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.