Analysis: Health Care Regulators Wrap Up Solid Year on Cost Control

Sep 25, 2013

The Green Mountain Care Board has tied up the loose ends on its second year of work, finalizing the budgets for the state’s 14 hospitals.

The increase in annual spending for the hospitals and the roughly three quarters of the state’s doctors who work for them was the lowest since formal oversight of the system began in the 1980s.

The final figure for fiscal 2014, which begins on Oct. 1, was $2.2 billion ($2,181,770,664), an increase of 2.7 percent.

By comparison, the underlying rate of inflation in the U.S. as measured by the Consumer Price Index was an annual rate of 1.6 percent from January to July of this year.

Most of the budget details have been reported from meetings of the GMC board

But in late August and earlier this month, but there were two interesting developments::

  1. The board ordered some of the hospitals to reduce their proposed rate increases.
  2. The board approved a new Fletcher Allen Health Care budget that included the addition of three physician practices to their organization.

                                                         Hospital Rate Increases

The decision on the rates arose out of the legislature’s action last spring increasing the Medicaid reimbursement rates to doctors and hospitals by three percent. 

The intended effect of the increase was to reduce the rates charged to private sector patients and purchasers of insurance, but some hospitals didn’t build it in because the legislation wasn’t final until late in the budget-building process. The board order to do so now cut the system rate increase from 5.47 percent to 5.14 percent.

The question of how the costs of the delivery system get translated into rates has been a second tier issue so far, mainly because containing costs is so important to reform process. It has considerable longer-term significance, however, because the rates are critical for the business community, whose political support for reform is so vital.

In any event, the rates are set for the coming year, although Al Gobeille, the board chairman, says that he and his colleagues will dig in more deeply to the rate issue in the months leading up to next year’s budget process.                                                          

                                                               Fletcher Allen Budget

The other issue resolved by the board was a final wrinkle in the Fletcher Allen budget saga. Fletcher Allen is by far the largest hospital in the Vermont system; it’s budget of just over $1 billion represents nearly half the total state spending on acute care. At the budget hearings in late August, the Burlington facility withdrew the budget it submitted in July and said it would resubmit a new budget in September.

The first budget called for a spending increase of 4.8 percent, exceeding the board’s target of 4.0 percent. Dr. John Brumsted, Fletcher Allen president, had said in July that if he was forced to cut the $8.5 million overage he would take all of it out of the health care reform items in the document.

At the hospital’s budget hearing in late August, however, Brumsted said the hospital would cut the money necessary to get to the board’s required level by cutting the hospital’s volume projections and operating margin, rather than the health care reform money, and that the hospital would adhere to the 4.0 percent target.

Brumsted brought in his revised figures on September 11. The new budget, which contained all the original money for health care reform, amounted to an increase of just under the 4.0 percent cap.

But he added a new element for the board’s consideration: the addition of three medical practice groups from the central Vermont area that wanted to move into the Fletcher Allen system. That could have been done several different ways, but the board told him to just factor them in now to the 2014 budget.

Some 70 percent of the doctors in Vermont work for hospitals, but the remainder do not. There are in effect two Vermont spending buckets, not one.

In strictly dollar terms, those practices would add $6.1 million to the Fletcher Allen budget, which would bring its increase to 4.4 percent, halfway between the original submission (4.8 percent) and the board’s announced target of 4.0 percent.

The transfer of physician practices, however, is a special case in the board’s budget regulation process. The reason is that most of the new money involved in the transfer is already being spent by Vermonters, but is not regulated.

Some 70 percent of the doctors in Vermont work for hospitals, but the remainder do not. There are in effect two Vermont spending buckets, not one. And the board decided last year to treat the transfer from one bucket to the other outside the normal budget process.

The physician group practice transfer issue played out in the Fletcher Allen case. The addition of the three practices added $6.1 million to the hospital’s budget, which increased it by 4.4 percent, which is still over the board’s 4.0 percent target.

According to the hospital’s budget documents, however, the three practices brought in a total of $4.5 million last year. The unregulated portion of the delivery system costs would therefore drop by that much, so that in overall cost to Vermonters that much of increase would be a wash.

Which leaves the remaining $1.6 million in “new money” to the system. But even that figure has its own wrinkles.

One comes from the fact that the cost of a physician practice normally increases when it moves from independent status into a hospital. The extra money can be accounted for by decreases in productivity—doctors may work fewer hours on a hospital salary, while the support staff often get higher salaries and more benefits.

On the other hand, there are some offsetting benefits to the state. One is that the new doctors’ services generate a provider tax when they are in the regulated system; another is that their services  qualify the state for larger reimbursements from the federal Medicare program.

In the Fletcher Allen case, these indirect benefits to the state amounts to about $847,000, leaving a “net” increase to the state’s health care costs of roughly $817,000, a very small amount in a $2.2 billion tab.

This is the reason why the board could accept the Fletcher Allen budget, even though at an increase of 4.4 percent it is outside the cap.

Additional Health Care Analysis By Hamilton Davis:

Care Board Clout Reflected In Hospital Budgets (9/7/13)

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)