by Hamilton E. Davis
Back in the years when Bernie Sanders was mayor of Burlington, command central of Vermont state government was the committee room of House Appropriations, a cramped, ornate aerie on the third floor of the state capitol. The centerpiece was a long rectangular oak table with 12 chairs, one for the witness of the hour, the other 11 for the committee members. Every dime spent by Vermont government had to receive its blessing here.
When the custodians of one or another portion of the state budget would pull their chair up to the table, they might notice a small piece of tape affixed to the edge. “Fasten your seat belt,” it read. Having absorbed that, they would raise their eyes to the opposite wall where there was another small piece of white tape. “What is it about No that you don’t understand,” it said. And at the end of the legislative session, the advocates and bureaucrats who knew they could not possibly live with the amount of money they had been allotted were invited in for one last appeal. The committee called it, “Whine Day.”
I’m not sure whether Bernie ever subjected himself to the rigors of the House appropriations process, but the enduring reality about government financing manifested there illustrates why his “Medicare for All” initiative is orders of magnitude more complex than he imagines. The reason: Neither federal nor state government can raise taxes fast enough to pay for the American health care system as it is now organized and financed. The only people who can keep up with costs that rise at multiples of the underlying rate of inflation in the economy are big employers. If IBM or John Deere get hit with a big increase in health insurance premiums they can build it into the price of computers or tractors very quickly. And they do. It has become a cliché that the biggest single cost of building a General Motors car is the cost of health care for its workers.
That does not mean that Medicare for All is impossible, only that it would require changing the way health care is paid for. That in turn means recasting its current corporate structure so as to shift the financial risk from the public to the doctors and hospitals themselves; and if you do both of those things you’ve uprooted the whole culture of the delivery system. Carrying out such an enterprise is hideously difficult—but it can be done, and one of the supreme ironies of the whole Bernie thing is that it is being done in Bernie’s home state of Vermont, and nowhere else. It is doubly ironic that Bernie has never evinced any interest whatsoever in the Vermont reform project.
The essence of the Vermont reform project is that it aims first to solve the problem illustrated by the House Appropriations process—getting costs under control. Only then can you think about shifting the 50 percent private share of the whole cost onto government financing. Vermont’s reform law, passed in 2011, established as a first step a regulatory body called the Green Mountain Care Board, with two mandates. The first was to put a cap on the annual increase in the costs of the state’s 14 hospitals; the second was to oversee a shift in hospital reimbursement from fee-for-service to block financing for blocks of patients.
The latter step means midwifing fixed price contracts between various payers, like Medicaid, Medicare or Blue Cross and groups of providers—doctors and hospitals—that can deliver a full range of necessary services to sizeable blocks of patients. The Vermont reform initiative has been quite successful in stage one, which amounted essentially to capping the cost of its 14-hospital system at an inflation rate of 3.5 percent per year. In fact, the final figures for Fiscal Year 2017 came in at just 1.7 percent over the previous year.
Keeping that sustainable rate, however, will require that the second stage—the fixed price contracts—also succeed, and accomplishing that goal will be far more difficult. Vermont has an agreement with the federal government to get 70 percent of its eligible population into risk contracts by 2022; the feds will require that 90 percent of Vermont’s Medicare recipients be enrolled.
Vermont’s current trajectory on the risk contracts is well short of that necessary to meet the 2022 deadline. The reasons for the slow pace amount to an augury of the kind of dynamic that could destroy a badly designed national Medicare for All program. By badly designed I mean a program that leaves fee-for-service reimbursement in place, and then loads that unworkable system with a huge new slug of demand.
A simple example, in approximate figures: the acute care delivery system in Vermont spends about $2.6 billion per year. That figure comprises the cost of doctors and hospitals; it does not include non-acute care like nursing home services, home care and social services associated with acute care.
Roughly half of the acute cost is now paid by government in the form of Medicare and Medicaid. It is important to note that government payments do not cover the actual cost of delivering the care. A rule of thumb is that Medicaid pays about half the real cost, while Medicare pays about 75 percent of the real cost. That means that the shortfall has to get picked up by private sector payments from insurance companies or large, self-insured employers. The shortfall, or “cost shift,” in Vermont in 2017 was $455,111,000, and we’re headed for a cool half billion dollars—the budgeted figure for the cost shift in 2018 is $486 million and in 2019 the number is $492 million.
That shows that some 20 percent of the total acute care cost has to be absorbed somehow. I’ve read the health care material in Bernie’s book, and some of the ocean of commentary from the health policy community, but I haven’t seen anything to indicate that people are yet focusing on the key metric, which is the allowable inflation rate and how that would impact the operations of the delivery system. They typically note that Medicare for All would have an impact on doctors and hospitals, but that’s just Homer Simpson commentary. The critical question is how to deal with the impact.
We have seen the political hit the idea took when former Governor Peter Shumlin tried to install a Vermont-level single payer—same concept—in 2014. Shumlin’s reform team worked on it for more than two years, and they concluded that there was no way the state could afford it. The payroll tax necessary to pay for it was too big a lift. That policy train wreck destroyed Shumlin’s political career.
And those numbers were just for the first year. The first year is always easiest in a political sense. The number will be big, but if you can generate enough political momentum then it gets passed, and everyone thinks, “Whew, it’s done.” The real problem, however, comes in the out years, when the big number you survived once grows, and grows and grows. And if the inflation rate exceeds the inflation rate in the general economy, you run into the iron realities of Appropriations Committees everywhere.
That conclusion isn’t just some theory. It is precisely what happened when Medicare and Medicaid fired up in 1966. By the early 1970s, the federal government, and all the state governments were running for cover, because the increased demand was generating inflation rates at three, four, five times the rate in the overall economy. The cover they found was to dump the unbearable part of the cost onto the private sector. With Medicare for All, there is no place to hide.
So, if that’s the case, why would anybody say that Medicare for All is possible?
The answer to that gets us to the second part of the Vermont project, the part that Bernie has never shown any interest in. Medicare for All would work if the health care delivery system costs could be well enough managed to keep the annual cost increases to the level of general inflation in the economy. In current terms, that would be something a little south of two percent.
Vermont’s regulatory apparatus is probably the most rigorous in the country. The Green Mountain Care Board has the power to approve hospital budgets, as well as to approve all major new capital expenditures by the hospitals. It also has the power to regulate the rates that Blue Cross and MVP, a New York-based carrier, can charge for policies sold on the federally sponsored Exchange. And as noted above, the rates so far are closer to sustainable than most.
It is also true, however, that the Vermont program is built on the proposition that just “regulation” will fail to deliver sustainable costs over time. The program, therefore, instructs the Green Mountain Care Board to foster, or oversee, recasting of the delivery system so as to shift reimbursement from fee-for-service to block financing, or capitation. The federal government clearly believes this is necessary—they are doing all they can to encourage a shift to”alternative payment models,” the clearest manifestation of which is fixed-price contracts between payers and groups of providers assembled into an Obamacare gizmo called an Accountable Care Organization (ACO). An ACO is just a baggy sort of company that allows a group of providers, say, a tertiary referral hospital, or two; several smaller community hospitals; and primary care doctors to deliver all the care needed for a big bunch of patients for a fixed price.
The fixed price attacks the engine of cost inflation, which is the total volume of care delivered by a system. All other regulatory schemes are based on unit costs, which can be fixed absolutely, but which are vulnerable to overuse. The payer can decide what it will pay for an MRI, but only the doctors can decide how many MRIs to order, a perquisite they exercise every day. With a fixed price contract, they can perform MRIs until the machines smoke, but they can’t make any more money thereby.
When considered in the light of the Bernie plan to install Medicare for All across the country, Vermont is closer to being in a position to manage that than any other state—by far. Consider: there are roughly 850 ACOs in the country. In 2016, when the feds were pushing the idea of rebuilt financing, they chose 20 ACOs to participate in what they called the ”Next Generation” project.
Of those 20, the only one driving directly at fixed price, capitated financing is Vermont. The implication of that datum is that an infinitesimally small piece of the national acute care system is anywhere near ready for full government financing. And anyone who thinks that moving the national system to a radically different financing structure in a short time is easy is living in a cave. Vermont has been working on it for eight years, and we aren’t there yet.
I have written about the issues involved in that quest for several years. But a highlight reel would include opposition from important elements of the press, the legislature and the primary care doctor community. Throw in a failure by Dartmouth-Hitchock to lead in eastern Vermont the way the University of Vermont has in the west, a reluctance by the Scott administration to lead, a diffident response by the business community, the inability of the small hospitals to cope with modern medicine, egregious foot dragging by Blue Cross, and the half-baked performance of the federal Medicare officials themselves in managing their end. Those are just the highlights…
The Vermont reformers working in the Green Mountain Care Board, OneCare Vermont, the Agency of Human Services, the Vermont hospital association, are pushing ahead steadily on all of these fronts, and they haven’t been stymied yet. At the same time, however, the movement is painfully slow. It is still not safe to shift the Vermont system to full government financing.
And the idea of trying to take the three trillion dollar U.S. system there without completely recasting that system so it could operate in an upside-down financial environment would be governmental insanity. No amount of Bernie ranting can change that reality.