In any case, these sessions provide a great opportunity early in the process for Vermonters to both learn about how we finance health care now and to bring their ideas about needed reforms.

The listening sessions will lead to a February 1 findings report to the Legislature—meeting a requirement of Act 48, Vermont’s Health Care Reform law passed last session.  Here’s what the law says in Sec. 9 on pages 104-5:

(c) In developing the financing plan for Green Mountain Care, the secretary of administration or designee shall consult with interested stakeholders, including health care professionals, employers, and members of the public, to determine the potential impact of various financing sources on Vermont businesses and on the state’s economy and economic climate. No later than February 1, 2012, the secretary or designee shall report his or her findings on the impact on businesses and the economy and any related recommendations to the house committees on health care and on commerce and to the senate committees on health and welfare, on finance and on economic development, housing and general affairs.

(d) In addition to the consultation required by subsection (c) of this section, in developing the financing plan for Green Mountain Care, the secretary of administration or designee shall solicit input from interested stakeholders, including health care professionals, employers, and members of the public and shall provide opportunities for public engagement in the design of the financing plan.

There are three listening sessions scheduled:

November 29:  Marlboro College Tech Center, 28 Vernon Street, Brattleboro, 7:00 p.m.–9:00 p.m.

December 13:  Rutland Free Library (Fox Room), 10 Court Street, Rutland, 6:00 p.m.–8:00 p.m.

December 14:  Large conference room at the Department of Vermont Health Access, 312 Hurricane Lane, Williston, 6:00 p.m.–8:00 p.m.

An additional session in the Northeast Kingdom and possibly one in Montpelier will be scheduled for sometime in January.  More information here.

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– Jobs, Jobs, Who’ll Create the Jobs?

Continue reading October 2011 Update

The study was done in Oregon, which offers health insurance to poor adults who don’t qualify for the regular Medicaid program. Because money is tight, enrollment in the Oregon Health Plan is limited, and in 2008, the state held a lottery to fill 10,000 openings. The lottery provided a unique opportunity to researchers to have two large, random samples of people: one group with health insurance and the other without. The working paper that was released this week is based on the results of the first year of the study.

(For those who are interested in reading the study itself—not just news reports about the study—it’s available for $5 through the National Bureau of Economic Research.)

On one hand, the study confirms what seems like common sense. People with health insurance are more likely to see a doctor, get regular check-ups, take prescription drugs—in short, seek medical care when they need it. But what becomes clear from news accounts is that there appear to be plenty of skeptics who question whether poor people benefit from having health insurance.

Pardon my naiveté. I thought the health debate was all about the money: how do we bring health care costs under control so we can afford to provide medical services for everyone who needs them. I didn’t realize that some are arguing—and I can only I assume with a straight face—that poor people would be better off without health insurance than with the publicly funded Medicaid program.

Something tells me this study won’t hold much sway with those who have such little regard for fellow citizens. Let’s hope the policy makers have more compassion.

Governor Shumlin is right. Health care reform is needed—the sooner the better. One big reason: Health care is busting the state budget.

But proposed reforms are not likely to produce real budget savings until 2015 at the earliest. And health care costs will continue to balloon until these reforms are in place. What happens to state budgets in the meantime? Which Vermonters bear the burden now? And who bears the risk if the needed reforms fail to materialize?

So far, low- and middle-income Vermonters have disproportionately carried the load. Going forward, this is neither fair nor fiscally wise.

Vermont health care costs have increased nearly 9 percent a year on average for the last 10 years—twice the rate of the state’s economic growth—according to data from the Department of Banking, Insurance, and Health Care Administration (BISHCA).

Just as health care is eating up a larger share of the economy each year, it is also demanding a larger share of the state budget—now more than 30 percent.  Unwilling to make the case for  increased taxes, lawmakers have covered this increase by forcing down spending on everything else—the courts, education, child welfare, services for the elderly, and other services essential to our civilized society. Most of these spending cuts are in human services, the largest area of the state budget, which affect low- and middle-income Vermonters most.

Meanwhile, those in the upper income brackets are largely immune from the budget impacts of rising health care costs. These Vermonters tend to be untouched by cuts to human services. Their health insurance premiums typically take a smaller percentage of their larger incomes. And health care tax breaks benefit those with higher incomes more than those of lower earners.

Until the economy recovers and health care cost growth is slowed to a sustainable level, Montpelier needs to find a way to cover both the rapidly increasing costs of health care and the ongoing costs of public services that Vermonters need.

Rather than impose additional cuts on top of already steep budget reductions, lawmakers should raise sufficient revenue. The best way to do so would be to levy a temporary tax on Vermonters with the highest incomes. Here are three reasons such a tax would be both economically sensible and fair. Such a tax would provide:

1. A much needed stimulus effect on the state’s recovery. Budget cuts and tax increases can dampen economic activity by reducing the amount that might otherwise be spent on goods and services. However, economists point out that state spending funded by tax increases on upper income households, who have enough money to be able to save, can have a stimulus effect because it puts money into the economy that otherwise would go into savings.

2. Relief from federal cuts affecting Vermont. Thanks to the extension of the Bush tax cuts, the top 5 percent of Vermonters are receiving a federal tax reduction windfall of $190 million each year in 2011 and 2012. At the same time the federal government is reducing aid to Vermont—leaving the state to pick up costs previously paid with federal dollars. Taking back some of this tax-cut revenue can keep state services intact.

3. A stake in health care reform for all Vermonters. A temporary tax on upper-income Vermonters to help pay for the budget impacts of rising health care costs gives these Vermonters a solid reason to help the governor get those cost increases under control.

The governor’s leadership on health care reform is laudable. And the legislature should enact his reforms this year. But until the cost-saving benefits are real, all Vermonters—not just those with low and middle incomes—should share the risks and pitch in to cover the state budget consequences of rapidly rising health care costs.

Paul Cillo is president of the Public Assets Institute (www.publicassets.org), a non-partisan, nonprofit fiscal policy think tank based in Montpelier. You can find this report on their website.

At the governor’s urging, the House passed a bill to increase taxes on health care providers. The House didn’t go quite as far as the governor wanted. He proposed raising the rate now paid by hospitals and nursing homes and extending the provider tax to cover dentists. After a lot of resistance from the dentists, the House dropped them from the plan.

The good thing about this particular tax is that the money will go to pay for health care services through Medicaid, which means it will be matched with federal money. For roughly every 40 cents in new taxes, Vermont will be able to provide $1 in additional health services.

The hospitals won’t actually pay the higher taxes, though. They’ll be passed through to the customer in the form of higher insurance premiums—and higher rates to those who pay their own hospital bills. According to the latest data from the Department of Banking, Insurance, Securities, and Health Care Administration (BISHCA), about 355,000 Vermonters have some form of private health care coverage, which means they will be paying the tax, either directly or indirectly. The rest of the population is either uninsured or covered through government-funded programs, like Medicaid or Medicare, which set their own payment schedules and therefore not affected by the tax. (However, some of the costs not paid by Medicaid or Medicare also get shifted onto private insurance premiums.)

While the House was increasing the provider tax, which affects more than half of the state’s population, the governor and House leaders beat back an attempt to increase income taxes on Vermont families with taxable income greater than $137,000. Those families represent about 3.5 percent of all resident tax filers. The idea behind raising taxes on upper incomes was to have the state recoup some of the windfall that the wealthiest Vermonters got when Congress and President Obama decided to extend the Bush tax cuts for another two years. Thanks to the extension, the wealthiest 5 percent of Vermont taxpayers will save $190 million in federal income taxes this year and a similar amount next year. The proposed rate changes—in effect, a surtax—would have reduced that windfall by about $27 million this year and roughly the same next year.

Broad-based taxes, as the terms suggests, are the taxes paid by a wide swath of people. The income tax clearly is a broad-based tax. But a targeted surtax on a narrow slice of income taxpayers—like the one defeated in the House recently or the temporary plan Vermont adopted 20 years to close an even bigger budget gap—doesn’t really qualify as a “broad-based tax increase.” Similarly, the provider tax may appear to affect just a limited number of taxpayers, but if it is passed on to a large segment of the population, it effectively becomes a broad-based tax.

Rather than using labels to determine which taxes to raise, the Legislature might want to consider who is in the best position to help the state maintain existing services as it digs its way out of the recession. The provider tax will hit some people who are able to pay more for health insurance, but mostly it will affect middle-class Vermonters, who already are struggling to afford their premiums. The surtax, on the other hand, was aimed that those who are doing better than most and who also just got a big break from the federal government.

Continue reading June 2010 Update

While proponents of health care reform cheered, the cause of health care and the protection of children took a huge step backward in Arizona. As the New York Times reported, Arizona has dropped its state Children’s Health Insurance Program (S-CHIP) to help close a budget gap. The state plans to reduce funding for Medicaid and also is making deep cuts in education.

Ending S-CHIP will mean 47,000 kids will have to find care elsewhere, like the emergency room, when they get sick, or they will have go without. The cuts to Medicaid could leave another 300,000 without health care.

Meanwhile, Arizona always scores well with organizations like the Tax Foundation that promote the idea that the best states are those with the lowest taxes.

Vermont hasn’t sunk quite so low yet, but this recession has exposed an alarming shift in attitude among political leaders who talk about changing the social contract between the government and its citizens. The governor sees 170,000 people on Vermont’s Medicaid rolls and sees a budget problem, not human beings in need of help. And instead of pushing back, legislative leaders amplify the governor’s rhetoric, warning that every program faces cuts and Vermonters need to prepare for pain.

For years, Vermont had a reputation for compassion. Whenever state rankings were published, our income was always lower than the national average, and our per capita spending on social programs was always a bit higher than average. But those fiscal policies served us well, helped to make Vermont the place it is, and we could point with pride to the fact that we were willing to do a little more for fellow citizens. Before we buy into the notion we no longer can afford to be a state that works for everybody, we should ask ourselves if we really can afford to become like Arizona.

When you plot those figures on a chart, you see a steeply rising line. Economically, this growth in the cost of health care is unsustainable.

Now contrast health care with education. Between 1992 and 2009, Vermont’s total expenditures for K-12 public education fluctuated between 5.5 percent and 6 percent. On a line graph, education expenditures are flat. Unlike health care, education costs are not becoming an ever-larger portion of the economy. In other words, they are sustainable.

In his final State of the State Address earlier this month, Gov. Jim Douglas touched on both health care and education. Care to guess which he called the bigger problem?

He uttered the words “health care” just three times, and the context was either congratulatory or neutral. Nowhere did he mention that one of the main reasons Vermont is having trouble balancing its budget—and has had for several years—is the unsustainable growth of health care.

“Education,” on the other hand, appeared 36 times in the governor’s speech, and the references were mostly negative. Only one other noun—the word “state”—crossed the governor’s lips more frequently.

The first step to solving Vermont’s budget problems is to understand what’s causing them. Controlling health care costs is a big task, and one Vermont probably cannot solve by itself. But making education a scapegoat diverts Vermonters’ attention from the real issue we need to address: galloping health care costs.

Download a PDF of the report or read the text below:

In the end, the Vermont Legislature found a balanced solution to balancing the state budget for fiscal year 2010, which begins July 1. After a gubernatorial veto-the first budget veto in the state’s history-and a dramatic override in a special session on June 2, lawmakers put in place a budget that uses a combination of cuts and taxes to cover part of the drop in revenues. The federal government also provided a big and timely boost, designed to help states weather the recession.

In Vermont, there were more cuts than taxes. While spending reductions totaled about $76 million, the net effect of tax changes and increased enforcement will bring in about $28 million more than had been anticipated for fiscal 2010 (Table 1). In the wake of cuts to the fiscal 2009 budget, an even split between taxes and additional cuts in the coming year would have been better. But by maximizing the use of federal stimulus money and also raising additional revenues, the Legislature protected services that could have been lost had Montpelier followed its usual practice of managing to the money-that is, balancing the budget by cutting services to make expenditures equal existing revenue-rather than raising adequate revenues to support needed services.

Cuts
The biggest budget reductions were in education and Medicaid. The Legislature cut $18.4 million, or about 7 percent, of the annual transfer from the General Fund to the Education Fund. It also cut $15.1 million from a variety of Medicaid programs. Most of those reductions will fall on providers-hospitals, doctors, and nursing homes-although seniors in the VPharm program will have to pay a $1 higher copay for their prescription drugs.

The state payroll also took a big hit: $14.7 million. It’s not clear yet what this will mean for programs and services. If all the reductions are made through layoffs, an additional 300 to 400 state employees could lose their jobs, depending on what share of their salaries are paid out of the General Fund. In the last two years, about 400 state jobs have been eliminated, leaving the total number of state employees at about 8,200.

Taxes
The Legislature made several tax changes to produce nearly $28 million in new revenue for fiscal 2010 (Table 2). These include changes to the estate tax, sales tax, and taxes on liquor and tobacco. The largest increase comes from changes to the Vermont income tax, which will also have the overall effect of making it more progressive-that is, taxes will increase more for those in the highest income brackets. The Legislature also lowered tax rates, so many Vermonters will see their income taxes drop. Overall, the income tax changes will generate an estimated $9.5 million in additional revenue for fiscal 2010¹.

The main income tax changes were:
• Reducing the deductibility of state income taxes. In the past, taxpayers who itemized their deductions could count the full amount of their state income taxes among those deductions. Now they will be able to claim no more $5,000. This change will affect primarily those with incomes of $125,000 or more.

• Limiting the exclusion of capital gains income. Previously, 40 percent of capital gains income was not subject to income taxes. Under the new law, which takes effect this July 1, taxpayers will be allowed to exclude a fixed amount of capital gains income rather than a percentage. From July 2009 through 2010, the fixed amount will be $2,500. However, during that period, taxpayers over 70 years old will be allowed to choose the fixed amount or 40 percent. Starting January 2011, the amount will increase to $5,000, and the exclusion will be the same for taxpayers of all ages. Taxpayers with capital gains on farm sales and timber sales will continue to be eligible for the 40 percent exclusion.

By stepping up tax compliance and blocking a tax break on the purchase of new vehicles that was included in the federal stimulus bill, the Legislature expects to bring in another $6.3 million.

Difficult Choices
Vermont’s budget struggles are far from over. There will be about $100 million in stimulus money available for the state’s fiscal 2011 budget, not nearly as much as in fiscal 2010. While forecasters predict the economy will begin to improve in the next 12 to 18 months, tax revenues will still be below pre-recession levels. Even after the stimulus funds are applied, the state is projecting a $67 million deficit in fiscal 2011.

Health care is a critical problem. Health care costs in Vermont were growing at a much faster rate than the economy even when the economy was doing well. Rising health care costs have pushed General Fund spending for health care up at a rate of 15 percent each year. Since health care accounts for about a quarter of the General Fund budget, reform that slows health care spending is critical. That’s why it is imperative that Congress make significant changes in the health care system. A federal solution would be better, but failing that, Vermont will have to find its own solution if it is going to have a sustainable budget.

When the Legislature returns next January, it can expect to confront the same basic choices it faced this year. Policymakers need to keep in mind that the ultimate goal is not simply to balance the budget, but to provide the services Vermonters need. That means ensuring that the state takes in sufficient revenue to pay for those services. Once again, a balanced approach will be the best policy.

ENDNOTE
1 A summary of all tax changes is available on the Vermont Tax Department website: http://www.state.vt.us/tax/pdf.word.excel/legal/legislation/Highlights%20of%202009%20Legislation.pdf

© 2009 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

Download a PDF of the issue brief or read the text below:

When is a dollar only worth 40 cents? When the state cuts Medicaid spending. When does saving 40 cents cost Vermonters a dollar? When the state cuts Medicaid spending.

Before the Legislature takes the ax to Medicaid in hopes of balancing the budget, it needs to understand Medicaid math. Cutting Medicaid may appear to save the state money, but it’s a false economy, because it ultimately costs Vermonters more than it saves.

The key to Medicaid financing is the matching mechanism. State dollars are matched with federal dollars in a ratio known as the federal medical assistance percentage, or FMAP. Currently, Vermont’s FMAP is about 60 percent. This means that every dollar of Vermont Medicaid spending costs the state 40 cents and the federal government 60 cents. FMAP is determined by a state’s per capita income and varies among the states from about 50 percent to about 80 percent.

As part of the stimulus package just passed by Congress, the FMAP is being increased to help states balance their budgets. That means any changes to Medicaid policy in Vermont will be magnified for the next three years: the 40 cents we have to spend on each Medicaid dollar could be reduced to 32 cents—and the feds’ share increased to 68 cents. So it is essential that policymakers and elected officials do the math.

Two Examples

Raising premiums. One technique for reducing Medicaid spending is to increase the premiums that beneficiaries pay. The money collected in premiums is not treated as state dollars—that is, it doesn’t qualify for the federal match. Under federal law, the premiums are deducted from the overall cost of Medicaid, and the balance is divided between the state and federal governments. Suppose the state Medicaid program spends $1 billion on care and collects $5 million in premiums. The federal share is calculated based on $995 million ($1 billion minus $5 million).

This means that higher premiums reduce federal contributions as well as state costs. If we raise a beneficiary’s premium by $1, the state saves only 40 cents—and loses 60 cents from Washington. With the FMAP increase contained in the stimulus plan, every dollar of cost shifted to premiums will save even less for the state budget. Increasing deductible payments has the same effect.

Provider Reductions. Another common technique for saving Medicaid spending is to reduce payments to doctors and hospitals that provide services. Medicaid math kicks in again. Out of every $1 reduction, the state saves only 40 cents and the federal government saves 60 cents. Meanwhile the service provider loses the entire $1.

Who Really Pays?

The logic of cutting a dollar to save 40 cents arises from a phobia of taxes and a narrow definition of state spending. State government spending—call it the “tax pocket”—is just one of the pockets we have to pay for health care. We also have a “premiums pocket” and an “out-of-pocket pocket,” which we use to pay providers directly. When we reduce spending out of the tax pocket, we give up federal funds and have to spend more from our other pockets. Health care that would have cost us—the people of Vermont —40 cents if we paid it out of the tax pocket is going to cost $1 because it is coming out of our premiums pocket. By cutting state government spending, the amount Vermont pays for health care actually goes up.

Another perverse consequence of cutting Medicaid is that it shifts costs onto those who are least able to pay. The money that comes out of our tax pocket is based largely on taxpayers’ ability to pay. That’s not the case with money coming from the premiums or out-of-pocket pocket.

Some people might argue that when times are tough, as they are now, getting only 40 cents to the dollar is worth it if we can reduce our overall spending. But we aren’t reducing it. When we cut Medicaid spending, the state and federal government save a dollar, but the cost is simply shifted to someone else in Vermont.

There’s no doubt that we need to slow the growth of health care costs. But what we learn from Medicaid math is that cutting state spending for health care isn’t the same as cutting the cost of health care for Vermont.

© 2009 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

Download a PDF of the issue brief.