by Hamilton E. Davis
By mid-February if not before, Vermont’s 14 hospitals will start building their Fiscal-Year 2023 budgets, some $3 billion to be spent on acute care for just over 625,000 people. Those budgets will take effect on Oct. 1 of this year, and they will add up to a really big number. Hospitals eat up some 10 percent of the Vermont economy: the state’s Gross State Product is around $30 billion. If you add in other health care spending like retirement homes and visiting nurse services, the health care tab rises to more than $6 billion, 20 percent of Vermont’s entire economic output.
When the hospitals’ Chief Financial Officers start drafting the new spending plans, they will do so in an environment unlike any other in the United States—one established by the Green Mountain Care Board in the form of its “budget guidance” for the new fiscal year. That process has been going on in one form or another since 1983, and the process got even more draconian in 2011, when the Shumlin administration launched its Single Payer reform initiative and the regulatory apparatus ramped up to another level. The coming budget process, however, will be markedly different from the one that has been in place for decades. The reason is that the Board’s cost containment efforts are basically tapped out: Over its tenure beginning in 2012 and 2019, the Board cut the long-prevailing annual hospital inflation rate of eight to nine percent per year to roughly half that, to around three and a half to four percent. Vermonters avoided spending nearly $2 billion over that stretch. Over the last few years, however, costs have begun to creep up again, and as of today the Board simply has no answer for that. Yet. The question this winter is whether they will find one. A Vermont Journal believes there is a clear path forward, but there is no indication at this point whether the Board will take it. The path looks like this:
Step One.
The Board should abandon its strategy of capping the total spending by each hospital, and shift to judging individual hospitals on the dollars-per-capita they are spending in their service areas. Every regulatory regime over the last 40 years has started with a total spending cap on Net Patient Revenue, but in the light of state and nationwide migration of patients from tiny local hospitals to bigger centers, that no longer makes any sense. In the serious health policy community, including federal Medicare officials, there is broad agreement on that.
Step Two:
Vermont has 14 full-service hospitals, 15 if you include Dartmouth-Hitchcock Medical Center (DH) across the Connecticut River in New Hampshire. Eight of those are so-called Critical Access Hospitals with 25 beds or fewer. Another six are bigger, but still pretty small. Rutland Regional Medical Center has 200 plus beds, but the other five are under 100 beds. We actually need four full service with the rest down(right)-sized to clinics that focus on primary care and emergency rooms. I posted a Manifesto on this point in August of 2020. Late last year, five national consultants made the same argument, backed up by comprehensive data.
Step Three:
The current Green Mountain Care Board took over regulation of the hospitals in 2017; a majority of its five members was appointed by Gov. Phil Scott, who was elected in 2016. Beginning with the 2018 budget, the Board has steadily drained financial resources out of UVM Medical Center. The Medical Center delivers a full half of all the acute care in the state; and, moreover, it is perhaps the single most important player in the state’s economy. Failing to rectify that dynamic going forward will be irresponsible—and just plain dumb. And the UVM question will be more fraught than usual this year because the Medical Center will need a big increase in its charges to Blue Cross and other insurers. If they don’t get it, they will be at great financial risk, which could mean that the whole issue could end up in the lap of the Vermont Supreme Court.
So, What Next?
If the above analysis is compelling, what are the chances that the Board will shift the necessary gears?
Well, they’re mixed. Replacing the cap on a hospital’s total spending with the cost per capita in each service area is perfectly doable, if the Board decides it wants to do it. I am guessing it will, but there are no guarantees.
Right-sizing the state’s hospital network, will be hideously difficult, even though doing so would save Vermonters hundreds of millions of dollars each year. The problem is that while it’s very easy to make the right-sizing case, the money would come out of the pockets of highly-paid administrators and doctors in the affected communities.
The Board could begin the process by dealing with just the most egregious cases first, but the early indicators have been negative. At a recent Board meeting, Kevin Mullin, the chairman, said flatly that the Green Mountain Care Board is not going to tell anybody what they can or cannot do.
Step Three, permitting the UVM Medical Center to get the financing it needs is technically easy, but the political environment for anything involving the UVM network is problematical. Still, the data is unequivocal, and if the Board refuses to confront it in the coming budget season then the Board’s future could become existential. The entire hospital industry, from the smallest to the biggest, along with the Governor and his senior staff, are thoroughly sick of the Board at this point, and while that sentiment has not showed up in the Legislature, it would likely rapidly go viral because so many members have a hospital in their districts.
Moreover, in the new fiscal year UVMMC will need a very large increase in the amount that it can charge Vermont Blue Cross and other insurers for the care the big hospital provides, and if they don’t get it the whole issue could end up in the lap of the Vermont Supreme Court.
The Case for Recharging the UVM Medical Center Finances
In a post late last fall, I made the case for the proposition that the Green Mountain Care Board had drained too much money from the state’s biggest, and by far its most important medical facility.
To recap, the Board has been cutting the UVMMC margin since it assumed office in 2017. Over the period 20161 to 2022, UVMMC has been shorted by $61 million just from recovering its expenses in delivering care. In the period 2018-2022, UVMMC has not been allowed to collect any of the cost shift that it has experienced over that period…keep in mind that UVMMC maintains the highest quality in the state, and gets that done at a per capita cost that is at least 20 percent and as much as 50 percent cheaper than the rest of the state.
The Board’s main tool was to regularly cut the “commercial ask,” the amount the Medical Center can increase its charges to Vermont Blue Cross to make up for the “cost shift,” the shortfall in hospital revenue that occurs when neither Medicare nor Medicaid pay the actual cost of the care they buy.
The fallout from the Board posture has been falling margins needed by any business, an inability beyond that to collect payment for actual care delivered, and deterioration in the financial data, like Days Cash on Hand, that tell investors how well the Medical Center management is running their business.
The critical metrics for any business are the money left over at the end of each year, minus interest on loans, depreciation, taxes and amortization (EBITDA); days-cash-on hand, debt load and age of plant. Any major business has to borrow money in the financial markets, and the interest rates the business must pay depend on the quality rating they receive from three agencies, Fitch, Moody and Standard and Poor.
In the budget submitted last year to the Green Mountain Care Board, UVMMC said it was okay on age of plant and debt load, but that the key metrics of working margin and days cash on hand were uncomfortably low. EBITDA was still marginally acceptable, but days cash-on-hand had slipped under water. Consider:
The above graph shows that UVMMC’s performance on a key financial metric. In general, the rating agencies have kept the Medical Center at an acceptable level. But all have indicated they are closely watching both the EBITDA margin and cash.
How serious has this been? The answer is, very. Beginning in the late teens, pre-Covid, UVM’s Medical Center has undergone a series of challenges that no one could have foreseen. The first was the loss of five operating rooms at UVM’s Fanny Allen site in Colchester because of a failing air handling system. The second was the attack on the hospital’s computer system by Russian hackers; the third was the slowing of productivity owing to the installation of the system-wide installation of the new EPIC computer system; and the fourth was the Covid attack itself. The cumulative effect of these tribulations was a huge hit on the hospital’s revenues. If the Board does not allow UVMMC to recover those revenues then it will put the hospital’s mission at risk. And more important, it will put the health of Vermonters at risk.
Aside from the sheer numbers, my impression is that some of the members have bought into the anti-UVMMC narrative that has been pressed since 2015 by opponents of health care reform. Evidence?
In the current year’s budget hearings last fall, the Board went over the UVM Medical Center nickel-by-nickel and forced cuts. Meanwhile, it passed the budgets for Rutland Hospital, the state’s second biggest hospital, and Gifford, a 25-bed facility in Randolph without even a hearing. Each of those two budgets was more than 50 percent more costly—with no good reason—than the Medical Center in Burlington. Go figure.
In 2012, the Burlington system rescued Central Vermont Medical Center in Berlin, a medium-sized full service hospital from the financial mess it had wandered into. In 2016 the UVM system saved Porter Hospital in Middlebury form bankruptcy. As of the current fiscal year, Porter is now one of the financially strongest Critical Access Hospitals in the state. And on a per capita spending basis, it is at least 30 percent and in some cases 50 percent cheaper than the other small hospitals. In other words, the UVM system has far outpaced all the other providers for big, medium and small hospitals in its Vermont lineup.
According to the Dartmouth Health Atlas, in 2018, Vermont had the lowest per capita Medicare spending rates in the U.S.--$8,010 against the national average of $10,716. (The DH Atlas is risk adjusted for price, age, sex and race). Within Vermont, the lowest cost counties were Addison, Chittenden and Washington. Those are the three counties served by the three members of the UVM health network in the state—Porter Medical Center, UVMMC, and Central Vermont Medical Center. Addison is one of the five lowest cost counties in the U.S.
In a recent Green Mountain Care Board meeting, the GMBC staff showed that Vermont has come in comfortably below spending level required by the federal government as a condition of its participation in federally-based reform. The only reason that is true is that the UVM network hospitals—the Medical Center in Burlington, Central Vermont Medical Center in Berlin and Porter Medical Center is Middlebury are so financially efficient compared to the rest of Vermont’s hospitals.
Thinking about Where We Are
There has been something strikingly anomalous in Vermont’s health care reform journey. We have bolted ahead of the rest of the country, but the process has never been pretty. There have been dead ends, notably in the mid-1990s when then-Gov. Howard Dean’s reform project blew to smithereens, along with the national initiative of Hillary Clinton; and in 2014 when then Gov. Peter Shumlin’s Single Payer scheme crashed and burned.
Along the way, there has been and continues to be forehead-slapping buffoonery on the part of the executive and legislative branches, the regulators, and the press, along with ignorant marginal players like the state auditor, and the health care advocate. Not to mention a lot of silly gasbaggery from various “opinion makers.”
Yet, here we are. Still ahead of the pack, and still in a position to actually achieve a medically and financially sustainable system on a statewide basis. All we need are a few players to step up and play at a competent, national level. It doesn’t seem like too much to ask, but it’s not happening today.