Thinking big numbers: guess how long one million seconds is, in days, weeks, months, years?
A billion seconds? No calculating—just take a shot.
by Hamilton E. Davis
Health care reform has had a long gestation period in Vermont, nearly 50 years, and for most of that time the galvanizing issue has been the need to get costs in the delivery system under control. Costs began their meteoric rise in 1966 with the birth of Medicaid and Medicare, national programs to pay for health care for the poor and the elderly. At that time, health care costs in Vermont amounted to 6.6 percent of the Gross State Product. The federal programs put a blowtorch under the tea kettle of demand, and costs began a meteoric rise that took health care’s share of the total state output to today’s level of just under 20 percent.
I am dredging up this history now for two reasons. The first is that the cost issue has faded from the reform environment over the last few years, which could skew the process; and, secondly, because we are now able to assess the financial impact of the reform project over its first seven years. That impact has been huge: Vermonters have saved nearly $2 billion in that time, and that is before the full force of reform has really begun to bite. The current Legislature has no real sense of that; and in fact, it’s general posture recently has been at best skeptical and at worst hostile toward the project in its current form. The negativity appears focused on the role of the UVM health network and the state’s Accountable Care Organization, OneCare Vermont. The huge savings over the last seven years could not have been achieved without the combined efforts of UVM, OneCare, and the Green Mountain Care Board.
In my last post, I used the metaphor of climbers challenging Mt. Everest to illuminate the reform saga. We are now at Camp Three in the Everest metaphor, and one of the biggest potential obstacles between here and the summit would be some kind of harassment by the Legislature. I'll write more about this in a future post, but for now consider that possibility as a cloud in the sky on Leg 4 of the Everest climb.
Following is my analysis of the effect to date on the financial dimensions of reform.
The first step to rein in costs came in 1983 when the Legislature established the Hospital Data Council with a mandate to figure out how costs worked in the system. The hospitals did not account for all of health care costs; other costs included sectors such as long-term care and independent physicians; and it did not even include all the hospitals—the VA hospital in White River, and the Brattleboro Retreat were left outside the regulatory tent. Still, the state’s community hospitals that were, and are, the engine of cost inflation.
In 1987, the Council issued a report showing the spending track for the period 1981-1988. It looked like this:
In 1981, Vermont hospitals spent $149,500,000. By 1988, it was $271.1 million, resulting in a compound annual growth rate (CAGR) of 8.9 percent during that seven-year period (CAGR is like an average only better). That was clearly unsustainable. And it was playing hob with private insurance rates. Medicare and Medicaid together account for roughly half of acute care spending, and since the federal and state governments don’t pay their full share of the costs, the difference has to be made up by private payers—the dreaded cost shift.
The Data Council had no actual power to force lower inflation rates, but that changed in the mid-nineties with passage of a reform bill that gave the state the power to “establish” hospital budgets. The new regime was called BISHCA, and it regulated the hospital system until 2011, when the Legislature adopted the current reform plan. The new sheriff was the Green Mountain Care Board, and for the first time in modern era a regulatory body began to act like, well, a regulatory body.
I say that because costs roared along out of control throughout the period of the 1990s and the ‘oughts. The sole break in that trend came between 1994 and 1997, when the inflation curve flattened markedly. The change came not from Vermont regulation, but rather from nationwide voluntary restraint by the industry during the managed care era. Once managed care went away, the cost resumed their climb on the same slope as the ‘70s and ‘80s.
Our contemporary view begins in 2001, which is where the GMCB data gathering really begins. (The earlier data exists but is in the archives where it is hard to get at.) The easiest way to follow the analysis is to look at the following graph.
From 2001 to 2009 costs inflated by 8.01 percent. That figure is labelled CAGR, which means Compound Annual Growth Rate, a number that is close to a simple average, but is considered slightly more accurate by the money priesthood. In my analysis I have ignored the actual spending figures for the Fiscal Years 2010, 2011 and 2012. The reason for ignoring 2010 is that the marked drop in the inflation rate was not the result of any regulatory effort by BISHCA, but rather occurred by a big reduction in demand from the 2008 recession.
In 2010, we entered the modern health care reform era, when Pete Shumlin, a state-senator from Putney, won a very close race for Governor, first against four very credible opponents in the Democratic primary, and then an equally credible Republican in the general election. Shumlin won his long slog through difficult political terrain in large measure because he promised to solve the problems of the health care delivery system. He called his project Single Payer.
Shumlin launched his reform project in 2011, with a strong focus on cost containment by the newly established Green Mountain Care Board. At about the same time, the UVM health care system, in partnership with Dartmouth-Hitchcock Medical Center, formed an Accountable Care Organization (ACO) to attack the cost problem at its roots by shifting reimbursement to doctors and hospitals from fee-for-service to fixed price contracts that put providers at risk for the financial performance of the system they run.
The first hospital budgets considered by the Green Mountain Care Board were submitted in FY 2013. The first system inflation rate in the new system was derived from the actual spending in FY 2012 compared with the 2013 figures. The figures for the succeeding year are shown in the bottom leg of the graph, culminating in the 2019 system budget of $2.6 billion. The average (or CAGR) was 3.91%.
Beginning with the same base—the 2012 system budget of $1.99 billion, I have shown an inflation track of a 7.0% for 2012 to 2019, on the assumption that those numbers would be expected from the regulatory regime preceding the GMCB. The actual figure for 2001 to 2008 was 8.01%, but I cut it back to 7 because some of the money mavens I talked to thought that 8.0 was a little high, based on some national data. I also wanted to be as conservative as possible. Anyway, for each of the seven years I compared the actual spending with the “what-if” or “but-for” figures on the top line to get a savings for each year. The total savings came to $1.9 billion for the seven-year period.
I was frankly astonished by that number. I believe it demonstrates two realities when you are dealing with health care costs. The first is that the financial demands of health care delivery system are absolutely voracious. The second is the sheer mathematical power of compounding. An example: I used the 7.0 figure in order to be conservative and not boggle the priesthood. The 7.0 figure yielded a total savings of $1.9 billion. The priesthood, however, has no Vermont figures whatsoever to support their 7.0 view. On the other hand, the numbers from 2001 to 2009 that generate the 8.0 figure are as solid as the Green Mountains.
The savings at the 8.0 level come to $2.6 billion, a difference of a cool $700 million. To get some sense of the potential financial rewards of pursuing reform aggressively, recall that last spring the Legislature and the Scott administration collaborated in a titanic battle, involving a blizzard of vetoes, a special session, and a threat to shut down Vermont state government, over a Scott effort to save, possibly, $26 million.
Given these huge savings, it passes understanding why there is not more appreciation in state government of the results of just the early phase of reform. Nothing that either the Scott administration nor the Legislature has even thought of doing approaches the benefits that have flowed from the reform process since the passage of Act 48 in 2011. And there are a lot more savings where the last ones came from. A brief suggestion: put the state employees and the state’s teachers into OneCare Vermont so that their health care can be delivered under fixed price contracts that keep inflation under control…
The health care numbers are so big they are literally bewildering to think about. If we used the 8.0 and found a savings of more than $2.6 billion, that figure would amount to half of the whole General Fund budget for the state. Just shifting from millions to billions is hard for ordinary people to get their heads around.
Speaking of which: did you try the test at the beginning of this piece? A million seconds versus a billion seconds.
A million seconds is around 12 days, enough for a short vacation.
A billion seconds is some 32 years, a third of a very long life.
Health care reform lives in a B for billion world.