Via E-Mail to [email protected]

Via E-Mail to Comments@Vermontact128study.Com

February 3, 2011

William Hsiao, Ph.D. 124 Mt. Auburn Street, Suite 410 South Cambridge, MA 02138

Dear Dr. Hsiao:

On behalf of Fletcher Allen Health Care, Vermont’s academic medical center, I would like to thank you and your team for the efforts you put into developing the draft Act 128 report issued on January 19. Despite the limitations placed on that work that you have described – a small budget and short timeframe – the draft report reflects a great deal of research, analysis and thoughtfulness.

We also appreciate the many meetings you and your team hosted for so many stakeholders, including Fletcher Allen’s clinical and administrative leaders.

We were pleased to see that many of the concepts that are common to the three major designs included in the report are ones that have been under discussion, or have been implemented in some form in Vermont, in the past several years. We at Fletcher Allen have been fully supportive of those reforms, and have already incorporated many of them into our operations and organizational culture. Those include:

An integrated care system that includes ten primary care practices, a large multi- specialty physician practice (the University of Vermont Medical Group, physicians jointly employed by Fletcher Allen and the UVM College of Medicine), and a full spectrum of inpatient and outpatient care services. As recognized on pages 49 – 50 of the report, Fletcher Allen’s hospital service area is among the highest-performing in the three-state region discussed in the Tri- State Report commissioned by the Department of Banking, Insurance, Securities and Health Care Administration in 2010, including having the lowest per- member per-month costs; the lowest rates of Emergency Department visits, potentially-avoidable ED visits, and hospitalizations for ambulatory-sensitive conditions; and among the lowest hospital re-admission rates.

A commitment to primary care and the primary care workforce. Unlike some academic medical centers, Fletcher Allen recognizes the importance of a strong primary care presence in the communities we serve, and along with the UVM College of Medicine – our partner in the academic medical center – we continue

Fletcher Allen Health Care – 111 Colchester Avenue – Burlington, VT 05401 Dr. William Hsiao February 3, 2011 Page 2

to invest resources into educating and training primary care providers as well as promoting primary care through the expansion of the Blueprint for Health’s patient-centered medical home model (discussed in more detail below).

An electronic health record capable of capturing and using information on a real-time basis not only for claims processing, but for quality improvement and operational efficiency purposes. Over the past several years, Fletcher Allen has invested over $70 million (capital and operating expenses) in implementing a system-wide EHR known as PRISM (Patient Record and Information System Management). As of December 2010, PRISM is now live in our inpatient setting and all of our outpatient offices and clinics. It is also available to referring providers who are not part of Fletcher Allen, but whose patients we care for. Fletcher Allen is now among the top 3 – 4% of health care institutions in the U.S. that have a fully-integrated EHR system.

Fletcher Allen was the second pilot site for the state’s Blueprint for Health, which is focused on transforming both the delivery of care and how care is reimbursed. We are expanding our Blueprint activities from the original pilot site (the Aesculapius Health Center, Vermont’s largest primary care practice) to our other nine primary care practices, and are also working with several community-based primary care practices as well as the Community Health Center of Burlington to assist them in implementing the patient-centered medical home model. This includes developing Community Health Teams for over 30 primary care practices and over 100,000 patients. We are also working with the Department of Vermont Health Access to expand our Blueprint pilot to include specialty care, targeting patients with chronic heart disease as a first step.

We are actively exploring the potential for creating or participating in an Accountable Care Organization (ACO) or Healthcare Innovation Zone (HIZ), an ACO-like designation authorized under the Patient Protection and Affordable Care Act (ACA) that emphasizes not only changes in care delivery and payment, but achieving those goals in the context of academic medicine and the education of new health care professionals. (In fact, we are eagerly awaiting the release of ACO regulations being prepared by the federal Centers for Medicare and Medicaid Services.) We have also been active participants in the Payment Reform Advisory Group formed in late 2010 to advise the new Director of Payment Reform for Vermont in his development of a strategic plan for payment reform in Vermont.

Our physician-hospital organization, Vermont Managed Care, has 15 years of experience in accepting capitated risk for defined populations of patients, and of managing their care cost-effectively. VMC contracts for and manages care for

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over 40,000 covered lives across six counties in northern and central Vermont, with a care network that includes ten hospitals and over 3,000 providers.

Our James M. Jeffords Institute for Quality and Operational Effectiveness has fifteen years of experience in clinical process redesign and implementation. The Institute is focused on ensuring that Fletcher Allen meets its strategic goals in the area of quality, patient safety and operational efficiency. Its care management philosophy, developed in 1995, echoes the “six aims” adopted several years later by the Institute of Medicine: “Fletcher Allen Health Care is committed to continuously improving the quality of care provided to our patients. It is our fundamental belief that high quality care is cost-effective care. The care management process will result in standardization of patient care that is patient-focused, evidence based, built on consensus and data-driven, results in improved outcomes, safe, efficient in resource consumption, and economically viable.” The Institute’s functions and resources include measurement (providing expert analysis of data to support clinical research, clinical and operational process improvement and ongoing monitoring of performance indicators), patient safety (focusing on proactive risk reduction and promotion of patient safety initiatives), and quality consultation (providing expertise in project management and all relevant analytic and process improvement techniques are available to serve the needs of the organization).

Having said that, we did identify a number of concerns and questions arising from the draft report, which we have addressed in detail in the enclosed comments. Some of our overarching concerns include:

The need for state-based reform efforts to align with the ACA, whose implementation is already well underway.

Our concern about the reliance on national data to understand Vermont’s health care system and to model the impact of any changes to it. There are many areas in which Vermont’s health care system is structured differently or operates differently than elsewhere, and we believe there is real danger in assuming that national statistics – particularly those around potential cost savings – can simply be scaled to Vermont.

While the options would move many Vermonters into a single-payer plan for the benefit package chosen, there would still be many other payers that providers would be dealing with. Fletcher Allen alone, for example, currently processes claims for about 1,150 unique insurers, many (if not most) of whom would not be affected by the “single channel” being proposed in the options. This materially impacts the savings assumptions in the report.

3 Dr. William Hsiao February 3, 2011 Page 4

While the report at one point recognizes the fragility of Vermont’s hospital system (acknowledging that “[a]ny measurable reduction [in the] total amount paid to Vermont hospitals could jeopardize the survival of Vermont hospitals”), we do not believe that this concern is adequately addressed. For example, Fletcher Allen is the only hospital in Vermont with a credit rating, and that rating is already at the low end of the industry norm. Any deterioration in our finances will threaten our ability to maintain our current services while transitioning to a new care delivery system.

Thank you for the opportunity to submit these comments. We look forward to your consideration of these comments, and to the final version of the report.

Sincerely,

Melinda L. Estes, M.D. President and Chief Executive Officer

Enc.

4 Fletcher Allen comments on Hsiao Report February 3, 2011

We have divided up our comments into several categories, as well as offering some general comments at the beginning (including comments that did not fit well into the categories we used).

General Comments

One of the most important principles for Fletcher Allen is that any state-based reform effort must align with the Patient Protection and Affordable Care Act (ACA), whose implementation is already underway. We recognize that Option 3, in particular, seeks to do that, and would hope that any legislation that is introduced will do the same.

The report does not discuss the impact of anticipated cuts to Medicare and Disproportionate Share Hospital (DSH) payments that will occur over the next several years under the ACA. It is not clear whether these were considered in each design model and their savings assumptions.

As importantly, the final report should also address the impact of the Governor’s proposed changes in state health care spending as announced in his budget address on January 25, especially in the context of the need for a strong health care infrastructure to deliver the care contemplated in all of the options. Those include an increase in provider taxes on hospitals and moving the Catamount Health program out of the private insurance market and into Medicaid, thereby reducing payments to providers from roughly 110% of costs to much-lower Medicaid levels. For Fletcher Allen, the combined negative impact of these two changes alone would be approximately $12.2 million (a tax increase of $7.7 million plus lost Catamount Health revenues of $4.5 million).

The report does not include at least one potential strategy for reducing costs and enhancing Vermont’s economy, most notably, opportunities presented by re- directing even a small portion of the estimated $315 - $350 million in hospital services presently going out of state.1 Including incentives that would bring this care back into Vermont could have a significant positive impact, both in terms of reducing overall health care costs (since Vermont providers are generally less costly than out-of-state providers) and because any “buy local” initiative will support the economic viability of all Vermont providers, individuals as well as facilities. Recapturing these services would also provide economic development and value to the State and local communities via increased provider tax payments and other income ( e.g. , an increased wage base) as well as jobs.

1 Estimate based on inpatient charges for Vermont residents leaving the state (2008 Vermont Hospital Migration Report (BISHCA, March 2010), page 5), plus outpatient revenue estimated at 80% of inpatient revenue, with an assumed collection rate range (net revenues) of 45-50%.

1 Fletcher Allen comments on Hsiao Report February 3, 2011

We are concerned with some of the characterizations in the report of Vermont’s non-profit hospital system. For example, on page 6, the report talks about a “need to generate a certain amount of revenue” that “drives high prices and over-utilization” that “results in high premiums.” It also seems to suggest that hospitals develop their budgets only as means to “drive and manipulate” revenues. In fact, while the Act 49 reports issued by BISHCA in 2010 do show some variation in care patterns among Vermont’s hospital service areas, as a whole Vermont utilization is generally among the lowest in the nation. More importantly, the report should recognize that hospitals do not develop their budgets in a vacuum – that is, entirely to “raise revenues.” Instead, hospitals need to generate revenues to take care of our patients. Vermont’s hospitals, both as a result of their non-profit status and legal obligations such as the federal EMTALA law, are open to all, regardless of their insurance or lack thereof. Also, hospitals do not directly control what services are provided within our four walls. Thus, budgets are developed based on a multitude of variables – including utilization trends and our understanding of upcoming changes to how care is delivered – with the hope that we have just the right amount of resources (physicians, nurses, beds and the like) for the patients who might come through our doors. If we were truly able to “manipulate” our budgets without constraint, hospitals’ operating margins would be much higher than the 0.2% average discussed on page 8 of your report – a level that the report presents as “jeopardiz[ing] the survival of Vermont hospitals,” should additional measurable reductions occur.

While some sections of the report use Vermont-specific data, a number of sections rely on national data and extrapolate from there to analyze Vermont- specific issues or savings. While we understand that not all data are easily available, there are many areas in which Vermont’s health care system is structured differently or operates differently than elsewhere. (For example, all hospitals in Vermont are non-profit, as are virtually all home health agencies.) There is real danger in assuming that national statistics – particularly those around potential cost savings – can simply be scaled to Vermont.

It would be helpful to anyone reading and evaluating the report to have easy access to the many resources cited in the notes section. Is there any way to post those resources?

2 This is not entirely clear, however. The report contains at least two contradictory statements about Medicaid: Page 61: “First, we assumed that Medicare and Medicaid benefits would continue to be covered at the current level, so current costs for the populations currently enrolled in these programs will remain largely unchanged.”

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clearly not apply to other categories of patients (most notable, out-of-state residents seeking care in Vermont). As described in detail in our comments under “Savings Assumptions,” we believe this materially impacts the savings assumptions set forth in the report, despite the authors’ stated attempt to use conservative assumptions.

Using the payroll tax as one of the major funding sources for any new system raises a number of questions:

o Does this mean that non-wage earners pay nothing, but still have access to all services? This would seem inequitable, and would unduly burden individuals who must work for a living in favor of individuals who choose not to, or because of comfortable financial circumstances do not need to. o As we read it, the report would exempt both employers and employees from the payroll tax if wages are below a certain threshold (180 – 220% FPL). While the exemption for employees makes sense, the incentive for the employer would be to artificially maintain lower wages for employees near the exemption’s cutoff.

We did not understand the job impact analysis for any of the three options. The source of projected new jobs is unclear, and the report does not appear to adequately account for the loss of jobs resulting from administrative savings or the dismantling of the commercial health insurance market in Vermont.

Similarly, there was no discussion or analysis that we could find of the statement following each option’s analysis that there would be no in-migration of individuals to Vermont solely for the purpose of obtaining care in the state. While the impact may not be huge, we cannot believe that there would not be individuals in neighboring states, or those with relatives here, who would make the rational decision to move to Vermont to benefit from our health care system, without having to worry about how much it would cost – especially individuals with chronic illnesses or disabilities, who would benefit the most, particularly if they are not capable of working and thus would not have to contribute financially to the system.

On page 5, the report discusses target ratios for primary care providers, but does not include any such benchmarks in its discussion of specialty care providers, which leads the reader to conclude that the growth in specialty care in Vermont is out of proportion to the state’s needs. We suggest that this discussion be expanded to include such comparisons.

Page 77: “We recommend identifying those [Medicaid] programs which do not offer benefits that the essential benefit packages would offer and modify their benefits.”

3 Fletcher Allen comments on Hsiao Report February 3, 2011

On page 52, discussing the Blueprint for Health, the report says that “there are no incentives for other providers – specialists or hospitals – to share information, improve coordination, or become part of the decision making process for patients.” This ignores what is happening in terms of shared information using Vermont’s health information exchange, DocSite, and work that is underway to expand Blueprint management to include specialty care (like the congestive heart failure project mentioned in our cover letter).

On page 85, Fletcher Allen is mistakenly referred to as “FAMC.” The acronym is incorrect, and we prefer to be identified as either “Fletcher Allen Health Care” or simply “Fletcher Allen.”

Page 102 of the report states that Option 3’s “independent board” model for negotiating provider payments and benefit packages would be insulated from the legislative process, with the implication that it would be fairer and less subject to pressure from stakeholders or politics as a result. Wouldn’t the political pressure simply shift to the members of the independent board? Also, how would members be appointed? How would members be held accountable? And wouldn’t the legislature still be involved, since it would need to approve the budget for the single payer and ensure that sufficient revenues are raised?

Delivery System Reforms

The report indicates that any of the options would benefit from delivery system reforms, and promotes both the “integrated delivery system” and the “accountable care organization” (ACO) models.

o The report does not really distinguish between an IDS and an ACO. Is the primary difference that an ACO is an IDS that accepts some or all financial risk for the patients for whom it cares? o On page 107, the report suggests that only state government can bring about the types of infrastructural changes necessary to move towards an integrated delivery system or an ACO. We fundamentally disagree that all of this depends on state action. Many of the types of changes described in that section were being materially advanced by hospitals and/or health care professionals before either the state or federal governments became involved. While our state and federal governments have key roles to play – notably, in their ability to raise funds and to bring all of the stakeholders to the table – true change will only come about with both leadership and support from the provider community. o The report suggests that multiple ACOs should “compete” in Vermont. Given the small size of the state and the regionalized nature of our health care providers and services, this does not make sense. We would appreciate a clearer explanation of this concept and how it would benefit Vermonters while reducing costs. How many ACOs should there be?

4 Fletcher Allen comments on Hsiao Report February 3, 2011

Would they all cover the full continuum of care, including sub-acute and long-term care? How would those services be paid for if the “essential” benefits plan is elected? Would there be enough physicians within each ACO to provide the full scope of services, from primary to specialized care? o The report does not make any clear recommendation on the issue of how patients should be attributed to ACOs, while acknowledging that attribution has a direct impact on costs and accountability. It would be helpful to get a clear recommendation on this. We would suggest that patients be given the option of which ACO they would like to “belong to,” along with financial incentives to obtain their care within that system, or disincentives for getting care elsewhere.

Savings Assumptions

One of the six “major design parameters” used in developing the report included the principle that “no option could yield a net decrease in the overall net income received by physicians, hospitals or other health care providers.” (Hsiao Statement to Legislature, 1/19/20.) The report also clearly expresses concerns about the low operating margins of Vermont hospitals, acknowledging that “[a]ny measurable reduction [in the] total amount paid to Vermont hospitals could jeopardize the survival of Vermont hospitals.” (Report, p. 8).

Despite these statements, the report’s proposals would likely have an immediate and major negative impact on providers, based on the assumed savings projected for each of the three options (the first-year savings of at least $590 million from the recommended choice, Option 3). The Report suggests that these savings would result substantially from savings in provider administrative expenses following the transition to a single- payer system and other savings from developing more efficient integrated provider delivery systems. As we read the report, the only way to capture these savings is to assume that they will occur and to proportionately reduce provider payments to reflect the assumed savings.

This is a major concern for us, as we believe the opportunity for administrative cost savings, especially as they would apply to Fletcher Allen as a provider, is significantly over-stated in the report.

First, under all three options, Medicare, Medicaid, and insurance plans covering out-of- state patients are explicitly described as not changing. Other programs, such as Workers Compensation and the TriCare program (covering active duty military personnel) are not explicitly referenced, but would likely remain the same as well. Not only does that reduce the opportunity for administrative simplification, but some elements of those programs – for example, Medicare End-Stage Renal Dialysis (ESRD) and Workers Compensation billing – require much higher complexity than the average insurance work processes and resource requirements. With this understanding of the

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design options, our estimate is that for Fletcher Allen, our administrative processes not subject to change represent approximately 65% to 70% of our payer mix.

Our analysis also shows that the “billing and insurance related” (BIR) administrative costs for this 65% to 70% are proportional to their share of the payer mix. Programs like Medicare, Medicaid (both in Vermont and New York), and Workers Compensation have very distinct BIR requirements. Accordingly, providers largely organize them across separate operations teams with unique processes, and as such, we are confident in our conclusion that 65% to 70% of our BIR costs will be completely unaffected by any of the three models in the report. For example, the amount of FTEs and workload needed to administer the BIR functions for Medicare (a single payer in its own right) are approximately the same as all other payers when adjusted for its share of the payer mix, i.e. , Medicare is approximately 40% to 45% of our payer mix and directly accounts for approximately the same portion of our BIR costs across all departments and processes.

To determine our best estimate on the impact of the remaining 30% to 35%, we first assessed what we believe, based on our actual budget and process knowledge, to be our BIR costs. Using our actual FY 2011 budgets and the combined total expense for BIR departments and teams (including personnel fringe benefit allocations), we calculate our total BIR cost to be approximately $25.5 million. We also built in an informed estimate for costs embedded in clinical and other areas that work on BIR-driven tasks, and concluded that our BIR cost is not likely to be any more than $35 million. (This represents approximately 4% of our total budget, as compared to the estimated 6.5% assumed in the Report.)

Next, we assessed which components would be affected by the single plan and payer models in the Report. In so doing, it is extremely important to understand that there is already a significant level of administrative standardization across commercial payers, largely driven by CMS/Medicare. All claims have a standard claims submission form, the UB-04 for institutional claims and the HCFA-1500 for professional services, each of which have fully electronic versions, which are in widespread use by Fletcher Allen and other providers, across all commercial payers. We estimate that 95% of the requirements on outbound electronic claims are exactly the same across all government and commercial payers, with most of the remaining unique configurations being predominately made through simple information systems mappings that are very inexpensive to build and maintain.

We further assumed that accounting for individual encounters of care will still be required, a process that will almost certainly require the data elements on the UB-04 and HCFA-1500. Even if payment reform means these are not used to generate claims for reimbursement, they will certainly be required as the informational basis for patient encounters within a health care system. These claims will be required for statistical reporting, tracking and analysis, organizational and system-level resource budgeting, epidemiology, and research, so we cannot realistically foresee a world where the encounter information contained on a claim will become dispensable. (In fact, the

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potential for population-based data mining using information from a single-payer system is one of the main pluses identified in the report.) Detailed claims-level data are also necessary for quality improvement activities, as we need a granular understanding of what we do in order to determine whether changes would improve the care we deliver. And to the extent any reformed payment system anticipates using some form of “pay for performance,” these data are absolutely critical.

Finally, as noted earlier, we must plan for the 65% to 70% of payers that will remain the same. Even for claims under the proposed single system, we need to anticipate secondary and supplemental private insurance plans that will almost certainly still require the submission of claims. For example, Fletcher Allen currently processes claims not just for Vermont’s three major payers (Blue Cross & Blue Shield of Vermont, MVP Health Care and Cigna), but for 1,150 unique insurers, only some of whom are licensed in Vermont , 3 and only 20 of whom have direct contractual relationships with us. We do not see anything in the report that would materially reduce that number. Therefore, we are not assuming any impact to our outbound billing and coding costs whatsoever.

Areas where we do see potential simplification from the models for reform are registration/eligibility, cash posting, payment follow-up, insurance contracting, and the billing customer service call center. These functions will benefit by a single source or standard for plan benefits, payments streams, and eligibility checking. There is also potential impact on the processes of utilization review, denials management, and prior approval/pre-certification for services. The impact will only be clear and substantive if there are no requirements in these areas, which might be possible under payment reform where Fletcher Allen is at financial risk for delivering clinically appropriate services. However, even in this case, we will need to invest in our internal systems and processes to ensure we are responsibly allocating the resources within our delivery system. It is worth pointing out again that currently, Medicare and Medicaid both represent about the same level of complexity on these dimensions as the average commercial plans, even though the commercial plans represent a much wider variety of benefit designs and clinical review criteria. It is our expectation that the state’s single-payer plan will follow this same pattern.

Finally, we would like to briefly comment that although we are not an insurance entity, more detailed estimates of the administrative cost savings on the insurance side should also assess how costs saved there will be driven by the reduction or elimination of programs that will need to be re-created on the provider ACO side under payment reform. ACOs will almost certainly need infrastructure, systems, and processes for care management, provider credentialing, holding and distributing capitated or shared savings funds, reserves and risk mitigation insurance, and possibly even internal claims processing.

3 According to BISHCA’s most recent “Annual Statement Supplement” for insurers (for 2009), Vermont has more than 40 health insurers qualified to do business in the state. See http://www.bishca.state.vt.us/ sites/default/files/2009-ASSR-All-Major-MedGroups.pdf.

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Based on our assessment of all of the above factors, we believe the most optimistic estimate of cost savings for Fletcher Allen due to administrative simplification is 15% of our BIR costs. This compares to the 50% reduction estimated in the Report for Options 1 and 3, and 33% for Option 2. Applied to our $35 million BIR cost estimate, this indicates a potential dollar savings of $5.3 million. This contrasts starkly with the assumed cost savings if we were to use the report’s assumptions (6.5% of costs as BIR and a 50% reduction of those expenses, which would yield cost savings at Fletcher Allen alone of about $29 million using our FY 2010 numbers).

We also have concerns about the savings assumptions associated with other functions:

Reduced fraud and abuse: As noted earlier, these assumptions appear to be based on national statistics. The estimated savings of 5% of total health care expenditures – which would be $235 million, based on total health expenditures this year of approximately $4.7 billion – seem overly high without evidence of any kind of systemic fraud and abuse in Vermont.

Waste and duplication savings: The report assumes saving associated with reducing waste and duplication in the system, and after an extensive discussion of national utilization statistics, says “A recent evaluation of health service supply in Vermont, New Hampshire and Maine found that the rates of diagnostic testing, hospital admissions and surgery in Vermont were similar to that in the other two states” (p. 47, citing the BISHCA Tristate report issued in June 2010).

That statement is simply wrong. The Tristate Report in fact clearly stated that Vermont performs better than our two neighboring states, as well as against other national indicators:

While there were some exceptions by HSA and type of service, utilization rates in Vermont were lower than in New Hampshire and Maine . The Vermont statewide rates for inpatient hospitalizations, outpatient ED visits, back surgery, and hysterectomy were lower than the NCQA HEDIS commercial HMO and PPO national averages based on data submitted by health plans. These findings for the commercially insured population in Vermont were consistent with the findings of the Dartmouth Institute report on Vermont’s Medicare beneficiaries, which noted, “Vermont’s utilization rates were lower than those observed in the rest of the United States and were generally lower than those observed in the adjacent regions of New York, Massachusetts, and New Hampshire .”

Tristate Report, p. 83 (emphasis added). In fact, in all areas of diagnostic testing, hospital admissions and surgery – the three areas called out in your report as being “similar” to our neighboring states – Vermont had rates lower than New Hampshire and Maine, and when comparisons were made, lower rates

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than national Healthcare Effectiveness Data and Information Set (HEDIS) rates. According to the Tristate Report:

Under the category of diagnostic testing, the tri-state average for MRI scans was 69.5 per 1,000 members, while Vermont’s average was 63.8 per 1,000 members. The tri-state average for CT scans was 84.8 per 1,000 members, while the Vermont average was 77.4 per 1,000 members.

For hospital admissions, the tri-state average was 51.3 per 1,000 members, while the Vermont average was 48.5 per 1,000 members. Additionally, the report noted that the national HEDIS commercial HMO average was 57 per 1,000 members, and the commercial PPO average was 54.7 per 1,000 members, both of which are higher than the tri-state and Vermont averages.

Under the category of surgery, the tri-state average for hysterectomies for women between the ages of 20 and 64 was 6.78 per 1,000 members, while the Vermont average was 5.81 per 1,000 members. The tri-state average for back surgery for members 20 to 64 years of age was 3.62 per 1,000 members, while the Vermont average was 3.04 per 1,000 members. Both of these measures were lower than the national HEDIS rates.

Tristate Report, pp. 11, 16, 21, 64 and 69.

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

We also note that while we have historically been efficient and low-cost, we also are starting to realize the efficiencies and avoidance of duplication – for example, by reducing the potential for duplicate radiology studies or unnecessary consultations – that may be achieved by having a comprehensive electronic medical record. This further reduces the opportunities for new efficiencies to be gained under any of the design options.

Finally, page 53 of the report also suggests the need for additional organizational capacity to find the savings attributed to reduced waste in the system (“Additionally, there will be an organization to monitor whether physicians use the most cost-effective health care available to their patients.”). This would have cost consequences to the system, which do not appear to have been included in the financial modeling. What organization would take that role? What resources would it need? How would it get paid?

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Malpractice reform. Again, we are not convinced of the value of extrapolating savings from a national study to Vermont, although we recognize that there are few reliable sources for understanding the savings opportunities here. More importantly, we were concerned about the apparently contradictory statements in this section, which both recommends that we move to a “no fault” system for compensating individuals harmed by the health care system, and at the same time states “Furthermore, individuals who experience major losses or damages will be able to sue providers for additional compensation” (page 59). That would simply add a new bureaucratic layer (the no-fault system) onto the existing judicial process, with no savings whatsoever – either in terms of administrative costs or reduced defensive medicine.

Primary Care Workforce

Developing and enhancing Vermont’s primary care workforce is a laudable theme in the report – and a theme that has been recognized in the state for years. Vermont has a long history of working to enhance and support primary care providers, including through the efforts of our partner in the academic medical center, the University of Vermont College of Medicine (which is consistently ranked high among medical schools for primary care),and the Area Health Education Centers (AHEC) around the state. Loan forgiveness programs – one of the report’s recommendations – have long been a part of these efforts, and at least one other recommendation (increasing payments for chronic disease management) is at the heart of the Blueprint for Health. Those efforts have borne fruit, in that about 40% of primary care providers in Vermont were either educated or trained at our academic medical center.

To the extent the report includes other recommendations – such as incentivizing continued practice through scheduled salary increases, bonus payments before and after residency for choosing primary care, providing non-salary financial incentives to new primary care providers (like “extra time off or subsidized housing”), and paying for administrative tasks such as referrals – we have the following questions:

How would salary increases be determined? Who would pay them? Are there certain benchmarks that would need to be achieved, and how would they be established, and by whom? Who would pay the “bonuses”? What if the individual decided to practice primary care but in a different state? What if they could not find an acceptable practice here in Vermont, or they could not come to terms with a practice (despite acting in good faith)? How would non-salary incentives be implemented? Who is covering the vacation time? How would this person be paid? Who would pay the housing incentives, and how much would they be? Since this is a taxable benefit, why not just provide a higher salary?

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Referral payments are currently illegal. What laws would need to be changed to allow this to happen? And how would you effectively track how many referrals a PCP has made and to whom?

Payment to Providers

We also have serious concerns about the general notion that primary care providers will benefit from increased payments under the proposed models, while correspondingly lower payments to specialists will be necessary in order to maintain the aggregate level of payments to providers.

Unlike some academic medical centers, primary care is a core service at Fletcher Allen. We currently have ten primary care practices in our two-county local service area, and employ over 170 advanced-practice nurse practitioners and physician assistants, many of whom work in primary care.

At the same time, Fletcher Allen is the only provider of a number of specialized services in Vermont, including open-heart surgery and interventional cardiology, neonatal intensive care services, inpatient renal dialysis services, kidney and pancreas transplants, pediatric surgery, and high-risk obstetrics.

While we recognize that from one perspective specialty physicians are paid quite well, this is where the adage that “Vermont is not an island” is most true. Reductions in specialty payments will make it even more challenging to recruit and retain specialists in Vermont, including at our academic medical center. 4

So long as this kind of payment “redistribution” is unique to Vermont, we can predict with confidence that we will continue to experience recruitment challenges, and will lose some specialty care providers to other states. Physicians are used to moving among practice settings, as most of them attend school in one place, do their residencies and fellowships in one or two other places, and then move elsewhere to practice. A material reduction in payment will cause some specialists to look outside of Vermont for better opportunities for them and their families.

While some will argue that this will save the Vermont system money, that is a false premise. The loss of specialty providers will not result in a reduction in the need for their services; patients will simply have to obtain those services elsewhere. That will create a net increase in spending, since Fletcher Allen’s costs are lower than those of

4 For example, here at Fletcher Allen, we routinely experience lengthy delays in recruiting specialists in a variety of practices areas. As of this writing, we have 14 positions for which we have been recruiting for over a year . This includes a breast oncologist, a general dermatologist, a rheumatology chief, a malignant hematologist, a neurologist, a trauma surgeon (we are the state’s only accredited Level 1 Trauma Center), a breast surgeon, a urologist, a general surgeon, a gynecological surgeon and a maternal/fetal medicine physician.

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medical centers in the Northeast (and compare well nationally, too), as shown in the following charts:

University Health System Consortium (10/09 – 4/10) Benchmark: Adjusted cost per discharge normalized for patient acuity in comparable academic medical centers within the UHC database.

Mean Fletcher Allen costs $ 11,387

Mean expected costs to compare group $ 13,594

Ratio of Fletcher Allen to compare group 0.84

Association of American Medical Colleges (Autumn 2009 Databook) Fletcher Allen Median Top Quartile Rank 5

Operating margin 2.67% 2.90% 4.68%

Patient care expense per discharge $ 10, 878 $ 16,181 $ 19,603 90 th lowest (out of 95)

Patient care expense per equivalent patient day $ 1,930 $ 2,743 $ 3,192

FTEs per occupied bed 5.16 6.65 7.89 89 th lowest (out of 95)

Capital expense per discharge (CMI adjusted) $ 449 $ 474 $ 628

In addition to these general concerns, we have the following specific comments:

Pages 85 – 90: The report refers to market failure as it relates to unequal medical knowledge and information. While this is true, that is not really a definition of a market failure; rather, there is asymmetric information between the physician and patient. This is always going to be the case. While patients are increasingly knowledgeable about their care, physicians will by the very nature of the patient-doctor relationship have enhanced medical knowledge relative to their patients. This is not in itself a cause for market failure. Market failures can occur as a result of adverse selection when all of one type of population of patients moves into or away from another pool of patients, such as the elderly or acutely-ill patient populations. In this type of scenario, the government may choose to enter the market as it has failed. Essentially, the goal of avoiding market failure is the rationale for forcing all healthy individuals to purchase insurance.

5 The AAMC ranks only some indicators. We have included rankings where available.

12 Fletcher Allen comments on Hsiao Report February 3, 2011

Page 88: The report discusses payment incentives and how the fee-for-service (FFS) incentive drives volume. The report also identifies a combination of “risk adjusted capitation and bonus” based upon performance including patient satisfaction, as the optimal payment structure for primary care physicians. For specialists, the report recommends a salary plus a bonus based upon performance.

These payment models have some idealism associated with the construct, however the report is completely devoid of key details and central issues regarding the physician compensation:

• Who determines the “salary” and what is the level of that “salary”? • Is that salary benchmarked to a national standard or local? • On what basis would salary change (up or down)? • Who is going to monitor and administer physician salaries? • How will teaching and research time be supported? • Is administrative effort supported at a clinical rate? o Specifically this would include areas such as medical directors (ICU, trauma, NICU, laboratory…) • What are the metrics associated with determining a bonus? • What is the percentage of salary associated with the bonus? • Are there financial or operational or budget triggers to initiate the bonus plan?

While many of these issues are details associated with a robust durable compensation plan, they are very important to the working physician. It is important to recognize that there is a national physician shortage and physicians have a wide array of choices regarding employment. These vary in terms of the model (owned, independent, hospital based), effort (full time, part-time), salary (guarantees, signing bonuses, deferred compensation), practice environment (academic, community), and geography.

Page 89: Transitional Period – The report outlines high-level transitional planning for the payment system in Vermont. The report recommends the following:

• Primary Care: risk-adjusted capitation plus pay-for-performance (if the physician is willing to bear risk), or the Medicare RBRVS fee schedule for those who are not. • Specialists: Medicare RBRVS fee schedule.

This high-level recommendation simply does not address the broad scope of practice provided by physicians. It does not address key operational issues such as access and quality. It does not take into consideration the actual level of compensation required to recruit and retain a highly-mobile and educated workforce, in which there is substantial national demand for services. There is

13 Fletcher Allen comments on Hsiao Report February 3, 2011

also no consideration for other key activities physicians perform in the community such as health system administration, teaching, and research. It also does not account for the incremental reimbursement that currently accrues from existing commercial payers to support these activities. While it is clear this premium will decay as the single-payer system is implemented, what dollars will cover the revenue gap?

Implementation

We suggest that this section be substantially expanded to address at least the following:

A clear timeline listing all of the actions that must occur for any of the options (or Option 3, your recommendation) to be fully implemented. That would include a discussion of any and all waivers or legal exemptions (like from ERISA) that would be either necessary or preferred in order to implement that option. A discussion of what would happen if some, any or all of the waivers are not achieved, including financial implications to Vermont taxpayers ( e.g. , would the payroll tax have to be increased to offset the assumed federal block grant under the Exchange, should that waiver not be obtained?). A discussion of the numerous legal issues implicated by the types of delivery- system changes being promoted (IDSs and ACOs), including recommendations and a timeline for how the state will address those issues, and the impact on costs should they not be. These include antitrust laws that govern federal policies on competition, the Stark Law (which limits the ability of hospitals to develop new reimbursement models with physicians), civil monetary penalty laws that prohibit hospitals from rewarding physicians for reducing or withholding services to Medicare or Medicaid patients (whether they are medically necessary or not), the federal Anti-Kickback Law aimed at financial incentives to influence referrals in programs including Medicare and Medicaid (with no safe harbor for clinical integration programs at present), and IRS rules for not-for-profit hospitals that prevent tax-exempt organizations from using the organization’s assets to benefit private individuals, including physicians. There is also no discussion of what infrastructural changes might be needed if we move to a delivery system based on IDSs or ACOs. There is some discussion through the report of moving to “smart card” technology for medical records (for example, on pages 39 and 107), but there is no analysis of the financial impact of moving to such a system, or the timeline for so doing. Given that Vermont is already among the nation’s leaders in terms of health information technology, but not through this technology, would this mean having to replace existing systems? What about the privacy and confidentiality implications?

14 Fletcher Allen comments on Hsiao Report February 3, 2011

Impact on Fletcher Allen as an Employer

In addition to being the state’s largest hospital and physician practice group, Fletcher Allen is the second-largest employer in the state, with about 6,700 individuals in our employment.

While Fletcher Allen is self-insured for our employee benefits, we understand that the intent of the report is to prompt employers to drop their existing insurance plans, since they would be responsible for paying the payroll tax to support whatever option is chosen. We have done some initial (although not exhaustive) analysis of the proposals with this in mind.

Relative to our current medical plan and its expense, the proposed “essential” health plan would cost more while generally providing a less favorable schedule of benefits to our employees. For example, a number of co-payments or coinsurance requirements would be higher under the proposed plan ( e.g. , PCP office visit co-pays would double from $10 to $20, and coinsurance on inpatient stays would quadruple (from 5% to 20%)), although some would be reduced (rehab services).

While the overall costs of our insurance – counting both Fletcher Allen’s and employees’ contributions – would either remain the same or decline by a small percentage, the major impact would be on the distribution of those costs. Almost half (44%) of our employees have one-person coverage, and it is they who would bear the brunt of the cost-shift. Assuming an employee payroll tax of 5%, the average non- union, non-exempt employee currently electing single coverage at Fletcher Allen would see a 54% increase in their payments under the new plan. The average unionized employee currently electing single coverage would see a much larger increase (180%), as would those currently electing two-person coverage (40% increase).

We would also have to understand the implications for our unionized employees, whose health benefits are subject to our collective bargaining agreement.

Finally, it is not clear whether large employers would be subject to penalties under the ACA for failure to offer health insurance to their employees (which could be as much as $2,000 per employee). While we assume that the intent would be to obtain an exemption from this requirement, nowhere is that discussed in the report, and it presents substantial risk to many employers in Vermont, including Fletcher Allen.