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?