Auditor's report calls health care costs unsustainable and getting worse

by Timothy McQuiston, Vermont Business Magazine State Auditor Doug Hoffer issued a non-audit report last week on the cost of health care in Vermont. He determined that the increase in health care costs was more than double the overall increase in all other goods and services over the last two decades and also was out-of-scale to neighboring states.

This problem appears to stem, he said, in part from convoluted systems and powerful institutions – not from the people who provide direct health care services, who are paid relatively less than in those nearby states.

The regulators in their response took issue with exactly that point, saying Vermont’s rural nature and broader health care requirements do not allow for an easy comparison to states with more concentrated populations and jurisdictions with multiple hospitals.

In Vermont, there’s basically one hospital per county (Windham and Windsor both have two). There are fewer hospitals in Vermont (14) than in Boston alone (17) with about the same population. Boston also has more psychiatric and VA institutions.

However, Hoffer points to the bottom line. Regardless of reason, Hoffer said in his written comments that the data in his report make clear that current health care cost and expenditure trends were economically unsustainable before the pandemic and are even more unsustainable today.

“Before the world knew the term ‘COVID-19, my office spotlighted issues surrounding the lack of health care price transparency in Vermont in 2014 and again in 2016,” he wrote.

“More recently, we audited Vermont’s All-Payer Accountable Care Organization Model, and we’ve conducted performance audits of other health care matters over the past eight years.

“This time around, we examined the heightened cost and financial burden of health care for Vermonters.”

Hoffer’s report, called "The Growing Cost of Healthcare in Vermont: It’s Time to Reel It In,"is a compilation of recent analyses and contextualizes the dramatic increase in Vermont’s health care spending over the past two decades.

“I, along with thousands of Vermonters, am extremely thankful for our front-line professionals who have gone to extraordinary lengths to provide care during this pandemic.”

When comparing median wages for common health care occupations, Vermont wages are regularly lower than other New England states, he said.

Health care wages, therefore, do not explain why Vermont had the second highest per-capita health care expenditures in New England in 2018.

This report shows how the growth in Vermont’s health care spending outpaced that of the US and New England. It demonstrates how health care spending and costs have increased in relation to other basic needs, common services, incomes, and taxes.

While this report provides a high-level overview of health care affordability and increased spending, Hoffer acknowledges that more data and analysis is needed to isolate the exact variables driving Vermont’s growing cost of health care.

The report provides an overview of known cost drivers related to hospitals – namely hospital market consolidation and increased health care prices – and there is much more work to do on this and related issues.

Just this month, yet another peer-reviewed report in a leading health care journal spotlighted issues for health care affordability and quality that relate to the consolidation of US providers, like we’ve seen in Vermont, Hoffer said in the report.

The researchers – many of whom are affiliated with Dartmouth College – found that while provider consolidation contributes to rising health care costs across the US, there is little evidence that it has yielded better quality of care.

The authors wrote: The evidence is clear that consolidation often leads to decreased competition and higher prices, one of the major reasons that US health care costs exceed those elsewhere ... The evidence from earlier studies that financial integration between hospitals and physician groups improves process measures of quality is at best mixed, with only one study finding evidence of improvement on several measures of process quality. We examined a broader range of measures and found no pattern to suggest that financial integration for physician practices was associated with better quality ... Given the paucity of evidence of benefit, federal and state efforts to address provider consolidation and monopoly pricing deserve continued attention.

The Green Mountain Care Board is charged in part with controlling the growing cost of health care in Vermont.

But, in the Board’s response to the draft report, Hoffer said there isn’t a clear acknowledgment of the issues and risks that provider consolidation poses for health care affordability in this state.

The upward pressure that provider consolidation puts on health care costs in Vermont is ripe for further review and consideration by the Board, he said.

“Since the affordability of health care affects all Vermont lives and concerns billions of public dollars, my office plans to continue examining this and related issues.”

This report does not attribute Vermont’s increased spending on health care to any one cause. The report is limited in scope and does not consider the quality of health care or other elements of the state’s convoluted and opaque health care finance system.

The report, Hoffer said, is meant to inform decisionmakers about past trends as they seek to provide Vermonters with more accessible and affordable health care.

GMCB Chairman Kevin Mullin, in his written response to Hoffer’s report, took issue with some of the data and technical issues but most importantly with the underlying reasons for Vermont’s higher health care costs.

The profound cost differences, Mullin said, are largely based on Vermont’s demographics and on changes to health insurance structure and data reporting.

For instance, with the Affordable Care Act, many Vermonters’ insurance shifted from lower-paying Medicaid plans to the commercial insurance-based Vermont Health Connect plans.

Vermont also has broader coverage than most other states, Mullin said, including for things like naturopathy.

Demographics could greatly figure in, such as population makeup. Vermont also has a lower uninsured population. Different states have different reimbursement methodologies.

Mullin said, “In order to accurately compare per capita spending, an understand of these confounding factors is necessary.”

Mullin presents his response as one of comparing apples to oranges between states with Hoffer’s report not taking into account Vermont’s unique situation nor all the factors that go into cost.

“We are concerned,” Mullin said, “that the analysis is not sufficiently refined to tease out the impact of consolidation over time separately from other factors. Vermont, like most rural areas, is characterized by limited competition in its hospital system, with 7 of 14 hospitals achieving critical access status for Medicare, and with health services areas dictated by geography. Critical access hospital status is granted to small hospitals in rural areas, because it is determined by Medicare that access is needed in that area. Critical access hospitals are also reimbursed by Medicare based on the cost of running the hospital, which certainly impacts prices.”

Vermont’s Increased Health Care Spending

Spending on health care services in Vermont was 167% higher in 2018 than in 2000.

That is more than twice the increase for all other goods and services over this period.

If health care spending had increased at the same rate as the U.S. average, we would have spent roughly $1 billion less in 2018.

Those savings would have more than covered Vermonters’ state personal income taxes in 2018, and the savings would have equaled $1,576 per person.

From 2000 to 2018, Vermont’s per-person spending on health care rose quicker than rents, utility bills, and State appropriations. Even when excluding expenditures for drugs, Vermonters spent 16.7 cents of every dollar on health care services in 2018, compared to 13.2 cents for U.S. residents at large.

If Vermonters had spent the same share of their income on health care services as the average U.S. resident, they would have had more to spend on housing, groceries, childcare, and other basic needs.

Spending on health care services consumed an increasing share of Vermonters’ incomes from 2000 to 2017.

In contrast, the share of personal income spent on all state and local taxes remained almost unchanged. It’s notable that state and local tax revenues were used for public employees’ health care and other health care initiatives, and that the increasing cost of health care in Vermont equates to less government dollars available for public services, infrastructure, and other needs.

By 2018, per-person spending for health care services was greater in Vermont than the US average and all but one of our neighboring states.

This comes after nearly two decades of growth above the US average and that of all other New England states.

From 2011 to 2017, most new spending on medical services went to hospitals and their physician practices. Their annual earnings over this period grew by $671 million.

For every new dollar spent on health care, $0.55 went to hospitals and their physicians.

The data suggests that Hospitals gained some of their new revenue by acquiring independent physician practices. The percent of physicians working for hospitals grew from 53% in 2011 to 69% in 2017. This coincided with a significant decline in revenues for independent physicians.

The trend appears to be continuing. According to the Vermont Physician Survey,82% of full-time physicians in 2018 were employed by hospitals.

Health care services are now concentrated in the hands of fewer providers who hold greater sway over the amounts Vermonters pay for health care.

The Economics of Health Care Market Concentration

Like Vermont, other US communities have seen their health care services concentrate in the hands of fewer providers. Ninety percent of all US metropolitan statistical areas had highly concentrated hospital markets in 2016.

The trend stems in part from the acquisition of independent physicians by hospitals and health care networks.

Provider concentration creates opportunities to generate benefits for a health system. Hospitals and large health networks can lower their costs by treating more patients (economies of scale) and offering more services (economies of scope).

Mergers and acquisitions are efficient means to these ends. Evidence suggests that “acquired” hospitals have at least 4% lower costs per patient-adjusted discharge than otherwise similar hospitals after four years.

But dominant firms — those that have significantly more market share than their next largest rival26 — can exploit their market power to charge higher prices, earn more revenue, and capture economic surplus that would pass on to consumers in a more competitive marketplace.

Prices in one-hospital markets (monopolies) are 12% higher than similar hospitals in markets with four or more rival hospitals (competitive markets), according to 2007-2011 private insurance claims data spanning 88 million patients and over $125 billion in annual health care expenditures.

Hospitals acquire independent physicians, in part, because there are advantages to managing providers at all stages of care, also known as vertical integration. Hospitals and their advocates argue that vertical integration can lower costs and improve patient care.

However, health care researchers also point to higher prices and lackluster impact on patient outcomes.

For example:

1.Physician prices across numerous states increased an average of 14% after their practices were acquired by hospitals. Increases varied by specialty. For example, primary care physician prices rose 15% while cardiologist prices rose 34%. What specifically is driving these price increases?

  • Facility fees from hospital-owned physician groups explain 45% of rising prices. Hospitals across the US can charge facility fees for “services provided by any healthcare [sic] provider it employs and at any facility it owns, even if the patient never sets foot in the hospitals.” Vermont’s commercial insurers pay facility fees directly to hospitals when reimbursing outpatient practices owned by hospitals.
  • Hospitals’ market power explains some of the rise in physician prices in this study. Prices rose 35% more quickly in single-hospital markets than competitive markets.

2.Commercially insured patients in markets with high vertical integration spent $75 more per year on average for outpatient care, even after adjusting for patient, plan, and market characteristics. This increase came from higher prices rather than higher utilization.

3.Increased vertical integration does not typically result in better care and is associated with patient dissatisfaction, according to Medicare Hospital Compare data from 4,438 hospitals between 2009 and 2015.

A review of these trends concludes that “vertical integration poses a threat to the affordability of health services and merits special attention from policymakers and antitrust authorities.”

Regulating Hospitals in Vermont

The Vermont Legislature created the Green Mountain Care Board (GMCB) in Act 48 of 2011 to:

1) improve the health of Vermonters,

2) reduce per capita growth in health service expenditures,

3) enhance patient and health care professional experiences,

4) recruit and retain high-quality professionals, and

5) achieve administrative simplification in health care financing and delivery.

The Board is responsible for the duties set forth in 18 V.S.A. § 9375, which include: hospital budget review, insurance rate review, other cost-containment measures, and health care reform activities more generally.

The Board’s hospital budget review requires Vermont’s 14 community hospitals to submit their budgets for the coming fiscal year to the GMCB with the following information:

1.Financial data, such as revenues, costs, assets, liabilities, and charges;

2.The scope and volume of services provided by the hospital;

3.Newly proposed services and programs;

4.Data on large capital assets, like buildings; and

5.Any other data the Board requests for that year. The GMCB adopted Rule 3.000 to guide hospital budget review.

Each year, the Board publishes guidance for hospitals to prepare their budgets and report their performance. This guidance includes the indicators that the GMCB will consider and benchmarks to evaluate performance.

Hospitals submit data according to the guidance and present their cases to the GMCB in a weeks-long review process.

The GMCB concludes by issuing budget orders that dictate the growth of budgets and charges.

Although Rule 3.000 does not address acquisitions, the Legislature directed the GMCB to “maintain a policy for reviewing new physician practice acquisitions and transfers as part of the Board’s hospital budget review” (Act 143 2016). In January 2017, the GMCB adopted guidelines for budget review that require hospitals to file financial projections of every acquisition.

The payments made for patient care (net patient revenue and fixed prospective payments, or patient revenue) have continued to concentrate in the hands of hospitals best positioned to leverage their market power to increase prices. The UVM Medical Center accounted for 51% of all new patient revenue at Vermont hospitals between fiscal years (FY) 2008 and 2019.

The UVM Health Network (UVMHN)—UVM Medical Center’s parent firm—acquired Central Vermont Medical Center and Porter Hospital during this period (Figure 8) as well as other hospitals in upstate New York.

Lastly, Vermont hospitals are turning to ancillary revenue streams.

“Other operating revenue” are revenue streams such as specialty drug sales, food and parking revenue, and other categories. This classification of hospital revenue grew by 83% between FY14 and FY19 and accounted for 8%, or $227 million, of hospitals’ total operating revenue in FY19.

Pharmaceutical sales accounted for most of this growth.

The GMCB has not regulated other operating revenue to date. Although a $52 million increase in these ancillary sources from FY18 to FY19 caught the attention of the GMCB, there is no indication at this time that the Board will modify its budget guidance or reporting requirements to limit the impact of other operating revenue on health care spending.

This is a non-audit report. A non-audit report is a tool used to inform citizens and management of issues that may need attention. It is not an audit and is not conducted under generally accepted government auditing standards. A non-audit report has a substantially smaller scope of work than an audit. Therefore, its conclusions are more limited, and it does not contain recommendations. Instead, the report includes information and possible risk-mitigation strategies relevant to the entity that is the object of the inquiry.