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.