Health Reform: More Why and a Start on How

by Hamilton E. Davis

   Okay, let’s go out on a limb here and assume that whoever reads this stuff accepts the proposition that we can’t get the cost of health care under control without shifting the way we pay for it. My sense is that the people who do accept it are in a minority, but it is also clear to me that they are the only ones that understand the problem. There is an ocean of carping about the reform enterprise, but there simply is no credible alternative path to sustainability.
   In a recent gathering of state health care officials in Washington, Mike Leavitt, a conservative Republican former governor of Utah, argued that fee for service reimbursement for health care is the “greatest single threat to the economic vitality of the United States.”
  There is a very powerful consensus among both Democrats and Republicans, Leavitt said, that moving health care financing to capitation is the only viable path to a sustainable future. A corollary principle is that coordinated care is better than uncoordinated care.
  He added that evidence for the bipartisan consensus on this issue was the 2015 passage of a federal law known as “MACRA” with full support of both parties in Congress. MACRA aims at forcing a shift away from fee-for-service to block financing and that kind of bipartisan agreement is almost unheard of in the toxic Washington environment.
   It is worth noting that the points made by Leavitt are foundation stones of Vermont’s reform effort as set forth in Act 48, the reform bill passed in 2011.   
   So, how might we go about it?
   The first step is to understand that the enterprise of modern medicine is radically different from that which prevailed 30, 40, 50 years ago. American medicine grew up as a cottage industry. A doctor gets training, hangs out a shingle and begins treating patients. Another doctor does the same thing, but there is no necessary connection between them. Hospitals are just boxes occupied by aggregations of doctors. There is no real connection between the boxes and even between the doctors within the boxes.
   Consider a patient at the Medical Center Hospital of Vermont, circa 1990—not that long ago. The patient has cancer of the spine, and he is undergoing surgery to save his life. As he lies there, he is attended by a neurosurgeon, an orthopaedic surgeon, a cancer specialist, an anesthesiologist, a radiologist (imaging), a pathologist, hospital employees such as nurses and technicians, and possibly others. Whatever it takes.
   Here’s the beauty part. Each one of those professional services was delivered by a separate company, with its own financial structures and fee schedules—five, six, seven separate companies. If we built cars like that, every car would cost half a million dollars, and a huge number of them would be falling apart before they got off the dealer’s lot.
   Modern medicine is orders of magnitude more complex than medicine was 30 or 40 years ago. It is also now hideously expensive. So, it is critical to understand that the delivery of medical care has to be integrated: doctors have to work together in coherent systems. Patients have to move smoothly and efficiently up and down the complexity ladder. They have to start with primary care, then move to community hospital and specialist care, then to tertiary centers for the most complex medical problems.
   An example for the need for this can be found in a piece I wrote for VTDigger.org awhile back on Vermont Senator Dick McCormack’s arm.
   There has been some important integration.  The University of Vermont units merged in 1995; the Medical Center Hospital of Vermont joined with 11 physician practice groups to form Fletcher Allen Health Care. But taking the state as a whole, there is still nowhere near enough integration yet to make the system viable for cost performance or quality performance.

                                                                         ACOs

   The first problem is how to organize the system so that cooperation among elements of the delivery system is possible. The template for that is contained in the federal Affordable Care Act (ACA) Obamacare. The key element of Obamacare as it applies to the Vermont reform effort is the provision for something called an Accountable Care Organization (ACO).
   (I understand that President-elect Trump has pledged to repeal Obamacare, but that is an issue for the future.)
   Commercial companies in a genuine market succeed or fail depending on how well they deliver products or services that people need and want at a price they can afford. They are like any biological organisms that must adapt to their environments. Health care companies that operate independently of one another have proven, over the last 50 years, that they can’t do that.
   The most significant barrier to getting to a single price for the product—medical care for blocks of patients at the primary, community hospital and tertiary level—is the federal prohibitions against price fixing by competitors. If a person who lives in Rutland needs health care, he can get it from his primary care provider, or from Rutland Hospital, or from the UVM system or from Dartmouth-Hitchcock. What is the most cost and quality efficient way to do that?
   Obamacare permits the primary care doctor in Rutland, Rutland Hospital and UVM or Dartmouth to coordinate this process totally. It bypasses federal anti-trust law. If the primary care doctor and Rutland Hospital and UVM join an ACO, they can get this job done just as efficiently, or almost as efficiently, as Toyota can deal with a problem with the machining of its camshafts.
   That’s what an ACO can do. We now have a fully operative ACO in Vermont. The ACO is called the Vermont Care Organization (VCO). Sorry, but there is no surcease from an alphabet soup world. The VCO subsumes more than 90 percent of all the medical delivery resources in the state.  
   And it has all the resources and legal authority it needs to succeed. Which doesn’t guarantee that it will succeed. The people that run the Medicare and Medicaid programs in the United States believe that the Vermont program is the single best vehicle to get modern health care on a sustainable cost and quality track. But it has to get done in Vermont and that will be a very difficult thing.
   I will look at the All Payer Model, the next big problem, in the next episode.

Volume is the Key to Cost Control

By Hamilton E. Davis

   The central reason for the national consensus in support of health care reform is the explosive growth in medical delivery system costs since the mid-1960s, when the federal government instituted Medicare and Medicaid to pay for health care for the elderly and the poor.
   A few statistics: In 1966, Americans spent 6.6 percent of their annual output (the Gross National Product) on health care; now the figure is just short of 20 percent. In Vermont, hospitals doubled their spending from 2000 to 2009, with no appreciable increase in state population or improvement of health status.
    When Al Gobeille, the chair of the Green Mountain Care Board, talks about health care reform he often cites the following data:
   A typical bill for health insurance for a Vermont family of four with an income of $60,000 in 2015 would be $23,957, 38 percent of their gross income. If costs continue to grow at an historical rate their income would grow to $73,140 in 2025, whereas their health insurance bill would grow to $41,253 per year, 56 percent of their income.
   The above figures have been picked out of an ocean of data on the inflation of health care costs over the last half-century. The result is that no serious person thinks Vermonters or Americans generally can allow costs to continue to grow on their historical trend.
   The question is what to do about it.
   The first response to the cost explosion was conventional regulation, which was tried at both the state and national levels. If a doctor-hospital combination has been getting paid, say, $4,000 to take out an appendix, just tell them they can only increase that amount by so much a year. We now have roughly 40 years of experience to tell us that price regulation has been a total failure. A dreary parade of alphabet soup agencies, boards, government gizmos of all kinds — all failed to keep costs remotely within a reasonable range.
   By the 1980s, the health policy community figured out why. Most of the public, including most of the press, legislators and government boohoos of all kinds, are inclined to think of health care as a conventional market. A patient (consumer) goes to her doctor and purchases care in the same way she buys a television set, a car, or a bag of carrots at the farmers’ market.
   She decides what she wants and if the seller can deliver it at a price the consumer thinks is reasonable, they have a deal. If not the consumer walks away, and if too many consumers walk away, the supplier goes out of business.
   That is a conventional market and in such a market competition acts as a rein on costs.
   Health care is simply not a conventional market. One of the first to articulate that thesis was a Stanford University researcher who argued in the 1980s that the cost driver in health care was what he called supplier-induced demand. In a conventional market, the buyer creates the demand the producer supplies it, or meets the demand. In health care the doctor does both — he or she tells patients what they need and then they supply it. The effect is to shift the driver of system cost from unit price — how much is charged for an appendectomy, or heart surgery or to sew up a cut finger — to the volume of care. In a given population, the volume of care can and does vary dramatically.
    Example: A person who has a headache can go to the doctor and be treated on a sort of continuum. The doctor can prescribe two aspirin; or she can order an MRI to rule out the possibility of a brain cancer. Let’s say the charge in one place for an MRI is $900, and the charge in another is $1,200. The first is cheaper, right?
   Not necessarily. The doctors in the first place may order twice as many MRIs as the doctors in the $1,200 facility. In that case, the cost over a cohort of, say, 10,000 people in a hospital service area would be $72,000 for a utilization rate of 60 MRIs per capita, and $108,000 for a similar cohort in the supposedly cheaper location.
   Could such a disparity actually exist? It not only could, but does, all over Vermont and all over the United States. Doubters could check out resources such as the Dartmouth Health Atlas, which documents the variability in utilization rates in the U.S. The ability to understand the problem of cost inflation in health care, and further, to understand the reform movement in Vermont and in the country, rests absolutely on acceptance of this fundamental reality:
   The cost of health care isn’t determined by the unit cost, it is equal to the unit cost times the volume.
   If you can’t control costs without considering volume, then you really have no choice but to change the way you reimburse doctors, hospitals and other providers for the care they deliver. Which is precisely what the Vermont reform effort aims to do. It is also the course fixed on by the Centers for Medicare and Medicaid Services (CMS) for the country at large. Moreover, the elegance of the Vermont design is why CMS has selected Vermont to lead the way toward new framework for delivering health care.
   The buzzword to describe the Vermont project is the All-Payer Model, the infrastructure for which is now in place in the state. I’ll sketch out what that means in the next episode…

Health Care Reform Enters the Action Phase

by Hamilton E. Davis

   In the spring of 2011, the Vermont Legislatures set the state on a path to the most far-reaching health care reform project ever attempted here or in any other state. Last week, the state completed work on the final piece of architecture needed to make the plan a reality.
   It took five and a half years of grinding effort to reach last week’s milestone. Now comes implementation of the plan, and that effort promises to be even more difficult. Changing the way the state’s doctors, hospitals and other providers deliver more than $3.5 to $4.0 billion in health care to the Vermont population will require a fundamental change in the way that money flows to the providers, and that in turn will require a fundamental reorganization of the system itself.
   In other words, we are on the brink of a huge upheaval in the cultural and financial environment of our health care system.
   This upheaval will take place in an atmosphere fraught with a lack of understanding on the part of the public, the press and the legislature, and in fact, in much of the medical community itself. There is also an important block of more or less explicit opposition to health care reform in all of those elements in the state.
   A personal note: I have been following the reform effort since its inception in 2011, and it is the most complex issue of public policy I have seen in more than 50 years working in that particular vineyard. There will be a little hiatus in the frenzy now that the All Payer Model has been signed. In 10 days we will know who the new governor will be, not to mention who will be the new president.
   The biennial shift in government will be particularly far reaching in Vermont. We will get not just a new governor, but a new lieutenant governor. In the Legislature we will get a new House speaker, and a new Senate President Pro Tem, accompanied by at least some committee changes. The state bureaucracy will get a whole new leadership structure.   
   After that, we will have two months before the new Vermont Legislature takes office. And in that interregnum we will begin to see the way that health care reform will affect the organization and functioning of the health care delivery system itself.
   In the past, I have dealt with the myriad issues involved by writing very long articles that often covered multiple facets of the reform project. I am going to try something different now. I’m just going to start at the beginning and go forward to the current situation in smaller bites that I will publish as quickly as I can write them.
   I’ll start with the need for reform, and sketch the failures of the past. I’ll lay out the architecture of the Vermont plan and then deal with each aspect separately. I can only hope that these efforts will cohere sufficiently to give my readers a clear-enough picture of the project to make judgments about it.
  Hey, it worked for Dickens.
  First up: Why we need reform and how the Vermont plan was built to meet that need.

GMCB Gets Somewhat Tougher on Hospital Budgets

By Hamilton E. Davis

   The Green Mountain Care Board on Thursday ground some more money out of the proposed spending by Vermont hospitals, trimming here and there on the budgets for four of the hospitals that breached the Board’s cap of 3.4 percent inflation for the fiscal year that begins Oct. 1. Their methodology precluded an immediate determination of just how much money is involved; the Board’s finance chief, Mike Davis, will get the final figures by early next week.
   I set out the parameters for the four in a post yesterday entitled A Crummy Deal -- a proposal by the four hospitals to reduce their roughly $15 million total overage by 20 percent. Total spending for Fiscal Year 2017 in the 14-hospital system, will run to $2.4 billion.
   The offerings for cuts were worth a little over $3 million. The Board’s decisions, all reached by unanimous voice vote of the five-member panel, were as follows:

Southwestern Vermont Medical Center in Bennington:

   The Board with little discussion let the 20 percent offer stand for Southwestern. The members judged that the Bennington facility showed clear evidence of budget discipline over the last few years, and has to deal now with significant problems in that region.

Northwestern Vermont Medical Center in St. Albans:

   The Board was more critical of the budget performance by this hospital. The 20 percent offer for Northwestern amounted to a cut of $168,000 in the overage total of $836,000. The Board increased that by figure linked to the hospitals requested rate increase charged to insurance carrier(s). My guess is that the final order will amount to an increase in the cut by another couple of hundred thousand dollars. (I will look much more closely at Northwestern soon.)

The University of Vermont plus Central Vermont Medical Center:

   The decision for those two hospitals, which are now partners, but whose systems are not yet sufficiently integrated to permit consideration of a single budget, had their reductions increased from the offer of 20 percent to 30 percent. Neither Mike Davis nor the Board members could come up with a quick dollar estimate for the effect of that decision.

N.B. The Board formally approved the submitted budget of Copley Hospital in Morrisville, with the understanding that Copley, now under new management and with its budget pretty much of a total mess, will have to submit a revised budget within the next three months.

A Crummy Deal for the GMCB

By Hamilton E. Davis

   A few weeks ago, I wrote a piece about the Green Mountain Care Board’s summer of discontent. In the fifth year of their cost containment odyssey, the members got a bad rap from the press on their performance to date; and they confronted $2.42 billion in hospital budgets for the coming fiscal year, an increase of 5.0 percent over the current year, well above their target of 3.4 percent.
   On Thursday, the Board’s summer comes to its effective conclusion when it makes the final decisions on four hospitals whose budget proposals breached the target level. Over the last 10 days or so the landscape looks considerably different than it did in mid-summer: the “overage” in the system-wide proposals, for example, looks markedly less alarming than it did, running to roughly 3.7 percent, still over, but in the ballpark.
   At the same time, there continue to be significant challenges in budget management. The most serious involves the budgets of four of the hospitals that exceeded the target—The University of Vermont Medical Center; its partner, Central Vermont Medical Center in Berlin; Southwestern Vermont Medical Center in Bennington; and Northwestern Vermont Medical Center in St. Albans.
   Dealing with these budgets will require that the Board mature as a regulator. It has done pretty well on cost containment so far, but it needs to bring its game up considerably. For its job will become far more difficult beginning in 2017, when the first statewide integrated system goes live: managing 14 individual hospitals is hard enough; keeping a lid on the market power of a single unit that subsumes most of them will be incomparably harder

The Backstory

   The $2.42 billion total for the original 14 hospital submissions amounted to $114 million in new money compared the current year’s budgeted spending. The proposals are for the Fiscal Year 2017, which begins Oct. 1. That compares with $78 million in new money in the budgets for the current fiscal year.
   The budget target over the last three years has been 3.4 percent, and the hospitals have been mostly breaking through that level. In the FY 2015 nine hospitals were over; in the current submissions 10 of the 14 were over. So the results have been messy, and are uneasy making, although they are far better than the rest of the country.
   Moreover, the most recent analysis of this year’s budgets makes them look a lot better. The reason is that the Board’s policy is to exempt two types of spending from the cap target. The first is the acquisition by hospitals of independent practices in their area. Most of these are small primary care clinics or individuals, although some are independent specialists.
   The independent doctors are not now regulated, but the costs they generate are part of the cost of the overall system. On paper, therefore, bringing them inside of the regulated system does not actually cost Vermonters more than they are already paying. A total of $18.7 million is budgeted for doctor transfers.
   A second category set outside the cap by the Board is investments that advance the cause of health care reform. A total of $7.3 million is allocated to that category. If you subtract those two categories from the $114 million in new money, you get roughly $88 million. That drops the percent increase in the straight-face range, in the high threes.
   None of that means that hospital costs, let alone the costs of the non-hospital sector of the health care delivery system, are sustainable. They are not; they are not even that close. The theoretical ability of Vermonters to pay for annual inflation in the system runs to no more than three percent; and even that is pretty painful at a time when inflation is less than two percent.  
   The operative theory in the health policy biz is that sustainable costs can only be obtained by shifting from fee-for-service reimbursement to block financing that places doctors and hospitals at financial risk for the operating of the system. Even with so-called capitation reimbursement, however, we will still need very strong and determined regulation, given that Vermont is too small to accommodate competing health care systems.
   That brings us to Thursday’s action.

Is This a Good Deal?

   The crux of the regulation issue now involves four of the 14 hospitals that are over the budget cap. After allowable discounts, they look like this:

   UVM Medical Center: Budget $1.2 billion (1,175,237,274); overage  $2.2 million.

   Central Vermont Medical Center: Budget$193.2 million; overage $10.6 million.  

   Northwestern Vermont Medical Center: Budget $102.9 million; overage $835,592.

   Southwestern Vermont Medical Center: Budget $152.8; overage $2.1 million.                               

    In response to suggestions by the Board that the four hospitals consider this jointly, the financial officers of the four hospitals worked out a proposal to deal with the resolution of the overage problem as a group.
   Last Thursday, the group presented its proposal. Its spokesman was Todd Keating, the finance chief at UVM. Keating said that the group had resolved on the following deal: each hospital would deduct from its budget 20 percent of its overage figure. The total overage for the four facilities came to $15.8 million. The total reductions or “givebacks” amount to $3.2 million.
   Keating acknowledged that the group had picked the number so as to avoid any real pain for any of the hospitals.
   What should the Board think about this? Here is the way I look at it.
   If it’s thought of as a deal, the deal is terrible. Twenty cents on the dollar amounts to salvaging what you can from a financial train wreck. Moreover, there is a real problem with considering the hospitals as a unit in the current circumstances. The Board is trying mightily to foster the development of an integrated system, where hospitals take financial risk jointly for their economic performance.
   But they are not there yet—UVM is approaching a full merger with Central Vermont, but the hospitals in St. Albans and Bennington are fully outside that effort. Beyond that, circumstances at each of the four hospitals vary dramatically. Finally, there is a critical question for the Board itself: It has two roles to play here.
   One is to oversee the development of the integrated system; the second is to regulate the hospital budgets so as to protect Vermonters, who are paying the bills for them.
   Thus far, the Board has leaned in the direction of reorganization. Their regulatory performance thus far has been good, but not outstanding. And it’s time now, it seems to me, for it to establish its bona fides as a regulator. If it doesn’t do so now, it would auger badly for its ability to do so when matched against the market power of a fully integrated system.
   What might such a strategy look like?
   Here is a suggestion, taking each hospital separately. A qualitative question, but an important one in my view, is to consider both the particular circumstances of each hospital and the attitude of its management and board toward cost containment. So, by hospital:
   UVM is the center of the system; it delivers half the care offered across the state. Despite a drumbeat of political criticism about how it plays its role, it seems obvious to me that UVM is fully committed to reform, and is doing its best to shift its own trajectory and hence the trajectory of the whole system.
   The Burlington-based facility has argued to the Board that in the last couple of years, it has experienced a significant increase the volume of patients coming through its doors, and it seems obvious that is true. Part of that derives from the increased demand emanating from Obamacare’s Vermont Exchange.
   An important second factor is a wholly unexpected change in the performance of Dartmouth-Hitchcock Medical Center, the academic medical center in Hanover, just across the Connecticut River in New Hampshire. Forty percent of Dartmouth’s traffic is coming out of Vermont, including a large proportion of the most sophisticated and expensive care delivered east of the spine of the Green Mountains.
   Over the last year or so, there have been rumblings about problems in Hanover, and the situation burst into the open in the last couple weeks when Dartmouth  announced that it has been losing money and will lay off a big chunk of its employees.
   In support of its proposed budget,  UVM argues that, owing to the two reasons above, it needs a rebasing of the size of the patient population.
   I totally agree with that. On the other hand, the amount of money UVM is over, a measly $2 million in a budget of more than a billion dollars, is pocket change. It amounts to less than two tenths of one percent. For the flagship of the Vermont system to be over the Board’s target by an amount like that is ridiculous. The Board ought to act like a regulator here. UVM’s reduction ought to be 100 percent, and it shouldn’t even be a close decision.
  Central Vermont is a tougher nut to figure out. Its volumes have increased dramatically also, partly because of the developments at Dartmouth, but also because its partner UVM is keeping more moderately ill patients in Central Vermont rather than sending them to Burlington. That’s a very good thing and it augers well for the integrated system that is coming in 2017.
   On the other hand, the increase proposed by Central Vermont is absolutely huge—an 11.0 percent leap. When I first wrote about this I listed CVMC as 1.1 percent because it never occurred to me that anyone would produce something like an 11 percent jump in the current era.
   So, what to do? The Board needs to be at least a straight-faced regulator here. CVMC probably needs everything it plans to spend. But the real pain in this system is the pain suffered by the people of Vermont, and they deserve far more consideration than they have ever gotten before. CVMC can slow down and eat its increase in smaller bites. Its giveback should be at least 50 percent rather than 20; 75 percent would be better.  
   One thing the Board might keep in mind if it gets the squeebles about being tough is that there is no evidence in the budgets generally that managements are factoring in the prospect of significant improvements in efficiency that are the supposed rewards of going to an integrated system.
   Fiscal 2017 begins in a little over two weeks, but three of its four quarters will begin in January, when Vermont’s integrated system goes live. If the hospital chiefs scream about this pain—which is a long way from being acute—the Board could simply tell them: start rationalizing your system sooner rather than later, faster rather than slower.
   Northwestern Medical Center in St. Albans. This hospital in my view is different from the other three. Its management has been blithely ignoring the Board’s guidance for the last three years. According to the Board’s data system, Northwestern has gone over its budget in 2013, 2014 and 2015. And at the hearing where the four hospitals presented their joint proposal, the Northwestern representative lectured Al Gobeille, the board chair, to the effect that the Board should be encouraging even more spending at the hospital.
   The situation at Northwestern needs to be dealt with in much more detail, and I will do that this fall. But it seems critical to me that the hospital managements and boards need to be at least trying hard to wrestle costs under control. At Northwestern, they seem to be building their facility out as fast as possible. They need to get real in a hurry, and the Board ought to make them do so. Reduce by the total overage—100 percent. Give the whole $866,000 back.
   The opposite situation seems to obtain at Southwestern Vermont Medical Center. Its budget is $1.5 million over the cap, but it has faced difficult circumstances over the last few years. A hospital closing in nearby Massachusetts has dumped a whole new block of patients on the Bennington facility, and Southwestern has to deal with
   This background, it seems to me, justifies giving Southwestern what it thinks it needs. The Board has every right to expect that the hospital’s management will be a strong supporter of increased cost efficiency going forward.
   Although no one has said so explicitly, Todd Keating’s comments about the twenty-cents-on-the-dollar offer being at the real pain threshold, that threshold looks like it arises from the situation at Southwest, more than at the other three. Cutting that hospital by just 20 percent looks to me like the right thing to do.
   A concluding comment: As important as the actual numbers are, the posture of the Board is even more critical. Board members may be tempted to treat Thursday’s decision as a deal to be struck between equals. That would be a huge mistake. The hospitals and the Board are not equals. The Board is a regulator, not a party to some deal between equals. State law empowers the Board to set the budgets for hospitals.
   The Board can’t be unreasonable and it has the equal responsibility to make sure that Vermonters get the health care they need, but their single most important task is to set the parameters for what Vermonters can afford to pay. They need to assert that prerogative more decisively than they have in the past.
   Now is a great time to do it. If not now, when?

The GMCB: The Summer of Their Discontent

by Hamilton E. Davis

      July through early August is usually a quiet time in the policy world. Legislators are concentrating on parades. Lobbyists, advocates, and the few news reporters left have trouble finding people to talk to. It’s time for the beach, the backyard, and the deck. In the health policy biz, however, early to mid-summer is the hinge of the year.
   Some $2.4 billion in hospital budgets arrived at the Green Mountain Care Board on July 1, kicking off a process that will produce a spending pattern for the new fiscal year beginning Oct. 1. July is also the time when the Board grapples with the rates that Vermont Blue Cross and the insurance carrier MVP can charge for health plans on the Exchange.
   The process is more fraught than usual this year because the whole health care system is on the verge of transitioning to a different type of payment system, which is generating huge cultural, political and financial stresses. Primary care and independent doctors have been flexing their new-found political muscle; a block in the Legislature is challenging the reform process; the Shumlin administration is headed for the exits and has lost its ability to manage the process; political candidates are striving for every edge they can get on their opponents and health care is raw material; and scarcely anyone who is not a specialist begins to understand the hairball that is health care reform.
   These pressures are converging on the only still-trusted piece of infrastructure in the whole landscape—the Green Mountain Care Board. And it didn’t help that the Board got a decidedly bad rap coming out of the gate.
   The bad rap was a press report that said that the hospital system had been piling up “profits” well in excess of what was reasonable, and that the Green Mountain Care Board wasn’t dealing with it. The second wasn’t actually a bad rap, but it was painful for the Board nonetheless.
   That came at the Board’s hearing on Vermont Blue Cross’s request for an 8.2 percent increase in the premiums the Blues would charge to Vermonters buying health insurance through the Exchange. The Burlington-based Vermont Workers Center brought in testimony from several individuals and small businesses that the rates were already unaffordable, and that an increase of that magnitude would be simply crushing.
   The hearing was painful for two reasons. One was that the argument for unaffordability was so compelling. The corollary was that there isn’t much the Board can do about it—in the short term. Once a spending stream is in place, state law provides that the Blues have to be paid enough to survive as an insurance company, and the actuaries for both the Blues and the Board testified that the north of eight percent was justified in those terms.
   The only real way to attack the affordability problem is to constrain the overall costs in the system and while that is the Board’s responsibility, it can only get at it going forward--not soon enough to significantly reduce the 8.2 percent. In fact, the Board later cut the 8.2 percent to 7.3, but even a move of that magnitude does not really render the policies on the Exchange affordable.
   The third hit came in early August when the Board received the hospital budget proposals for the Fiscal Year 2017, which begins on Oct. 1. On a system wide basis, the budgets far exceeded the Board’s 3.5 percent cap on total hospital spending. All in all, a tough three week stretch for the board…
   The reason why I’m spending so much time on these events, including what would normally be an ephemeral news article, is the relative fragility of the reform process. Budgets are boring and complex, so they can be used in political struggles around the whole issue of health care reform, including the problems with the Exchange, which aren’t actually within the Board’s purview at all. There are reform opponents on the right, the left and in the middle and they will use any weapon that comes to hand. And press coverage can exacerbate those pressures.

                                                                The Whole “Profits” Chimera

   The development that knocked the Board sideways in late July was the publication of what was called a special report in VTDtdigger. The headline on the article read:

Despite Regulation, Hospital Profits Up

   The obvious intent of the report was to impeach the performance of the Green Mountain Care Board. The measures cited were “profits”, which are actually operating margins in hospital budget land; but call them profits if you will. The other metrics cited were days-cash-on and the value of hospital assets.
   These have all been out of control, the article implied; a second implication was that the extra money was fueling excessive salaries inside the hospital system. And the culpable party was plain to see.

   An analysis by VTDigger shows that, although individual hospitals vary, Vermont’s 14 hospitals have, on average, improved their financial footing since the Green Mountain Care Board started regulating hospital budgets in fiscal year 2013.

   The first puzzling thing about this contention is that the supporting documentation was wrapped in developments that took place long before the Green Mountain Care Board was created. The increase in hospital assets covered the period 2001 to 2015—15 years, not three. The increase in margins was calculated from 2006 to 2015—nine years. When the article wrapped in those two metrics with days-cash-on hand, it did so over 10 years…
   The primary focus, however, was on the issue of profits. What was even more galling to the Board was that the operating margins are one of the few elements in the hospital budgets that are fully under control. The margins have been running around three percent or a little under, which is perfectly reasonable.  
   The main reason for the margins is not so the people in the hospital can have a party, but so that hospitals can maintain their physical plant and to borrow money at the lowest possible interest rates.
   The most striking example of that need is UVM’s financing for its new inpatient wing. When the $180 million project was approved, the Board permitted UVM to increase its margin from roughly two percent to as high as four. (It actually runs a little under that)
   The increase persuaded Standard and Poor, a major credit rating agency, to raise UVM’s bond rating from BBB+ to A-. That shift took place a year ago, and when UVM went to the financial markets a couple of weeks ago to borrow $89 million, it got a very favorable rate, one that will save $11 to $12 million over the life of the loan.
   Having a two to three percent operating margin across the system, in other words, is simply a prudent way to run such a complex industry. It is interesting to recall that from the very early days of health care regulation the issue of operating margins was a point of emphasis.
    For example, the Vermont Hospital Data Council was established by the Legislature in 1983 (not 1992 as the Digger piece says) and its second chairman, the Burlington business man Patrick Robins routinely urged hospital presidents and chief financial officers to build a margin into their budgets.
   Still, the simple word “profits” is enough to push every button on the health care world. So, why should we ignore them?
   Here are some of the reasons:

1.      In the Vermont health care world, if a hospital racks up more than its allowable operating margin (the right words for profit) it has to give them back. For example, that is what happened last year to both the UVM Medical Center and Rutland Regional Medical Center.

2.      The actual numbers are too small to be decisive. Operating margins in the system run from two to three percent, which is simply a responsible level. But let’s stipulate that they need to be cut in half. The cut would amount to one and one half percent.

   The numbers in the health care biz are so big it’s hard to envision them--a few hundred million dollars here, a couple of billion dollars there. So, think of it this way. A husband and wife sit down to discuss how to fill a $1,000 hole in their household budget. The husband says that he, By God, will do his share.
   What would that be?
Well, for the next two weeks I’ll get a Latte instead of a Pedestrian at Maglianero’s. 
A sacrifice like that at Maglianero’s, the ne plus ultra coffee joint on the Burlington waterfront, would save the husband about $15. You can fill in the wife’s response for yourself…The numbers in the profit issue are just too small. 

3.      The answer for people who are serious about solving the policy problem of sustainable health care costs is that health care financing is nothing like private sector financing, or even financing in regulated industries like electricity. In both of those cases demand is determined by the customer: the customer wants or doesn’t want a television set; the customer wants to operate three toasters instead of one.

    In health care, the provider determines the demand. And the customers never stop showing up. What they get is what the doctor or the hospitals say they need. The demand, in other words, is close to limitless and continuous. In that kind of environment, you don’t need profits to ramp up salaries for doctors and hospital executives. You just take the salaries up and they become an expense and they show up, not in profits, but in the basic health care bill—net patient revenues.
   The principle to keep in mind is that in health care the cost to Vermonters isn’t the unit price—so much for an MRI, or a knee replacement. The cost is the unit price times the volume. And 40 years of research has shown that volume is highly variable.
   Primary Care doctors haven’t been able hook onto this financing train, but they amount to less than 10 percent of the cost of the system. But hospital-based doctors and hospital executives have. From 2000 to 2009, for example, virtually every hospital in Vermont doubled its budget. There was no earthquake, or cholera epidemic, and no influx of people into the state. Given that health care is an industry whose labor costs run to around 60 percent, salaries went up a lot.
   So, has the Board just been spinning its wheels for the last three years? Actually, it has done pretty well. The members placed at least a reasonable lid on cost increases. It has persuaded the federal government that Vermont has one of the most promising and innovative cost containment initiatives in the country. And it has overseen the development of a truly-integrated system that can be the vehicle for redesigning the flow of money into the state’s hospitals.
   None of this is to say that hospital costs are under control. Nor is it to say that the Board’s performance has been flawless, it hasn’t. But it isn’t guilty of the sins it has been charged with in the press.
   That doesn’t mean that the days ahead will be easier. In fact, they will be much tougher. In an ironic touch, the Board had no sooner begun to shake off the effects of the Digger piece, when a serious new challenge walked in the door.
   On Aug. 4, the Board’s finance chief, Mike Davis, presented the hospitals’ proposed budgets for the FY 2017, which begins Oct. 1. In a dramatic shift from the last several years, the budgets came in far above the Board’s 3.5 percent cap, so far above it that I believe it presents the Board with an existential challenge to its position, and ultimately to the future of health care reform itself.
   The net patient revenue figure is the key to hospital financing in Vermont. It is the amount of actual dollars Vermonters pay to get hospital-based care each year. There are all sorts of numbers that can be brought forward to provide a look into the system. There is gross revenue, discounts from gross revenue, charges per unit, discounts from charges, unit cost increases or decreases, hospital operating margins (“profits” as we’ve seen above).
   These figures can be and are manipulated every which way from Sunday. What counts, however, is net patient revenue. When I chaired the Vermont Hospital Data Council in the late 1980s, I called it the “Green Dollar Number.” The Green Dollar Number is what shows up at the point where Vermonters collectively take out their wallets and fork over the actual cash to pay for the system.
   That is the reason that Vermont law has given the Green Mountain Care Board the authority to set a cap on net patient revenue for the hospitals. The Board has set a cap of 3.0 percent in the amount that a hospital’s budget can grow from FY 2016 to FY 2017. The Board has also provided that a hospital can go over the cap by about half a percent if the overage is to be spent on something the Board believes will advance the cause of reform of the system.
   The problem is that the proposals now under consideration add up to an increase of 5.0 percent over the current year. In terms of Green Dollars that means that the FY 2016 budget called for new money totaling $78 million over the previous year and the proposals for FY 2017 would require $114 million in new money. That is an increase of 46 percent over that period.
   The proposed budgets haven’t just exceeded the cap, they have made a hash out of it. Ten of the 14 hospitals exceeded the Board’s limit, and most of those weren’t even close. Copley Hospital in Morrisville came in at 7.4 percent; Northwestern in St. Albans at 7.5 percent; Southwest in Bennington, 6.1 percent. The topper was Central Vermont Hospital at 11 percent. The University of Vermont asked for 4.3 percent, the first time it has come in over the cap. Nine of the 14 hospitals exceeded the cap for FY 2016, and 10 of the 14 have proposals that are over for FY 2017.
   The flagship of the system—UVM and its partner, Central Vermont Hospital—had a weighted average of about seven percent, double the cap.
   No one has analyzed these budgets yet. The Green Mountain Care Board will begin that process next Wednesday when it holds a hearing on the UVM and CVH budgets.
   My sense after watching the hospital cost dance for 35 years is that some of the increases are definitely necessary, but that some of them are definitely not necessary. The problem for the Board is that there is really no practical way to figure out which is which in the three to four weeks that the Board has to maneuver.
   One way to get at it would be to look at the quality metrics, but the Board hasn’t really done that so far. And even if they do, telling any hospital they can or can’t do something presents a huge political problem.
   As I noted above, in theory, the advent of an integrated system would shift that problem to OneCare Vermont, or its newly almost-formed bigger successor Vermont Care Organization; they are Affordable Care Organizations set up under the aegis of the federal government. But there is no chance that OneCare, the only structure that actually exists now, can solve the Board’s problem by early to mid-September.
   However this dilemma is resolved, the budget submissions appear to have destroyed the usefulness of the tool that the Board has relied on since its inception in 2012—a cap based on net patient revenue. The only way the cap could be saved would be to apply it across the system, and that would entail the risk that some Vermonters might be denied care they need. But if nearly everyone ignores the cap, it is very hard to see why anybody should take it seriously.
   The countervailing problem is that unless the Board has the credibility to get costs under control, then the whole health care project itself would be at risk. And in that environment, OneCare Vermont and its descendent Vermont Care Organization would begin to look more like an enormous risk rather than the savior for the system.
   The huge question would be:
   If the Green Mountain Care Board can’t exert a credible lid on any single one of the state’s 14 hospitals, how could it do so when it faced a single organization with all the medical resources in it? The market power of a fully integrated system would be too much for a feeble regulator.
   The conundrum laid out above is why I have called the current situation an existential challenge to the Board. This challenge isn’t simply irritating, like the press article, or frustrating, like setting the rate increases for insurance companies. This is the toughest challenge the GMCB. If this is truly a summer of discontent for the Board, the hospital budget issue is a very good reason for it.

#####

GMCB Gets Heavy Budgets

    Vermont’s 14 hospitals have submitted budget proposals to the Green Mountain Care Board for the coming fiscal year that total $2.422 billion, an increase of $114 million over last year’s tab. The percentage increase was 5.0 percent, well over the Board’s 3.5 percent target.
   Mike Davis, the Board’s finance chief, presented the figures to the members yesterday. He said the numbers were still a bit rough; they haven’t been fully vetted yet. But he said they’ll be ready by mid-August, when the Board opens hearings with the individual hospitals.
   Once the hearings are completed, the board will arrive at a decision on each hospital by mid-September, and the budgets will go into effect on Oct. 1, the beginning of FY2017. If a hospital disagrees with the Board decision on its budget the hospital can appeal the decision to the Vermont Supreme Court.
   The key number in each budget is the increase in the hospital’s Net Patient Revenue. The increase in each hospital’s NPR number is shown in the graph below.  It shows that 10 of the 14 have exceeded the Board’s target of 3.5 percent. There can be a host of reasons why that should be so, some of them good, others not so much. Those are the decisions the Board will have to make in the next six weeks.

Reading the Tea Leaves on Bernie

by Hamilton E. Davis

   The whole State of Vermont has gone bonkers over the presidential candidacy of Sen. Bernie Sanders, as has a sizeable chunk of the country. Bernie’s win in the Michigan primary took Vermonters into hyperventilation territory and they are likely to stay there until next Tuesday when Illinois, Florida, North Carolina and Ohio hold their primaries. So, what is going on? Can the grumpy old guy with the bad hair from the north end of Burlington actually get into the finals?
   The hard-nosed guys who never hyperventilate don’t think so, and I think they are right. There are two essential sources, in my view, that can get you to see past the emotional responses to political questions like this. The first is Nate Silver, who runs a web site called 538 and who has made himself the nation’s leading prognosticator by virtue of his skill as a statistician. The second is Nate Cohn, who writes under the Upshot heading in The New York Times. Read these guys and you still might get something wrong—they both got Michigan wrong—but you will be as grounded as it's possible to get.
   No one knows whether Michigan was a fluke, or not. I think Bernie himself was shocked. During the run-up to the Michigan primary itself, Tad Devine, Bernie’s campaign manager and the architect of his stunning run so far, gave an interview to the Politico site in which he suggested that Hillary Clinton might choose Bernie as her running mate in the general election.
   Maybe they’re going to put him on the ticket then, Devine said. He isn’t kidding as far as I can tell, the interviewer wrote.
   That looks to me like a message that you might send if you thought your campaign had peaked. Keep in mind that the guy saying it wasn’t some indiscreet volunteer playing hooky from college; it was the top campaign guy.
   In any event, the fact is that Bernie did win Michigan and if it didn’t shock Bernie, it shocked everybody else, on both sides of the equation. It certainly knocked Nate Silver sideways: he had estimated Clinton’s chance to win Michigan at greater than 99 percent and Bernie’s chances to win at less than one percent. The question now is whether Michigan portends a Bernie surge that can actually get him the nomination.
   Here is what Cohn has to say in the Upshot:
   Imagine…a brutal stretch for Mrs. Clinton, one where she underperforms the demographic projections by as much as she did in Michigan for the rest of the year. She would lose in Ohio and Missouri on Tuesday. States where Mrs. Clinton was thought to have an advantage, like Arizona, New Mexico, Pennsylvania, Illinois, Indiana, California and Connecticut, would become tossups. Mrs. Clinton would win New York, but by just eight percentage points.
   She would be swept in the West, including 40-point losses in places like Alaska, Idaho, North Dakota, Utah and Montana and 30 point losses in Washington and Oregon. She would lose by 20 points in Wisconsin and Rhode Island, by 30 in West Virginia and Kentucky.
   She would still win comfortably.
    The reason, Cohn writes, is that she has too big a lead to be overtaken in any realistic scenario. Keep in mind that these aren’t simply finger-in-the-wind guesses. They also have nothing to do with super delegates. They are what you get when you apply the Michigan results to all those states. So, is a Bernie nomination it possible? Sure, but it is very remote. My guess is that the only Vermonter who fully understands that is Bernie himself.
   As I noted above, Nate Silver has a firmer grip on the hard statistics than anyone else. He made his bones in national elections beginning in 2008 and he had a striking performance in the 2012 election, when President Obama defeated Mitt Romney. Silver saw it coming all the way, and his work badly embarrassed some of the old political guard. He made Peggy Noonan, the intelligent person’s Republican who writes in the Wall Street Journal, look like a fatuous ninny when she predicted a Romney landslide after talking to a cab driver, or some damn thing. Another victim was Karl Rove, the very smart but nasty brains behind former President Bush; Rove got run over on national television when he refused to believe the results in Ohio after they had come in.
   Silver doesn’t seem to have fully come to grip on Michigan. He described it right after the votes came in as the worst screw-up in polling history, since his political readings are based primarily on polls by others, to which he applies various correction factors. It certainly was the greatest screw-up in Nate’s history. Saying that Clinton has a higher than 99 percent chance of winning and Bernie less than one percent really isn’t statistics at all—it just says, forget about it. If he had said that Clinton had a 98 percent chance to win Michigan and Bernie had a two percent chance, he would have been fine. Two percent is not no percent in statistics land.
   It is interesting, however, that Silver hasn’t backed off an inch in the approach to next Tuesday’s tests. He gives Bernie no chance (less than one percent) in Illinois, Florida and North Carolina and just two percent in Ohio.
   So, Tuesday will be big. If Silver is right, the Clinton lead in delegates will grow significantly and the path for Bernie will be pretty much closed off. If he exceeds expectations, even by a lot, then the path will look like it’s there, but Bernie, and his Vermont chorus will then have to face the Nate Cohn thesis—that the path is already gone.

N.B. While I agree with Silver and Cohn, I also think that Bernie’s campaign has been unique in American political history, and has had a marvelously salutary effect on the country’s political life. I’ll make that case next.

Vermont's Slowly-gelling ACO Landscape

PART TWO

By Hamilton E. Davis

    The ACO concept is in its infancy is Vermont, and to a considerable degree in the U.S. The pace is going to pick up drastically, however, as the need for cost containment is so pressing. By January of 2016 every major health care system in the country is going to be participating in the next phase of ACO movement, or looking closely at operating in a way that will cost them money if they manage badly.
    Vermont will be one of the bellwethers in this campaign. Vermont’s largest ACO, OneCare, has been selected by the federal government to be one of a couple dozen ACOs that will participate in the next phase of the reform effort. The ACO phase of reform is more than simply federal, however. The Vermont Legislature assigned to the Green Mountain Care Board the responsibility for refashioning the state’s system and the use of an ACO structure was part of the state plan from the outset. 
    OneCare was formed in 2012 by the two tertiary hospitals that serve Vermonters.
    They are the University of Vermont’s system, which dominates the western part of the state, and Dartmouth-Hitchcock Medical Center, located just over the New Hampshire border, but 40 percent of whose patients come from Vermont. Through 2014, OneCare’s membership also included the state’s 12 smaller community hospitals.
    Two smaller ACOs have been operating in Vermont during the first phase of the reform effort.  One is called Community Health Accountable Care (CHAC); it is made up of groups of primary care doctors that get some federal financial support. The groups are called Federally Qualified Health Centers. In 2015, CHAC accepted into membership four small hospitals from eastern Vermont—Northeastern, in St. Johnsbury; Gifford in Randolph; Springfield; and Grace Cottage in Townshend. The third ACO, called Healthfirst, is a group of 68 independent primary care physicians.
    The first stage of ACO activity in Vermont is now drawing to a close. Over the last three years all three ACOs participated in some so-called “shared savings programs” with Medicare as well as Medicaid and commercial insurers. The basic idea was for doctors and hospitals to begin to get a grip on costs by assembling blocks of patients, calculating the cost of caring for them in the past, and then trying to constrain the increase in costs for those patients going forward.
    If the providers kept the costs under the previous inflation trend, they saved money for Medicare and the other payers, and if they saved enough, they could keep some of that money for themselves. In the argot of the field this is called upside, or one sided, risk. It isn’t really risk: heads I win, tails you lose doesn’t meet the dictionary definition. But it was a start; the providers got a feel for the basic idea. Al Gobeille, the chair of the Green Mountain Care Board, calls this period the “training wheels” phase of the ACO movement.
    The results of the effort across the three ACOs and the three payer components—Medicare, Medicaid, and Commercial—were mixed, and not particularly impressive.  They saved some money for the payers, but didn’t get to keep much. The most important outcome was that most of the players in the acute segment of the state’s delivery system got their feet wet. Anyone who wants to dig into the details of the early ACO experience can do so by reading the reporting of Morgan True and Erin Mansfield on vtdigger.org.
    The most important point in my view is that neither OneCare, nor CHAC, nor Healthfirst was actually operating as an ACO, if we assume that an ACO is supposed to be an integrated system. They might have been building infrastructure, and they may have been doing very good work in improving primary care by extending doctors’ ties to their local communities. But the system pretty much operated as it has in the past, and the savings racked up were more the result of luck than new lines of coordination between units. This observation is not intended as a criticism of any of the ACOs. The preliminary work they have been doing they need to do. It is just that the level of integration—the seamless management of patients from primary care up the ladder of complexity—is a shift in the medical culture of today where patients move randomly from doctor to doctor without any tight management or coordination.
    The movement to date, therefore, hasn’t really moved the system closer to market discipline. You only do that by taking real risk. With real risk, you make money if you control cost and quality and you lose money if you don’t. There is still some time left for the training wheels phase. The Medicare shared-saving agreements can continue through calendar 2016, but after that the focus will be on real risk, where providers can lose money by performing poorly.
    Vermont is preparing now to enter the era of real risk. The first stage. In other words, the training wheels are about to come off. And so far, it isn’t clear at all that Vermont is ready. The immediate question the system faces today is whether the two small ACOs will give up their efforts to operate ACOs on their own; and an equally important corollary—what kind of governance of a single ACO would be acceptable to them. In other words, how big a role would they have in an ACO dominated by the two big tertiary centers?
    Working that issue out has been going on under the aegis of the Green Mountain Care Board for the last nine months or so. The midwife for the process has been Richard Slusky, a veteran hospital administrator, (a long-time CEO of Mt. Ascutney Hospital in Windsor) who joined the Board when it was formed in 2011. The Board has been concerned from the outset of the reform effort to keep all of the major players on board; Al Gobeille, the Board chair, likes to describe it as a “coalition of the willing.”
    To that end, the Board has provided grants to all three ACOs to help them get going and to participate in the shared savings programs. The process has been grindingly slow, however; for the ACO effort is stripping off the veneer of civility that it usually obtains in these matters. One of the issues that has been working just beneath the surface is the bitterness and resentment that the “smaller” elements in the system—small hospitals and many primary care doctors—feel toward the University of Vermont Medical Center.
    To get a sense for this you might read the 2013 article by Dr. Katharine Hikel of Hinesburg, a physician who writes about health care, in Vermont Woman magazine. Her basic claim is that the Burlington-based facility is too big, too expensive, too rich and too overbearing. The components of the UVM system, she wrote, “pay executive-class wages for dozens of vice presidents, revenue managers and marketing specialists whose work has little relation to patient care…A complex tertiary medical center costs more to run than a small community hospital,” she wrote. “The question is whether our tertiary-care hospitals have grown overlarge.”
    You hear the same theme from many of the small community hospitals in the state. The idea gained some public credibility when Seven Days, the alternative newspaper in Burlington, ran a front-page story to the effect that the UVM system was swallowing up as much of the state-wide system as it could. A variation on the theme is the claim by some of the small hospitals that they are inexpensive and stand in marked contrast to what they call the over-priced UVM system.
    This sort of generalized resentment is exacerbated by a genuine fear on the part of the primary care community of providers that they are in a system of strongly enhanced cost containment, and that they will get even less money than they do now. I will argue in the future that the claims that UVM, and by extension Dartmouth-Hitchcock, are too expensive are in fact not valid. The fears about primary care, however, are valid. Primary care in Vermont, and in the U.S. generally, is badly under-funded and is in a chronic crisis situation. In fact, both the Green Mountain Care Board and OneCare are committed to remedying these problems with the primary care system as soon as possible.
    So, where do the Vermont ACOs go from here?
    Starting with the smallest. Healthfirst, the grouping of 68 independent doctors, has been operating an ACO, in partnership with a national firm, that has been participating in the Medicare shared savings program. Amy Cooper, the director of Healthfirst, told the Legislature recently that the partnership will drop its joint effort with Medicare. The reason is that in the three-year phase of the Medicare shared savings program it was too hard to make any money. A big problem across the board is that Vermont costs are very low compared with other states so that it's very difficult to get under the trend line, and thereby get some “shared savings.”
    Cooper says now that for Healthfirst the question of whether to operate an ACO in Vermont is still open. It would still be possible to participate in shared savings efforts with Vermont Medicaid or with the private insurance carriers in the state. “We just can’t tell yet what all this might look like,” she said. Cooper said whether or not Healthfirst operates an ACO the group will stay together to work for the benefit of its members.
    CHAC, meanwhile, has been the center of the resistance to moving their primary care doctors into OneCare. CHAC’s central concern is to ensure that the primary care segment of the delivery system gets the resources it needs to serve its patients well, and to continue to build links into their communities that contribute fostering wellness for whole populations. CHAC’s leverage in this situation derives from the federal law that stipulates that a Vermont resident cannot be considered part of an ACO unless he or she is sent there by a primary care doctor. And CHAC has a lot of primary care doctors.
    Joyce Gallimore, who manages the CHAC effort, is non-committal at this point about whether her organization will abandon its stand-alone ACO and lead its members into a single state-wide ACO.
    “It’s hard to say one way or another,” she said. “Governance of the ACO is one issue. Another is the terms of the agreement with the federal government—how will the money be distributed. What will be the cost of the infrastructure and how will those costs be distributed and how will those costs be distributed to individual providers…there are so many details it’s hard to skinny down,” she concluded.
   My guess is that both small ACOs will end up joining a single state-wide organization. The reality overarching the whole issue is that you can’t have a credible ACO unless you offer a full range of medical services, and all of the higher end services available in Vermont are part of OneCare. Since neither Healthfirst nor CHAC encompass a full range of services neither can take financial risk for big blocks of patients. And if you can’t do that there is no point in operating an ACO in the health care world of the future.
    Beyond the simple logic, an important reason to be sanguine about eventual cooperation between the state’s providers is that Todd Moore, the president of OneCare, has been assiduous about cooperating with the smaller ACOs. He has eschewed any use of the huge muscle that OneCare has available in the state now. Primary care, for example, accounts for only three to five percent of the total health care spending in the state. And even when you subtract the spending by the four small hospitals now in CHAC, OneCare still accounts for more than 90 percent of the hospital spending for Vermonters.
    Even if both small ACOs join the single state-wide unit the governance of OneCare remains problematical. Full integration of the delivery system is inherently difficult and would be even if all the players were great pals, which they are not. The culture of American medicine at least since the end of World War II has inclined strongly toward dominance by specialists over primary care physicians. Anyone who doubts that is invited to consider the money paid to each. Specialists get paid more than primary care docs: actually not more, but rather far, far more.
    Health policy theorists have speculated for at least 30 years that medicine needs to reverse that pecking order and to make primary care doctors into “gate keepers,” who can manage all the care given to their patients. I think it’s a great idea, but anybody who looks inside the system should be forgiven for putting it in the “don’t hold your breath” category. If we consider only Vermont, you can safely put it in the fantasy category.
    If we look out, oh, at least five years, or more likely eight to 10, market-type discipline could force an evolution along those lines. But anyone who thinks that in Vermont in the near future a five-percent tail is going to wag a 95-percent dog is dreaming.
    So, the Monday morning meetings will continue, no one can say when we’ll see a resolution of the ACO governance issue. Todd Moore and his team have accepted the invitation to operate a second generation, with the caveat that they cannot begin functioning in the new wave until January of 2017.
    The issue of bringing the providers now in the two small ACOs into OneCare is that OneCare will need a full year to get a good start on a truly integrated system, which could be used as the basis for risk contracts with payers. For even if Healthfirst and  CHAC’s members decide to join OneCare based on acceptable governance, the units won’t be really integrated. That is, they don’t now function now in a coordinated fashion, certainly not to the degree that their efficiency would begin to resemble a seriously competent private-sector organization.
   We’ve gone a long way in Vermont, farther, I would argue, than anyone else in North America, but we have only just stepped into the swamp that lies between current reality and the sustainable system that we can see on the horizon. The hardest work, in other words, has just begun.

The ACO is Key to Health Care Reform: Part One

by Hamilton E. Davis

    In my last column I wrote about the two-front health reform campaign, focusing on the cost containment issue. The second front went away last December when Governor Peter Shumlin decided he would not pursue the funding of health care in Vermont. Cost containment, however, is not just alive, but thriving.
    Rendering the cost of the health care system in Vermont financially sustainable also has two fronts. The first is the purview of the Green Mountain Care Board, the five-member body tasked by the Legislature with regulating and reorganizing the doctor-hospital system in the state; many health care watchers are quite familiar with the Board because it has been regulating hospital budgets in the state for the last four years.
    The second major element in cost containment is called an ACO, which is—what? In many ways, an ACO is the mystery meat of health care reform. It’s fair to say that hardly anyone really understands the ACO idea, a situation that is exacerbated by the fact that many of the players like it that way because the ACO issue subsumes some of the most difficult political and financial tensions inherent in the reform project.
    It may seem weird, but I think that the best way to get at the essence of the ACO conundrum is to head to the nearest lumberyard. Let’s say that you want to build a new one-car garage and you have worked out on the back of an envelope the number of two-by-fours you’ll need. Say, 60 eight-foot two-bys. So, what will it cost you?
    Off to the first lumber yard, the price per two-by is $2.50. Try another one, $4.00. A short drive away, $5.00. One more, $6.00. Back to the back of the envelope. Yard one total is $150. Yard two is $240. Yard Three is $300. Yard Four is $360. Given that all the pieces are cheap softwood, this is a pretty easy decision. Yard one is the best buy, so you order the wood there.
    Now comes the delivery truck and it drops off 200 two-bys. And the driver hands you a bill for $500, which you are obligated to pay.
    Oh, come on. That would never happen. The lumber yard would be out of business in a week.
    Okay, okay. It wouldn’t happen with a lumberyard. And it wouldn’t happen buying a television set, or carrots at the farmer’s market. But it happens every day in the health care delivery system. And until the delivery system is reorganized, health care costs in Vermont, and in the United States, will never be sustainable year over year.
    Is health care financing really that strange and irrational? And if so, why? The first thing to understand is that the evidence for the dynamic I’ve laid out here is overwhelming. There is little to no opposition in the policy community that the financing system has to be changed because it sets up very powerful incentives to do more than patients need. Which is why the ACO machinery was built into Obamacare: it is considered to be the only way to get costs fully under control.
    To look at the “how” of it, we’ll go back to the lumberyard analogy. In a market economy, buying two-by-fours, or t.v. sets, or carrots, you decide what you want; that’s the Demand.
    The lumberyard or the tv manufacturer or the farmer produces stuff you want.  That’s the Supply. The interaction between the seller and the buyer balances the supply and demand, which is the definition of a market. And a real market is awesomely efficient.
    In health care, by contrast, doctors tell you what you need and then they supply it. Your only role is to pay for it. And the more they supply the more you have to pay.
    In the health policy biz, they call this “supplier-induced demand.” The payment mechanism that underpins it is called fee-for-service. If a health care provider does something, he gets paid for it. If he doesn’t, he doesn’t get paid. A particularly insidious characteristic of the dynamic described here is that competition in such a system increases costs, not decreases them. That “unmarket” is the engine that has driven health care costs in the United States from roughly six percent of our total national output in the mid-1960s to nearly 20 percent today. In Vermont it is 20 percent.

The theory of ACOs

    While there has been a consensus on the financing dynamic for decades, finding a way to fix it has been fiendishly difficult. Beginning as far back as the early 1970s, the primary impulse has been regulation—just have government order providers to slow down the rate of inflation. Governments, both state and federal, have done their best by simply refusing to pay the full amount of the bills the providers presented for Medicare and Medicaid services. That hasn’t worked: the providers just shifted the shortages to private sector insurance premiums.
     A second impulse was to set rates for specific services; and states tried that in all sorts of ways. Rate setting failed because of the dynamic illustrated by the lumberyard. Fix the unit cost for, say, an MRI, and the number of MRIs goes way up.
    The poster child for this syndrome is Maryland, where state government moved many years ago to pay all hospitals the same amount for the same services. They never controlled volume, though, and the result is that Maryland has one of the highest cost delivery systems in the country.
    It is important to note that this is not some kind of heinous conspiracy. It is simply the way that the American health care system developed in the modern era. Doctors always took responsibility for their patients, but they almost never took responsibility for what other doctors did, and they wanted nothing to do with trying to manage costs. In the 1970s and 1980s, it was common to hear doctors say that it was unethical, even immoral, to even consider costs. The only thing to be considered, the argument ran, was that whatever the patient needed he should get.
    A potential solution to the problem was designed into the Affordable Care Act, Obamacare, in what the designers called an Accountable Care Organization, an ACO in the current argot. It seems to me that the ACO idea is enveloped in a fog of misunderstanding, fear, political maneuvering and general angst.
    In essence, however, it seems like a plausible and even compelling way forward. At the least, there is nothing on the policy horizon that looks anywhere near as good. The idea works like this:
    An ACO in concept is a grouping of doctors and hospitals that can deliver the full continuum of acute care to a cohort of patients for a fixed, per capita price. Some caveats: We are only talking about acute care here. Long term care, home health and other essentially social services, while critical overall, are not essential in the ACO universe. The continuum starts with primary care delivered by doctors and nurse practitioners and ranges up from there to stand-alone specialists and small and medium sized hospitals and finally to the very sophisticated care that gets delivered in tertiary medical centers.
    The care within such a structure needs to be truly integrated. All of the elements within it are focused on a single task—to treat every patient in the most effective way, both in terms of medical quality and its attendant costs. The concept is similar to that of a complex technical manufacturer, like a car or a computer company, where there are thousands of individuals with a wide variety of occupational skills whose output is expressed in a single product that satisfies the customer, and is affordable.
    Those can exist in medicine now, but they require that all the assets be owned by a single entity. The ACO law makes it possible to form an integrated system without full ownership by exempting the ACO from such federal statutes as anti-trust prohibitions. Readers who have got this far may begin to raise objections to the integration idea, and I’ll deal with those later; for now, it is important to see how the concept works in theory.
    Once you have a fully integrated ACO, you can participate in risk contracts, the kind of arrangement that permeates our economy. If you want to get a contractor to build your new garage, you get bids for the work and you sign a contract for the work at a fixed price. If the contractor gets the work done for the price, he makes his profit. If he gets it done for less, he makes more profit. If the work costs him more than he estimated the difference comes out of his own hide. You can also get the work done for a so-called “time and materials” price—the contractor takes no risk at all, in which case you would probably get a pretty expensive garage. In health care, the thing we know with the most painful kind of certainty is that we’re getting ferociously expensive health care in our current time-and-materials system.
    Here is what a fully functional ACO would look like:
    Its membership would have to be able to deliver the full complement of acute medical care to the patients covered by the contract. The whole process starts with primary care. That’s not only true in the medical sense—everybody’s first contact should be with a primary care provider, either a physician or a nurse practitioner. It is also a key element in the way that the Affordable Care Act was written.
    The only way the patients in the contract grouping can be included in an ACO is if they enter through the primary care portal. They thereby become an “attributed life.” A patient can’t be considered a member of the ACO if he or she goes directly to a hospital or a specialist physician. So, the foundation of any ACO has to be primary care doctors.
    Once an ACO has its primary care doctor base, it needs to build in the necessary services all the way up the acute care severity ladder, from free-standing specialists to small hospitals to major medical centers. The ACO doesn’t have to have the fullest possible range of services, but enough to make risk contract workable. For example, if a Vermonter needs a heart transplant, he can’t get it here. He’ll have to go to a national center, say, Pittsburgh. But there are only a few such cases.
    Especially in Vermont, it is critical to understand that you can’t have a fully elaborated ACO, one that can take financial risk, without having the ability to deliver the full range of services. That is critical in Vermont because there are only two sources of tertiary care—UVM and Dartmouth—and they are both in OneCare. In an urban area like Boston, for example, you could have several. There are four medical schools, Harvard, Boston University, Tufts, and UMass-Worcester along with four of the best tertiary centers in the world—Mass General, Brigham and Women’s, Beth Israel and UMass-Worcester, along with a ridiculous volume of lesser facilities. Also primary care doctors on every block along with a large population.
    Vermont is nothing like that. There is only one source of tertiary care, and that belongs to OneCare.
    In any event, that is a look at the ACO component of the ideal world I set out in last column. Tomorrow I’ll look at what is actually happening on the ACO front in Vermont now.

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Slogging Toward Health Care Utopia

by Hamilton E. Davis

    After four and a half years, the most critical issue in health care reform — how to contain costs in the delivery system — is now coming to a head.
    The action is taking place on three fronts: the Green Mountain Care Board in Vermont; OneCare Vermont, a group of doctors and hospitals in Vermont and nearby New Hampshire; and Washington, D.C., where the federal government is hoping that Vermont can help find a way to a sustainable system. And the deal, as they say, is going down now.
    It's important to recall first that while cost containment is critical to reform, it is only half of Gov. Peter Shumlin's original single payer plan that was passed by the Legislature in 2011. The vision that animated Shumlin's single payer reform plan had two main parts. The first was to contain costs in the delivery system; the second was to break the link between employment and health insurance by shifting the total financing of the system to the state and federal tax base. The second target died last December when the governor decided the financing was not feasible.
    The focus has shifted entirely to controlling costs in the doctor-hospital system, which is essential to making the health care system sustainable, or affordable to the public, year in and year out. That goal has eluded state and federal policy makers for 40 years.
    Before heading into the policy swamp, it might be helpful to envision what lies on the other side. In other words, what would a fully sustainable system look like?
    Ideally, it would come as close as possible to the supply and demand discipline that makes all real markets work. The Green Mountain Care Board, which has been assigned the problem by the Legislature, would decide how much Vermonters can afford to pay for health care. At the same time, representatives of the state’s doctors and hospitals would determine what resources they need to deliver high quality to the people of the state. The board and the system representatives would then negotiate an agreement acceptable to both, at which point the medical system would be responsible for the quality and cost performance of their system. That’s the ideal.
    What lies between the situation that exists today and the ideal is a swamp of gnarly details and tensions among the players — in short, the demons that plague the effort to recast a fifth of the state’s economy that deals with the health, and, in fact, the lives and deaths of Vermonters. The action is difficult to follow so I have developed a series of maps, or sketches that I hope will make it easier. The first lays out the ideal.

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    As I have said, that is the ideal and we are nowhere near that yet. What we do have is four years of regulatory action by the Green Mountain Care Board. Over that time the board has controlled hospital budgets as well as private insurance premiums; and the board has had considerable success, cutting annual inflation rates for health care spending to about half the historical rates.
   But regulation will only go so far: rendering costs sustainable year in and year out will require that the delivery system itself be recast so as to shift the payment from fee-for-service, which encourages overuse, to some sort of block financing for groups of Vermonters. It will also require the elements of the system, individual hospitals and doctors, to cooperate rather than compete with one another. Only a system along these lines will permit doctors and hospitals to take responsibility for the cost and quality of the Vermont system.

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    Vermont pays for its health care system with money from the state and federal governments on the one hand and by private insurance and self-insured and out-of-pocket payments by individuals on the other. The responsibility for controlling payment rates has been assigned by the Legislature to the Green Mountain Care Board. In essence that means deciding what the people of Vermont can afford to pay for health care.
    That money would then go to doctors and hospitals. In ideal terms, the distribution of funds would be decided by the facilities and people in the delivery system itself. The entity that would perform that function is called an accountable care organization (ACO). I will get into the ACO issue in depth below, but for now just think of it as a piece of machinery that represents doctors and hospitals and is empowered to negotiate with the board for what it thinks the providers need and distribute the money in the most efficient way possible.
    The Green Mountain Care Board would demand that the care delivered be of high quality and is adequate to serve all Vermonters. But the board would not micromanage the system. While the board has tremendous regulatory powers, and more human and financial resources than any such body in health care in Vermont's history, it nevertheless has to deal with this implacable reality: No government structure can actually manage a health care delivery system.
    Here is where the money that funds the current system comes from.

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    The figures come from the Green Mountain Care Board's expenditure analysis for fiscal year 2013, the latest available. The numbers apply to all Vermonters; that takes into account some anomalies, such as that a piece of UVM Medical Center's revenues come from New York state, and the fact that about 40 percent of Dartmouth-Hitchcock's revenue comes from treating Vermonters, although the New Hampshire facility isn't subject to Vermont's regulatory process.

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    The diagram above captures the essence of the board's current regulatory dilemma: the state has the power to manage the flow of money from three of the four sources — Medicaid, whose rates are set by the state; and private insurance and self-insured employers and out-of-pocket payments by individuals, which the Green Mountain Care Board can manage by establishing hospital budgets and private insurance rates.
    What Vermont has no control over is Medicare. The state is seeking a waiver from the federal government to manage the flow of dollars from Medicare. That's because the current way the money flows to Vermont hospitals and doctors is absurdly complex. Medicare pays one set of rates, Medicaid another. The private insurance industry pays providers differently for the same services and those payments are kept secret.
    Making sense of this mare's nest is critical to reform. You can't have a sustainable system if nobody knows who pays how much to whom and for what.
    If the board gets a Medicare waiver, which it expects in the near future, then it would have what it calls an "all-payer model," which means that it could begin to channel all the sources of funds into one stream. There are two reasons for that.
    One is to be able regulate the costs in the entire system effectively, on its own. The second is to encourage the ACO, aka the doctors and hospitals, to make contracts with payers in which the providers take risk. A risk contract is one in which the ACO agrees to take care of a block of patients for a certain price. If the ACO gets the job done for less, it can keep all or a portion of the savings. If it exceeds the price, the ACO members must make up all or some of the overage themselves.
    There is a strong consensus in the health policy community that providers must take a financial risk if costs are to be sustainable over time. That proposition lies at the heart of the Vermont reform design that is established by Act 48, the health care reform legislation passed in 2011.
    The Medicare waiver sought by the Green Mountain Care Board would package a blanket exception to all of the relevant statutes, especially those on price-fixing and antitrust, that now stand in the way of risk contracts in the state's delivery system. The board, on its own, could not get into risk contracts, and its hope is that a single ACO will be able to integrate enough doctors and hospitals in the system to do that.
    The board has rate setting authority under Act 48, but it has not used it. If the development of an effective ACO stalls, the board could build a rate setting capability. If the board gets its waiver, it can blend the Medicare funds with the rest of the fund sources, then apply its rate setting capability to what would remain a fee-for-service payment system. And such a thrust could be effective, given that the way the funds are distributed now is so irrational.
    Intensive discussions and negotiations between the Green Mountain Care Board, supported by the governor's office and federal Medicare officials, have been going on for months around the Medicare waiver. Al Gobeille, the chair of the Green Mountain Care Board, has been increasingly optimistic that the waiver will come through, and soon, probably some time in October.
    The all-payer waiver would place Vermont at the forefront of health care reform in the United States. The only similar structure, one that has been developing over some decades, is in place in Maryland. And the Vermont system promises to be more far-reaching than Maryland's. The Maryland system, for example, only has a waiver for hospital services, as opposed to the Vermont design, which calls for including both hospitals and doctors.

The second front: Cooperation, not competition

    The second front in cost containment, the development of an ACO that could take financial risk, is already well advanced in Vermont. Just a few days ago, the state's largest ACO was invited by the federal government to be an early adopter to an advanced form of ACO.
    The idea of an ACO is widely misunderstood, or not understood at all, so it is worth going back to the basic concept. Recall that the goal at the far side of the swamp is to move away from fee-for-service reimbursement, which encourages overuse and fragmentation, and thus low quality care.
    If a patient, call her Sally, wakes up feeling poorly, she might call her primary care doctor. If her doctor can solve Sally's problem, she will. And the cost will be minimal. If not, then Sally enters the world of specialty doctors, and hospitals, moving up the complexity ladder and in the process incurring exponentially higher costs.
    In order for this process to be as efficient as possible, these treatment sites have to be coordinated, sharing information and decision making, rather than competing with one another. If at every step, a doctor or hospital can make more money by doing something rather than not doing something, the odds are that will happen.
    The concept of the ACO was developed in the federal Affordable Care Act (Obamacare) to meet this need. One of the most important problems the ACO concept solves is to waive federal antitrust laws that prohibit price fixing by competing elements in a business field. Cooperation, not competition, is the touchstone of an integrated delivery system.

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    Irrespective of how the ACO situation works out over the next several months, the regulatory structure could not possibly take the ideal form set out above. There will have to be joint management of the system by an ACO and the Green Mountain Care Board. The ACO will be able to sign risk contracts to care for big blocks of patients for a negotiated price.
    The Green Mountain Care Board will manage that process to ensure both that costs are contained and that the care is adequate in volume and high in quality. At the same time, however, the board will have to regulate the costs that are incurred on a fee-for-service basis for those units of the delivery system that are not part of the ACO risk contracts.
    There are now three ACOs operating in Vermont, but only one of them has the size and integration necessary to get to the underlying rationale for the structure, which is to enable doctors and hospitals to take financial responsibility for the whole continuum of care. That is OneCare Vermont, a consortium that includes the University of Vermont's health care network, the Dartmouth-Hitchcock system in New Hampshire and most of the smaller community hospitals in Vermont.
    There are two other ACOs. One is called Community Health Accountable Care (CHAC), which includes most of the federally qualified health centers (FQHCs) in the state. An FQHC is a group of primary care doctors who get some financial help from the federal government so as to ensure the availability of care in underserved areas.
    The second is called Health First, a group of some small doctor groups as well as individuals. Some of the Health First members are primary care doctors, others are specialists.
    Neither of the two small ACOs is anywhere near big enough to function as an important cog in the development of risk contracts, so they are not relevant in that sense. The small ACOs would not be involved in risk contracts, but their members could be. That is the reason why all three ACOs have signed a memorandum of understanding that Vermont can only have one ACO going forward. 
    That is not to say, however, that the small ACOs are not important in the delivery system itself; they are. Moreover, they are very important as the whole issue of health reform goes forward. Part of that is structural — the ACO program gives a central role to primary care; beyond that, independent physicians play a very important role in the politics of the delivery system.
    The whole question of the ACO, in other words, is vital to the ability of Vermont to get to a sustainable position. What we know now is that OneCare Vermont is on the cutting edge by virtue of its selection to participate in the federal government's next iteration of the ACO strategy.
    We also know, however, that the way the new system is structured over the next few months will be critical to Vermont's effort to get to the goals on the horizon. It is a very gnarly problem, however, and we won't be able to get through the swamp unless we can solve it.
    Finding a path through the swamp will be the subject of the next column.

Cost Containment: The Rubber is Hitting the Road

 by Hamilton E. Davis

   The four-and-one-half-year saga called single payer health care reform in Vermont has galvanized dozens of individual issues, large and small. There was the early failure in the launch of the federally-financed health insurance Exchange, still not fully overcome. That was balanced by the success of the Green Mountain Care Board in reducing the rate of cost increases in the hospital system. But then came the devastating collapse last December of Governor Peter Shumlin’s effort to shift the private insurance piece of health care financing to a state tax.
   For many Vermonters, health care reform died with the Governor’s capitulation to what he saw as insurmountable financial reality: there was no way to shift the roughly two and a half billion dollars of private financing onto the state tax rolls in one jump. There’s no question that Shumlin’s decision dealt a powerful blow to health care reform. There is no more “single payer” reform in Vermont. But there is reform, and very important reform. And it is now cresting in a way that is putting Vermont at the forefront of the effort to remake American medicine.
   Before going into that, it is important to understand that there were always two main aspects to reform. One was the shift in the financing of care. Now, roughly half the cost of care is paid by federal and state governments in the form of Medicare and Medicaid.  The other half is paid for by insurance premiums and out-of pocket contributions by individuals. The original Shumlin plan was to shift the second half to the state tax base. There were good reasons to try for that. The current system is rife with unfairness and inefficiency; and in theory it was certainly possible. While that move was deemed impossible for both political and financial reasons, there is still support for it on the left. “Medicare for all" still resonates in some quarters.
   Irrespective of such sentiment, however, it was always true that the more important aspect of reform has been cost containment in the delivery system. In 1966, when the federal government stepped into financing for the old and the poor, Americans spent 6.6 percent of what they earned on health care. That figure is now approaching 20 percent; in Vermont it is 20 percent. Failure to rein in that inflation rate in would destroy any reform effort, single payer or anything else.
   The bedrock question, therefore, is how to contain costs, and not just damp them down for a year or two or three, but set them on a permanent track at a level no higher than the ability of society to pay the bill. That means cutting the inflation rate of the last 40 years by more than half. The goal amounts to around 3.5 percent.
   A strong consensus in the health policy community, and the plan envisioned by the Shumlin planners, called for getting to sustainability by shifting from fee-for-service reimbursement to some sort of block payments to a group of providers to take care of a group of patients. The buzzword for that is capitation. The ability to do that depends, in turn, on shifting the culture of the delivery system from competition to cooperation. The buzzword for that is integration; some call it consolidation.
   Figuring out how to do that is where we are right now in Vermont. By right now, I mean in the next few weeks. The specifics of the decisions to be made were sketched recently by Morgan True of VTDigger.org. The following is my attempt to provide some context for them and to assess some of the problems involved.
   There are two players on the field. The first is the Green Mountain Care Board; the second is called OneCare, a coalition of hospitals gathered together in a new kind of entity called an Accountable Care Organization whose structure is laid out in the federal law known as Obamacare. The ACO issue is complex and we’ll go into that more later, but it may help to look at the drawing below to get the lay of the land.

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   The top of the sketch shows the sources of the money available to pay for health care in Vermont. The left bucket is Medicare, the one to the right is Medicaid, the next is private insurance, paid for by employers or individuals, and the fourth is payments from individuals. There is sort of wild-card bucket representing the Exchange, which involves both money from government and individuals. In essence, however, the Exchange is basically an expansion of Medicaid and can therefore put aside for the time being.
   The money from all the buckets goes to pay doctors and hospitals for delivering health care to everyone in Vermont. The sketch shows that as a sort of funnel.  Sitting in control of the funnel is the Green Mountain Care Board, whose core responsibility is to decide how much Vermonters can afford to pay for health care. The Board was formed by the Legislature in Act 48 to perform that role.
   The state reform law also sets forth the two levers it expects the Board to use in getting job done. The first lever is regulation. The Board now sets hospital budgets; it also regulates the rates that private insurers can charge individuals and employers. It also has the power to set the rates that insurance companies can pay for individual episodes of care, although it has not exercised that power so far.
    No government entity in the United States has more power than the Green Mountain Care Board to manage the problem of health care costs. Which doesn’t mean that getting there will be easy, far from it.
    The first problem the board faces is that decades of experience in many states has shown that regulation alone has never been adequate to control costs. Hence the second lever provided by the Legislature: a mandate to restructure the delivery system moving away from fee-for-service, and forcing the medical community to take responsibility for both the cost and quality of care across the whole state.
   That mandate, however, generates a very difficult conundrum for the Board. A system of 14 hospitals and thousands of doctors spending somewhere north of three billion dollars every year is hideously complex. How can the Board manage such a thing?
  Despite what anybody might say, the reality is that the Board can’t possibly do that. It would need to build out a rate setting system that would take years. And even then they have to face the fact that rate setting hasn’t worked well in this country. Most important, there are so many complex issues to be managed every day that no board can really do it.
    Which is the rationale for an ACO, made up of providers and run by providers. If you want to know how many MRI machines you need for Rutland County, you better ask the people at Rutland Hospital. If you want to know how many mohs surgeons we need in Vermont, you better not count on a civilian board to tell you. They couldn’t do it, even assuming they know what a mohs surgeon is, which many of them won’t.
   The ACO theory, in short, is an integral part of the original Shumlin plan, but getting there is highly problematic. The theory is clear enough, but stresses inside the medical community—between big hospitals and small, and between primary care doctors and specialists—might make it impossible to form a working ACO, at least in the short term.  In that case, the Green Mountain Care Board would have to use its regulatory powers to do the best it could.
   If, however, the disparate elements of the system are able to form themselves into a fully functioning ACO then the Board could direct the necessary money to the ACO, and that organization could distribute the money in a way it considered rational. Most important of all, the ACO could take “risk”. That means that it could contract with, say, a big employer to take care of its employees for a single price. If the ACO could get the job done for less than the contracted amount, it would keep the difference; if not, it would have to absorb the overage itself.
   So, what is happening now?
   There are three ACOs in the state, but only one is fully functional—OneCare. OneCare was formed by the University of Vermont medical system and Dartmouth-Hitchcock Medical Center and originally included all 13 smaller hospitals in the state, as well as some primary care doctors working together in several Federally Qualified Health Centers.
  A second ACO is comprised of the FQHCs and a third includes some stand- alone, independent physicians in the state, most of whom are primary care doctors. I believe the two smaller ACOs are basically place-holders built to protect the interests of the members. One indicator of that is that all three have signed a “Memorandum of Understanding” to the effect that Vermont needs only one ACO.
   The MOU is more memorandum than understanding in that it doesn’t actually commit anyone to anything.
   For the last several months, the various players have been talking about what the governance of a single ACO would look like. The central issue is the fear of the small hospitals and some of the primary care doctors that UVM and Dartmouth would dominate the coalition and force them to make changes they don’t want to make.
   In any event, the federal government has provided a powerful incentive for the various parties to come together in a fully elaborated ACO. The incentive came in the form of an invitation to enter a new type of ACO aimed at moving the state more rapidly to integration. Only about 25 of these so called “Next Generation” invitations have been offered and Vermont must decide in the next several days whether to accept.
   It is virtually certain OneCare will accept the offer, the only question being whether they will try to get ready to do so by Jan. 1 of 2016, or wait a year, which they would be allowed to do. So, the negotiations will continue. We’ll follow the developments on this front over the next several weeks.
   Meanwhile, the Green Mountain Care Board is engaged in its own dance with the federal government.  Recalling the first diagram in this post, the only gap in its ability to regulate the money going into the system is the Medicare bucket, the first one on the left. So the board has asked the federal government for a waiver allowing Vermont to blend the flow of Medicare money into overall flow, so that it would be possible to integrate the system and allow an ACO to enter into risk contracts. The Board calls this an “All Payer Model.”
   The Board is now waiting to hear whether Vermont will get the Medicare waiver. There is a very strong likelihood that it will, because the same agency that opted to invite Vermont into the Next Generation ACO program is the one that has to decide on the Medicare waiver. Al Gobeille, the chair of the Green Mountain Care Board, told Morgan True that he expects the issue to be resolved by the end of September.   
   In short, the structural pieces necessary to build a sustainable cost containment system are now in place, or very nearly so.
   The question then is whether Vermont, given all the tools it needs, can actually build the health care system of the future.

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 N.B. A mohs surgeon specializes in removing skin cancers, layer-by-layer. Vermont has one.

Heading Deeper into the Health Reform Jungle

by Hamilton E. Davis

   When Governor Peter Shumlin launched his single payer health care reform just over four years ago—it now seems like a lifetime—no one could have predicted the wild ride it would be for Vermonters and their health care system. By the end of the 2011 legislative session, the Shumlin team had produced a superb plan for reform and had gotten near-unanimous support for it from the legislature. The governor followed that up with a strong performance dealing with the aftermath of Hurricane Irene. Sunshine prevailed in the Green Mountain State.
   The reform project was comprised of two main thrusts: the first and most important was getting costs in the health care system under control; the second was shifting the financing of health care away from insurance premiums and on to a tax basis. A little less than half of the system cost was already there, in the form of Medicare for the elderly and Medicaid for low-income people. Achieving these reforms would require shifting the ethos of the delivery system from competition between providers to cooperation.
   The financing side of the project began to go off the rails in 2013, when the administration failed to get the federally financed health insurance Exchange off the ground. And when Governor Shumlin abandoned the financing aspect altogether last December, many Vermonters assumed that reform itself was dead.
    It isn’t. The cost containment elements of the plan are continuing apace, and in fact, are about to move to a new and potentially more decisive stage. Cost containment is the central responsibility of the Green Mountain Care Board, which took on the cost task in 2012, under the terms of the health care reform bill passed by the Legislature in 2011. The primary tool available to the Board is the power to regulate hospital budgets. The Board is now considering the budgets submissions for Fiscal Year 2016, which begins on Oct. 1 of this year.  
  The budgets submitted for FY 2016 total $2.3 billion, an increase of 3.6 percent over the current year’s spending. That amounts to an increase of about $80 million, dead on the Board’s target, which was gratifying to Al Gobeille, the Board chair. Gobeille particularly welcomed the fact that the increase passed along to non-government financed consumers would come to 4.3 percent, the lowest level in at least 15 years. The increase to consumers is higher than the overall budget totals because state and federal governments pay less than their full share of the costs; in the health care biz this is called “the cost shift.”

                                                        Are Costs Sustainable Yet?

   While the FY16 hospital budgets remain under reasonable control, it is not yet possible to say that costs in the system are sustainable. Sustainable basically means that the annual inflation rate will not exceed the growth in Vermont’s economy; in other words Vermonters could afford to pay the increased cost.
   The GMCB target is about 3.5 percent, but the actual cost increase per year is roughly a full percentage point above that, somewhere between four and five percent. Much of that is the cost shift; the rest could lie in areas that the Board doesn’t regulate, such as independent physicians. And that is just the money. The Board also has to confront the legislative mandates to ensure both that the care delivered is of high quality and that Vermonters have reliable access to it.
   So, the Board is moving toward the final phase of the Shumlin cost containment plan. The plan calls for a series of critical, but difficult shifts in both the culture and the operations of the delivery system as it now functions in Vermont. A central provision on the cost containment side is to shift the payment of doctors and hospitals from fee-for-service, which is a powerful incentive for overuse, to some sort of per capita system, where doctors and hospitals deliver the services needed for groups of patients. The point of that shift is to enable doctors and hospitals to take risk for their financial performance.
   If a group of providers agrees to provide necessary health services to a group of residents for a specific price and they overspend the target, they would have to make up at least some of the overage themselves. If they came in under the target, they could keep at least some of the difference. This type of risk is not contemplated for the budgets now under consideration, but it could be in Fiscal Year 2017. 
   In order to manage the enhanced level of regulation of the Vermont system, the Board is now preparing to seek an “all payer waiver” from the federal government. All payer is a bit misleading: what the Board needs is to have the federal government make Medicare payments to Vermont providers using criteria set by the board that would be applied to other payers in the state; specifically payments for Medicaid recipients, which is already controlled by the state, and payments by private insurance carriers.
   The waiver would fill in the most important gap in the Board’s powers to manage the costs in the system. The Board now has the power to set hospital budgets, which encompasses the majority of doctors; and it has the power to set the rates charged by private insurance carriers such as Vermont Blue Cross and MVP, a New York- based carrier.  The Board also has the power under state law to set reimbursement rates for doctors and hospitals, but it has not yet used it. The legislature voted in its most recent session, however, to authorize the Board to hire three new employees to work on rate setting.
   Rate setting would be a much heavier level of regulation than the setting of hospital budgets. Take a community hospital, say, Porter in Middlebury. The current regulatory regime calls for the Board to authorize an overall amount of money for a year. That budget would pay for all the services provided by the hospital. But the hospital provides a wide variety of services, some of which the Board could decide shouldn’t be done at all, or should be cheaper than what the hospital charges payers. Rate setting would allow the board to go inside the operations of the hospital by telling the hospital what it could charge for each service.
   For example, in an earlier post of mine, most small hospitals in Vermont perform surgical replacement of hips and knees—known as DRG 470. The small community hospitals get paid more than $30,000 for that service, compared to less than half that paid to big hospitals, like the UVM system or Dartmouth-Hitchcock. The GMC Board could use its rating-setting powers to remove that imbalance.
   The Board is now developing the model it would use if it receives the all-payer waiver from the federal government. That work should be completed within the next couple of weeks; a decision by the feds should be forthcoming by early September.
   If all of this seems impossibly abstract and bureaucratic, there is still more coming.
   The Green Mountain Care Board represents the power of the state; it functions as the voice of the people about what they need from the health care system and what the Vermonters can afford to pay for it. But once the care is delivered and the money is available, there remains the question about how the money is distributed among providers. The Board could take on that task itself. But there is an alternative.
   The federal law called Obamacare contemplates that the management of units within the delivery system could be carried out by Accountable Care Organizations (ACOs) which are groupings of providers that transcend the current boundaries between hospital service areas as well as doctors offices For example, the University of Vermont Medical System, the Dartmouth Hitchcock system and most of the community hospitals in Vermont have formed an ACO called “OneCare.” There are smaller ACOs that encompass some independent physicians as well as Federally Qualified Health Centers (FAHCs).
   So, a huge question is: Should the money be directed by the Board to individual hospitals and doctors, or should the money go to one or more ACOs, so that they could decide how distribute the money.
   The ACOs comprise the first and most important step in the attempt to shift from competition among providers to cooperation. In my entry to the understatement-of-the-year contest, I would offer: It ain’t easy.
   On the surface, it would appear that the ACO idea should be very popular with providers. Each is a private entity controlled entirely by providers. Wouldn’t it be better for them if providers decide how to utilize the financial and medical assets in the system, instead of those decisions being made by an arm of state government?                
   Well, in theory, perhaps. But the ACO movement has revealed the tensions that the reform era has galvanized within the delivery system. There are strains between primary care doctors and specialists; there are strains between big hospitals and small ones; there are strains between providers and insurance carriers; and there are strains between all of these and regulators as well as the state and federal governments.
   Those strains are becoming increasingly visible. OneCare is by far the largest ACO in the state. Until recently it included all the hospitals in the state along with Dartmouth Hitchcock. In the last few weeks, however, three community hospitals have dropped out—Springfield Hospital, Gifford Hospital in Randolph, and Northeastern Vermont Medical Center in St. Johnsbury. Beyond that, in order to be able to offer a fully elaborated network for all necessary services, OneCare needs a full complement of primary care providers. And so far, they are coming up short.
   The main reason is that a critical block of primary care doctors are working in FQHCs, and they seem so far to want to stay there, rather than joining OneCare. The reason for that is not far to seek: Whereas primary care clinics were dying for years for lack of adequate financing, those clinics now are flourishing because of enhanced funding from the federal government.
   That is important, because OneCare applied in May to get a federal designation as a “Next Generation” ACO, and its ability to do so will suffer from its relative paucity of primary care physicians. The federal government expects to name just 20 or so ACOs to the advanced status and increased benefits that flow from it. A key element for the feds is that the establishment of cohorts of patients, as over against separate individuals, is based on “attributed lives” and in ACO land they are attributed based on their choice of primary care providers.
   Establishing systems of care for large groups of patients is a key precursor for moving away from fee-for-service medicine to so called capitated reimbursement; that step is considered by the health policy community to be essential to getting health care costs on a sustainable track. But the shift in the role of primary care in the system represents a cultural upheaval in American medicine, which has been dominated since World War II by big hospitals and specialist physicians. Hence the stress…
   Which doesn’t mean that OneCare won’t get selected. Perhaps it will. But it is something of a long shot, given the primary care problem, along with the loss of unanimous involvement by the state’s hospitals.
   Even if they don’t, however, OneCare will continue to operate. For one thing, it will have under its purview, at least technically, a huge percentage of the roughly $2.4 billion hospital budget. There are dozens of nasty little questions woven into these issues.
   If you are exceptionally committed to grasping this issue, you need to understand the overarching conundrum: What will be the relationship between OneCare, with or without a Next Gen designation, and the Green Mountain Care Board, with or without an All payer waiver.  
    As of mid-August, no one in either Vermont or the federal government can draw a map of that landscape. Yet, they have to figure it out somehow in the next couple of months. So, enjoy the rest of summer.
   The planners and deep thinkers in the Green Mountain Care Board, OneCare, the federal government health care bureaucracy, and all the stakeholders in the health care community won’t be enjoying it that much. They will be too busy trying to design the delivery system of the future.

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Tea Leaves Speak: Scott Is In

by Hamilton E. Davis

   Republican Lt. Gov. Phil Scott has sent out fund raising letters to 20,000 Vermont residents, indicating that he is prepared to run for Governor in 2016. Of course, he doesn’t say he has actually decided to run; he’ll see what the results are from the request and make his decision in the fall, he says. But the real decision has been made: you don’t ask 20,000 people to give you money unless you are prepared to spend it.
   To date, Scott has been wrestling with such questions as whether he is prepared to change his life style, increasing his political metabolism by orders of magnitude; and whether he wants to shift his involvement with his construction company. It’s fair to assume that his decision to go into fund raising mode demonstrates that he has resolved those questions.
   If the fund raising goes badly, then Scott could abandon his quest for the governor’s chair. There is no reason to expect that, however. Scott in recent years has been the most popular candidate the Vermont Republicans have to offer. And the party has been on something of a roll lately, as evidenced by gains in legislative seats in 2014 as well as the near upset of Governor Shumlin by an unusually weak and inept Republican, Scott Milne. Now that Shumlin has announced his decision not to run in 2016, Scott is likely to start out with a solid margin over the two most likely Democratic candidates, House Speaker Shap Smith and Matt Dunne, a strong contender for the 2010 Democratic gubernatorial nomination, which was won by Peter Shumlin.
   The Democratic contender that might have led Scott to back off was Congressman Peter Welch. The sheer weight of Welch’s long experience and his obvious capability almost certainly would have cleared much of the field: Democratic hopefuls like Dunne and Smith would have conceded the nomination; and any Republican would have faced a huge hill to climb in a state as blue as Vermont in a Presidential year. 
   Welch’s decision to seek reelection to his Congressional seat opened a clear path to the Fifth Floor of the Pavilion building for Phil Scott. His fund raising letter is a powerful signal that he intends to make a run for it. 
   An interesting area for speculation in the light of the Scott move will be the reaction of the conservative wing of the GOP. Scott has long been too middle-of-the road for activists like Darcie Johnston and Mark Snelling. They would much prefer a more conservative choice, like former State Sen. Randy Brock or Dan Feliciano, a Chittenden County businessman. But Brock got humiliated by Shumlin in the 2012 contest, and Feliciano garnered just over four percent of the vote 2014 as a Libertarian.
   Assuming Scott goes, the conservatives will have to choose between trying to get someone like Brock to run against Scott in a Republican primary, or support Scott and hope to persuade him to move to the right on issues like health care reform. In the wake of the 2014 contest, Darcie Johnston wrote a comment on A Vermont Journal to the effect that she could support Scott under the right circumstances. But that comment was made before Shumlin took himself out of contention. And as readers of the tea leaves know, things can change.
   A wild card in the political landscape could be Bruce Lisman, the retired financial services executive from Shelburne. Lisman has said publicly that he is thinking about running, but he hasn’t indicated where he would slot himself politically. He is widely considered to be a Republican, but he has said he is not certain what party banner he would choose. He could, of course, run as an independent, but he would clearly be setting himself up to be a spoiler, drawing votes mainly from Scott rather than the Democrat. He’ll have to come down somewhere by fall or give up the idea of a campaign.
   For now, however, the key player in the political sandbox is Phil Scott. So saith the tea leaves, which continue to steep.

Shumlin Gets First Touchdown in 2 Years

by Hamilton E. Davis

   The cancer that has eaten away the vitality of Governor Peter Shumlin’s health care reform effort has finally been driven into remission. Vermont Health Connect, the federally financed insurance Exchange, now has a working computer system to manage the thousands of Vermonters who rely on it to guarantee their health care.
   Flanked by more than a dozen of the staffers and others who have been working on the problem for the last year, Shumlin announced at a Monday press conference that the Exchange can now enter “changes of circumstances” for policy holders electronically. Since the Exchange went live in late 2013, that work has been done manually.
   The manual system was so unwieldy that that tens of thousands of accounts fell into error in one way or another, and the whole Obamacare system appeared on the verge of collapsing completely. Why it got into that fix is set out in the previous blog entry. So the governor and Lawrence Miller, his lead administrator for health care reform, set a June 1 deadline to attain “change of circumstances” capability, and an Oct. 1 deadline for the capability to automatically re-enroll customers.
   They said at the time that if Optum, their consultant, couldn’t meet those tests they would begin planning to shift from a Vermont-based system either to the federal computer platform, or to one developed by Connecticut. Those assurances may have been needed to manage the political environment, but in fact they were spurious: there is nowhere near enough time shift to another platform for the 2016 enrollment period, so failure was not an option.
   When Shumlin, Miller and the others were laying out the issue, a palpably skeptical press corps probed to see whether what they were hearing was real, or whether it was just more blather from Shumlin. Could policy holders who get married or change their addresses get that information entered into the system immediately? Well, maybe not immediately, but reasonably soon. How long will it take to eliminate the backlog of such changes? By fall.
   There are all sorts of technical issues involved, and there almost certainly will be glitches along the way, but it became clear even to the skeptics that the administration has taken a huge step forward. Think of it as a huge pile of dirt that has been piling up and has to be cleared away. For more than a year, a pitifully weak guy has been working at it with a teaspoon. As of today, it will be several powerful guys with steel shovels. The pile won’t be gone over night, but it’s on its way.
   It would be hard to overstate how important that step is. The failure of the Exchange rollout has tainted the whole health care reform effort, even though the Exchange was not really part of the Vermont reform initiative. If the Shumlinites can’t manage an Exchange serving 40,000 or so Vermonters, the argument ran, how can they manage care for the whole state?
   The Republicans particularly have had a wonderful time with this theme for the last two years, and that fact has showed up in the polls about Shumlin’s performance in office, and particularly in last fall’s election, which was catastrophic for the governor and his party.
   A friend who likes football metaphors has commented that Shumlin has been trying to get to the Super Bowl, and yet he hasn’t scored a touchdown for two years. The announcement Monday wasn’t the Super Bowl, but it was a touchdown. The first since the original launch of his health reform, and his management of the aftermath of Hurricane Irene in 2011.
   It will be interesting to see what he can make of it.

The Scary Deadlines

By Hamilton E. Davis

   There has been so much bad news about Vermont Health Connect that good news might generate a shock wave all of its own. Yet, there is a real possibility, finally, that the huge mess at the federally-financed insurance Exchange may be resolving.
   The next milestone will occur on June 1, when the computers at the Exchange are supposed to be able to handle “change of circumstances”, which occur if an eligible person has a child, gets divorced, or undergoes a change in income. In such a case, the federal subsidy may go up or down or go away. A change now can only be handed manually, which means in many cases that it doesn’t happen at all.
   The second test will come on Oct. 1, when the Exchange’s computers have to be able to automatically renew old policies and enroll new customers. The enrollment window for the policy year 2016 will open Nov. 1, and that almost certainly can’t be handed manually either. Moreover, the change of circumstances is a separate stream of program tasks, so that one can’t presume being able to handle change of circumstances improves the chances for succeeding with open enrollment.
   So, the news may continue to be bad, and failure to get the system running properly by October would be catastrophic. The reason is that there isn’t time to develop a Plan B for the open enrollment period beginning Nov. 1. The alternatives that have been discussed so far—moving to the federal Exchange computer platform, or buying the Connecticut system, which works—couldn’t be accomplished until the 2017 cycle.
   What that adds up to is that failure is not an option. Which is not very comforting, given that so far, failure is all we’ve had.
  Nevertheless, my sense just from talking to several of the people involved, is that things look better than they have before. Lawrence Miller, Governor Shumlin’s health reform chief, says he feels good about how the system is progressing. “We’re on track so far,” he says. Some of the veteran navigators—people who help enroll in the Exchange—sound more optimistic than they have in the past.
   Glitches could arise in the next few weeks, but several interim tests have been passed so far and there is no obvious reason the system now under construction can’t work.
   How can that be true, given how much has gone wrong so far?
   The problems that plagued the Exchange since its inception seem pretty obvious from this time and vantage point. The task of setting up the Exchange was originally assigned to the Department of Vermont Health Access (DVHA), which is a unit of the Agency of Human Services. The first planning grant came to the state at the tail end of the Douglas administration, about 2010.
   The Exchange was supposed to go live in Oct. 1 of 2013, but it became clear by the spring of that year that the project was irretrievably deep in the weeds, where it has remained for the last two years.
   The underlying problem, in my view, was twofold: first, the consultant retained to do the work was completely incompetent to do so; and second, the AHS management team had no idea how to handle such a situation. It took Governor Peter Shumlin a year too long to move on his management problem, but he did so finally in early 2014, when he turned the problem over to Lawrence Miller, then his Secretary of Commerce. Miller, a former business executive and one of the few Shumlinites with straight-face operations experience, began looking into the situation in the winter of 2014 and moved over to the Exchange problem permanently in June.
   So Miller has been in place for just under a year. By midsummer of 2014, he had dumped CGI, the Canadian consultant that had made a mess of the situation to that point, and shortly thereafter turned the work over to a new consultant, Optum, a national firm. Evidence abounded that CGI was incapable of doing the work—there is no such evidence that Optum is unable to perform. Optum has had just nine months or so to work, but they have hit all their interim targets so far, according to Miller.
    In addition, Miller turned the problem of actually directing the Exchange project to a new leader, Bob Skowronski, a retired insurance executive with long experience in insurance management systems. It is too early to be certain that Skowronski can get done what earlier bureaucrats couldn’t.
   But there are at least some straws in the wind. For example, on Feb. 5 of this year, a couple of bureaucrats from DVHA came before Green Mountain Care Board to discuss the insurance products that will be offered by the Exchange in the coming year. Their presentation was so inept that the Board seethed with outrage, a fact noted by Robin Lunge, Miller’s colleague on the health reform team, who was at the meeting.
   One week later, Lunge sent Skowronski in to accomplish the same task, and he did so with such facility that the Board gushed all over him. A straw in the wind.
   Getting the Exchange going is now under the direction of Skowronski, reporting to Miller, along with State Health Commissioner Harry Chen, and AHS Secretary Hal Cohen. There is no inherent reason that they can’t succeed.
   That leaves the question of what Governor Shumlin intended in his recent press conference when he said that if the DVHA failed to meet the June 1 deadline for getting change of circumstances operational he would shift to a new plan, like moving the Exchange to the federal platform, which is favored by some members of the Legislature.
   What was striking about that press conference was that when Lawrence Miller went into the legislature to talk about it the next day, he seemed to be saying that deciding now to do something like either joining the federal system, or buying the Connecticut system would be a bad idea…
   So, where are we on this question? If it is now June 2 and the system does not allow changes of circumstances, what happens on June 3? Do we fire Optum? If going to the federal platform or buying Connecticut’s system can’t be accomplished this year, how do we handle open enrollment beginning Nov. 1?
   According to Miller, contingency planning for failure to meet the deadline is simply something the state has to do. It does not, he emphasized, mean that Optum stops work. In other words, June 1 is not a drop-dead deadline, merely one that could trigger contingency planning. If  Optum and Skowronski get change of circumstances working by, say, June 12, then Vermont will use that capability and then shift its focus its focus to the open enrollment period.
   Oct. 1 will be the second deadline, but that also could slide at least a little bit. If open enrollment, or automatic renewal of current policies, is ready by, say, Oct. 6, then the whole Vermont system will be good to go.
   Nevertheless, Miller says that he would have to initiate contingency planning if the June 1 deadline isn’t met. The administration arrived at that conclusion, he said, by simply backing up from the Nov. 1 open enrollment date. Contingency planning would go on in parallel with the Optum work on the Vermont system.
   How would that work? Miller says he would have to put together a planning team and start figuring it out. Neither Miller nor anyone else, however, has any clear idea how to proceed if Optum fails. So there will be lots of crossed fingers over the next three weeks.

UVM's Tower is a Major Cost Issue

by Hamilton E. Davis

   In the broad scheme of things, the Green Mountain Care Board’s denial of the University of Vermont Medical Center’s request to add to the planning costs for its proposed new bed tower should just be a slight bump in the road. The requested increase amounted to $1.5 million for a project that is expected to cost $187 million—less than one percent.
   In its formal decision, the Board said the reason for the denial was that the new money was actually not for planning per se, but for the early construction phase. The Board has not granted approval for the project itself; the Board will hold hearings on that question May 18 and 19.
   The hospital, in other words, simply assumed that it will be granted permission to build, and getting started a few months earlier than planned could save a little money. The Board didn’t buy that.
   “The board must maintain the distinction between conceptual and project expenditures to ensure that the authorization of planning expenditures does not thwart the cost containment purpose at the heart of the CON (certificate of need) review,” the decision read.
   The Board’s rationale is clear enough, and the brief delay could amount to not very much. It also seems clear, however, that if final project approval is pretty much assured, starting early makes sense. So, the Board decision could presage a much tougher attitude on the project itself, based on its sheer cost and volume.
   The reason for the new bed tower is to modernize the inpatient facilities of the hospital. Inpatient rooms now are presumed to be more efficient if they are single rooms, not doubles. They also have to be bigger in order to accommodate bulky modern equipment and to ease the flow of medical personnel in and out.
   In the health care industry, no one disputes the new room paradigm. The problem in the UVM case could lie in the cost to the system of doing the work, According to documents provided by UVM to the Board, the hospital’s long-term debt, now at $495 million, would rise to $605 million, a 22 percent increase, if the project goes forward as planned.
   Moreover, the hospital’s margin of revenues over expenses—the “profit” or “bottom line” in a non-profit entity—would increase to $100 million or so per year out into the future. The hospital’s margin has risen sharply in recent years. During the first decade of the millennium, Vermont hospitals got state approval for margins of roughly two percent of their net income.  
   In Fiscal Year 2013, UVM got Board approval to take its margin to around four percent. UVM’s financial planning documents envision that edging up to the five percent range. The margin is not directly connected to the bed tower project, but it will have a significant effect on the rates that get charged to patients.
    Given that the UVM health care system delivers nearly half the care in the state, the bed tower could become a focal point in the Board’s three-plus-year effort to get costs into the sustainable range. The Board has retained a consultant, Deloitte Transactions and Business Analytics, to assess the tower financing. The consultant’s report will be available prior to the late May hearings.
   In addition to the financial issues, the Board will have to cope with the practical political effect of the addition of the tower. The 13 community hospitals in the state are facing tough regulatory pressures on their costs, and there could be considerable resentment there over the financial weight of the tower.
   No knowledgeable person is likely to challenge the bed tower project on its medical merits, but the cost pressures inside the whole system are growing daily. And the outcome of UVM’s project could be a manifestation of just how tough those pressures will get in the next two to three years.

Democrats are Losing the Framing Battle

When the going gets weird, the weird turn pro

                                                  Hunter S. Thompson, the father of Gonzo journalism

by Hamilton E. Davis

   The year of weird politics in Vermont continues apace. We are a supposedly blue state, but the right wing of the Republican Party has seized control of the political narrative, as evidenced by the course of the legislative session. The Democrats are still in control, but they lost strength last November, and they are probably on a track to lose more seats and possibly the governorship in 2016.  The ultimate weirdness is that the left is acquiescing in the trend.
   The backstory to this thesis is a decades-long debate over state financing. The essence of that debate centers on the role of state government-- what should government be doing, and how much should it spend doing it? The key to the Republican rise is that they have focused public attention on the latter. “We have a spending problem, not a revenue problem,” they say.
   The current session of the legislature has been dominated by that question, driven by the lash of state budget gap of as much as $130 million, a gap projected to run for the next few years, at least. The budget question is highly complex, but it is being seen against the Republican narrative that Vermont is highly unfriendly toward business, that its tax rates are too high, and that Democratic profligacy is hurting Vermont economically.
   I believe the weight of the evidence shows that that is wrong; at a minimum, it is highly debatable. The weight of the evidence also shows, however, that the Democrats and the Progressives are losing the debate. In the current legislative session, the House finally cobbled together a budget that looks like the dog’s breakfast. And that only after bizarre attempts to find places to cut, ranging from throwing out whole pieces of government, like the tourism office, to cutting seats out of the legislature itself.
   The governing assumption, however, was that spending is just too high, and its corollary, that the source of the problem is a wasteful attitude on the part of Democrats and the left. No prominent Democrat, from the governor on down, argued with that proposition. Shumlin in fact endorsed it.
   That performance is politically devastating. For one thing, the evidence seems to show that Vermont has a revenue problem, not a spending problem. We are spending less of our output on state government, not more. If all the Democrats and Progressives have to offer is a promise to cut spending, then the voters can be forgiven for thinking it would be better to turn the whole matter over to the Republicans, who really enjoy cutting government spending and probably would be better at it. 
  The threads of the argument could be seen in the flow of news and comment over the last couple of weeks.
   The most extreme example of this phenomenon was a report by ALEC (the American Legislative Exchange Council) that Vermont ranks 49th out of 50 states in its economic outlook. This proposition was greeted with great glee by the right in Vermont.
   “For 2015, the top states with the best economic outlook are Utah, North Dakota, Indiana, North Carolina and Arizona,” according to a Vermont group called Watchdog. “States making a race to the bottom include New York, Vermont, Minnesota, Connecticut and New Jersey.”
  Wow, interesting…Wait a minute, Connecticut, really?
  Take a look at the report and you’ll get a sense of what Alice would have found in political Wonderland. ALEC makes two calculations, economic outlook and economic performance. On economic outlook, where Vermont is next to last; states like California, Oregon, and Connecticut rank far behind such economic engines as Alabama, Mississippi, South Carolina and West Virginia. Washington state (think Microsoft) trails places like Nebraska and Kansas.  
   Vermont does somewhat better on economic performance; it ranks 38, which is actually just behind California at 37. If we could cut our minimum wage and cut taxes some we could sail right by California. Take that, Silicon Valley: here comes Chittenden County. Nothing either Vermont or California could do, however, would get themselves up there with powerhouses like Oklahoma (4) or Wyoming (5)…
   This stuff is obviously bizarre—ALEC is notorious for it. But the narrative that the right wing in Vermont has been able to establish renders way more effective than it should be.
   A second thread in a more credible vein came in the form of a column by Art Woolf on the growth of personal income in Vermont. Woolf is a an economics professor at UVM, and his work is mostly couched in neutral academic terms; but a close reading over time shows him to be a consistent supporter of the Republican themes.
   Woolf’s column was based on data from the U.S. Bureau of Economic Analysis showing that Vermont’s per capita income increased faster than the national average; we rank 18th in the country. “Vermont was a low income state in the past, but that characterization is no longer true,” Woolf concluded.
   A second piece of intelligence from the federal data is that Vermont’s per capita income continues to rank below the New England Average. It is also true, however, as Woolf notes, that most of the New England states, as well as New York, are some of the richest in the country. “Connecticut has the nation’s highest personal income per capita, 35 percent above the U.S. average,” Woolf writes. “Massachusetts ranks second and New Hampshire ranks eighth.”
   Vermont ranks 18th; the only New England state that comes in below the national average is Maine. But Woolf concludes by reaffirming the Republican thesis: the “bad news” in the report is that “compared to most of our neighboring states we still have a ways to go to catch up, and there is not much indication we are headed that way.”
   So, what should we think about this? Well, it isn’t a palpable absurdity like the ALEC stuff, but Woolf’s conclusions are pretty argumentative. In the first place, the graph he includes shows that Vermont is catching up to its neighbors, at least since around 2000, which is to say, for the last 15 years. Scaling off the graph, Vermont has moved over that period from about 77 percent of the New England average to about 84 percent.
   It is true that we hit that point in the mid-1970s, before dropping back between them in 2000. But at a minimum, there is nothing in these data to indicate that Vermont is some sort of economic cripple. And contrary to the little Republican snark that Woolf drops into his last sentence, there is some indication that we are catching up to our neighbors: over the last decade, the Vermont percentage has risen from about 80 percent of the regional average to about 84 percent, a pretty respectable slope.
   Beyond that, the implicit proposition that Vermont is doing something wrong because it isn’t as wealthy as places like Massachusetts and Connecticut is pretty silly. Vermont is a tiny, mostly rural state; its largest city has 40,000 people. And it isn’t at all clear that Vermonters want to turn their state into Massachusetts, or Connecticut, or New Hampshire, for that matter.
   The third thread on the Republican theme that Vermont is an economic cripple came from the Joint Fiscal Office, which issued a report showing that the total state tax burden has been going down, not up, over the last 10 years. According to the analysis of the report by Jack Hoffman of the Public Assets Institute, the expenditure of state funds before the 2008 recession represented 11.5 percent of the state’s domestic product—the total output of our economy. It will be down to 10.9 percent for fiscal 2016.
   “That may not look like much of a difference,” Hoffman wrote. “But if state spending equaled the same percentage of our economy in fiscal 2016 as it did in fiscal 2007, the budget would be higher by nearly $200 million.” Given that the budget gap is well below that, it is perfectly reasonable to suggest the underlying problem facing state government is a drop in revenue, rather than a spending blowout. The JFO study also showed that Vermont was tied with Massachusetts for the fastest growing economy since the bottom of the recession in 2009. (Art Woolf missed that one).
   None of that is to suggest that solving the budget conundrum will be easy. It won’t. But the job needs to be carried out in an environment where the facts really matter. We won’t get any help there from either ALEC or Art Woolf.
   But so far, we’re not getting any help from Democrats, either. No governor in Vermont has really made the case for what state government ought to since the 1980s. Howard Dean, a Democrat who took office in 1991, did a few liberal things, but he was every bit as fiscally conservative a governor as any who has served in the modern era. The Republican Jim Douglas, who served three terms in the oughts, took his marching orders from what he used to refer to as the “Burlington Bishops,” by which he meant the entrepreneurial elite of Chittenden County.
   They demanded two things: no new taxes and clear away as much of the environmental constraints on development as possible. Douglas did his very best. And Governor Peter Shumlin is cast in basically the same mold. His image is liberal, based on his going-in support for closing Vermont Yankee and establishing a single payer health care system.
   But Yankee essentially went away on its own, and Shumlin abandoned the difficult aspects of health care reform. And his underlying posture is not that the state needs new revenue, but that its fundamental problem is that it must cut spending. Dean, Douglas, Shumlin: by instinct, Republicans all.
   That’s just weird. Will we ever again see a political leader who will make the case for what state government needs to do, not simply what it can cut?

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Doctor Deb's New Prescription

by Hamilton E. Davis

      One of the most important principles underpinning health care reform in Vermont is the proposition that health care financing should be separated from employment. If you lose your job, or if your employer doesn’t pay for health insurance, that shouldn’t leave you without access to health care.
   That principle was one of the victims of Governor Peter Shumlin’s decision last December to scrap the financing portion of his single payer reform initiative. The cost of shifting to public financing of the entire system was estimated at north of $2 billion, and Shumlin and his staff decided it couldn’t be done.
   At the beginning of the legislative session in January, Shumlin built back a small piece of financing into his budget proposal, but that plan involved only getting more money for Medicaid as a way to reduce the cost of health care somewhat. It did nothing to move health care financing away from its employment base. One of the things the Shumlin planners never did was to take seriously the idea of moving toward public financing in a series of steps, rather than one big leap.
   The idea of doing nothing structural on the finance side was unacceptable, however, to some of the advocates of reform. One of those was Dr. Deb Richter, a Montpelier-based physician, who has been one of the leading proponents of single payer health care reform for two decades. When Shumlin signed the health care bill in 2011, he pointed specifically to Richter as the leading player in the reform effort.
   A few weeks ago, Richter proposed a new approach to the financing side of health care reform—a single payer system for primary care in Vermont. Richter called for the state to finance just primary care for now at a cost of roughly $160 million, to be paid for by a payroll tax, and possibly other revenue sources. If the whole cost were to be borne by the payroll tax, the rate would be about 1.2 percent.
    Those numbers are not insignificant, but they are far below the figures bruited during the first four years of reform for a fully elaborated single payer system.  The payroll tax estimates during that period ranged from 8 percent to 14 percent; that combined with the $2 billion plus total tab presented an insuperable barrier to action in the near term.
   Richter’s plan has been sponsored in the House by Rep. Leigh Dakin, a Democrat from Chester, and in the Senate by Sen. Jeanette White, a Windham County Democrat; the measure has several co-sponsors in both chambers. The House bill has sponsors from Republican, Democratic and Progressive members.
   Richter envisions the plan would work like this:
   Every Vermonter would be eligible for primary medical care, paid for by the state. There would be no premiums, co-pays, or deductibles. Primary care doctors as well as nurse practitioners would be paid a lump sum per month for each resident in their panels. Richter used a figure of $500 per person per year, although she says the figure could almost certainly be lower. Vermonters enrolled in Medicare would get most of their costs paid by the federal program, but Vermont would pick up any co-pays or deductibles.
  People could go to any primary care provider they chose, which Richter considers to be an incentive to high quality. “Patients can vote with their feet, if they think they are not getting what they need from a particular doctor,” she says.
   Richter argues that public financing for primary care would confer a host of benefits to residents of the state as well as to the health care system itself. Primary care providers treat all the health care needs of a person, in contrast to specialists, who focus on a specific disease, like cancer, or a specific organ, like the liver or the eyes.
   By making sure that residents can get quick access to primary care when they need it, Richter says, we can reduce the amount of specialty care needed in emergency rooms or when the medical problem has become more serious. She also points out that it is cheap: primary care uses just five percent of the total per capita cost for a given patient.
   Moreover, financing primary care would provide a necessary boost to primary care providers, who usually get paid less, often far less, than specialists. The entire primary care network, in Vermont and in the country for that matter, is badly stressed by the increasing demands of technology and administration, she says.
   “The leading reason is that they’re not given enough time with patients,” Richter says. “Primary care, above all, takes time with patients—not so much with computers, algorithms, questionaires…the actual time spent with patients has been dangerously eroded.”
   It is important to note that the Richter proposal would advance a second critical principle of health care reform, the notion that in order to establish a financially sustainable delivery system we have to move away from fee-for-service medicine, which is a powerful incentive for overuse. The Richter scheme would represent the first movement toward lump sum per person payment for health in Vermont, or anywhere else in the country, for that matter.
   Richter and her sponsors do not expect any final action on the primary care legislation in the current session. The whole idea needs considerable study, and to that end the health care bill now working its way through the House contains an appropriation of up to $200,000 for the development work. The Shumlin administration has not endorsed Richter’s proposal, but they are giving it serious consideration.
   Shumlin himself has told Richter he is open to the idea, and his senior staff, including Lawrence Miller and Robin Lunge, are beginning to vet the numbers. There is no shortage of difficult issues to resolve, especially in getting such a scheme to mesh with federal requirements. But when asked whether the administration is taking the Richter proposal seriously, Miller replied:
   “Absolutely.”

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A Matter of Style

by Hamilton E. Davis

  Vermonters are now four months past the last election, but the political waters are just as roiled and murky as they were after last November’s voting. And because politics ultimately beget policy, both the administration of Peter Shumlin and the Legislature are still adrift, with nearly half the 2015 session gone.
   As we pointed out recently the health care committees have just four working days left to crossover, the point at which bills passed by one body are supposed to go the other chamber. The money committees have just eight working days to get bills to the other side. There is no clear direction yet on such vital questions as how to handle a very tough budget deficit, or how to deal with the financing side of health care reform.
   The key factor in the current situation has been the inability of Governor Peter Shumlin to reestablish his leadership standing in the statehouse. Shumlin’s political aura was shattered by last November’s election, which he won by the narrowest of margins, and by his decision to abandon his signature single-payer health care  initiative.
   Hard evidence of the damage was the poll taken in mid February that Shumlin’s favorability rating has dropped into negative territory for the first time in his four-year tenure. The poll by the Castleton Polling Institute showed that 41 percent of Vermonters approve of the governor’s performance, while 47 disapprove, a striking drop from his position when he destroyed his political opponent in the 2012 election. An important piece of collateral damage was the fact 67 percent of the public approve of Shumlin’s dropping single payer; in the early days of the project, the public favored the single payer project.
   There is no question that Shumlin got the message the voters sent in November. It is also clear that he has not yet been able to repair the damage. He has tried, but it hasn’t worked—at least, not yet. A major step was his proposal when he began his term in January to levy a 0.7 percent payroll tax to increase Medicaid payments, and thereby reduce insurance premiums for commercial payers. A minor piece of that might pass, but there appears to be little support for the whole thing, which itself is a tiny fraction of his original healthy reform project.
   As for the budget, Shumlin has proposed some cuts, but his recommendations seem to carry no special weight with lawmakers. They are casting all over the place to find things to cut: both Republicans and Democrats have held private gatherings just to brainstorm pieces of government they can just throw overboard. A list of the suggestions is now listed on the Joint Fiscal Office’s website.
   Various state commissions, dump ‘em. Close high cost state parks. Cut pay for state workers. Cut travel time for judges. Cut the operating budget at the Exchange. Lay off some game wardens. Eliminate funding for the humanities, the Vermont Symphony Orchestra, the Council on the Arts, the state historical society. Kill the Travel and Tourism department…cut House seats from 150 to 120. Cut House seats?
   A common element is that the whole mess doesn’t amount to that much money; it’s just nibbling around the edges. The broader issue is that there is no overarching, coherent plan to solve the problem.
   Old timers at the statehouse recall a similar set of circumstances in 1991 when the late Governor Richard Snelling, a Republican, was seen one day striding past the cafeteria to Speaker Ralph Wright’s office. Wright, a Democrat, and Snelling had jousted for years.
   Snelling proposed to Wright that they both support a major tax increase as a way to eliminate a deficit, with the tax to sunset once state finances had recovered. The deal also involved cuts in state government. The agreement was striking because it was so unexpected, because it was so bipartisan, and because it was a perfect example of political power brought to bear in a way that benefited the whole state.
   There is no such nexus of power now.
   Part of the problem may be a matter of Shumlin’s political style, a subject of interest for several years. As the leader of the Senate, Shumlin was always a major player in the statehouse. He did not quite dominate it, but he was never less than one of a handful of key players. A master of the political maneuver.
   A consistent question was whether Shumlin could make that style work as the state’s chief executive, or whether he would, or could, change it. He managed very well in his first two years, but his style has fallen short in his second two. You can see the two impulses—a serious assessment of state realities, offset by the same kind of shallow, “happy talk” that marked his Senate tenure—in one of his new efforts to rebuild his political standing.
   In January he began issuing so-called Op Ed articles every week. Written by Scott Coriell, his press secretary,  in close collaboration with the governor, they aim to provide a regular overview of where state government is going.
   A few weeks ago, his weekly article contained a somber, realistic look at where we are now. The state budgets have been built on the assumption that spending could sustainably rise by five percent per year, he wrote. The assumption was based on projections by professional economists.
   They were wrong, however, Shumlin said. The reality is that budget growth cannot much exceed three percent. Now, he continued, we have to rebuild state spending to comport with the new, much lower ceiling. Sounded like he was channeling Dick Snelling and Ralph Wright.
   But there hasn’t been any compelling follow up. What we have is just a collection of proposed nibbles around the edges. And his most recent article was pure happy talk. The Legislature is doing just a magnificent job under his leadership, he wrote.     They are going to clean up Lake Champlain (they’re not); solve the property tax/education financing conundrum (unlikely); solve the cost shift problem in health care financing (no chance); build the economy and generate more jobs (possible, but that will be driven by national conditions).  
   One way or another, a budget will get built and adopted, although it won’t be pretty. But the Shumlin leadership style remains problematic, and his political standing uncertain. He is working much harder, but he still seems like a lame duck. No one knows whether he will run again in 2016, let alone whether he could defeat the putative Republican candidate,  Lt. Gov.Phil Scott.
   And when it comes to issues, running –and winning in 2016—happy talk won’t be enough. Cleaning up the lake, shifting to a three percent inflation track in state spending, recasting the education system, and especially, reforming the health care delivery system, will be a hard grind for five years or more.
   The ridiculous happy talk simply has to go away, because no one who doesn’t have his head under water believes it. I ran into a member of the House Health Committee the other day who was contrasting the feelings on the committee about the credibility of Governor Shumlin and Al Gobeille, the chair of the Green Mountain Care Board. If the governor and Gobeille presented differing positions on health care reform to the committee, the vote would be 11 to 0 in favor of Gobeille, the member said. 
   That pretty much sums up the governor’s leadership problem. He has to rebuild his governing style or continue to drift into irrelevance. I think he could do that. Shumlin still has the implicit advantage of a weak Republican opposition, whose current success rests pretty much entirely on opposition to him.
   Does he want to? I don’t have a clue.
   N.B. The question resonates most clearly on the toughest challenge Shumlin faces—health care reform. I’ll look at that next.