by Hamilton E. Davis
The Green Mountain Care Board last week unanimously denied a request by Northwestern Medical Center for a 14.9-percent rate increase. The decision on the St. Albans facility’s plea was based on the Board’s sharp criticism of both the hospital’s strategic decisions, and the way that the hospital’s case for the request seemed to change over time. The hospital’s response was equally sharp: its spokesperson said that the decision would inflict significant damage to the hospital’s financial status and to its services. He described the Board action as “not responsible.”
The Board decision increased the heavy financial pressures weighing on Northwestern (NMC), which has lost money the last three years. It also illuminated a range of issues that affected all the community hospitals in Vermont; those issues will come to a head over the next six months as the Vermont delivery system confronts the financial damage from the Covid virus as well as the challenges of the final stages of the health care reform project in the state.
According to hospital officials, Northwestern was on track to lose $9.6 million this fiscal year, which ends Sept. 30. The proposed increase would have generated $3.8 million in the remainder of the year, reducing the loss to $5.8 million. The hospital attributed the loss to two major factors. The first was a drop in revenue stemming from the installation of a new electronic medical record system: learning the new system meant that doctors saw fewer patients each day. The second was a roughly four-fold increase in the money needed to pay outside nurses to fill in gaps in the staff.
It is important to note that the appeal for a higher rate was made before the advent of the Covid crisis, which flared in March. Like all the hospitals, Northwestern incurred large new losses in the wake of Covid, but those cannot be quantified because they are being offset by a direct flow of financial aid to all the hospitals by the federal government.
The Board’s analysis assumed that the Covid upheaval will be a one-time event while issues generated by the rate increase will drive the hospital’s business model going forward. And that analysis amounted to a powerful indictment of the hospital’s case as well as its performance.
The Case Against the Increase
The case against the appeal as well as the hospital’s performance was led by two of the five Board members—Jessica Holmes and Maureen Usifer. Over the course of several hours of public discussion, beginning last December, Holmes, Usifer and the other Board members made the following arguments:
An overarching complaint by the Board was that members didn’t have a clear picture of what was going on at the hospital. In a series of presentations, both oral and written, beginning late last year the hospital officials gave vague or contradictory statements about such critical issues as patient volumes, and the financial implications of the hospital’s business model. Also in general terms, all the Board members commented that it makes no sense to approve a huge rate increase to Northwestern now when the 2021 budgets will be due in July; and the Board can consider the Northwestern issue as part of the systemic problems at all the hospitals.
A major problem was that the hospital was never clear whether the expenses arising from the electronic medical record were permanent or transitory. If they were transitory, then the money would come back as the staff got more familiar with the system. In that case, it would make no sense to bake those costs into the fee structure going forward. A one-time expense requires a one-time fix, like taking money from the hospital’s cash pool.
On the last issue, the Board members noted that Northwestern has the second highest level of cash on hand among Vermont hospitals. The median level of that standard financial metric is just under 120 days, whereas Northwestern’s is north of 180 days. The hospital could get the cash equivalent to the rate increase for the current fiscal year by using 15 days of its cash on hand, the Board said, adding that the hospital would still be well over the Vermont median in cash on hand.
A related issue on the loss of volume was whether the hospital had lost doctors. In the hospital’s written submission in April, officials said they had lost 10 doctors, a quarter of their staff. If that many doctors were gone, then the loss of volume would be permanent and the whole business model would have to be recast. The problem was that in the last hearing, hospital officials said that they didn’t think they had lost that many, possibly just a few. The hospital never came up with an actual number. The loss, they said, was the result of doctors who would normally see, say, 20 patients a day could see only 18 or 19 because they were struggling with the new record system.
The amount of the increase was huge, bigger than anything the Board had since its inception in 2012. And It wasn’t just the 14.9 percent amendment to the budget—the original budget passed last fall authorized a rate increase of 5.9 percent. Total is 20.8 percent for the fiscal year. The full year cost for the 14.9 ask would have been $9 million; the five month cost would have been $3.7 million. Moreover, the entire tranche of new money would be paid by private sector payers, mainly Vermont Blue Cross—state and federal governments, which pay half the system cost, would pay nothing extra. This feature would exacerbate one of the Board’s perennial concerns: whatever the merits or demerits of any particular line item in the budget, the overall cost of health care was already too expensive for Vermonters to afford.
One of the most troubling implications of the rate increase was that it would be used to support a fully elaborated Intensive Care Unit (ICU). The hospital now has a few beds in what it calls an ICU, but it said in its appeal that its nursing staff is not currently trained to the level necessary in a unit whose purpose is to manage the most dangerously ill patients. The hospital said it would fill that gap by hiring ICU-trained traveling nurses, reinforced by a telemedicine tie to the ICU at Dartmouth-Hitchcock. The hospital said that it wasn’t denigrating its “tertiary partner,” the University of Vermont’s Medical Center Hospital; but that appeared to be the implication. UVM says that it can accommodate any St. Albans patients that need an ICU. In any event, the Board pointedly questioned why Northwestern would assume the very high costs of an ICU when there was a fully-credentialed unit 30 miles down the Interstate in Burlington.
The Board also wanted to know whether, in beefing up the capability of the ICU, the hospital had calculated whether it would lose or make money on the unit. The buzzword for that element in accounting land is “contribution to margin.” In English-speaking land that means that if you take the cost of building and running the service, and divide by the number of patients you expect, will you get a unit cost that makes real-world sense. The hospital said that it could calculate contribution to margin, but it didn’t actually do so.
In its line of inquiry, the Board tied the issue of contribution to margin to the reform project, which in its final stages is facing the question of the long-term structure of the small hospital system. In its budget orders last fall, the Board directed several small hospitals to develop “sustainability” plans to address that issue. In a March letter to the Board, the hospital association mounted a broad-scale attack on the whole Board agenda:
“It is not currently possible for the majority of our hospitals to accurately calculate a contribution margin on a particular service line. Many factors and assumptions are involved, which differ from hospital to hospital. For example, expenses can be differently allocated across service lines.” The Board said it was interesting and encouraging that NMC could do just that.
The Board expressed strong disappointment that the hospital’s cost cutting strategy eliminated elements of its population health program, like the community exercise program Rise Vermont that had been a high priority in its list of community priorities, while allocating new money to a sleep program that hadn’t been mentioned on the priority list at all.
The Board’s questioning reflected obvious impatience at what it saw as a tendency on the part of the hospital to change its narrative and response to questions through the year, beginning with back-and-forths with the Board late last year, and in February and April of this year. A particular sore point, in addition to the loss of doctors, was the issue of the hospital dues to OneCare Vermont. The hospital said some months ago that the roughly one million dollars annual dues was one of the causes of its financial difficulties. The later communications, however, dropped the OneCare issues in favor of the loss of volume in the medical practices and the cost of travelers.
The Hospital Responds
The following response was provided by Jonathan Billings, vice president for community relations who worked for the hospital for more than 30 years. I have tried to line up his responses with specific points the Green Mountain Care Board set forth to explain its rejection of the hospital’s request for a 14.9 percent mid-year increase in the rates it charges commercial payers. In no particular order:
In the overall sense, Billings said the hospital was very disappointed in the Board’s response to its plea for help. Northwestern was one of the earliest and most enthusiastic proponents of the reform project in Vermont, he said. The hospital was the only facility other than the UVM network to join in the capitated risk contracts that are the engine for reform. Billings said the hospital understands that costs need to be constrained, but that the Board needs to decide what services are needed where; and then ensure that those services can be adequately funded. For example, he noted, the Board approved the for-profit surgical center in Colchester that drained off a significant volume of NMC surgeries, which contributed to its losses. He added that NMC will continue to seek a rate increase as part of its sustainability plans in the upcoming hearings for the FY2021 budgets.
On the issue of the workforce at Northwestern Medical Center (NMC). Billings said that the maximum capacity of the hospital is 43 beds, but that the number of staffed beds runs around 30 to 35, depending on patient flow. That figure is bigger than the eight facilities in the state that are rated Critical Access Hospitals, which are limited to 25, but it still ranks well below not just the UVM Medical Center Hospital in Burlington, but also Rutland and Bennington and Central Vermont in Berlin. It is a very small hospital.
As to whether NMC changed its story on whether its problems with patient volume came from a loss of staff, Billings said that any given number would be a “snapshot in time”, that doctors come and go, and the effect on volume changes depending on whether the doctors are new and just building practices, or are locum tenens (hired docs to fill a vacancy on a temporary basis) as opposed to well established physicians. The result, however, is clear—reduced revenues.
On the addition of a sleep disorder service, Billings said that was really not a new service—it was a natural extension of the pulmonology service at the hospital that had been temporarily suspended owing to a doctor retirement. It made sense, he said, because the new pulmonologist was experienced in sleep issues, and there is a long waiting period for sleep disorder treatment at UVM in Burlington.
On the Board’s suggestion that the hospital use its large block of cash on hand to make up the $3 million shortfall for the next five months, and resubmit its request in the 2021 budget, which is due on July 1, Billings said NMC will resubmit its request, but that it needs to be prudent about its use of cash to fund losses. The reason, Billings said, was that hospital officials are worried about the trajectory of the number of days of cash on hand, which is an important metric when considering the solvency of a business. A few years ago, Northwestern had 350 days cash on hand, and, given its recent skein of losses, the projection for the current year is around 150 days. If that drops another 15 days, Billings said, the hospital would be getting too close to the 100 days level, which would trigger its bond covenants and eventually threaten its existence.
On the issue of whether NMC should operate an ICU when there is a fully manned ICU 30 minutes down the Interstate in Burlington, Billings said the hospital believes that its approach to the ICU issue is measured and reasonable. The ICU has four beds. In response to the Board suggestion that they might not need an ICU at all, Billings said that the physicians stratify care according to what they can safely do, and they send worse off patients to Burlington or even Boston in extreme cases. Small numbers of critically-ill patients make it difficult to retain ICU trained nurses, forcing a reliance on travelers, who are more expensive. The telemedicine tie to Dartmouth will help address that shortcoming.
On the issue of the financial viability of high-intensity service lines, Billings said that his hospital has the cost accounting capacity to test those service lines, and that it does so all the time. A specific example is spine surgery performed by a single member of its orthopedic team for several years; for the past several years, Northwestern has been the only small hospital to carry out spine surgery with a single member of the staff. Billings said that NMC is careful to limit its physicians to things they can competently do. He added that the Green Mountain Care Board is going to weigh in on what service lines a hospital will offer, it will have to decide what it wants the entire small hospital network to look like going forward. If small hospitals aren’t allowed to do medically appropriate services that are financially beneficial, they won’t be able to survive, Billings said.