Hsiao: Single-payer savings are conservative

By Anne Galloway, Feb. 19, 2011

Harvard economist William Hsiao told lawmakers a month ago that if they adopted a single payer style health care plan, Vermonters could save $500 million in the first year of implementation (2015).

Since then, questions have been raised about that target figure. Fletcher Allen Health Care, in comments to Hsiao, said the professor overestimated the savings that could materialize from a single-payer system.

In a 15-page rebuttal to the Hsiao plan, hospital administrators took issue with Hsiao’s assertions that Vermont residents could save that much money through a system that would be designed to curtail administrative costs, waste, duplicative services, fraud and abuse. Officials pointed to statewide statistics regarding Vermont’s hospitalization and diagnostic testing rates, which they said are lower than those of neighboring states.

“Getting these numbers right is not about resting on our laurels or pretending that we cannot further reduce unnecessary services,” officials wrote. “It does speak directly, though, to what kind of savings can be further squeezed out of an already high-performing system.”

Hsiao’s report estimates that Vermont medical providers could reduce administrative costs by 6.5 percent under a streamlined billing system. Under that scenario, Fletcher Allen would be expected to save $29 million — a figure officials say is out of the question. They said it would be possible to save $5.3 million in estimated administrative costs. The hospital spends $35 million on billing and insurance related expenses per year, according to the written comments. (Fletcher Allen’s total revenues in 2009 were $875 million.)

Hsiao didn’t waver, however, in his assessment of the potential savings a single payer system could generate. The Harvard professor’s team ran the numbers again for his final report, which was submitted to the Legislature on Friday, and the projected 2015 savings came in at $580 million.

Hsiao said he received as many comments about an overestimation of the savings as he did complaints about underestimating the totals. In all, 170 Vermonters commented on the draft report, which was submitted to the Legislature in January.

“We didn’t do such a bad job,” Hsiao said. “We came out in the middle.”

If anything, Hsiao said, the totals his team calculated are conservative.

“We don’t want to mislead the Legislature and the governor to do something highly risky,” Hsiao said. “We erred on the side of conservatism. We overstated the cost so if things don’t work out you have a margin (of error). The worst thing we can do is be too optimistic so you’re left in a deficit position. It’s not my intention to put you in that position.”

Dr. Jonathon Gruber, a health care economist from MIT, supported Hsiao’s conclusions in a presentation to the House Health Care Committee Friday afternoon.

“Bill’s been conservative, but appropriately so,” Gruber said. “It’s better to get it right than overreach and see it collapse.”

Hsiao said his team included in its estimate labor savings based on an all-claims payment system in which doctors and nurses would no longer need to satisfy billing requirements for insurers.

In the final report, Hsiao said he fleshed out a few details, but his broadest conclusion didn’t change: In order for the state to save money and provide better health care outcomes for all Vermonters, it needs to adopt a universal health care system with a uniform payment mechanism.

“The system is broken,” Hsiao said. “It’s broken in a systemic way. Different parts don’t come together in a synchronization. It will only get worse, not better.”

Hsiao recommends investing $350 million of the $580 million in estimated savings into programs to support primary care doctors and an extension of “essential” medical benefits to uninsured or underinsured Vermonters.

In 2016, the single payer system is projected to save $770 million. By 2019, Hsiao estimates it will reduce health care spending by $1.1 billion.

The Department of Banking, Insurance, Securities and Health Care Administration says the state will spend $5.9 billion on health care in fiscal year 2012. By 2015, that number is expected to climb an additional $1.6 billion.

Employers would reap substantial savings, according to the Hsiao report, if the essential benefit package is offered by the state. (A comprehensive package, which would include nursing home care, would result in substantial increases in overall medical expenditures.)

Per employee spending on health care would drop by $200 in 2015 and $550 in 2019, according to the report. The total estimated savings for 2015 would be $80 million for businesses; in 2019, companies would save about $220 million on health care costs, according to Hsiao’s report.

Instead of paying premiums for workers, employers would contribute to the cost of health care through a payroll tax, under the Hsiao plan. The tax would be 12.5 percent in 2015 and 11.6 percent in 2019, including a 3 percent contribution from employees. If the system doesn’t change, employers and workers will pay out the equivalent of a 13.4 percent payroll tax in 2015 and 13.7 percent in 2019 via premiums.

The estimates, Hsiao said, depend on how effectively and quickly the system changes. “We cannot predict the future,” Hsiao said. “There is always some uncertainty.”

One of those uncertainties is whether the courts will overturn, or the Congress will repeal the Affordable Care Act which was enacted last year. The report says that when the law is fully implemented, Vermont will be eligible to receive $400 million. Both Gruber and Hsiao said this federal funding would pay for coverage of half of the state’s 47,500 uninsured residents. If the federal money doesn’t come through, it will be harder for the state to implement single payer because the payroll tax would have to be several percentage points higher, Gruber said.

Hsiao and Gruber both cautioned that the independent board that manages the payment system for providers must consist solely of members from the two sets of stakeholders that are naturally at “loggerheads” – businesses and providers.

“The United States has relied on politicians to make these decisions and they have not been able to control costs because powerful interests can influence politicians,” Hsiao said.

Other countries, he said, have established direct negotiating processes between the parties that pay and the parties that are compensated. “That brings about a better balance,” Hsiao said. “And it allows the system to maintain stability. That’s our motive and reasoning for recommending an independent board.”

If the single payer system is financed through a payroll tax, Hsiao said the Legislature should control the rate.

Rep. Mark Larson, chair of the House Health Care Committee, asked Hsiao if the health care delivery system can be reformed without addressing the payment system for providers.

Hsiao let the word “no” hang in the air before he elaborated. “That’s pie in the sky thinking,” Hsiao said.

“I would ask the people who propose this, what leverage will you use to change the health care delivery system?” Hsiao said. “You have to assume the current health care delivery system is in some kind of equilibrium. How will you be able to disturb it other than just arbitrarily say I’m going to pass a law, I’m going to force you to do it. You won’t be able to do that. Not in the United States, not even in China, an autocratic country which is trying to do that and failing miserably by now.

“The question is what leverage do you use?” Hsiao said. “The leverage you use is the payment system. You change the incentive structure, then the delivery system will move. The payment system is like a magnet. The delivery system is like many iron particles when you change that magnet to a different position the iron particles will move. But to do that — to change the payment system — you have to change the financing. To be effective in changing delivery system you have to remove the current situation where providers can play games with the insurance such as cost shifting.”