Yesterday, Dr. William Hsiao presented a draft proposal by health care policy analysts to the Vermont legislature about the creation of a single payer health care system in the state. According to the report, adopting single payer would result in roughly 25 percent savings on health care between 2015 and 2024.

The report contained two different designs for administering the program, a purely government-run single payer, and a public/private single payer. It also looked at two potential benefit levels, essential and comprehensive.

Option 1: Government-run single payer

The plan would be a full government-run single-payer health care program for the state with fairly direct control by the state legislature. The government would set benefits, taxes, payment rates, and carry out all the administrative functions. It would cover all legal Vermont residents who would all get a Smart Card with their medical records.

It would have a quasi-single risk pool and basically standard payment rates for all individuals in the state, although technically not the same benefit package. Most people would receive the same benefit package, the exclusion would be people on Medicare whose benefits would remain the same, and those who qualified for Medicaid, if that group would currently get more comprehensive benefits.

Nothing would stop individuals or businesses from buying additional supplemental private coverage.

The analysts recommend the state use a risk-adjusted capitation rate plus a pay-for-performance system to pay providers. They also suggest fostering the creation of accountable care organizations. In addition, they recommend medical malpractice reform that involves switching to a no-fault compensation system similar to the one in use in New Zealand.

Benefits Package

Two different possible benefits packages were examined for people under 65. A “comprehensive” package that would have an actuarial value of 97 percent for medical services and cover vision, dental, nursing home and home care. This would be a truly amazing plan, far better than what most people currently have, but is obviously the significantly more costly option.

The other was an “essential benefits” package that would have an actuarial value of 87 percent, have limited vision and dental, while excluding nursing home and homecare. The focus is on preventive care and early detection.

Despite the name “essential” this package would provide a good level of coverage on par with the level of coverage most people in the state are getting from their employer. It would also be well in excess of what uninsured individuals would get in the new health care law, which only provides subsidies to help people buy private insurance with an actuarial value of 70 percent.

Mainly for issues related to cost, the “essential” package was recommended over the comprehensive package.

Financing

The plan will in part be financed by the money already going to provide public health care in the state, such as Medicaid, SCHIP, Medicare, or new exchange subsidies. To use this money in a single-payer system would require several different waivers of federal law to get a block grant transfer of the funds.

In addition, the system will be funded by a relatively progressive payroll contribution tax; this is to deal with the problem that employer health care is currently tax exempt, so analysts recommend it is replaced by a tax that can also be deducted.

Under the tax code in the United State, employers’ spending on health premiums is tax exempted. Additionally, the employee’s share of the premium can also be tax exempt if an employer has a flexible spending account. It is imperative that in introducing a new health financing structure in Vermont, this tax exemption remains in place for Vermont employers and workers. For this reason, we do not propose that Vermont should finance its health reform efforts with an income tax. Rather, a payroll contribution system enables employers’ contributions to remain tax exempt. According to our consultations and review of tax laws, benefits for Vermonters under such a system would not be taxable—much like current Medicare benefits—and employers could deduct payroll contributions as business expenses.

[...]

We recommend that Vermont follows the principle that workers paid below certain wage rate and their employers would be 100% exempted and the exemption be phased out gradually as the wage rate increases.

Option 2. Public Option

(This option would be a state public option offered on the exchange created by the new federal health care law. It will be examined at length in a separate post)

Option 3. Public/Private Single Payer

This option varies little from the “government-run single payer” option. It is the same benefits, financing, and payment reforms. There are really only two main differences.

Most importantly, they recommend that instead of the day-to-day decisions being made directly by the government, they are decided by an independent board of all stakeholders:

Instead of being purely government-administered, under this option, the Single Payer Entity would be governed by an Independent Board representing all the major payers, including, employers, state government and consumers, as well as the beneficiaries or recipients of benefits and payments, including providers and consumer groups.

The major role of the Independent Board will be to negotiate updates to the benefit packages and payment rates to providers. These two factors together would determine the next year’s expenditures and also the revenues of providers. We believe that this approach is an improvement over the budget system in Option 1 because it is largely insulated from the Legislative process and will produce substantially more buy-in by all parties than a budget that is developed in the Legislature

The governor would ultimately have the discretion to veto the board’s decisions.

This independent board was recommended partly for political reasons because businesses felt “government would be unable to withstand political pressures to increase benefits and coverage, necessarily funded through increased taxes.” Similarly, providers who receive low Medicaid reimbursement rates were concerned a more direct government program would drive rates too low.

The other difference is that instead of the government running claims administration and provider relations, this job would be contracted out to a private company via a competitive bid.

Additionally, Option 3 preserves a limited role for private insurance in the area of claims administration and provider relations. The Independent Board will contract out, through a competitive bidding process, the claims administration for the entire single payer system. As described in Section 4A: Savings, international experience suggests that this governance structure will also impact the potential savings and health care expenditure growth rate. We expect competition over claims administration to provide incentives to innovate and increase efficiency.

Waivers, Waivers, and more Waivers

To get the proposed single-payer systems to work, the state will need several waivers from federal law. The state would need waivers to make changes to Medicaid and SCHIP. It would also need a waiver from the new health care law to not set up an exchange and get the money as a block grant, but the law doesn’t even allow for that type of waiver until 2017.

In addition, the state would need waivers to allow it to bring Medicare rates and billing in line with the rest of the system. (Although not getting the Medicare waivers would be unfortunate, this system could function slightly less efficiently as a “two payer” with Medicare and one program for everyone under 65.)

The design of the single-payer proposal is meant to not run afoul of ERISA, so as not to need a waiver, but I suspect if single payer is adopted, we will probably see a few lawsuits about the issue.

Criticism

While I understand the logic behind having a relatively insulated board make decisions about rates and exact benefit design with stakeholder input, the devil is in the details. I believe the democratically accountable legislature should play an important role in determining and approving all board members. I’m also unhappy with having a governor veto for the board. I don’t like the trend in American politics for an ever more powerful executive, and think a legislative veto in general would be preferable.

I’m also fairly unconvinced that a competitive bidding process for claim administration would really save the state money. I know the free market logic behind government contractors in such circumstances, but there are sufficient real-world examples showing savings not materializing.

Another thing the legislature should consider is that even if using a private contractor did result in very small savings compared to having the government do claims administration directly, it is likely much of the work would be done by employees outside the state. Keeping these jobs in the state might be the better holistic move for the state’s budget and economy instead of chasing the possibility that an outside private contractor might be slightly more efficient.

There is also the problem that the single-payer proposals require many federal waivers and no guarantee the state will receive them. It is disappointing the report didn’t use the “public option” or other means to detail a backup plan that could get as close to single payer as possible without the need for waivers.

Conclusion

Much thought was put into the proposal to make it as politically palatable as possible to all stakeholders. Attempting to achieve a benefit package on par with current private plans while choose to leave Medicare benefits unchanged seems a smart move. Using a payroll contribution tax, while not the ideal funding mechanism, is probably the most practical given federal law, since it too allows businesses to keep their tax deduction on their employer health care.

Overall, the proposal is extremely good and the projected savings are very impressive. To give you an idea, a 25 percent reduction in total US health care spending would have been over $600 billion last year alone. Ideally, Vermont will seize the opportunity, and get the waivers needed, to show the county the path to true health care reform.