Dr. Hsiao Lays the Groundwork for his Designs

By Ethan Parke
Vermont for Single Payer Supporter, Montpelier
August 7, 2010

It was an impressive performance on August 5th by Professor William Hsiao, the Harvard health policy economist who has been hired to design three universal health care systems for Vermont. Dr. Hsiao was in Montpelier to give a progress report to the Vermont Health Care Reform Commission.

Using his courteous, often humorous demeanor, and his total command of the subject, Dr. Hsiao deftly fielded skeptical questions and gave every indication that the health care designs he and his team are working on will be comprehensive, evidence-based, and tailored to fit Vermont.

“We’re not doing a design in an ivory tower,” said Dr. Hsiao. “We’re designing something in the real world.” Hsiao said his researchers have been interviewing health care providers, insurance companies, and state officials, to gather background data and to fully understand Vermont’s health care problems and the possible solutions.

Throughout Hsiao’s presentation, what came clear was that in order to control costs and to make health care universal, there must be a rational system. Right now Vermont only has a patchwork of unaffordable insurance based on adverse selection, various government programs, problematic fee-for-service provider compensation, and fragmented financing, Hsiao said.

“No country can control costs unless it has a health care system operating as a whole,” declared Dr. Hsiao. He said Taiwan reduced costs by 8 percent in the first year of its universal health care program—but only because it created a single payer financing mechanism.

State Representative George Till, who is a physician, challenged that assumption. “I agree with your diagnosis, but I don’t agree that the problem must be corrected by a single payer system,” said Till. He asked Hsiao if costs couldn’t be controlled simply by paying all providers the same rate, much like Medicare does.

Dr. Hsiao replied that mandating a uniform payment rate is one aspect of a single payer system, but that in order to control costs you must also unify the payment source as much as possible. Only by taking this extra step can cost shifting be eliminated, and fraud and abuse be kept in check, he said. Hsiao’s implication was that a system that consolidates financing can build in incentives and disincentives to achieve desired results, whereas fragmented financing encourages each provider to find ways for others to pick up costs.

Another commission member, State Senator Kevin Mullen, voiced skepticism on two issues. He said when lawmakers tried to enact health care reform several years ago, IBM objected that it would not want to have employee insurance in Vermont that was different from insurance covering its employees elsewhere. Mullen also said he thought the federal ERISA law would block reform efforts in Vermont. “I worry that we will just be spinning our wheels again,” said Mullen. “I would like to see some real progress next year.”

Hsiao deflected the point about IBM, saying that a company doing business all over the world would be very used to publicly financed health care systems. On the subject of ERISA, Dr. Hsiao joked that “It’s my nightmare.” He said he knows full well that the ERISA law has many interpretations, but added that he is talking to experts at Harvard Law School about the issue.

Two commission members, Con Hogan and State Representative Topper McFaun, said they hoped Hsiao’s work would include as much economic analysis as possible. Unfortunately, said Hsiao, there is only so much his team can accomplish with the funding that has been provided and the short time frame allowed. A key member of Hsiao’s team, renowned MIT economist Jonathan Gruber, will test the three designs using a micro-economic model, Hsiao said. Gruber’s job will be to see how the designs would affect households and employers, but a full macro-economic analysis, looking at the effect of reform on the entire economy, is beyond the scope of Hsiao’s contract. Pressed on this point, Hsiao said he will certainly provide economic analysis, but it will be mostly qualitative and based on economic theory, not on precise numbers.

The three models to be designed by Hsiao’s team are (1) a state run single payer system, (2) a public option within a framework prescribed by the law passed last spring by the legislature, and (3) a consultant-designed plan. This third plan, according to Hsiao, will be designed within political and institutional constraints posed in Vermont. These constraints will be determined, in part, through “stakeholder analysis,” said Hsiao. It was unclear how the third plan might differ from the first, especially given Hsiao’s successful experience with single payer systems worldwide. One possible explanation is that the first design would be more or less a “pure single payer” and the third plan might be a single payer that is modified to fit Vermont realities.

Time will tell which design, if any, the next legislature and the new governor will decide to implement. For the time being, however, single payer supporters should be thrilled that the world’s foremost health system designer is working for Vermont. Dr. Hsiao’s breadth of knowledge, his pragmatic approach, his optimism, and his matter-of-fact endorsement of single payer dazzled his audience last Thursday in Montpelier.