Analysis: Hospital Budgets To Get 3 Percent Increase, But Real Shake-Up Lies Ahead

May 6, 2014

The Green Mountain Care Board has informed Vermont’s 14 hospitals that their budgets for the next fiscal year should increase no more than 3 percent, with up to an additional .8 percent allowed for projects that advance the cause of health care reform in the state.

The total for the hospital system for fiscal year 2015, starting in October, would be $2.69 billion, an increase of $66 million over the current year’s base budgets. If the GMC board approves the full .8 percent for reform infrastructure, it would add $17 million, for a total of $83 million in new money for the system.

Meeting these targets would keep the bulk of the Vermont delivery system on track towards financial sustainability, which is the key to Gov. Peter Shumlin’s single payer health reform plan.

The GMC board had a target of 3 percent increases for the current year, the coming year (FY 2015) and the following year (FY 2016). The increments for reform infrastructure were 1 percent in this fiscal year, .8 percent for the coming year and .6 percent for the following year.

Meeting these targets would keep the bulk of the Vermont delivery system on track towards financial sustainability, which is the key to Gov. Peter Shumlin's single payer health reform plan.

Al Gobeille, the chairman of the GMC board, said in an interview that he believes the 3 percent level is sustainable, with the reform expenditures considered as an investment. 

Global Budgets

In addition to maintaining the pressure on hospital budgets, the GMC board will open up the second stage of cost control in the coming year by considering a so-called “global budget” for Rutland Regional Medical Center.

In general, global budgeting involves a hospital getting payment in advance from the federal government and insurance providers for taking care of a large group of patients and then holding the hospital at risk for its performance. If hospitals come in under budget, they can keep all or some of the savings; if they go over, they have to give back all or some of the money.

In practice, however, there are many ways to structure such a system, and no one in Vermont has figured out exactly how to do it. According to Gobeille, if the board and the hospital can figure out a specific route to follow by fall, they’ll go ahead. If not, they will chalk it up to experience, with the hope the negotiations reap benefits in the future.

A central problem in the Rutland case is that a decision on what might be called a global budget isn’t up to the Green Mountain Care Board. Instead, it has to be fashioned from agreements between the hospital and three main payers for the care that is delivered there. The primary payers, Medicare, Medicaid and commercial customers, have different rules on how to share financial risks and shared savings, and so far Rutland doesn’t have agreements with any of them.

The move was suggested by the Rutland hospital president Tom Huebner, who wants to figure out how to operate his facility in the transformed landscape of a reformed system.

Southwestern Vermont Medical Center in Bennington also considered getting involved in the pilot effort, but had to abandon the idea when the only hospital in nearby northwestern Massachusetts closed, throwing large numbers of new patients into the Bennington facility.

Advent Of Accountable Care

While spending targets and the global budget idea represent real progress, they will not necessarily ensure spending discipline out into the future. What is needed is some sort of more ambitious, broader structural reform in health care delivery. The only thing that can do that is an “accountable care organization” (ACO), the template for which was set forth in the federal Affordable Care Act legislation.

The primary ACO in Vermont, named OneCare, was developed jointly by Fletcher Allen Health Care in Burlington and the Dartmouth-Hitchcock system in Hanover, N.H. This ACO includes all of the hospitals in Vermont as well as Dartmouth. The organization also includes more than 1,800 physicians.

OneCare is working with the federal government to provide care to the Medicare population in Vermont, but the intent is to extend the concept to the whole population.

ACOs go further than global budgets by encouraging the kind of integration that will permit better quality control and more reliable cost containment. A global budget may achieve some improvements in each hospital, but it also locks in the inefficiencies that are rife in a multi-hospital system mixed in with a wide range of unconnected doctors.

A given hospital might be very good at, say, replacing hips, or treating certain kinds of cancer, yet not do so well at providing some other service, like pediatric care. The result is you could have too many specialists of a certain discipline and not enough in another. In a rural area, you might need to shift some medical resources in a hospital to a more comprehensive primary care network.

An accountable care organization, in other words, provides a framework for assembling and managing the medical resources needed to take care of all the people in a region. Global budgets in hospitals can’t do that.

How do you get to a mature ACO, one that can decide which hospitals should do hip replacements and which shouldn't, and which regions need more primary care rather than a new hospital service? Gradually.

Gradual Change

How do you get to a mature ACO, one that can decide which hospitals should do hip replacements and which shouldn’t, and which regions need more primary care rather than a new hospital service?

Gradually. There are no fully operational ACOs, so Vermont system designers can’t simply pull a model off the shelf.

There are basically three levels or steps necessary to get to a fully operational ACO.

The first step is simply the decision to join an ACO, with the understanding that the point of the exercise is to begin to shift the focus of the constituent units – doctors and hospitals – from worrying only about their own units and focusing their perspective to the problems of the whole region.

Vermont has taken that step relatively quickly. The state has three ACOs and the largest one by far – OneCare – covers all the hospitals in the state plus Dartmouth-Hitchcock. The Vermont hospitals include around 65 percent of the state’s physicians.

The second step is to begin to experiment with shared savings programs, such as the one now being considered by Rutland. At the same time, the federal government and the state are beginning to collect data on the way that the Vermont system works now. The methodology involves assessing the per capita costs attached to the various units that deliver care in the state now; those data are supplied by federal government.

The third step would be to begin making actual decisions about the deployment of medical resources based on measurements of cost and quality. No one can say exactly how the third stage would operate. If a hospital is now doing hip replacements which can be done more cheaply – and possibly better – somewhere else, will that hospital agree to stop doing the surgery?

Doctors and hospitals would have to reach a point where they agree that the affordability of the whole system is more important than their individual concerns. What argues for optimism on that question is the consensus that costs have been out of control for more than 40 years and that building a fully mature ACO may be the only way to answer it.