THCB

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?

David Dranove, PhD, is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red”. He has a Ph.D. in Economics from Stanford University.

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david yurman outletbob hertzGary Levin MDVikramsteve Recent comment authors
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david yurman outlet
Guest

wonderful post-thanks for sharing

Vikram
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Vikram

Nate- Aetna.com as an exampe has 18 million members. Further take out enrollment, login and claim search hits. What’s left of remaining 1 million hit? Also these hits stats do not tell session time. We are back to square one. Flyers, emails etc probably make you giddy. I gave pertinent example of FDA being at it for last 30 years and making no progress with their pyramid of food. If payors were better than providers in medicine & care, then they would rather take up medicines themselves. New England Journal of Medicine would be full of ground breaking research from… Read more »

Vikram
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Vikram

Nate- few things you need to know. The hits you got are only top level. Secondly they do not tell session time. Thirdly for their respective membership, you have better chances of getting rain Sahara. Aetna.com as an example. They have 18 million members. Now Aetna.com does also serve brokers & providers. Take out all the enrollment, login and claim search hits and you are left with less than peanuts. Naturalnews on other hand has ‘rabid’ customer base out to eliminate chemicals, processed food, plastics, white flour and sugar from their lives. We are back to circle one where it… Read more »

bob hertz
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The last few enries here have spoken to coverage issues and reimbursement issues —- but as Patrick Mac suggested earlier, the sheer challenge of single payer financing is daunting enough all by itself. For example: Health reformers often underestimate the degree to which large enployers subsidize everybody else in our current non-system. When large employers pay for family health insurance, this enables the worker’s spouse to go off and work for a company that does not provide health insurance– in real estate, cosmetology, restaurants, churches, retail sales, fill in the blank. Under all the single payer plans that I have… Read more »

Nate Ogden
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Nate Ogden

“A simple website like naturalnews has done more to wean away people from harmful food and discover cheap natural cures than all payors put together.” NaturalNews.com #2010 953.,599 unique views Anthem.com #1936 986,622 Aetna.com #1134 1,611,785 Cigna.com #2021 948,046 Ya sure they have Vikram. They don’t get enough eyeballs to change a menu let alone the combined effort of all payors together. A good wellness program reaches far more people and is far more robust then you website reference. You already came off your first ignorant statement; “Any payor who thinks they can positively impact health of members in a… Read more »

Vikram
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Vikram

Nate – read carefully what you have written above. The programs you run are the programs providers need to be doing. Next what, second physician, opinions, alternative therapies at your location? It cannot be denied that you got some claims off, but once again its outlier attempt. There will be some story telling points to tell for sure but not substantial enough. A simple website like naturalnews has done more to wean away people from harmful food and discover cheap natural cures than all payors put together. Now let me get to basic issue with payor program. First recognition that… Read more »

Nate Ogden
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Nate Ogden

“Any payor who thinks they can positively impact health of members in a way that overall costs will go down is wildy optimistic.” On this ignortant statement we can end the conversation. No idea what your head is buried so deep in but this is one of the dumbest statements I have seen on here. We(payors) save lives on a daily basis and have the testamonials to prove it. To say the billions spent on wellness programs, nurse coaches, lifestyle education, health screenings, and so on hasn’t improved health is beyound denial. When we schedule a blood draw and screening… Read more »

Vikram
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Vikram

Nate- you were not paying few months back and now if you are paying there are two ways it’s happening- a. It through self funded mechanism b. the patient is merely HIV+. Many patients can live with dormant HIV for years without adverse reaction. Any payor who thinks they can positively impact health of members in a way that overall costs will go down is wildy optimistic. How can I prove that? Heard FDA pyramid of balanced food and eat more veggie campaign? Inspite of all the veggie/vegan fads and invasion of foreign foods vegetable consumption has gone down, even… Read more »

Nate Ogden
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Nate Ogden

“backup proof is that you don’t pay for any AIDS patient and CMS does. ”

? What are you trying to say here Vikram, I’ll give you the benefit of the doubt that I am misunderstanding your comment and your not claiming private insurance doesn’t cover AIDS patients.

I have AIDS patients on my plans now.

Vikram
Guest
Vikram

Nate- backup proof is that you don’t pay for any AIDS patient and CMS does. That population will have higher morbidity than your healthy employee base. That bolsters your claim that your insurance is healthier than Medicare.

Gary Levin MD
Guest

Nate: Interesting observations..

Nate Ogden
Guest
Nate Ogden

“Commercial payors are very good handling healthy population and unhealthy are better served via Govt insurance.”

Anything to back this up? Every study I have seen says government insurance is more likly to kill you then private insurance. I have never read a sstudy that showed public coverage was better for you.

Vikram
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Vikram

Nate, there are hundreds of thousands of doctors overseas ready to come to work in VT, if given a chance. Now State Medical boards wont allow that. That is where your angst should be directed to. There are people who want to get expensive service and there are people who it that way. I note Patrick’s analysis of grave situation of VT. Though I would like to point out that paying additional taxes is no big deal, because if alternatively one would pay premium. Commercial payors are very good handling healthy population and unhealthy are better served via Govt insurance.… Read more »

steve
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steve

Didnt Hsiao help develop the Taiwan system? Why is it that no red state has given us a free market health care system?

Steve

Nate Ogden
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Nate Ogden

Federal government won’t allow it. How do you disolve Medicare at state lines? Opt out of Medicaid? http://www.realclearpolitics.com/news/ap/politics/2011/Mar/21/healthy_indiana_plan_expansion_opposed_by_some.html Indiana wants to use its public health savings account program for low-income adults to cover people who will become newly eligible for Medicaid under the new federal health care law beginning in 2014, but federal officials haven’t yet said whether they will allow the program to continue beyond next year. State officials say they have pressed federal Medicaid officials for nearly a year to say whether the Healthy Indiana Plan, or HIP, can continue beyond the scheduled Dec. 31, 2012, expiration of… Read more »

steve
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steve

Medicaid? Medicaid for a plan that wont come into affect for a year or two?
Again, why hasnt a red state given us a free market health care system, and not just in the last year?

Steve

Nate Ogden
Guest
Nate Ogden

Mediciad isn’t the plan, did you even read it before responding? The feds won’t give them permission to continue their plan, how does a state implement a free market system when the government wont release 50% of the dollars?

You realize you can’t operate a free market system under a government system right?

Paolo
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Paolo

Don’t forget that the closest border to Vermont’s population center is not New Hampshire, or New York, or Massachusetts. It’s another country that has had single-payer for many years, and unlike us, it just had its AAA credit rating reaffirmed. That might explain why most of their residents are not terrorized by the concept.

Nate Ogden
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Nate Ogden

why haven’t we invaded them for their oil yet?