Analysis: Evaluating Health Board’s Performance On Hospital Budgets

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The Green Mountain Care Board has now completed its approval process for the coming year’s budgets for Vermont’s 14 hospitals. It was the board’s first effort and marked the third iteration in the state’s effort to regulate health care costs. The first was the Hospital Data Council that ran through the 1980s and early 1990s; that morphed into BISHCA, which first got the power to set budgets in the mid-1990s; and now the Green Mountain Care Board, which has the same powers as BISHCA, but should have far greater weight than its predecessor.

So, how did the new board do? Well, it passed, but with something less than flying colors. Whether that was the result of the fact that the job of grinding down health care costs is hideously difficult or that the board will need to get tougher with the hospitals probably won’t be known until next year.

The board’s challenge was to maintain the downward pressure on costs generated by the national recession that began in 2008 and continued with the Vermont Legislature’s decision to cap the last two hospital system budgets first at 4.5 percent in 2011, and then at 4.0 percent in 2012. The Legislature exempted some increases for particularly desirable items such as moving stand-alone doctors onto hospital payrolls and for payments such as provider taxes that hospitals could not avoid.

That amounted to a neck-snapping slowdown from the first decade of the millennium when the budgets increased by an average of around 10 percent per year from 2000 to 2009; every hospital in Vermont more than doubled its budget during that period. By contrast, under the lash of the Legislature’s caps, the inflation rate from 2010 to 2011 was 4.5 percent and from 2011 to 2012 came in at 4.6 percent.

For the 2013 budgets, the board set a cap of 3.75 percent, with the same exemptions that prevailed in the previous two years. So, there was considerable shock all around when the budgets came in at a system inflation rate of 7.2 percent, not as bad as the first decade, but bad enough-more than three times the underlying rate of inflation in the economy.

The board reacted by calling in several of the higher-spending hospitals and grilling their presidents and financial officers about every nook and cranny in the budgets. Just a rough review of the budgets showed that most of the exemptions claimed were justified, but the overall budgets themselves looked like they had some vulnerable spending.

Fletcher Allen, which accounts for nearly half of hospital sector spending in Vermont, wanted to double its operating margin, from around $21 million to $40 million. The hospital made a strong case for it, but still, that’s a huge jump in just one year. Southwestern Medical Center in Bennington asked for just under an additional $450,000 simply to pay for shifting its physicians from its own employ to its new partner, Dartmouth Hitchcock in New Hampshire. Rutland wanted to fix a big hole in its pension system.

Copley Hospital in Morrisville wanted to set up a boutique orthopedic practice near Waterbury, the kind of arms-race effort to grab market share that has helped fuel health care inflation.

So, what did the board finally do? It cut a total of roughly $800,000 from the $141 million system increase. The total cuts were imposed on two hospitals, Porter In Middlebury and Copley Hospital in Morrisville. Both were straightforward formulaic decisions: both hospitals were hit because even with the exemptions taken into account, each exceeded the 3.75 percent cap.

And it just wasn’t very much money. The system increase still amounted to 7.1 percent, more than three times the rate of inflation in the overall economy-an unsustainable rate by anybody’s definition. The $800,000 the board did cut got lost in the rounding off. And the hit on the commercial insurance companies will sting. The board approved the requested rate increases for every hospital.

Rutland rates will rise 10.3 percent, Fletcher Allen by 9.4, Southwest by 9.9 percent. And the across-the-system rate increase will exceed 8 percent.

Could the board have done more? Almost certainly. Fletcher Allen absolutely needs a 4 percent profit margin to maintain a favorable bond rating, and that is key to its role as the leader in restructuring the whole Vermont system. But did they need every penny of it in one year? Probably not.

Rutland and Southwest need to reorganize significantly, but they are still under no direct pressure to take the unnecessary utilization out of their systems, which has been endemic in those systems. The board authorized the money to finance the shift of Southwest physicians to Dartmouth-Hitchcock, but there are no assurances that that new structure will mean that Southwest will shift to an academic medical type utilization pattern.

None of this means that the board’s job is easy. Every regulatory body in every state for the past 40 years has failed to significantly constrain the increase in health care costs. The next one to do so will be the first. And it could still be the Green Mountain Care Board.

But the board clearly is betting on the "come" as the gamblers might say. It acquiesced to every piece of the Fletcher Allen budget because it believes, accurately in my view, that Fletcher Allen is the lynchpin to the restructuring of the whole system. That goal was advanced last week by the agreement by Fletcher Allen and Dartmouth to set up a joint program to manage Medicare patients in the state.

The board also obviously believes that the community hospitals, with the possible exception of Copley, has gotten the message that they have to shift from a strategy of building "market share" while playing off Fletcher Allen against Dartmouth, to a much lower profile of delivering only appropriate care at affordable rates within their own communities.

Moreover, a big piece of the increase was the shifting of physician practices, mostly primary care, from outside local hospitals. That costs some money up front, but the process promises to be highly beneficial, since it brings many more physicians within the regulatory reach of state government. And all the evidence so far indicates that Fletcher Allen is fully committed to restructuring the delivery system, and that the community hospitals are now prepared to cooperate in that process with both Fletcher Allen and Dartmouth.

Hence the board’s confidence in its decision. Still, a 7.2 increase represents a big increase in one year.   The reason the question is critical is the absolute requirement that the board maintain its credibility with all the players in the system. The next year will tell whether it’s justified.

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