For Single Payer To Proceed, Proof Of Cost Control Needed First

Jan 20, 2014

As lawmakers begin to focus on how to pay for Gov. Peter Shumlin's single payer health plan, they want to know if the plan will work as promised to control costs and provide universal coverage.

In this analysis we examine the challenges ahead, including the legal thresholds that must be cleared for single payer to proceed and the conflicting financial projections.

Part 1: The Legal Threshold

Most of the attention to Gov. Peter Shumlin’s single payer health care initiative has been focused on the rollout of the federally financed insurance exchange, but the vastly more challenging problems of rebuilding the health care delivery system in Vermont have now begun moving to the fore.

The central issue in the reform process is whether costs can be contained, and how that might be accomplished. These questions are cloaked in uncertainty at this point, but there is no doubt about their importance. In all the tens of thousands of words Shumlin has spoken about the major issue of his governorship, none are more important than the ones he used in a speech in Rutland shortly after he was elected.

“If we can’t get costs under control,” he said, “we’ll pick up our marbles and go home.”

Lawmakers Asking Questions

This concern was subsequently built into Act 48, the legislative foundation for the reform effort, but it was done in a way that makes an already difficult problem substantially more so. This is because the sequencing of steps in the reform process appears to put the cart before the horse.

In essence, the cost containment requirements almost certainly cannot be met until after 2015, which is when Act 48 calls for the Legislature to approve the financing for the program. That one appropriation would run to at least $1.6 billion. That’s a big number to fund, more than this Legislature, or any legislature, has ever met before. Even if the exchange rollout had been silky smooth, even if the state’s legislators believed that Peter Shumlin is a reincarnation of Franklin Roosevelt and his bureaucrats equal to the NASA engineers that put a man on the moon, the financing for the single payer would be very big step indeed.

Even if the exchange rollout had been silky smooth, even if the state's legislators believed that Peter Shumlin is a reincarnation of Franklin Roosevelt and his bureaucrats equal to the NASA engineers that put a man on the moon, the financing for the single payer would be very big step indeed.

The legislators don’t believe any of the above, of course, and the fact that 2015 will be too early to be certain that the whole new machinery will act the way it's supposed to will turn a very big challenge into an even bigger one.

The first sense of that was on display last week when the House Ways and Means Committee invited Al Gobeille, the chairman of the Green Mountain Care Board, in to talk about single payer.

Ways and Means isn’t just any old legislative committee. A House speaker who knows his business, and Shap Smith definitely is one, loads that committee with some of the very best quality people he has available because it is so central to the financial health of the state. And the rest of the Legislature will think long and hard before overriding their views.

Gobeille took the committee through the process his board has embarked on, but towards the end of the session, the committee members began to hone in on the hard questions. Alison Clarkson, D-Woodstock, asked a basic question: How are we supposed to sell this unless we’re sure that we’re going to be better off than we are now?

Gobeille managed all this as well as anybody could, but the simple fact is that there is no way to get the new system built and tested in the next 11 to 12 months. Almost as if musing to himself, Jeff Wilson, a Democrat from Manchester, commented: “If we don’t have surety, you would have to vote no.”

How did we get to this point, and what might be done about it?

The early drafts of Act 48 did not present a problem as stark as the one laid out above. It was always clear that cost containment would be central, and it is clear now that Gobeille’s GMC board is well into the job.

Triggers And Timing

But then Senator Kevin Mullin, a Rutland Republican, proposed a series of amendments that came to be known as the “Mullin triggers.” The state cannot adopt a single payer system until six conditions will be met, the law now says. Those conditions are, in essence:

  1. All Vermonters must have insurance coverage that pays at least 80 percent of their medical costs.
  2. Green Mountain Care, the single payer structure, will not have a “negative” aggregate impact on Vermont’s economy.
  3. The financing for Green Mountain Care is sustainable.
  4. Administrative costs will be reduced.
  5. Cost containment will result in a reduction in the rate of growth of per-capita health care spending.
  6. Health care professionals will be reimbursed at levels sufficient to allow Vermont to recruit and retain high-quality health care professionals

These strictures basically amplify the wording in number three: costs must be sustainable. That means not just that you can afford the money for the first year of the program, but that the year-over-year increase in the costs can be borne by the people of the state.

Bending The Curve

There is something inherently unfair in this, of course. The fact is that the current system isn’t itself sustainable. Health care costs in Vermont have risen at a brutally expensive rate since the early 1970s. Hospital budgets, which include more than 60 percent of the state’s doctors, doubled from 2000 to 2009.

We paid those costs only by leaving 40,000 Vermonters uninsured and tens of thousands more underinsured (they could pay huge medical costs even if they had some form of insurance) and by shifting the costs from government to private payers. Governments, both federal and state, shielded themselves at least partly by the cost shift.

While single payer would back millions of dollars in private payments, the fact is that they would be the responsibility of the state. The risk in that is the possibility that the inflation rate would explode anew.

Those defenses would come down in single payer, and while the single payer would back millions of dollars in private payments, the fact is that they would be the responsibility of the state. The risk in that is the possibility that the inflation rate would explode anew.

Getting the costs under control will require unprecedented changes in the health care delivery system itself. In the past, ties between elements of the health care system – doctors and hospitals – were limited. They competed with one another to a significant degree and that is still going on.

In the future, they will have to be integrated, tied together, both clinically and financially. The reimbursement system will have to shift from fee-for-service, which is a powerful incentive for overuse, to some sort of per capita financing, rather than financing per medical episode. And the doctors and hospitals will have to take “risk”; they will have to set a price for caring for a group of patients, and if they exceed it, the overage will come out of their pockets.

Delay Or Defer?

These goals can be accomplished with great difficulty, but certainly not within the next year. Even by 2016 would be a stretch. By 2017, we should have a decent look at how the new machinery works. But by January of 2015 – no way.

An obvious solution would be to delay the vote on the “big number” (starting at $1.6 billion) out to 2017. The Shumlin Administration can’t count on a waiver from the federal government for a single payer program until then anyway. Over the next two to three years, they could prove out elements of the new system, which now amount to no more than some pilot projects.

Al Gobeille could say to House Ways and Means: The exchange works smoothly; the hospitals and doctors have the necessary computer systems in place so as to avoid slippage as a patient moves from local doctor to local hospital to tertiary hospital. Some payment reform is already happening. OneCare, the nascent cooperative effort between Fletcher Allen Health Care, Dartmouth Hitchcock and the state’s 13 community hospitals is starting to show it can control costs for the Medicare population.

Every piece that got tested and worked well would set the stage for the next level.

There have been some quiet and inconclusive conversations within the Shumlin team about such a course. But the governor would have to buy into it. And it might not be politically possible for Shumlin to do that, given his relentless optimism (he thought the whole thing would be in place this year, which was not so much optimism as fantasy) and the certainty that the Republican opposition would howl to the heavens.

Still, without great progress on the Mullin triggers, the big number vote in the 2015 session of the legislature will be a heavy lift indeed.

Part 2: The Numbers Game: Consultants Peg Cost of Single Payer 

Paying for a publicly financed, single payer health care system for Vermont is the most challenging policy issue facing the state. It is also a deeply polarizing political issue, pitting not only Democrats against Republicans but Governor Shumlin against the stakeholders in the debate – doctors, hospitals, the business community and insurance companies.

Both sides at this point are using consultants’ reports to buttress their position, but as we will see neither of the two extant reports is anywhere near adequate to resolve the underlying financial and structural issues involved. They serve mainly to underscore both the technical difficulties in getting to major reform, and the seething tensions between the governor’s team and the other major players in the game.

Both sides at this point are using consultants' reports to buttress their position, but as we will see neither of the two extant reports is anywhere near adequate to resolve the underlying financial and structural issues involved.

The Legislature leapt right into the health care reform maelstrom when it convened for its 2014 session. Gov. Peter Shumlin made a rare appearance before the House and Senate health care committees to reassert his commitment to his single payer initiative and to express confidence that the federally financed insurance exchange will get straightened out.

The most important single piece of news that day was that Shumlin has dispatched his Commerce Secretary, Lawrence Miller, to the state office in Williston to try to make that happen. The next day, officials from the exchange’s two insurance carriers, MVP and Vermont Blue Cross, warned the House committee that the exchange isn’t working right yet, and that there will be a big problem for some small businesses if it doesn’t function smoothly soon.

The import of this flurry of activity is that Shumlin and his aides are trying to restore their relationship with legislators, which was badly strained by the difficult rollout of the exchange. Which they should be able to do: The mess with the exchange will get straightened out, although it is not possible to say when. The state, after all, has run medical subsidy programs like Medicaid, Catamount Health and VHAP for years without much trouble.

Looming on the horizon, however, are the real challenges of health care reform, which are more complex than the exchange problems by orders of magnitude. These include:

  • Building computer systems to link all the doctors and hospitals in the state.
  • Integrating those providers sufficiently so that they can deliver quality health care at costs that can be sustained year over year.
  • Shifting from fee-for-service payment to providers to some sort of group-based financing, so that the risk for too-rapid costs gets shifted from patients and employers, where it is now, to the hospitals and doctors themselves.
  • Uprooting the culture of competition between providers that prevails now in favor of cooperation. 

No one has ever done these things before in the United States. Ever.

Nonetheless, these challenges will probably begin to show up in this session, driven in part by the strains and tensions generated by the problems with the exchange. And they will be in full flower in the Legislature next year when the biggest single factor in the Shumlin initiative – how to pay for a single payer system – is to come up for a decision.

The magnitude of the challenges is manifested by the angst that Shumlin's initiative has galvanized in the organizations that will be affected by it.

The magnitude of the challenges is manifested by the angst that Shumlin’s initiative has galvanized in the organizations that will be affected by it. A classic single payer, for example, wouldn’t require insurance companies. Not a happy thought for Blue Cross.

Keeping costs under control means constraining the flow of money from the public to doctors and hospitals. Health care providers worry about that a lot. And paying for a piece of the single payer program with taxes or fees on Vermont employers worries both large and small business in the state.

That is not to say that the Shumlin scheme will end up being unacceptable to any of these groups. But they can’t yet see what the program will look like; hence the angst.

Dueling Consultants

The nature and significance of the angst is made clear in two consultants’ studies of the single payer program as it exists to date. The first is the lengthy analysis of the issues involved by a group from the University of Massachusetts (UMass). Its report was done for the Shumlin Administration.

The key finding of the UMass study was that implementing a single payer in 2017 would require a legislative appropriation of $1.6 billion to pay for health care for all Vermonters; that would be in addition to the money that would flow into the system from other sources, mainly the federal government.

In building its model, the UMass group also generated estimates of how doctors and hospitals might be paid, and how much the single payer might save in reduced administrative costs.

The second, by Avalere Health, a consulting firm based in Washington, D.C., was commissioned by the stakeholders – Fletcher Allen Health Care, Vermont Blue Cross, the Vermont State Medical Society, representing doctors, the Vermont hospital association, the Vermont Chamber of Commerce, the Vermont Business Roundtable and the Vermont Assembly of Home Health and Hospice Agencies.

The announced purpose of the Avalere study was to test the assumptions used by the UMass group.

The Avalere group argued that the UMass estimate of the “gap” that will face the legislature in 2015 is too small, that it will be more like $1.9 to $2.2 billion rather than $1.6 billion. They based that partly on what they said were unrealistic savings on administrative costs posited by UMass. They also argued that the UMass figures showed that both doctors and hospitals would have their reimbursement cut so drastically that it would imperil the ability of the delivery system to function.

Known Unknowns

The most important thing to say about these two studies is that neither tells you much about what the Vermont health care system will look like in 2017, nor can they be relied upon to guess what kind of financial arrangements will be necessary to implement the program the Shumlin administration finally fixes on.

The most important inference to be drawn from them is that the stakeholders have moved into a much more hostile stance vis a vis the Shumlin program. The hard evidence for that is clear in the Avalere study, which is primarily a fighting document aimed at undermining the UMass study and thereby reducing support for it in the Legislature.

As set forth above, neither study is able to say much about the financial parameters of a rebuilt system three or four years out into the future. But there are some real numbers involved. A particularly illustrative one is the Avalere report’s claim that UMass overstated the savings that would accrue from reductions in administrative costs.

The UMass report, Avalere wrote, posits the administrative costs of a single payer system at 7 percent of total spending. They then compared that to the national figure of 12 percent in most systems. The 5 percent savings makes up a piece of the revenue flow for the UMass estimate of a $1.6 billlion gap.

Avalere then asserts:

“More recent estimates from the GMCB (Green Mountain Care Board) suggest that the average ratio for private plans in Vermont for 2013 is actually 6.7 percent. Since private insurance companies in Vermont – in particular, the state’s dominant private insurer, Blue Cross Blue Shield of Vermont – have already reduced the administrative margin to levels below the mid-point target in the Financing Plan, it may not be possible for the state-run program to achieve additional savings.”

This, then, is something you can actually check out. And the Avalere document here is highly suspect. For one thing, the Green Mountain Care Board does not now and never did make “estimates” of the administrative ratio. The actual document Avalere is referring to was produced by Vermont Blue Cross, whose ox could not only get gored but killed by a single payer system.

Tracking this kind of data is convoluted, but basically it looks like this: The two private carriers, Blue Cross and MVP, produce an ocean of data about their whole company operations in response to a requirement in Vermont law.

The data contained in the official filing shows that administration expenses are actually 11.2 percent for MVP and 10.2 percent for Blue Cross for the first two quarters of 2013.  Pretty close, in other words, to the UMass figure of 12 percent. The claim by Avalere that the actual Blue Cross number is mid-single digits just isn’t credible. A caution in all of this is that there are many ways to calculate all of these numbers, and Avalere could simply pick out a different set of numbers and come up with a different result.

The reality, however, is that the normal way to measure efficiency yields a figure twice as high as Avalere uses. Moreover, the Avalere figure just doesn’t make sense. The administrative complexity of the current system is extreme, and cutting it dramatically like a single payer plan would do has to be simpler and less costly. The Avelere report achieves the needs of its sponsors, however, by casting doubt on the validity of the UMass work and on the competence of the Shumlin team in managing the project.

None of this is to say that the figures in the UMass document are gospel. The UMass authors themselves make the point that their study represents just a starting point to the discussion about how to craft a reform system. As such, it is based on a whole raft of assumptions, many of which will turn out to be wrong. And in any event, even minor changes in the assumptions can lead to major changes in the final figures.

While the UMass document is clearly a reasonable attempt to model a system, the Avalere report can make no such claim.

While the UMass document is clearly a reasonable attempt to model a system, the Avalere report can make no such claim. The figures on administrative costs clearly illustrate that. But the conclusion is also evident from other aspects of the two documents.

For example, UMass tries to get at how much doctors and hospitals would have to be paid in 2017. To get there, the state’s consultants look at every claim submitted for payment under the current system. These range from payments for a kid’s visit to a physician’s assistant to the bill for open-heart surgery. They then convert that to a percentage of what Medicare pays to estimate that piece of the 2017 bill.

Avalere, by contrast, takes only payments to hospitals into account and from that much more limited base concludes that the 2017 budget won’t have enough money to pay providers adequately to keep them on the job. There is no way to know which of the two studies will be “right” three years from now, but by far the most likely answer is neither.

To help resolve the differences, the Legislature has hired its own consultant to calculate the cost of the new system.

The effort to find a consensus figure is all well and good as long as you don’t place too much hope in it. There is as yet no operational plan for single payer, so projecting a cost is difficult or impossible at this point.

Regulatory Changes

The health care situation is changing rapidly and the pace of that will only speed upRegulation of hospital budgets, which really began with the current 2014 budget, will get massaged again for the 2015, 2016 and 2017 fiscal years. Moreover, the GMCB is embarked on a program to reorganize the delivery system and to shift the payment system from fee-for-service to some sort of group-based reimbursement method. No consultant on earth can predict what those numbers will look like.

Any provider reimbursement system will have to be built so as to get reasonable compensation into the system. The decision on that issue will have to be some sort of arrangement worked out between the GMC board and the leaders of the health care system that arises out of the reform process.

Moreover, the basic UMass plan seems to peg doctor and hospital payment to whatever Medicare happens to be paying at the time. Doctors and hospitals should be forgiven for being skeptical about that. In fact, however, any provider reimbursement system will have to be built so as to get reasonable compensation into the system. The decision on that issue will have to be some sort of arrangement worked out between the GMC board and the leaders of the health care system that arises out of the reform process.

In sum, there is no way to tell yet what the single payer initiative will look like even two or three years out, let alone in the current legislative session. What the UMass and Avalere studies tell us now is that the players, the administration and the stakeholders are on diverging tracks.

That is not a particularly hopeful augury.