Vermont’s Bold Experiment

I was delighted to see the lead article in Health Affairs describing Vermont’s new single payer health care financing system. Harvard Professor William Hsiao and his coauthors describe this as a “Bold Experiment” and I couldn’t agree more. It is also a very welcome experiment. For over thirty years I have heard the rhetoric that a single payer system would never work in the United States. For that matter, I have heard that a true market-based system (with vouchers) would never work either. Why not let the states experiment and find out what will and won’t work? Thankfully, the Vermont legislators and Governor Shumlin had the courage to take this leap of faith.

The biggest obstacle to implementation appears to be ERISA, which limits the extent to which states can regulate self-funded plans. Apparently, self-insured employers could object to having their tax payments used to support the plan. But Vermont can apply for an ERISA waiver under terms in the Affordable Care Act and the state hopes to begin its bold experiment in 2015.

As bold as the plan might be, Hsiao et al. might be even bolder in projecting the potential cost savings, which they peg at 25.3 percent. Academics rarely go out on a limb with projections like this that can easily be assessed in a few years time. And academics are rarely so optimistic. I wish I could share that optimism.

Let’s take a close look at the projections. Hsiao et al. expect a 2 percent reduction in expenditures from malpractice reform. This is plausible, but malpractice reform is easily severed from health financing reform – many states have already done so – and I do not see why we should attribute any resulting savings to the implementation of a single payer system.

Hsiao et al. also projecta reduction in administrative expenses of 7.3 percent, stemming from “the consolidation of insurance functions” and “reduced administrative costs for providers stemming from uniform claims administration.” This also seems plausible and the actual savings could be even higher, inasmuch as the state will be doing away with all of the marketing and medical underwriting functions of private health insurance.

From here, things get dicier. Hsiao et al project another 5 percent savings from reduced fraud and abuse. How so? The “comprehensive claims database” is supposed to make detection easier. The authors cite a 2007 FBI report as the basis for their 5 percent estimate. That report states that fraud and abuse amount to as much as 3-10 percent of total U.S. health spending, but it makes no mention of the potential cost savings from creating a comprehensive claims database. Hsiao et al. also cite a study of fraud and abuse in Taiwan but do discuss its relevance to Vermont. Will consolidating claims help stop fraud and abuse? Medicare is not a comprehensive claims database but it is awfully big, yet Medicare fraud and abuse is rampant. Large private insurers also fall victim to fraud and abuse. If Hsiao et al believe that Vermont’s state employees will do a better job fighting fraud and abuse than private insurers, good luck to them!

Hsiao et al project the biggest cost savings, 10 percent, will come from payment reform and integration of delivery systems – essentially, moving everyone into an Accountable Care Organization. (Hsiao and colleagues acknowledge that the shift to ACOs is not mandated yet include the projected cost savings as if it was a fait accompli.) As I have previously blogged, any cost savings projected from ACOs are truly speculative. And in a small state like Vermont, the shift to ACOs may backfire. To understand why, consider that single payer systems in Canada and Europe largely hold down costs by bullying the medical community into accepting low wages and restrictions on access to medical technology. The bullying works – the proof is in the cost savings. But Vermont is not large enough to support more than a handful of ACOs, each with a local monopoly. If anyone does the bullying, it will be the monopoly ACOs demanding higher rates and funding for more technology. Dominant ACOs may have even more bargaining power than the state; legislators can always be fired. (I realize that Vermont is perhaps the most liberal state in the nation and I suppose that goes for their physicians. But let’s see how liberal they are when the state decides to slash their fees by 10 percent.)

Lastly, Hsiao et al. project a savings of 1 percent in governance and administration, apparently due to “insulating major spending decisions from the political process.” They expect to keep politics out of the single payer system?

Let me reiterate. The new Vermont law is terrific. I hope they implement it as soon as possible and that it succeeds beyond my wildest expectations. But I doubt it will succeed beyond Hsaio et al’s expectations, as those truly are wild. If Vermont can reduce administrative costs and expand coverage without sacrificing quality or creating shortages, the experiment will be a success. If and when that happens, I hope more states will follow suit.

Now which state will be bold enough to experiment with a fully market-based system?

Wag the Dog

I just read this summary of CMS Director Don Berwick’s description of healthcare integration:

“Dr. Berwick cautioned that integrated care is not the status quo repackaged; one size will not fit all. Instead, according to Berwick, truly integrated care is characterized by patient-centered, shared medical decision-making, where patients are remembered by the system, where care is carefully handed off among team members, where team members act proactively to manage both the patient and resources in a data rich environment, where information is transparent, and where organizations and individuals are curious about performance and inventive and resourceful in seeking out best models of care.”

Who could complain about that? Patient-centered?, Sharing? Proactive providers? Rich data? Transparency, curiosity and resourcefulness? He may as well throw in God, mother and country. Where do I sign up? But there is a sense of deja vu about all this. Advocates of healthcare integration have always sold us on these benefits. And providers have bought in, the result being the twin disasters of physician hospital organizations and integrated delivery systems. Dr. Berwick does say this is not the status quo, because this isn’t just integrated healthcare, it is “truly” integrated.

But I don’t quite get it. What is “truly” integrated healthcare? Is Dr. Berwick saying that organizations must be integrated in order to deliver care that is patient-centered, etc., but that they need to do a better job of it? (I think he is.) Or is he saying that the delivery of medical care should be organized so as to give us care that is patient-centered, etc. but that providers need not be integrated to do so? (I hope he is.)

For two decades we have been told that organizational integration will bring about the integration of care delivery. But it never has. So I hope that Dr. Berwick will keep an open mind about organizational design. Vertical integration sometimes improves production processes and sometimes makes them worse. The economics of organization has identified many issues that need to be addressed if one is to sensibly design the organization of a value chain. These issues include contractual incompleteness, coordination of design attributes, protection of relationship specific investments, internal capital markets and influence activities.

After due consideration of these issues, it is far from obvious whether integrated healthcare organizations will outperform market based firms. It is telling that they have not so far. But spurred on by policy makers and a handful of persuasive academics who ply their trade in healthcare strategy but seem to be blithely ignorant of the underlying economics, healthcare managers have displayed a herd mentality when it comes to organization integration. I fear that with the urging of CMS, we are on the verge of another integration wave. I just hope that healthcare managers take the time to duly consider the economic risks and benefits of organizational integration. I am not optimistic.

Integration is just a buzzword. It should convey neither positive nor negative connotations. But in healthcare it has become an end in and of itself. The means justifying the ends, if you will. If we can improve patient care without forcing organizations to integrate, then why the rush to integrate? If integration actually sets back the process of promoting high quality, low cost care, then again why the rush to integrate.

Let’s not let the tail wag the dog.