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Meet The Architect of Vermont's Single-Payer Plan

Harvard's William Hsiao Zigs as Rest of Health Care Zags

By Hoag Levins
The LDI Health Economist, November 1, 2011

PHILADELPHIA -- In the mid-1990s, Harvard health economist William Hsiao abandoned the U.S. health system as an area of study to focus his efforts on the health systems of other countries. The switch was motivated by frustration. "I gave up on the United States," said the 75-year-old China-born scholar who emigrated to this country as a teenager. "I did not do any more work on the U.S. because Washington politics were so driven by ideology, and money played such an important role in policy making, that I really couldn't contribute to it any more. The research I did just got pushed aside."

Hsiao, a professor of economics at the Harvard School of Public Health in Boston, subsequently went on to become one of the world's leading authorities on national health care systems, providing analysis and consulting services to 30 countries in Europe, Africa, Asia and Australia. He played a major role in reorganizing the health care systems in nine of those nations.

'Incoherent and incongruent system'

Through it all he retained his dim view of America's health care system and the lobbyists and partisan politics that control its destiny. In a recent interview in Health Affairs magazine he said the U.S. has "put on so many Band-Aids [on health care] that it has become an incoherent and incongruent system that causes much waste, inefficiencies and poor quality health care."

And so, Hsiao's history and attitude make it all the more noteworthy that last year, after a 16-year hiatus, he again focused on U.S. health care and became the architect of a new law establishing Vermont as the first state to adopt a "single-payer" health insurance strategy. He recently discussed that experience in a University of Pennsylvania seminar co-sponsored by the Leonard Davis Institute of Health Economics and the Center for Public Health Initiatives.

Vermont and the U.S. face common problems: the uninsured, the underinsured, cost escalation and an uneven quality of care," he said. "If you've read the Commonwealth Fund's reports, you know the U.S. has some of the best quality care in the world and some of the really not-so-good care. It's highly uneven. Vermont has the ambition to solve all these problems with a single-payer system."

Around the world

The single-payer approach is now widely used in other areas of the world including Canada, Great Britain, France, Germany and Switzerland. The model varies widely from country to country but, generally speaking, is a state-run, taxpayer-funded insurance program that standardizes administrative procedures, claims processing and payments across a broad population of patients. That unified system collects all the money, pays all the bills and sets the rates and rules for care.
Called "Green Mountain Care," the single-payer system outlined in the 203-page Vermont plan that became a 102-page law in May is a public-private hybrid. It envisions a state-organized system of universal coverage for all residents funded by payroll taxes and administered under contract by a large private enterprise, probably an insurance company.

To prepare the plan, Hsiao, who has been a Harvard faculty member for 32 years, led a team that included Jonathan Gruber, an economics professor at the Massachusetts Institute of Technology; Steven Kappel, the head of Vermont's Policy Integrity organization; and a group of Harvard health policy analysts. Their work was funded by a contract from the Vermont legislature and a grant from the Commonwealth Fund.

When the project began, Hsiao asked the state to define the goals it wanted the plan to achieve. The legislature wrote:

'Essential health services for all'

"To ensure universal access to and coverage for essential health services for all Vermonters. All Vermonters must have access to comprehensive, quality health care. Systemic barriers must not prevent people from accessing necessary health care. All Vermonters must receive affordable and appropriate health care at the appropriate time in the appropriate setting and health care costs must be contained over time."

The Harvard professor said Vermont officials also wanted the new plan to establish community-based preventive and primary care centers as the foundation of an overall system that included the state's 14 hospitals.

Hsiao noted that his international experiences taught him that effective health care policy reform is only possible when there is a certain kind of "opening" in the political fabric. In Vermont, a state where grass-roots community organizations play a larger role in government than in most other states, three things happened to create such an opening.

Growing financial crisis

The first was a rising sense of financial crisis: Vermont currently spends $5 billion annually on health care; those costs now make up 20% of its domestic product and continue to rise. Second, 22% of Vermont's 625,000 residents are either underinsured or uninsured -- a point of great concern in a state known for its politically progressive philosophies. Thirdly, the candidates in the 2010 gubernatorial election harnessed their campaigns to the momentum of the national debate, making Vermont's health care reform a platform priority second only to jobs.

Hsiao's team even helped the new governor "sell" the plan to voters and legislators. "You have to frame the issue to capture the public's imagination and attention so they can resonate with it quickly," he said. "We used 'the current system is broken' because it was a statement that people could all relate to in his or her own way. What we were doing was not economics but rather political economics."

Using Jonathan Gruber's microsimulation model, Hsiao's team analyzed Vermont's health care economy and identified 16 hurdles that had to be overcome to craft a viable plan. "Then we talked to all the payers; state government, businesses large and small, workers, households," said Hsiao. "They all told us, 'I can't afford another penny for health care. If your proposal requires me to pay more, I'm going to oppose it.' At the same time, providers were telling us, 'If you decrease our net income by a penny, we will oppose you.'"

Medicare and Medicaid

Hsiao ultimately recommended a single-payer system because he believed it has the best chance of generating the savings needed to fund the reforms without increasing overall annual health costs. One element was the consolidation of all current Vermont insurance plans, including Medicare and Medicaid, into a single plan. Aside from creating various sorts of efficiencies, this would also eliminate the costs currently paid for the marketing, sales and underwriting expenses of separate insurance companies as well as for the small army of providers' employees who processed claims.

"In the U.S. today, every insurance plan negotiates separately with providers," said Hsiao. "On average, a solo practitioner in Vermont has to deal with more than 30 different plans with different rules, rates and payment methods. Physicians on average spend roughly five to eight hours a week dealing with billing and insurance-related work. Their nurse spends half his or her time on this same thing. Close to one administrative clerk has to be hired to do the paperwork. On a larger scale, Massachusetts General Hospital is a major teaching hospital for Harvard Medical School that employs more than 900 clerks to do this work. We ask 'Is that necessary? Is there a better way that reduces it?'"

Another element of Hsiao's Vermont plan was to insulate its policy making and management from undue political influence.

'Divorce politics as much as possible'

"For proponents, the 'single-payer' concept usually means the government runs it," said Hsiao. "We said no. Our proposal tried to divorce politics as much as possible by creating an independent board that handles the system's design, benefit packages, rates and payment methods."

The plan includes the creation of a "direct negotiations" structure that puts representatives of the payers -- businesses, employees and state government -- on one side of the table and representatives of the providers -- physicians, hospitals, drug companies and consumers -- on the other side to work out policies and rates. Hsiao has used this same direct negotiation system in other countries and notes that "even if it's not implemented that well, it still takes the politics out of the middle, which is particularly important in the U.S. where politics is dominated by powerful and moneyed groups."

The overall daily administration of the new system would be put out for bid to private contractors. "When Vermont Blue Cross-Blue Shield understood that, their board of directors actually changed its policy to say that it would work with Vermont's single-payer system," Hsiao said.

Payment system leverage

Perhaps the most important mechanism for achieving savings and controlling quality across the new system will be its unified reimbursement capabilities. "We've learned from experience around the world that if you want to reduce waste and improve quality, the leverage you use is the payment system," said Hsiao. "And the way to do that is to create the right incentive structures. Think of it like putting a magnet in the right place so that iron particles will automatically be drawn there."

He notes that when the system is implemented in the next several years there will be winners and losers. "Some -- like the uninsured and underinsured -- will gain. We recommend that primary physicians also gain in income," he said. "But there's no free lunch. Somebody has to pay and some will lose. Private insurance companies, for instance -- particularly those outside Vermont. Another group to lose will be employers who do not offer health insurance or offer very shallow insurance. Their costs will go up." Couples who both have high-income jobs will also pay more, and specialist physicians will see a decline in income.

Hsiao readily admits that no health care model -- including single payer -- has totally succeeded. "I don't think any country has solved the problem of controlling health care costs. All the advanced economies as well as middle income countries are trying to find a way to do that. The one that has been able to do that best so far is England, but its centralized system does that in fits and starts. France is also doing a very good job but is decentralized through different states and cities, so they don't have as tight control as Great Britain."

Does he think that Vermont's gambit could ultimately influence other states or even the federal government to explore single-payer systems?

He said the biggest challenge to that would be "opposition from insurance industry, pharmaceutical industry and major medical centers. I believe the [U.S. health care] crisis will continue to deepen, and I will make a prediction that within ten years the American people will be willing to make a big change, like going toward a single-payer system. The question is whether the physicians will agree. If the public, the physicians and hospitals do agree to it, I think the opposition from the insurance industry can be overcome."