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.