Analysis: Can This Man Figure Out How To Fund Single Payer?

Nov 26, 2013

When Gov. Peter Shumlin launched his single payer health initiative two years ago, he set up a three-part structure to deal with the various problems that have to be solved to get to his goal.

He set up the Green Mountain Care Board to deal with cost containment through regulation and restructuring of the health care delivery system. He assigned the launch of the federally financed insurance exchange to his human services Medicaid unit, and he kept the gnarliest issue, how to pay for the whole thing, inside the top echelon of his administration on the fifth floor of the Pavilion office building.

The Green Mountain Care Board went right to work and is on track. The Medicaid unit went right to work also, the botch of the exchange rollout notwithstanding. The issue of how to pay for single payer, however, has been something of an orphan for the first two years of the project.

That fact changed quietly a few months ago when Shumlin and Jeb Spaulding, his secretary of administration, brought a new player on board to look for a solution to the problem of how to pay for single payer. He is Michael Costa, a 35-year-old lawyer with extensive experience in both taxation and the political management of complex financial issues.

Who Is Michael Costa?

Costa will work in the five-unit pod of offices in the fifth floor devoted to the single payer project. His title is Deputy Director for Health Care Reform. That is something of a minor league title, but in fact his portfolio is quite broad. He has the governor’s mandate to work on the substance and messaging of the reform project across all the elements of the administration.

Costa came to Vermont in January of 2010 to be the director of the Blue Ribbon Tax Structure Commission, established in 2009 by the legislature and then-Gov. James Douglas. Costa essentially ran that group, drafting the working documents, carrying out and overseeing the research and coordinating the work of the various players. He also acted as spokesman for the commission at various government hearings.

He got the commission job on the strength of his experience first as a legislative aide to a Massachusetts state senator, and then as the chief of staff for the supervisor of San Mateo County in California. In that post he managed a wide range of public policy issues and dealt with other legislative players, the public and the press.

Following his work on the commission, Costa went to work as special counsel to Mary Peterson, the Vermont tax commissioner. And in February of this year he was asked to set up a policy division in the commissioner’s office.

Costa first showed up on Shumlin’s health care radar when he accompanied Peterson to administration meetings dealing with the single payer project. He had no formal training as a health economist. But he had a decade of experience working with tax issues, and he seemed to be comfortable with the formidable complexities of health care financing. He also seemed to have a sure hand in dealing with the political forces surrounding the issue. In July, Shumlin made him deputy to Robin Lunge, who directs the project from the governor’s office.

The reason why Costa’s expertise is critical to the project’s success involves both the complex technical issues surrounding financing and the political environment in which the whole thing is operating. From the first days of the project, the problem of how to pay for single payer has been subject to powerful political considerations. It was the political environment that drove Shumlin’s management of the financing issue in his first two years.

Political Antecedents

The roots of the problem go back to the 2010 election, when Shumlin was not sure that he had beaten his opponent, Brian Dubie, until the early morning hours – the margin was just a few thousand votes. That razor-thin outcome guaranteed that Republicans would mount an aggressive effort to unseat Shumlin in 2012. And that in turn guaranteed that Shumlin would have to put off the cost issue until after the 2012 election. Which he did.

If there was any doubt about the political wisdom of that decision, it was dispelled in February of 2011, when Harvard Professor William Hsiao brought in his report on how to install a single payer system in Vermont.

Hsiao delivered his document to much fanfare in the well of the House chamber in late morning, surrounded by television cameras and legislators, hangers-on and ebullient single payer supporters.

A key element, if not the key element, was a new payroll tax – roughly 10 percent on  employers, and 4 percent on individuals – that would need to be added to the already existing spending in the system in order to get everybody in the state covered adequately.

By early afternoon, employers all over the state had run those numbers for their own companies and found that the Hsiao plan would cost them considerably more than they were paying for health insurance at the time, which Shumlin had assured them would not happen.

By late that afternoon, therefore, the Hsiao plan was dead, and the system designers knew they were going to start at square one. Administration Secretary Jeb Spaulding got around to admitting that to a reporter a year or so later.

So while all the other elements of the team were moving ahead, Spaulding delayed doing what he knew he had to do, which was to retain a consultant to work on the problem of financing. He had to be sure that a consultant wouldn’t drop a financial stink bomb into the Shumlin reelection campaign in the fall of 2012.

The Financing Dilemma

Eventually, however, the administration went ahead and retained a consulting group at the University of Massachusetts to solve the problem. However, just before January 2013, when the UMass group was due to release its report, the administration told them to scrub the actual financial recommendations and just discuss some possibilities.

Meanwhile, the governor himself was looking for any way out of the financing dilemma. One of his first ploys was to say that he was turning it over to the Speaker of the House Shap Smith and the President Pro Tem of the Senate, John Campbell. The sheer implausibility of that idea led to its quick death. The governor’s next move was to announce the formation of a group of senior private financial players in the state to give him a solution. The odds of that happening were nearly as long as the odds against getting an answer from legislative leaders, although there have been some briefings for the group.  

The reason for all this waffling around was that finding a politically palatable way to finance a single payer system is poisonously difficult. At this point, at least, nobody has figured it out. And in some ways, there’s no reason yet why they should.

Nobody has a clear idea of what the cost will be out in 2017, or the level of inflation we’re likely to see once the system is reorganized and the payment system is shifted from fee-for-service to some sort of group pricing by doctors and hospitals.

Nevertheless, the one thing that the Vermont Legislature, and any other legislature for that matter, is sure to fix on in any big reform project like this is what it is going to cost. Shumlin’s people have to confront that now, whether they are ready to or not.

Debating The Numbers

In practical terms, that means that Costa will have to come up with some array of “options” or “possible approaches” by early spring of the coming year – say, February or March. And the governor intends to come up with a real number and a specific methodology to raise the money by early in 2015.

Neither Costa nor anyone else in the administration is ready to start talking about the substance of that yet. There are some elements, however, that are clear.

One is that the starting number will be $1.6 billion, although that figure has lately been challenged as too low by consultants hired by a number of business and health care groups. The $1.6 billion estimate comes from the truncated UMass study. (It was the specific tax or fee mechanism that the consultants scrubbed at the instruction of the administration.) That number describes the shortfall state government would face once all the other revenue streams are taken into account –Medicaid funds, for example, along with things like the Obamacare subsidies for small business.

A second point that is clear is that if there is to be a payroll tax, the Hsiao proposal that it be set at the combined 14 percent payroll tax is politically impossible. There is no way to tell what would be possible, if anything, but nothing over a mid to high single digit figure has any chance. Even a more modest figure doesn’t get at the most difficult barriers.

One is the so-called ERISA issue – the federal requirement that the state can’t interfere with a company that self-insures its employees. Companies such as IBM and General Electric fall in that category, and even if Vermont could get a waiver of that law, no governor is likely to force a company like IBM to do what it doesn’t want to do.

Signing On Big Businesses

In the current situation, for example, Shumlin has already assured IBM executives that he won’t interfere with their health insurance system, which covers its employees across the U.S.  The governor also has said he wants to put a financing plan in place that is so enticing to employers that they’ll sign up on their own.

But the central dilemma facing the Shumlin designers isn’t limited to big players like IBM.  There are roughly 16,500 small (1-50 employees) companies in Vermont and only about 7,500 now provide health insurance. That leaves 9,000 such companies that now pay nothing for health insurance, and many of them are very small margin operations.

If they are faced with an employer tax of any significant magnitude, then it could threaten the survival of many of them. They now pay a little bit in effect for health insurance as part of the same mechanism that finances unemployment insurance, but that revenue stream wouldn’t get Shumlin anywhere near the $1.6 billion he needs.

So the problem remains, and neither the program designers nor the Legislature is anywhere near a solution.

Still, for the first time since Shumlin launched his project in early 2011, there is now a serious effort underway to attack the problem of financing. The silliness of dumping it on legislative leaders or finding some external collection of financial experts is basically gone.

Shumlin now has a serious player working on it. And that man, Michael Costa, is right down the hall on the fifth floor.

If you’re a supporter of single payer health care reform, wish him luck.

(Veteran journalist Hamilton Davis is a longtime observer of Vermont health care and politics.)