Some $2.4 billion in hospital budgets arrived at the Green Mountain Care Board on July 1, kicking off a process that will produce a spending pattern for the new fiscal year beginning Oct. 1. July is also the time when the Board grapples with the rates that Vermont Blue Cross and the insurance carrier MVP can charge for health plans on the Exchange.
   The process is more fraught than usual this year because the whole health care system is on the verge of transitioning to a different type of payment system, which is generating huge cultural, political and financial stresses. Primary care and independent doctors have been flexing their new-found political muscle; a block in the Legislature is challenging the reform process; the Shumlin administration is headed for the exits and has lost its ability to manage the process; political candidates are striving for every edge they can get on their opponents and health care is raw material; and scarcely anyone who is not a specialist begins to understand the hairball that is health care reform.
   These pressures are converging on the only still-trusted piece of infrastructure in the whole landscape—the Green Mountain Care Board. And it didn’t help that the Board got a decidedly bad rap coming out of the gate.
   The bad rap was a press report that said that the hospital system had been piling up “profits” well in excess of what was reasonable, and that the Green Mountain Care Board wasn’t dealing with it. The second wasn’t actually a bad rap, but it was painful for the Board nonetheless.
   That came at the Board’s hearing on Vermont Blue Cross’s request for an 8.2 percent increase in the premiums the Blues would charge to Vermonters buying health insurance through the Exchange. The Burlington-based Vermont Workers Center brought in testimony from several individuals and small businesses that the rates were already unaffordable, and that an increase of that magnitude would be simply crushing.
   The hearing was painful for two reasons. One was that the argument for unaffordability was so compelling. The corollary was that there isn’t much the Board can do about it—in the short term. Once a spending stream is in place, state law provides that the Blues have to be paid enough to survive as an insurance company, and the actuaries for both the Blues and the Board testified that the north of eight percent was justified in those terms.
   The only real way to attack the affordability problem is to constrain the overall costs in the system and while that is the Board’s responsibility, it can only get at it going forward--not soon enough to significantly reduce the 8.2 percent. In fact, the Board later cut the 8.2 percent to 7.3, but even a move of that magnitude does not really render the policies on the Exchange affordable.
   The third hit came in early August when the Board received the hospital budget proposals for the Fiscal Year 2017, which begins on Oct. 1. On a system wide basis, the budgets far exceeded the Board’s 3.5 percent cap on total hospital spending. All in all, a tough three week stretch for the board…
   The reason why I’m spending so much time on these events, including what would normally be an ephemeral news article, is the relative fragility of the reform process. Budgets are boring and complex, so they can be used in political struggles around the whole issue of health care reform, including the problems with the Exchange, which aren’t actually within the Board’s purview at all. There are reform opponents on the right, the left and in the middle and they will use any weapon that comes to hand. And press coverage can exacerbate those pressures.

                                                                The Whole “Profits” Chimera

   The development that knocked the Board sideways in late July was the publication of what was called a special report in VTDtdigger. The headline on the article read:

Despite Regulation, Hospital Profits Up

   The obvious intent of the report was to impeach the performance of the Green Mountain Care Board. The measures cited were “profits”, which are actually operating margins in hospital budget land; but call them profits if you will. The other metrics cited were days-cash-on and the value of hospital assets.
   These have all been out of control, the article implied; a second implication was that the extra money was fueling excessive salaries inside the hospital system. And the culpable party was plain to see.

   An analysis by VTDigger shows that, although individual hospitals vary, Vermont’s 14 hospitals have, on average, improved their financial footing since the Green Mountain Care Board started regulating hospital budgets in fiscal year 2013.

   The first puzzling thing about this contention is that the supporting documentation was wrapped in developments that took place long before the Green Mountain Care Board was created. The increase in hospital assets covered the period 2001 to 2015—15 years, not three. The increase in margins was calculated from 2006 to 2015—nine years. When the article wrapped in those two metrics with days-cash-on hand, it did so over 10 years…
   The primary focus, however, was on the issue of profits. What was even more galling to the Board was that the operating margins are one of the few elements in the hospital budgets that are fully under control. The margins have been running around three percent or a little under, which is perfectly reasonable.  
   The main reason for the margins is not so the people in the hospital can have a party, but so that hospitals can maintain their physical plant and to borrow money at the lowest possible interest rates.
   The most striking example of that need is UVM’s financing for its new inpatient wing. When the $180 million project was approved, the Board permitted UVM to increase its margin from roughly two percent to as high as four. (It actually runs a little under that)
   The increase persuaded Standard and Poor, a major credit rating agency, to raise UVM’s bond rating from BBB+ to A-. That shift took place a year ago, and when UVM went to the financial markets a couple of weeks ago to borrow $89 million, it got a very favorable rate, one that will save $11 to $12 million over the life of the loan.
   Having a two to three percent operating margin across the system, in other words, is simply a prudent way to run such a complex industry. It is interesting to recall that from the very early days of health care regulation the issue of operating margins was a point of emphasis.
    For example, the Vermont Hospital Data Council was established by the Legislature in 1983 (not 1992 as the Digger piece says) and its second chairman, the Burlington business man Patrick Robins routinely urged hospital presidents and chief financial officers to build a margin into their budgets.
   Still, the simple word “profits” is enough to push every button on the health care world. So, why should we ignore them?
   Here are some of the reasons:

1.      In the Vermont health care world, if a hospital racks up more than its allowable operating margin (the right words for profit) it has to give them back. For example, that is what happened last year to both the UVM Medical Center and Rutland Regional Medical Center.

2.      The actual numbers are too small to be decisive. Operating margins in the system run from two to three percent, which is simply a responsible level. But let’s stipulate that they need to be cut in half. The cut would amount to one and one half percent.

   The numbers in the health care biz are so big it’s hard to envision them--a few hundred million dollars here, a couple of billion dollars there. So, think of it this way. A husband and wife sit down to discuss how to fill a $1,000 hole in their household budget. The husband says that he, By God, will do his share.
   What would that be?
Well, for the next two weeks I’ll get a Latte instead of a Pedestrian at Maglianero’s. 
A sacrifice like that at Maglianero’s, the ne plus ultra coffee joint on the Burlington waterfront, would save the husband about $15. You can fill in the wife’s response for yourself…The numbers in the profit issue are just too small. 

3.      The answer for people who are serious about solving the policy problem of sustainable health care costs is that health care financing is nothing like private sector financing, or even financing in regulated industries like electricity. In both of those cases demand is determined by the customer: the customer wants or doesn’t want a television set; the customer wants to operate three toasters instead of one.

    In health care, the provider determines the demand. And the customers never stop showing up. What they get is what the doctor or the hospitals say they need. The demand, in other words, is close to limitless and continuous. In that kind of environment, you don’t need profits to ramp up salaries for doctors and hospital executives. You just take the salaries up and they become an expense and they show up, not in profits, but in the basic health care bill—net patient revenues.
   The principle to keep in mind is that in health care the cost to Vermonters isn’t the unit price—so much for an MRI, or a knee replacement. The cost is the unit price times the volume. And 40 years of research has shown that volume is highly variable.
   Primary Care doctors haven’t been able hook onto this financing train, but they amount to less than 10 percent of the cost of the system. But hospital-based doctors and hospital executives have. From 2000 to 2009, for example, virtually every hospital in Vermont doubled its budget. There was no earthquake, or cholera epidemic, and no influx of people into the state. Given that health care is an industry whose labor costs run to around 60 percent, salaries went up a lot.
   So, has the Board just been spinning its wheels for the last three years? Actually, it has done pretty well. The members placed at least a reasonable lid on cost increases. It has persuaded the federal government that Vermont has one of the most promising and innovative cost containment initiatives in the country. And it has overseen the development of a truly-integrated system that can be the vehicle for redesigning the flow of money into the state’s hospitals.
   None of this is to say that hospital costs are under control. Nor is it to say that the Board’s performance has been flawless, it hasn’t. But it isn’t guilty of the sins it has been charged with in the press.
   That doesn’t mean that the days ahead will be easier. In fact, they will be much tougher. In an ironic touch, the Board had no sooner begun to shake off the effects of the Digger piece, when a serious new challenge walked in the door.
   On Aug. 4, the Board’s finance chief, Mike Davis, presented the hospitals’ proposed budgets for the FY 2017, which begins Oct. 1. In a dramatic shift from the last several years, the budgets came in far above the Board’s 3.5 percent cap, so far above it that I believe it presents the Board with an existential challenge to its position, and ultimately to the future of health care reform itself.
   The net patient revenue figure is the key to hospital financing in Vermont. It is the amount of actual dollars Vermonters pay to get hospital-based care each year. There are all sorts of numbers that can be brought forward to provide a look into the system. There is gross revenue, discounts from gross revenue, charges per unit, discounts from charges, unit cost increases or decreases, hospital operating margins (“profits” as we’ve seen above).
   These figures can be and are manipulated every which way from Sunday. What counts, however, is net patient revenue. When I chaired the Vermont Hospital Data Council in the late 1980s, I called it the “Green Dollar Number.” The Green Dollar Number is what shows up at the point where Vermonters collectively take out their wallets and fork over the actual cash to pay for the system.
   That is the reason that Vermont law has given the Green Mountain Care Board the authority to set a cap on net patient revenue for the hospitals. The Board has set a cap of 3.0 percent in the amount that a hospital’s budget can grow from FY 2016 to FY 2017. The Board has also provided that a hospital can go over the cap by about half a percent if the overage is to be spent on something the Board believes will advance the cause of reform of the system.
   The problem is that the proposals now under consideration add up to an increase of 5.0 percent over the current year. In terms of Green Dollars that means that the FY 2016 budget called for new money totaling $78 million over the previous year and the proposals for FY 2017 would require $114 million in new money. That is an increase of 46 percent over that period.
   The proposed budgets haven’t just exceeded the cap, they have made a hash out of it. Ten of the 14 hospitals exceeded the Board’s limit, and most of those weren’t even close. Copley Hospital in Morrisville came in at 7.4 percent; Northwestern in St. Albans at 7.5 percent; Southwest in Bennington, 6.1 percent. The topper was Central Vermont Hospital at 11 percent. The University of Vermont asked for 4.3 percent, the first time it has come in over the cap. Nine of the 14 hospitals exceeded the cap for FY 2016, and 10 of the 14 have proposals that are over for FY 2017.
   The flagship of the system—UVM and its partner, Central Vermont Hospital—had a weighted average of about seven percent, double the cap.
   No one has analyzed these budgets yet. The Green Mountain Care Board will begin that process next Wednesday when it holds a hearing on the UVM and CVH budgets.
   My sense after watching the hospital cost dance for 35 years is that some of the increases are definitely necessary, but that some of them are definitely not necessary. The problem for the Board is that there is really no practical way to figure out which is which in the three to four weeks that the Board has to maneuver.
   One way to get at it would be to look at the quality metrics, but the Board hasn’t really done that so far. And even if they do, telling any hospital they can or can’t do something presents a huge political problem.
   As I noted above, in theory, the advent of an integrated system would shift that problem to OneCare Vermont, or its newly almost-formed bigger successor Vermont Care Organization; they are Affordable Care Organizations set up under the aegis of the federal government. But there is no chance that OneCare, the only structure that actually exists now, can solve the Board’s problem by early to mid-September.
   However this dilemma is resolved, the budget submissions appear to have destroyed the usefulness of the tool that the Board has relied on since its inception in 2012—a cap based on net patient revenue. The only way the cap could be saved would be to apply it across the system, and that would entail the risk that some Vermonters might be denied care they need. But if nearly everyone ignores the cap, it is very hard to see why anybody should take it seriously.
   The countervailing problem is that unless the Board has the credibility to get costs under control, then the whole health care project itself would be at risk. And in that environment, OneCare Vermont and its descendent Vermont Care Organization would begin to look more like an enormous risk rather than the savior for the system.
   The huge question would be:
   If the Green Mountain Care Board can’t exert a credible lid on any single one of the state’s 14 hospitals, how could it do so when it faced a single organization with all the medical resources in it? The market power of a fully integrated system would be too much for a feeble regulator.
   The conundrum laid out above is why I have called the current situation an existential challenge to the Board. This challenge isn’t simply irritating, like the press article, or frustrating, like setting the rate increases for insurance companies. This is the toughest challenge the GMCB. If this is truly a summer of discontent for the Board, the hospital budget issue is a very good reason for it.