by Hamilton E. Davis
The campaign, or perhaps more accurately the siege, of Vermont’s effort to lead the country to a fully sustainable health care delivery system is coming to something of a head this fall. The two barriers still blocking the way are the crying need to recast the state’s 14-hospital network into something that makes medical and financial sense; and the crying-just-as-hard need to reach some consensus on how to keep the University of Vermont’s Medical Center Hospital financially capable of leading the state system into the third decade of the 21st century.
The most politically sensitive and fraught question is how to deal with the small hospitals, which are financially challenged and are prone to trying desperately to deliver as much high-intensity, high-revenue care as possible, in order to afford to deliver the kind of low-intensity, low-revenue care that meets the actual needs of their communities.
There is no gainsaying the importance of that aspect of reform. Low volumes are a threat to medical quality, and those same low volumes tend to generate high, often enormously high, unit costs for stuff like hip replacements and other complex surgeries. Moreover, there is enormous potential for cost savings in system reorganization: my calculations show that getting the small hospitals cost structures to the level of the UVM health network facilities could save Vermonters $500 million per year. Accomplishing that is basically a matter of political will, which is no trivial matter. Still, the UVM question is ultimately more important, so I will deal that first, and get to the recasting the small hospital network in my next post.
The Board Needs to Regulate UVMMC Differently
The Green Mountain Care Board caps the Medical Center’s spending in two ways: by limiting the annual increases in its overall budget; and by controlling the amount of money the hospital can collect from commercial insurers. The starting point is Net Patient Revenue (NPR), For the Medical Center in Burlington, the total patient spending ranges from $1.2 billion in 2016 to $1.5 billion in 2022, for the Fiscal Year that began on Oct. 1 of this year.
The cap imposed by the Board on Net Patient Revenue has been set for some time at 3.5 percent per year. That number came out of a calculation of the historic growth of 3.0 percent per year in the Vermont state product, plus 0.5 percent as a premium to finance the potential cost of implementing reform. The NPR cap has clearly outlived its usefulness: the reason is the wide variability in the volumes of patients coming into the different hospitals.
The first problem showed up several years ago. Patients were starting to move away from small community hospitals, both because rural areas across the country were losing population, and because the ones who were left began to bypass small local facilities in favor of larger centers. Beginning at least five years ago, Vermont’s Community Access Hospitals (with 25 beds for fewer) would estimate their volumes based on historic levels, and they would estimate their total expenses on the assumed volumes; when the expected volumes didn’t show up, and the expenses didn’t come down in tandem, the little hospitals began to lose money—regularly.
Critical Access Hospitals get a federal subsidy, but even then, the community business model began fail. In the 1970s and 1980s, hospitals in St. Albans, Winooski, and Bellows Falls went out of business or were absorbed by other hospitals; in the last decade, a medium sized hospital in Berlin and a CAH in Middlebury got rescued by the UVM Health Network; and a couple of years ago, Springfield, a CAH went into bankruptcy, from which it just emerged. Over the last two years, four different consultants have warned the Board that the dynamic is still at work and is a threat to the entire system.
Meanwhile, the Green Mountain Care Board’s NPR cap regulatory model has begun to undermine UVM’s Medical Center, the anchor not only to the state’s health care system, but the single most important prop to the state’s economy in general. As a business, UVMMC contributes $1.5 billion to the state’s total economic output; at the same time, the UVM College of Medicine feeds a steady stream of doctors and other medical professionals into the system; and its faculty carries on a full research agenda.
The two most important metrics for assessing the Medical Center Hospital’s position in Vermont’s health care are the facts that it is by far the larger and most complex provider; and that on a per capita basis it is by far the cheapest. Another equally important metric is it that delivers the highest quality. Since the toxic political narrative that permeates the Vermont policy space argues the opposite of the above, it is important to look at the actual figures, from multiple sources. Here we go:
Federal Medicare officials report the spending on Medicare recipients by hospital service area in the various states. Medicare is not the only payer, of course, but it is arguably the most important, since older Americans consume the highest volume of care. A hospital’s Medicare spending pattern is a reliable proxy for its overall performance. The latest year of available data is 2018. Consider the chart below:
The low bar on the left shows the lowest per capita cost spenders in the state—UVMMC in Burlington, Central Vermont Medical Center in Berlin, and Porter Medical Center in Middlebury. Those three are the Vermont facilities of the UVM Health Network. Their average spending in 2018 was $6,334.09.
The high bar on the right shows the big spenders—the hospitals in Rutland, Bennington, Randolph, Windsor and Townshend. Their average spending in 2018 was $9,730.95, a full one third higher. The average of the remaining six hospitals was $8,361, roughly 23 percent above the low figure. (Click here to see the figures for each Hospital Service Area for the six-year period 2013 to 2018, the last year for which the feds have figures.)
The obvious message in the above graph is that the current GMCB regulation template no longer makes any sense at all. The big spenders, like Rutland, Bennington, and Gifford in Randolph, just have to keep chugging along at their very high cost rates and they get just a pro forma look from the regulators. In this year’s budget settings, Rutland and Bennington got barely more than a glance, and Gifford didn’t even have to make an appearance. UVMMC, by contrast, got its inflation rate request cut by 14 percent.
The central problem with using NPR as a cap for UVMMC is first that Chittenden County is one of the few in Vermont that is growing; and second, that patients here, like in the rest of the country, are bypassing small rural facilities in favor of bigger centers like the Medical Center in Burlington and Dartmouth-Hitchcock in nearby New Hampshire. In 2017, for example, UVMMC saw a huge spike in volume with a $40 million overage on its NPR. The Medical Center’s dilemma as it enters FY 2022 is that it can’t process all the patients that are piling up on its doors fast enough.
The Vermont reform players need to ask themselves whether it makes sense to cap the traffic into their highest quality, lowest cost facility in favor of keeping up volumes at lower quality, higher cost in the rest of the system. That regulatory template needs to be scrapped now. The number that counts is not Net Patient Revenue, but the cost per capita in the hospital service area, adjusted for demographic differences like age.
There is an important second metric that Green Mountain Care Board needs to examine closely now. That is the way that it regulates what’s known in the biz as “the commercial ask.” A hospital’s revenue is divided into two streams, one for treating Medicare and Medicaid patients, with the money coming from the state and federal governments; the other is coming from private insurance companies and self-insured employers. The government payers pay what they want to, always less than cost, (patently unfair) and the private payers pay the full cost, plus the government shortfall. In Vermont, unlike other states, the regulator has to approve the size of that payment—the commercial ask.
Over the six years between Fiscal Years 2016 and 2022, the Green Mountain Care Board has steadily constrained UVMMC’s private sector revenue stream. The following graph shows the effect of that process:
In each of the six years, the left-hand bar represents the amount that the Medical Center needed to cover its increased expenses for that year. The years 2016-2020 are actual figures; 2021 is a close estimate based on partial results; I have not shown FY’s 2022 budget because it is anomalous; I’ll deal with that in another post. The center bar is what the Board allowed. The right-hand bar is the shortfall experienced by UVM. The single bar at far right shows the total shortfall.
It’s that right-hand bar that represents a threat to the UVM Medical Center itself and to the whole Vermont health care delivery system. The Board will have to build a new regulatory template for the commercial ask or else risk pushing half the state’s medical capacity back to the financial brink a few years into the future.
Why has the Board used UVMMC as a piggy bank? A pretty obvious reason is that the Board is under very heavy political pressure to make the health care insurance offered by, say, Vermont Blue Cross, more affordable. The more Blue Cross pays the Medical Center, the more its premiums rise. Of course, the amount the UVM rates are increased are dwarfed by the higher per capita costs in the community hospital system. But the UVM’s Medical Center has been subjected to a five-year vilification campaign by reform opponents, along with Chittenden County progressives, like the former Senate President pro tem Tim Ashe, and Sens. Chris Pearson and Michael Sirotkin.
The analysis above shows quite clearly in my view that the GMCB has drained so much money out of the UVMMC revenue stream that the engine of the Vermont hospital system is now at serious financial risk. It is essential that the Board remedy that failure before it issues its next budget guidance in the spring.
It is also true, however, that the senior management of UVMMC and its network have contributed to the problem by failing to place its financial needs squarely on the table and demand that the Board confront them. The senior management and the network boards need to shift their financial and political posture on this fundamental issue; and they need to do sooner rather than later. The evidence for that conclusion is just as clear as the evidence that the Board has mismanaged the problem overall.
Herewith: The direct shortfall in the commercial ask was something just over $60 million dollars over six years. The Board’s reduction in the commercial ask came to a bit over $20 million. In other words, UVM’s senior management never asked for the missing $40 Million.
When asked about this, the UVMers reply that they felt boxed in by the cap on total revenue on the one hand, and rising costs on the other. Which is true, but that doesn’t mean that senior management doesn’t have to manage its environment. UVM operates under a heavy regulatory apparatus and their own boards and senior management are going to develop a new strategy for coping with the external world.
One could argue, and I would, that the Board should have been able to see that and calculate its impact: In dealing with the other hospitals in Vermont, the Board routinely falls all over itself trying to repair egregious poor performance and outright failures. An example would be Springfield Hospital. And it gives a free ride to hospitals like Rutland, Southwest in Bennington, and Gifford in Randolph, whose costs run at 30 percent higher than the UVM Network. Regulators have a responsibility not just to press down on costs, but to ensure that vital services are maintained. For the last five years, the Green Mountain Care Board hasn’t done that with UVM’s Medical Center Hospital.
So, the UVM senior management team clearly has to fashion a different strategy for dealing with regulators. The Green Mountain Care Board hasn’t left them any choice.