Analysis: Green Mountain Care Board Got Budget Performance It Needed From Vermont's 14 Hospitals

Aug 7, 2013

A series of developments in health care reform over the last couple of weeks has demonstrated how tangled this policy problem is and how knowledgeable people, including former Vermont Governor Howard Dean, can make a hash out of it. The public is the loser every time.

On July 25, the Green Mountain Care Board got its first look at the proposed budgets for Vermont’s 14 hospitals for the fiscal year beginning Oct. 1. The rate of increase over the current year’s figure was 3.0 percent, the lowest annual bump in the modern era.

In dollar terms, the hospitals asked for and got in the current year’s budget $141 million in new money compared to the 2012 spending. In the new budgets, they asked for just $62.8 million in new money, less than half of last year’s increase for a savings of just under $80 million. The base figure is just north of $2.1 billion, which pays for the 14 hospitals, plus the doctors they employ, which amount to some 60 to 70 percent of the practicing doctors in the state.

The Green Mountain Care Board was gratified by this development: the hospitals came in dead on the target they had been given of a 3.0 percent increase. Moreover, the board had been prepared to accept as much as a one percent additional increase to pay for infrastructure improvements that would support health care reform. They didn’t have to use that safety valve at all.  And this year’s review stood in sharp contrast to last year’s performance when the target was 3.75 percent and the budget came in at 6.5 percent.

So all that was good news, given that cost containment is the most important single element in health care reform. Yet it didn’t appear that way in some quarters. Some of the press coverage suggested that Vermonters wouldn’t really benefit much because the rates that hospitals charge for their services will go up by 6.2 percent, roughly double the total spending increase.

Rates are simply the prices that hospitals charge for each episode of care in what is called a “fee-for-service” system. Fixing a broken arm has one price, a cancer treatment another.Rates, or prices, are problematical in health care, which we’ll talk more about below.

A few days later, former Governor Howard Dean wrote an op-ed piece in the Wall Street Journal sharply criticizing what he said was Obamacare’s reliance on rate setting to control health care costs across the country, and he took a swipe at Vermont’s reform initiative in the process on the grounds that rate setting was what the Green Mountain Care board was using.

Rate setting, Dean wrote, “has a 40-year track record of failure. What happens in those schemes (which many states including my home state of Vermont have implemented with virtually no long-term effect on costs) is that patients and physicians get aggravated because bureaucrats in either the public or the private sector are making medical decisions without knowing the patients.”

Dean elaborated on that in a subsequent press interview in which he said that the whole Green Mountain Care Board structure was a bad idea that wouldn’t work. What is needed, he said, is a basic change in how health care is paid for, and much greater integration in the delivery system.

So, were the budget submissions good news—or not? Does the fact that the hospital rate increases as a percentage run at double the total spending increase mean that Vermont is just treading water on cost containment? Is Governor Dean’s claim that the Green Mountain Care Board is a bad idea because it relies on rate setting mean that health care reform cannot work in Vermont”

The reality is that in fact the news was good. And the answer to the questions raised over the last two weeks are all, No. But the reality of health care financing is such that you can’t follow this debate without getting into the issue of why health care is so fundamentally different from just about anything else we spend money on in our society.

The first thing that has to be understood is the relation between the total system spending increases and the rates charged by hospitals and doctors . This relationship is driven by the fact that federal and state governments don’t care what the prices are; they pay what they want to pay. That fact is critical because government buys roughly half the health care delivered in the country. Medicare and Medicaid account for some 43 percent of that and things like the Veterans hospitals and health care for federal employees make up the rest.