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Vermont’s health reform law: A five part series

(Vermont’s Super MedPAC, Federal and ERISA plans, Pharma, Anti-trust, and Financing)

By Kevin Outterson, Professor of Law and Health Policy at Boston University
The Incidental Economist on-line, May 6, 2011

H.202 passed the House 94-49 yesterday and Governor Shumlin promises to sign it.  The Vermont law deserves some careful attention, but doesn’t appear to be creating much of a stir in Vermont itself – the lead story in this morning’s Burlington Free Press was flooding on Lake Champlain and the most popular story on the website was UVM students in an annual clothing-optional rite of spring.

I’ve read the law (142 pages, a joy by federal standards) and will post throughout next week:

Vermont’s Super MedPAC

While Washington continues to debate the federal IPAB, Vermont has now passed a much more powerful version at the state level, the Green Mountain Care (GMC) Board.  Among its powers (18 VSA §9375) are rule making authority that IPAB can only dream about:

Implement by rule, pursuant to 3 V.S.A. chapter 25, methodologies for achieving payment reform and containing costs, which may include the creation of health care professional cost-containment targets, global payments, bundled payments, global budgets, risk-adjusted capitated payments, or other uniform payment methods and amounts for integrated delivery systems, health care professionals, or other provider arrangements.

Notice the absence of exceptions for doctors and hospitals. Rate setting figures prominently:

Set rates for health care professionals [including drugs and devices] pursuant to section 9376 of this title, to be implemented over time, and make adjustments to the rules on reimbursement methodologies as needed.

They also have oversight review for:

  • Benefit packages;
  • Insurance rate increases;
  • Hospital budgets;
  • CONs; and
  • Quality and performance outcome measures

Fun fact:  the Chair of GMC board is paid $116,688 (plus free health care!)  (Sec 33a)

Federal and ERISA plans in Vermont’s GMC

Vermont’s single payment system law (Green Mountain Care or GMC) will certainly include all state and municipal employees, everyone in the VT exchange, and individual and small group markets directly regulated by the state.

The law also intends to cover state workers’ compensation injuries – a historic move towards full integration.

For federal entitlement plans – Medicare and Medicaid – Vermont will ask the Obama Administration for waivers so that all of these federal funds are paid directly to Green Mountain Care, with all federal rules waived, including Part D formularies.  If these waivers are granted, all Medicare and Medicaid reimbursement rules would be suspended in Vermont and all providers paid solely under GMC.

Other federal plans  - TRICARE, VA and FEHBP – are left for another day, as are employees of foreign governments.

The last category includes private ERISA plans, which are shielded from state law to various degrees (fully self-insured plans enjoy the greatest freedom).  Vermont can’t force these plans to conform to GMC (as the Supreme Court has made abundantly clear in almost two dozen ERISA opinions), but these employers could voluntarily choose to participate.  Vermont is considering a “pay whether or not you play” tax on all employers to fund GMC, which would certainly encourage ERISA plans to either join GMC or leave the state altogether.  (One prominent employer in Burlington with a self-insured ERISA plan has put a “for lease” sign up at the local office).  The Governor’s job over the next few months is to persuade these employers to voluntarily participate in GMC, with this tax being the stick.  The carrot is the promise of a cheaper health care system that actually works.

Bad news for PhRMA in VT

Marjorie Powell is PhRMA’s point person for state legislation. Vermont is one of her problem children – and not just Vermont. States in the northeast seem to love legislation that the drug industry hates.  The Maine Rx program was litigated to the Supreme Court back in 2003 (PhRMA v. Walsh), with the drug industry losing 6-3. More recently, the anti-data mining statutes in Maine, New Hampshire and Vermont triggered split decisions in the First and Second Circuits and an appeal to SCOTUS earlier this year.  Oral arguments were heard in April.

Part of the story is that the northeast is an incubator for innovative prescription drug policy, supported in no small part by the National Legislative Association on Prescription Drug Pricing (NLARx).  Their website is a cornucopia of model legislation and policy papers; what we’d expect from NCSL if it was totally free from drug company influence.  (Disclosure:  I’ve donated time to NLARx over the years).

Which brings us to Vermont’s single-payment system (GMC).  Several items in this law will keep Marjorie and her friend busy.  This not a final plan yet, but simply a framework of things drug companies don’t like:

  • Evaluate a single state-wide drug formulary – recommendation due by Jan 15, 2012.  Expect every drug-company supported patient advocacy group to testify against this.  (See the excellent Pro Publica report on PhRMA support to patient advocacy groups).  In any event, it is not clear that a single formulary would save money. Much more flexible formulary rules and aggressive generic & therapeutic substitution might. (Health Affairs ungated).
  • Dramatically expand use of 340B pricing, potentially for all drugs in GMC.  I don’t know how this is possible – 340B was designed for low-income populations, not entire states.  Expanding 340B to all eligible populations is a great idea, since the prices are quite low, but making it universal will threaten access for the free clinics that were the historic base for 340B.  (I’ve written about price discrimination in prescription drug markets in US Senate testimony and the Yale Journal of Health Policy, Law & Ethics).
  • VT may request a full part D waiver, rolling all Part D drug purchasing into GMC.  This would bypass the debate on CMS “negotiating” Part D drug prices by letting the state try.
  • VT will also consider buying all GMC drugs through Medicaid, with the statutory and supplemental rebates.  I don’t know how a state could buy drugs through Medicaid for non-Medicaid populations. This also threatens to undermine the US price discrimination scheme. In any event, PhRMA can offset the rebates by raising prices.
  • A single mechanism for negotiating rebates and discounts, concentrating and leveraging the state’s buying power, creating a monopsony to negotiate with monopolies.
  • Expanding anti-datamining, gift ban, & transparency rules. Not in the legislation at present, but expect it to be added if the Supreme Court strikes down the current version of the VT anti-datamining law in Sorrell v. IMS.
  • Importation from Canada. Also missing from the list, but a perennial option frequently discussed in VT.

The state action doctrine under the Vermont single payment system

The Vermont single-payment system legislation requires competitors to work together in a collaborative fashion generally prohibited by federal antitrust laws.  The Act protects Vermont providers and others from federal antitrust scrutiny through the “state action” doctrine, which grants antitrust immunity to actions by US states.  If a state wants to create monopolies in cable television, toll roads or public utilities, the federal antitrust statutes won’t stand in the way.

Some implications in Vermont:

  • Anything the State does directly is immune; and
  • Acts by private parties (payers, providers, etc.) may be immune if they are acting pursuant to a clearly articulated state policy and are closely supervised by the State.

18 VSA §9376(d) (§3 of the Act) intentionally provides state action immunity:

(d) To the extent required to avoid federal antitrust violations and in furtherance of the policy identified in subsection (a) of this section, the [GMC] board shall facilitate and supervise the participation of health care professionals and health care provider bargaining groups in the process described in subsection (b) of this section.

Also in §9377(a):

It is also the intent of the general assembly to ensure sufficient state involvement and action in the design and implementation of the payment reform pilot projects described in this section to comply with federal and state antitrust provisions by replacing competition between payers and others with state-supervised cooperation and regulation.

Other similar provisions are in 18 VSA §§9377(c) (§3 of the Act), 18 VSA §724 (§3c of the Act).

Financing the VT single-payment system

H.202 builds the framework for a single-payment system in VT, but doesn’t pull the trigger yet. Two financing plans will be presented to the Legislature by January 15, 2013 (see sec.9). For background, skip the legislation and look at the official report by Hsiao, Kappel and Gruber.

The current model is a payroll tax, on both employers and employees, with exemptions for low-income workers.  In fundamental design, this is similar to Social Security or Medicare. The tax rate numbers are not set in stone, but one estimate is 11% for employers and 3% for employees. If Vermont can pay for health care with just 14% of wages, that will be a remarkable bargain.

The tax applies whether or not the employee accepts GMC.  This is a “pay whether or not you play” tax – quite different from the “pay or play” laws in Maryland or SF.  As a prominent Vermont employer said, no one wants to pay for health care twice, so this structure encourages the self-insured ERISA plans to voluntarily join GMC.