Deep Stresses in the Vermont Hospital System Surfacing This Summer

by Hamilton E. Davis 

Vermont is now entering the eighth summer of its health reform project, and this one promises to be different from all the rest. So far from being the doldrums of the policy year, summer in health policy is actually the crest. On July 1, the state’s 14 hospitals submitted their Fiscal Year 2020 budgets and they will be critical—cost containment is still the highest priority for the reform managers. In a couple of weeks, the Green Mountain Care Board will hold its annual hearings on the rates that Vermont Blue Cross and the New York-based carrier MVP can charge customers on the federal insurance Exchange. And sometime soon, federal Medicare officials will visit the state to check on the most important state reform effort in the U.S.

All of these processes have taken place in recent years, of course, but this summer will be different both qualitatively and qualitatively. The broad shape of reform is now clear, but the structure in place is still far from mature: major decisions remain to be made, and many of them will be as difficult as the initial steps were. For there have been tectonic shifts in the geology of the state’s hospital system.

Let’s count the ways:

The Community Hospitals

One of the anomalies that make reform in Vermont complex is its asymmetrical hospital infrastructure. The UVM health network’s Medical Center Hospital in Burlington dwarfs the other 13 facilities in the state. UVMMC delivers roughly half the care in the state. A not-so-obvious anomaly is that the dominant hospital for the eastern half of the state is Dartmouth-Hitchcock Medical Center in Lebanon, N.H. D-H is the referral center for community hospitals in Randolph, Newport, St. Johnsbury, Windsor, Springfield, Brattleboro, Bennington, and to some extent, Rutland.

One of the most difficult problems facing Vermont reformers is that most of the community hospitals are too small to function efficiently, either in financial or quality terms, in the 21st century medical world. Of course, nobody wants to talk about that because of the very important role the small hospitals play in their home communities. But the issue is becoming too pressing to ignore much longer. Consider the evidence. In the modern era, three hospitals have basically gone away. Kerbs Memorial in St. Albans merged with a second hospital in town; Fanny Allen in Winooski gave up independence and joined UVM; Rockingham Hospital in Bellows Falls went broke and closed. In the nearer term, Porter Hospital in Middlebury joined the UVM health network as it was going on the rocks; as did Central Vermont Medical Center in Berlin, although CVMC wasn’t obviously going on the rocks. And right now, Copley Hospital in Morrisville, and Gifford in Randolph are losing money. Plus, Springfield Hospital is actually on the rocks—AKA bankruptcy court.

In response to this trend, which is national as well as regional, the Green Mountain Care Board has launched a study of the rural hospital issue. A major driver of this trend is the fact that many community hospitals have built their financial structures around relatively sophisticated medical procedures, like hip and knee replacements, that bring in big money per case, but are not economically efficient because their volumes are too low. The weakness in that strategy is getting more and more obvious every day. In the last three budget review cycles by the Green Mountain Care Board, the members have pointed out a persistent pattern in small hospitals of expenses rising, while revenues coming in are declining. That pattern makes it clear that the financing for the small hospitals is not sustainable.

Nobody so far has suggested what to do about the problem, but the issue won’t wait much longer. Watch the hearings for a hint.

Hospital Budgets

The hospital budgets for Fiscal Year 2020, which open Oct. 1 of this year, will have to be looked at in a different light than in the past. One of the main reasons is the decline of the small hospital network, as set forth above. The small hospitals usually exceed the Green Mountain Care Board’s cap target, but they are not usually held to account for that. The thinking seems to be that, what the heck, the overage for each individual hospital is small, and everyone understands that the little guys are struggling. So, let it go. There would be some stern talk about falling patient volumes, increasing expenses, and negative margins, and exhortations to change the business model. But that would be about it, until the next year, when the whole dance would occur again.

Any who doubts that is invited to consider the Springfield experience. When Springfield Hospital stunned everyone by telling everyone last winter that they couldn’t pay their bills, the reformers leapt into action. The Agency of Human Services wrote them a check for $800,000 to keep them afloat. And when the hospital administration came into the Board a few months ago and asked for a rate increase, they got it, basically no questions asked. Hey, you can’t kick ‘em when they’re down.

And once the hospital brought on Mike Halstead of Quorum to run the place, it hasn’t sugar coated anything. Halstead very clearly said that the hospital couldn’t survive without a “partner” (read: someone to drop a bag of money on the place to rebuild it); he said just as clearly that he hadn’t been able to entice Dartmouth-Hitchcock into that role. In other words, nobody has an answer to what is a very serious illness. Moreover, the reformers have to worry about Copley, Gifford, Mt Ascutney (Windsor) and North Country (Newport) that are showing many of the same symptoms.    

A second conundrum for the Board is how to regulate UVM’s Medical Center budget, and the other two units in its network—Porter in Middlebury and Central Vermont in Berlin. The UVM Medical Center is an entirely different beast from the community hospitals. It’s not just that the UVM facility is much bigger than anyone else, although it is. It also has a different financial structure. Its doctors don’t get paid fee-for-service, they get paid salaries. Which is a huge difference. Paying for each unit of care is a powerful incentive for overuse. At UVM, by contrast, the big challenge is getting the work done that walks in the door.

For the first five years of the Board’s reign, the UVM Med Center came in right at or under the cap. The most illuminating evidence came in 2017, when the Med Center went $40 million over its budget and yet the system wide cost dropped from a 4.4 increase in 2016 to a 2.8 percent bump in to 2017. The only way that happens is if some of the patients that had been going to small hospitals went to UVM instead, and if, when they got there, they were dealing with different medical practice patterns that are less driven by the profit motive, and more by medical necessity. In fact, nearly all of the positive elements in the first five or six years of the Vermont reform era in the budget dimension were delivered by the UVM Med Center.

At the same time, however, a narrative was born in the political environment that UVM was a really bad actor, that it was trying to destroy the other elements in the delivery system. That narrative never infected the Board itself, but it made it much easier for the Board to think of UVM as a piggy bank for the state. Example:  last year’s hearing on Blue Crosses insurance premiums. In the last couple of years, Blue Cross has been coming in for rate increases inflated far above the rate occurring in the hospital system. When the Board gets in the hearing room in Room 11 of the State House, they know they will be dealing with a whole bunch of people in red tee shirts contending that no one can afford those insurance rates. They’ll hear the same thing from Vermont’s Health Advocate.

The Board will cut the Blue Cross rate ask some—it’s over 15 percent in the rate case that will be held in the next couple of weeks. But there is no way they can keep the advocates happy. So, when the Board got to the UVM Med Center budget last year, they refused to let UVM charge Blue Cross for its share in the underpayment by Medicare and Medicaid. That took a bite out of the UVM bottom line, which is essential to UVM’s ability to borrow money in the bond markets.

The same issue will be on the agenda in this summer’s hearings. But UVM’s ability to function as the Vermont reform piggy bank is rapidly declining. The reality is that Medicare and Medicaid do not pay the actual cost of the medical care they buy, and if they can’t shift any of that loss to private payers then they will have to cut into their own muscle. And if that happens, the real victims will be the thousands of Vermonters who pour through the state’s biggest and most important hospital every day.

So, big challenge for the Board. And, of course, there will be no shortage of voices saying it’s all UVM’s fault. And their job will be to evaluate that side of the ledger. The real issue underlying all of this is whether the Medical Center’s inflation rate is being driven by new patients getting high quality care. The problem:

Neither the Green Mountain Care Board nor the Scott administration, nor the Legislature, nor the insurance industry, nor any other element of the regulatory system has any ability whatsoever to distinguish medically justified care from that which isn’t.

It isn’t as though the Board hasn’t thought of it. Several months ago, the GMCB staff and the finance people from the hospitals began looking at ways to shift the regulatory base from Net Patient Revenue (the total spent by each hospital for delivering care) to the cost per capita spending in each hospital service area. That metric turns the financing picture upside down. If you focus on Net Patient Revenue the UVM system look wildly expensive. In the past, by contrast, Cost per Capita has showed UVM to be, by far, the least expensive care in Vermont.

The reality is, however, that the contemplated shift is nowhere near ready for prime time; there is no assurance that it would even be ready for the 2021 budgets, which will be going together in just six months.

The question on the table, then, is whether if UVM exceeds the 3.5 percent cap, it will get punished by the Board. Which would be a major mistake, because UVM, after five years of grinding costs out of its own system, is starting to run too lean.  

Evidence? Compare the experience of Porter Medical Center in Middlebury and Springfield Hospital on the eastern side of the state. When Porter went on the rocks a few years ago, they just joined the UVM network and their problems went away. UVM provided the financing to get by the crisis, and their vastly superior organizational muscle was available to ease other problems at the Middlebury facility. The same thing is true for the Central Vermont Medical Center in Berlin.

A very different recipe at Springfield. That hospital, like all of the community facilities in the Connecticut River valley, refer their complex patients to Dartmouth-Hitchcock Medical Center. in Lebanon, N.H. When Springfield went into the weeds, they pleaded—actually begged—D-H to rescue them. Not a chance. Despite the fact that the New Hampshire facility gets some 40 percent of its traffic from Vermont, and realizes several hundred million dollars in revenue in the bargain, D-H evinces no interest at all in the Vermont situation. Its focus lies instead on its prospects to the southeast, where Boston’s medical behemoths are pushing north. Another probable constraint is the very heavy regulatory regime in Vermont compared to New Hampshire, and the near impossibility of getting any investment support from state government. The fact is that the costs of reform are being borne entirely by the hospitals themselves, and D-H has no interest in taking on that burden for the state’s east coast.

So, Vermont is on its own when it comes to problems in Newport, St. Johnsbury, Windsor, Springfield and Randolph. Not all of those are in trouble now, but several are; and neither the Scott administration, nor the Green Mountain Care Board, nor OneCare Vermont has a clue what to do about it.


One of the most persistent challenges Vermont reformers face goes by the name Scale. The scale problem grows out of Vermont’s agreement with federal Medicare officials to get 70 percent of its eligible population (and 90 percent of its Medicare recipients) into fixed price contracts by 2022. Under these so-called risk contracts, the various payers—Medicaid, Medicare, Blue Cross and, sort of, self-insured employers contract with a bunch of doctors and hospitals to provide all necessary care to large groups of people for a set price. That process is the central element in Vermont reform.

The problem so far has been that while the number of Vermonters included in the system has grown steadily, it has not grown fast enough. The number involved in risk has grown from 30,000 in 2017 to 110,000 in 2018 and to about 170,000 in 2019. (These numbers are approximate). The shortfall currently is a little over 200,000 lives; and the question is whether the reformers can make up the slack between now and 2022. What will that take?

A part of the bottleneck in the system is the number of primary care physicians that will attribute their patients to the OneCare Vermont, the entity that can contract with payers under fixed price contracts. For the past three years, there has been considerable reluctance on the part of elements in the primary care community to do that. That reluctance is easing, but it is not clear whether it is easing fast enough. We’ll know more about that by fall, when the payers and OneCare put the 2020 agreements together.

Another piece of the bottleneck is the posture of Blue Cross of Vermont. Blue Cross attributes part of its customer base in the federal insurance Exchange, but the real issue is whether the Blues will try bringing a big chunk of the big-employer-self-insured community into OneCare. The Blues don’t bear the insurance risk for those patients, but they manage the paperwork for them, and therefore have a strong role in the decision. Over the last few years, the Blues were basically having no part of it.

That may be changing, however. Kevin Stone, the acting CEO of OneCare, has been working closely with the Blues top management, and if they can craft a product that the big employers will buy, it could go a long way toward getting to scale.

Other Problems

Those are the big issues, but there are others. One is that OneCare Vermont has been without a permanent president since February, and it needs to get a new leader on board soon. Another is that Al Gobeille, one of the most important players in the system, has now left his post as Secretary of Human Services, and it’s not clear when the Scott administration will fill his job. Yet another is that while Dartmouth-Hitchcock dominates the whole eastern half of the state, its budget and strategies are a black hole to Vermont reformers. Finally, the single most important driver—federal Medicare and Medicaid officials—is in an ambiguous position. They have lead the national effort to achieve “alternative financing systems,” but it is not clear yet how they will handle their end as Vermont works to get the required 90 percent of Medicare recipients into risk contracts.

Hence the conclusion that this summer is different from earlier summers, and while the whole apparatus could just keep chugging along, it’s worth considering the geology metaphor I opened with. We can live for many years with tensions building up beneath the surface of the earth, but every once in a while they become too much to bear, and the resolution is an earthquake that can shatter whole cities. The same risk is out there this summer in Vermont’s health care delivery system. The dysfunction in the community hospital network, the complexities of the hospital budgets, the shortfall in scale—any one of them could be seriously destabilizing, and all of them together constitute a major threat.

Wish the reformers luck.