Post-ACA Healthcare Financing Reform: Vermont Leads the Way

Ryan Gamlin*

*M.D. Candidate, University of Cincinnati College of Medicine, Cincinnati, OH 45267, USA

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The U.S. Third Party Payment system of healthcare financing is inefficient when compared to those of other developed economies. The Affordable Care Act, while further institutionalizing many elements of this system, also provides a mechanism for state experiments in systemic payment and care delivery reform, with Vermont leading the way.

“Wanderer” by Ryan Xiao

“Wanderer” by Ryan Xiao

A Changing U.S. Insurance Landscape

In March of 2014, the White House completed a major media and public relations campaign encouraging Americans to sign up for health insurance coverage in the first of the Patient Protection and Affordable Care Act’s (ACA’s) consumer enrollment periods. From the administration’s perspective, the effort—though technologically troubled—was a numerical success, with a recent study showing that more than 10 million Americans likely received coverage, either through state or federal exchanges or Medicaid (Sommers et al., 2014).

While questions remain, particularly around the issue of patient access in light of the “narrow networks” sometimes offered as a part of exchange plans, the law unequivocally achieved a number of laudable improvements in both the issuance of and access to health insurance. Principal among these improvements were guaranteed issue for those with pre-existing medical conditions, the elimination of insurance rescission, and increased access to Medicaid for the working poor. Also promoted as a mechanism for lowering health care costs, the ACA was implemented during a sustained period of unusually low health care cost growth (Dranove et al., 2014). This timing, combined with the difficulty of disaggregating factors that affect national healthcare spending, will make cost savings claims difficult to prove.

The ultimate test, of course, of a law entitled, in part, the Affordable Care Act, is whether or not medical care (rather than insurance, which is an intermediate measure) is truly affordable for the consumer. The ACA, calcifying structural administrative inefficiencies in the United States’ health care financing system, is not a beacon of hope in this regard. Vermont, however, has chosen to take advantage of a provision of the law that allows states to enact new health care financing systems. As the first state to invest substantial resources in creating a novel financing system, Vermont serves as a public test case for broader health care financing reform.

Burdens of Administrative Costs in Healthcare

Those in the U.S. not covered by a government program like Medicare or the Veteran’s Administration are health care consumers in a Third Party Payer system, a financing arrangement characterized by a long, complex sequence of financial and administrative transactions between patients, insurers, and health care providers. As the U.S. Institute of Medicine has reported, one of the major failures of our Third Party Payer system—a system in which both health care dollars and paperwork change hands substantially more than in other developed economies—is the cost of billing and insurance administration (Smith et al., 2013). A widely cited 2003 study in the New England Journal of Medicine showed that in 1999 health administration costs totaled in $1,059 per capita in the United States, a threefold multiple of the $307 spent per capita in Canada (Woolhandler et al., 2003).

In today’s terms, that means that the United States spends an unnecessary $350 billion or more per year due to our byzantine payment scheme. To place this number into perspective, at nearly 10% of our national health care spending, $350 billion represents an amount capable of effecting dramatic change in our health care system’s affordability, accessibility, and cost; it could pay, annually, for each Emergency Department visit that does not end in a hospital admission, or every visit to a doctor’s office (Agency for Healthcare Research and Quality, 2011). And this number will likely rise in coming years, as all plans offered through federal and state exchanges are participants in the inherently administratively inefficient Third Party Payer system.

International Financing and Payment Systems

The United States has a singular but not totally unique health care financing and administrative system (Götze and Schmid, 2012). While other developed nations such as Germany and Japan use Third Party Payment, they also invariably employ two powerful tools of administrative simplification markedly absent from the U.S. system: central price controls or negotiations and a high degree of plan uniformity. The ACA’s four plan tiers point in the right direction vis-a-vis plan design, yet it is important to recall that even the most optimistic numbers of those covered through the ACA represent approximately 5% of Americans, meaning that the vast majority of insured persons are subject to little plan design standardization beyond those imposed by Essential Health Benefits provision of the law. [Individuals covered by Medicare or Medicaid—approximately 30% of Americans–also have plans with a high degree of administrative uniformity (DeNavas-Walt et al., 2013).] This proportion stands in stark contrast to other countries with third party payment. In Germany, for example, the ratio is nearly reversed; nearly 90% of citizens are covered under a single statutory plan design (Deloitte Center for Health Solutions, 2010).

Consumers ultimately bear the administrative costs of healthcare, which vary both internationally and domestically, depending on their underlying financing scheme. Health system administrative costs in Canada, for example (under a National Health Insurance program), are one third those in the United States (Woolhandler et al., 2003). Domestically, total costs of administering Medicare (a single-payer-like program) have grown substantially slower than those of private insurance (Centers for Medicare and Medicaid Services, 2013). And health care providers incur additional costs of time and money in the third party payment system; doctors in the United States spend nearly four times the money interacting with payers when compared to their counterparts in Canada (Morra et al., 2011). And while substantial debate continues about the proper interpretation of these costs in both models, a fact beyond dispute is that the United States spends much more to generate poorer health outcomes (Davis et al., 2010), and there is substantial evidence to implicate our unique financing system in this failure.

Vermont’s Innovation

Given that our payment system incentivizes utilization, costs more, and does not generate better population health, what options present themselves for changing a deeply rooted financing paradigm? A 2012 Department of Health and Human Services regulation providing individual states the ability to petition for “Waivers for State Innovation” may provide the substrate for a natural experiment. In practical terms, these waivers require that any financing scheme enacted by a state must establish that its reform plan would provide coverage that is 1) at least as comprehensive as that mandated by the ACA, 2) is at least as affordable as ACA coverage, 3) covers at least as many residents as the ACA would have covered, and 4) does not increase the federal deficit (The Federal Register 76, no. 49, 2011).

This provision of the law allowing states to create new financing and care delivery systems is to be applauded, and one state is forging ahead with fundamental healthcare payment reform: Vermont. A team led by Harvard economist William Hsiao—a key policy contributor to Taiwan’s 1995 transformation to a single-payer system—projected the state to save approximately 25% annually in its total healthcare spending (a total savings of $4.6 billion in the first 5 years), with a substantial concomitant statewide macroeconomic stimulus. Hsiao’s projected savings would come principally from lower administrative expenses, with 40% of total savings generated by “payment reform and integration of delivery system” (Hsiao et al., 2011).

Though projected savings are substantial, Vermont faces challenges in financing the transition. The state’s total healthcare bill is projected at $5.9 billion, of which $1.6 billion is necessary as new, incremental revenue (Wakely Consulting Group, 2013). This represents a substantial sum when compared to the state’s total 2013 revenues of $5.4 billion (Vermont Comprehensive Annual Financial Report For the fiscal year ending June 30, 2013). Practically, this means that must find both the means and political will to increase tax revenues by nearly 30% before 2017.

Hsiao’s Taiwan experience is also not perfectly analogous; Vermont, as a small state in a union characterized by high interstate mobility, stands in geographic contrast to Taiwan, an island nation state. This means that Vermont will likely see some amount of cross-border medical traffic—those patients bringing with them traditional health insurance coverage—thereby lessening some amount of potential administrative savings. Substantial interstate mobility also exposes Vermont to some degree to adverse selection risk; individuals or families with low income but high expected medical costs could conceivably pay less under Vermont’s payroll-financed system than under the ACA’s premium-based scheme. Both of these risks are diminished, though not eliminated, however, with the combination of guaranteed insurance issue and Medicaid expansion as core provisions of the ACA. Finally, Vermont has not yet found the political will to enact substantial medical tort reform, a feature crucial to the new system’s success, according to Hsiao et al. (2011).

Canada: A Lesson Adjacent

Taiwan’s victories in both coverage and cost (Lu and Hsiao, 2003), though, are reason to remain hopeful for the eventual successes of Vermont’s single-payer healthcare, should it come to pass. And if it does, the prospects for Vermont’s experiment gaining national traction may have historical parallels in the evolution of Canada’s health care financing and administration. The Canadian Medicare system (equal in name only to the U.S. Medicare system)—often mistakenly thought of as national from its inception—also began with a single-state vanguard. State-managed healthcare in Canada began in Saskatchewan with the passage of 1916 legislation providing for state-salaried doctors. The system was further solidified with enactment of a 1947 Saskatchewan hospitalization program covering all residents. And from these provincial beginnings, nearly 20 years would pass before Canada had the beginnings of the national Medicare system seen today, codified in the Medical Care Act of 1966 (Marchildon and O’Fee, 2007).

Doctors in Vermont, as a key constituency of health financing reform (and necessary as a practical matter of care delivery), must be convinced that a single-payer system is not a harbinger of reduced professional autonomy or professional financial decline. Fortunately, though, in Canada, concerns of government control over health care decisions and declining reimbursement have both proven poorly founded. Canadian health records remain privileged information between physician and patient. Financially, national health care has, if anything, raised the relative wages of doctors; in the 5 years preceding the introduction of the national health care system, physicians’ incomes averaged 33% greater than the average for other professionals. In the 5 years following the introduction of Medicare, their incomes increased to 47% above those of other professionals (Comanor, 1980).

Both policymakers and doctors in Vermont would do well to take note of the Canadian experience, as the Canadian path to robust health care financing transformation was not only iterative but hard won. British Columbia attempted to create its own Health Insurance Act in the 1930s, but the effort was short lived. Doctors rallied their political will en masse and ensured its demise. Doctors in Canada have also demonstrated beyond the ballot, with major strikes preceding the expansion of state involvement in healthcare at each step, with smaller, local strikes occurring on a reasonably frequent basis (Stevenson et al., 1988). These setbacks have ultimately forged a system, however, in which doctors—often wary of payer consolidation accompanying financing reform and its attendant reimbursement leverage—have retained their proverbial “seat at the table” in annual fee-schedule negotiations.

The Path Ahead

While powerful forces (structural economic inertia not the least of these) have contributed to the widespread sense of inevitability surrounding the United States’ health care financing system, many of the greatest ideas to come from this country have been refutations of established practices or norms. We are, of course, a nation borne of the refutation of an idea. There is hope that Vermont may provide one more tally in that long list, and that further experiments, whether they be in single payer or other new models of health care financing simplification, follow. So while it is too soon to tell if Vermont’s transformation will prove successful—or even take place—the greatest success of the Vermont initiative lies in its very experimentation: one state’s attempt to enact profound change in health care financing and delivery by using the capacity for systemic change contained within the ACA, a law that in general codified “health financing as usual.”


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