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.