Vermont Passes Single-Payer: The Potential of State Innovation

May 11, 2011 § Leave a comment

One of the better parts of last year’s health reform bill (PPACA) is a provision allowing states to opt out of many parts of the bill as long as they meet its coverage requirements. This may seem counter intuitive at first – how could the bill be strengthened by not implementing it? – but by acknowledging that there may be better ways to solve the problem of soaring health care costs while setting a floor for the care all citizens must receive, the bill allows states to experiment with alternative and potentially superior delivery systems. One of the first states moving to take advantage of this provision is Vermont, which last week passed a bill to implement a state-wide single-payer health system. The bill calls for relatively radical changes in Vermont’s health care system and, while many of its specifics remain to be fleshed out, it offers a number of promising ideas for solving our country’s health care crisis.

The Vermont plan is to combine all of the individual payers in the market into a single, unified payment system. Under this system – referred to as Green Mountain Care – individuals, small groups, federal and state governments, employers and insurers will all pay in, and the State will administer the plan. Vermont will set reimbursement rates, equalizing payments in the private and public sectors and reducing dramatically the amount of administrative paper work that must be done, but purchasers of private insurance will still be able to choose between different benefits packages.

This will be most easily accomplished with the individual and small-group markets that Vermont is given authority to regulate under PPACA, and with state and local level employees. These individuals will be able to choose between different plans on an insurance exchange, allowing them to compare different plans side-by-side. Vermont has also asked the Obama administration for a waiver for Medicaid and, in an unprecedented move, for Medicare as well. This would allow Vermont to receive the federal funds for both of these programs and funnel them through its Green Mountain Care plan.

The most difficult group to bring in to the system will be the large employers who currently provide coverage for their employees. For these employers, Vermont plans to levy an across the board tax, with the hope that employers will choose to place their employees into Green Mountain Care because they are paying part of the price regardless. This could, of course, be problematic: if some employers choose to leave the state instead of paying the increased taxes, the plan will have a negative effect on revenues, making providing care to everyone more difficult. Given significant buy-in, however, the bill contains a number of provisions to help contain costs.

Chief among these is the creation of the Green Mountain Care Board (GMCB), a much stronger version of the federal Independent Payments Advisory Board created by PPACA. The GMCB is given broad authority to implement cost containing measures including rate setting, alternative payment and delivery systems, and oversight of insurance companies (including premium increases) and hospital budgets. Importantly, providers are not beyond the scope of GMCB’s powers as they are in the federal IPAB, and GMCB would have power to negotiate drug prices, a power that many – including President Obama in his latest budget – have proposed for IPAB.

Another major source of savings will be the unified administrative system. As I noted last week, administrative overhead on the individual insurance market typically runs about 40 percent of total costs. For the small group market this is around 25 percent, and for large employers around 10 percent. In comparison, the federal government only spends around 3 percent of Medicare and Medicaid dollars on administrative costs. If Vermont is able to realize a significant fraction of these potential savings, they would be able to reduce costs across the board, reducing premiums for those still purchasing insurance on the private market, and allowing Vermont to reduce the tax it levies on employers.

There are, however, significant challenges that still remain. The bill includes no concrete financing mechanisms – a study group is currently examining different options – and this has been a frequent target of criticism. This is less problematic than it appears, though, because costs will ramp up relatively slowly, giving the legislature plenty of time to implement the study group’s recommendations. Additionally, if Vermont receives Medicare and Medicaid waivers, a significant portion of the required revenue will come directly from the federal government. Another issue will be overcoming the resistance of the pharmaceutical industry to reduced profits and maintaining access in the face of reduced provider revenues.

If Vermont is able to successfully implement this plan they will provide an example that can be followed by other states. Canada, in its path towards single-payer took a similar route: it was first implemented in a single province before spreading and evolving into a national program. Obviously, successful implementation is far from guaranteed, and there may be plans better suited to America given the system we have today. But the point is that by allowing state level innovation, PPACA provides for the kind of localized solutions that both conservatives and liberals should be able to support and which will, hopefully, end up saving the entire country money in the long run.

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