VPR News
4:57 pm
Thu September 5, 2013

Analysis: Care Board Clout Reflected in Hospital Budgets

When someone writes the history of health care reform in Vermont, he or she would do well to look closely at the Green Mountain Care Board hearing last week on Fletcher Allen Health Care’s proposed fiscal 2014 budget.

There are 14 hospitals in Vermont and they and the doctors that work for them spend upwards of $2.1 billion a year to keep Vermonters healthy. Fletcher Allen accounts for a billion dollars or so of that amount, nearly half the system. No other hospital comes close to its size and influence.

So, Fletcher Allen is the key to health care reform in Vermont and its president, Dr. John Brumsted, has enthusiastically welcomed the responsibility for that mission. An important element of that task, not the only one clearly but probably the single most important, is getting costs under control. And so far, Fletcher Allen’s performance on that front has been problematical.

To see why that is and why the company’s about-face on its budget is a critical step forward for the whole reform process you have to look at the track of the cost containment effort over the last two years as well as over the last few months.

In March of this year, the GMC board set a spending cap increase of 3.0% for the 14-hospital system. The board also said that an individual hospital budget could increase by as much as 4.0%, if the overage was dedicated to paying for infrastructure to advance the cause of health care reform.

The board’s ability to enforce this cost constraint was especially important because of its experience in last year’s budget management process. Last year, the board set a target of 3.75%; it was the board’s maiden voyage since it was established by the legislature to get costs under control and to manage Governor Peter Shumlin’s single payer initiative.

It wasn’t a happy voyage: many of the hospitals blew right through the target, generating a system increase of 6.5%. One of the biggest single chunks of new spending in those budgets was a doubling of the Fletcher Allen operating margin or “profit.”, from $20 million to $41 million.

The Brumsted reversal marks a shift from the dynamic that has governed health care regulation in Vermont...for 40 years

Doctor Brumsted told the board that the hospital had to have the new money to satisfy the Wall Street money markets, which the hospital would have to tap for new programs and facilities that Fletcher Allen needs in the next several years. Without a margin of this size, Brumsted said, the company could not get the most favorable possible interest rates for these borrowings.

Favorable interest rates are particularly important now, since Fletcher Allen is planning to build a new in-patient bed tower that will cost at least $85 million, according to company’s planning documents, and probably quite a bit more.

In the months leading up to last year’s hearings, the board pressed to keep the increases under control, but in the end they approved every budget as submitted and in the process threatened to erode their own credibility. The $2.1 billion system was adding $142 million in new money, some three times the underlying rate of inflation in the U.S. economy.

This year, the voyage has been very significantly happier. When the hospitals submitted their budgets in July, the system-wide increase came in dead-on 3.0%. And that included all spending they needed for health care reform. The new money for 2014 came to just $62 million, less than half the previous increase.

There was a nagging problem, however. Of the 14 hospitals, just three were over their target limits. One was Grace Cottage, which is so small that it has no appreciable impact on state spending. The second was Northwest in St. Albans, a medium size community hospital. The third, however, was Fletcher Allen.

The effective cap for Fletcher Allen was 4.0 %, since the academic medical center is the focal point for the health care reform initiative. The hospital’s budget, however, came in at an increase of 4.8 %, roughly $8.5 million over the target.

When asked about whether the budget could be cut, Brumsted told me in late July that he had been through the budget with tweezers and that the only place that the budget could be cut would be spending for health care reform. Anything else would force Fletcher Allen to cut services, he said.

There wasn’t much public discussion about Fletcher Allen’s posture, but it did seem to strike a discordant note. The $8.5 million overage would be a big number for community hospitals, but for Fletcher Allen the amount was tiny, just over eight tenths of one percent. The budget contained at least $7.1 million for health care reform, most of that would finance OneCare, the joint venture between Dartmouth Hitchcock and Fletcher Allen to provide integrated care to Vermont’s Medicare population.

To say that nothing whatever could come out of the budget except the reform money seemed to suggest that Brumsted’s position was that the delivery of health care was the hospital’s responsibility and reform the responsibility of the GMC board. If the board ordered him to get his budget under the cap, Brumsted told me, then he would cut just the health care reform money.

When pressed, Brumsted said he believes health care reform is essential for Fletcher Allen’s own future and that he is committed to it, and emphatically rejected the suggestion that his budget didn’t reflect that. Still, it just didn’t seem politic when the other hospitals in the state had gone all out to keep costs down.

Then came the August 28 hearing on the Fletcher Allen budget, and Brumsted did a neck-snapping U-turn. He would not discuss the budget, he told the board, because Fletcher Allen was going to tear it up and submit a new one. The new one would cut out the $8.5 million so that the new total would meet the 4.0% cap.

And none of it, he said further, would come out of health care reform.

The reason they could do that, Brumsted said, was that data that was only recently available showed that the traffic of patients into the hospital was slowing, which means that Fletcher Allen would do less of things like elective surgery. The hospital would maintain its suggested rate increases, so that the savings would have to come by cutting the company’s operating margin from 4.0% to “something closer to three.”

So, what happened between late July and the late August hearing? Well, there are two somewhat different back stories.  Brumsted says that the decision to rebuild the budget was his decision based on the data that he got late. Observers around the board believe that Al Gobeille, the newly-installed chair of the board pressured Brumsted to abandon his insistence on taking the overage out of health care reform.

In a sense, however, it doesn’t really matter how it happened. The fact is that the new Fletcher Allen budget (due any day) will drop the system increase to 2.6%, which means that the new money to be spent in fiscal 2014 would be $54 million, not $62.

That inflation trajectory would be less than one percent above the underlying rate of inflation in the economy, which would be very close to a sustainable rate.

Moreover, the Brumsted reversal marks a shift from the dynamic that has governed health care regulation in Vermont and in fact in the U.S. for 40 years. That dynamic has been that hospitals and doctors tell regulators what they want and regulators give it to them. The evidence for this conclusion lies in the explosion of health care costs during that time.

It is also clear that Fletcher Allen is going to bear considerable pain in executing its new budget. It may be true its patient volumes are going to be down, but it is also true that Brumsted is for a year at least giving up something like a quarter of the operating margin that he said last year that Fletcher Allen had to have. (The margin would drop from $41 million to around $32-34 million.)

The only way that he can get the margin back to where it needs to be will be to cut actual expenses from his medical operations, and that will be very hard. In sum, the whole Fletcher Allen decision represents an unprecedented stand-down for a major hospital in the history of modern regulation in Vermont.

So whatever lead to the Fletcher Allen decision, the enduring fact is likely to be that hospital CEOs in the future will think long and hard, longer and harder than they have so far, before they flout the GMC’s targets.

Additional Health Care Analysis By Hamilton Davis:

Care Board Got Hospital Budgets It Needed (8/7/13)

Hospital Budget Increase Lowest In Modern Era (7/26/13)

Radar Wallack's Departure Won't Derail Health Reform (4/9/13)

Shumlin Has Much Left To Do On Health Care Agenda  (3/4/13)

Care Board Sets Hospital Budget Targets  (2/22/13)

Troubling Portents In Care Board Process  (2/18/13)

Board Sets 4% Inflation Rate For Hospital Budgets (2/8/13)

Care Board Considers Controlling Costs  (1/22/13)

Establishing The Health Care Exchange (2/23/13)