12-16-14 – Crouching Tiger, Hidden Costs

Posted by Chris Campion

Paying for health care, no matter what the payer vehicle is, is simultaneously a complex and simple idea.  Costs are incurred when care is delivered, and someone has to pay for those incurred costs.  How that payment occurs, however, is the crux of the issue, and has become more of a political football than a rational discussion about costs, revenues, and the delivery of care.

As VPR notes, there are those in the legislature that have had and continue to suggest ways to pay for the uninsured.  In some instances, though, they seem to be putting the horse before the cart.

Gov. Peter Shumlin will unveil his single-payer financing proposal later this month. But a powerful Senate lawmaker says the Legislature might want to spend less time this year talking about how Vermont pays for health insurance, and focus instead on making sure everyone is getting it.

Few people in the Legislature will have more influence over the health care debate in than Sen. Tim Ashe. The Chittenden County Democrat not only chairs the committee that handles tax matters for the Senate, he’s also the Senate President’s most trusted advisor on health care reform matters.

Ashe says he isn’t necessarily opposed to pursuing a publicly financed health care system. But he says the payroll tax on employers that would be needed to fund it will make it a difficult goal to attain, at least in the short term.

Senator Ashe well understands that the payroll tax will not only fail to raise enough money to cover the estimated $2.2 billion required to finance Governor Shumlin’s single-payer plan (and $2.2 billion is the low end of the estimate), it will also have a potentially catastrophic effect on small businesses, as they will not be able to absorb that large of a cost increase.

If you remove the idea of insurance from this requirement, and just think of it as a cost that gets added to a business with  no offsetting revenue, then those businesses that are already operating at the barest margins of profitability will slide into the red.  Businesses that can absorb this cost are largely providing insurance coverage already; those that cannot, will not, and it will either force businesses to cut costs, staff, hours, and/or force Vermonters onto the state exchange.  Which is likely the goal, anyway, to make all Vermonters, regardless of current coverage, to enroll in their state-mandated insurance coverage through the state.

Senator Ashe keeps the idea simple, which is a good place to start:

“I believe people across the political spectrum believe that every person in Vermont should have health insurance,” Ashe says. “So, I believe that at a minimum we should come out of this legislative session with a plan for how we’re going to get everybody health insurance.”

Here’s what I believe – I believe having insurance does not make one healthy.  I believe having insurance does not guarantee access to medical care.  I believe having insurance does not affect what decision a doctor makes in the emergency room and the patient is bleeding out.  I have auto insurance, but that won’t stop me from getting in an accident.

“I believe, I happen to have a radical belief, which is that we can provide insurance to every person in Vermont without raising a penny,” Ashe says.

Assuming you can increase the number of people covered under insurance without increasing the costof said insurance does not make sense.  Would that make sense if the state said we’re going to make all Vermonters who don’t currently drive a car purchase auto insurance?  Wouldn’t they have to pay for the coverage, in some way, or have someone else pay for it through taxes?  You can’t increase the insured pool size and not expect the insurance costs to go up.

But this misses the larger point.  Having access to insurance isn’t the goal; having access to health care is the goal. An insurance card won’t stop an arterial bleed; a hospital, physician, and nursing staff will.  And as Medicare so ably demonstrates, having insurance does not mean you have access to health care.  It’s quite the opposite, as it  turns out.  The fact that the government’s existing version of single-payer (Medicare) is simply a cost-shift to commercial insurance carriers means, as always, that costs cannot be wished away under the guise of the state’s beneficence.

Ashe has two ideas to help fund this universal coverage, first:

Ashe says he would accomplish this task by taking all the money Vermont already spends on health care for the uninsured, and using it to buy insurance for them instead. He says the state would likely need to find additional dollars as well. And for that money, he says he’d look to the largest cost centers in the health care system: hospitals.

First, Vermont long had a system for insuring the uninsured, called the Vermont Health Care Assistance Program (VHAP).  It’s what a hospital would sign a patient up for if they showed up at the hospital with no insurance.  A state allocation, partially funded by taxes levied on hospitals, provided the dollars to this fund to insure those people who sought or needed care at the hospital, but had no existing insurance.  This program was already up and running, and working.  The only net benefit from taking the dollars from this and issuing insurance cards to the uninsured is to, well, make sure the uninsured have insurance cards, and to claim that the state provides universal coverage.  In other words, no net tangible improvements to anything, but the state can claim they’ve insured everybody.  Which was already occurring.

The state also collects a provider tax, which also goes, in part, to cover the uninsured – so the hospitals are already paying for the uninsured out of their revenues.

And the second idea:

Ashe says the state could take a number of approaches to curbing administrative costs at hospitals. But he says he doesn’t think it makes sense for either legislators or members of the Green Mountain Care Board – the five-person panel that regulates hospital budgets – to be micro-managing medical centers.

This is not a new idea, and not new to any organization that’s trying to reduce costs.  That said, assuming that, by whatever vehicle, hospitals will simply find administrative cost savings if mandated to by the state means that the legislature thinks the hospitals are already wasting a lot of money.  Even if the legislature states that they are not qualified to tell hospitals how to cut costs (as Ashe does above), yet somehow, miraculously, the legislature just simply knows that there are administrative savings to be had, it absolves the legislature of the responsibility for any cuts that are made, even if the legislature does not mandate which cuts be made.  It’s a fundamental contradiction:  if you state that you’re not qualified to tell someone how they should cut costs, how can you possibly know that they should be able to cut costs in the places you think should be cut, i.e., administrative costs?

But by then taking “cost savings” from a hospital and applying them to funding for the uninsured, along with providing insurance from the pool of dollars that’s already in place to insure the uninsured, misses the largest and most critical issue as to why insurance rates go up at such a high clip:  The government’s existing version of single-payer does not cover costs, and creates a cost-shift onto commercial payers to cover the difference.

In the 2014 Green Mountain Care Board’s approved 2014 budgets for Vermont hospitals (p. 17), the cost-shift to commercial payers is detailed, and explains why those commercial rates climb so much every year – because the Medicare and Medicaid reimbursement rates do not cover the costs of care (let alone the free care and bad debt piece of the hospital’s lost revenues):

GMCB 2014 Budget Cost Shift Summary

The amount shifted and given away has roughly doubled in 6 years, from 2008 to 2014:

Cost-shifting made easy.

These are hundreds of millions of dollars that are absorbed almost completely in rate increases for commercial insurers.  Those shifted costs of care cannot be found in future administrative reductions.  There’s no rational way to assume that a hospital is sitting on $100 million in administrative reductions, but just hasn’t quite gotten around to it yet.

That said, had the state not spent $100 million on an “exchange” that has done nothing but increase overheads and not deliver one additional second of patient care, well, that’s 25% of the annual cost shift that’s occurring right now.  The same state that’s telling Vermonters that it knows that costs can easily be reduced, while ignoring this fundamental reason for the increase in commercial insurer rates:

Look at those costs go down!

Vermont’s aging demographics are the primary reason why those shifts have become larger over time, and that does not look to change in the near future.  If you have more people receiving care under Medicare, then the shift can only get larger, and cutting back an IT budget line will not make up a fraction of that difference.

The real culprit in the cost-shift is not the patient, the hospital, or the state legislator – it’s the US government’s version of single-payer, which does not cover costs, and happily shifts that responsibility onto the backs of those people currently working and paying for insurance through their employers, or the self-insured.  It’s not only a cost-shift, it’s an income shift – an income re-distribution, one not voted on by elected representatives, but one made possible through decades of bureaucratic sclerosis and an abdication of responsibility by the US Congress, which continually fails to address its own mistakes, and the massive unfunded liabilities it has created.

{ 2 comments… read them below or add one }

Valerie Mullin December 16, 2014 at 3:34 pm

Well written, I would only add being able to purchase insurance across state lines.


Ivan Smith December 16, 2014 at 6:51 pm

Valerie, in Germany, you have mandated coverage where citizens are required to buy insurance from a list of 200+ “sickness funds”, and you have your choice of all of them regardless of what part of the country you live in. There probably is a public system that runs parallel to that, and your employer (if you have one) also contributes. Here’s the thing, in Germany, as well as the rest of the industrialize world that use insurance as medical payers, (Japan, much of the EU, Australia etc.), the insurance has to be nonprofit; can not argue with the doctors about the patients care, and has to accept any one that signs up. In some places it’s like buying car insurance here in the US.
They also in most if not all cases have central mechanisms that hold down medical costs, like medications and what not. Even with the ACA; that still allows: insurance companies to be profit centers, and have over head up to 20%, there is the potential for the conflict of interest between making profits, and patient care.
Until the ACA goes further to insure patients don’t get shafted, and there is a viable public option for every one, selling insurance across state lines is not a good idea.


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