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.