Cost Shift

January 19, 2015

At the beginning of each session, the first several weeks are taken up with reviewing the information we will need to master before making critical votes as the session progresses. That is certainly true this year, perhaps more than ever. Before we adjourn in late April or early May, we will have closed a budget gap of over $100 million and made a myriad of decisions to balance the needs of family budgets, energy infrastructure, affordable housing, environmental protection, social services, and the like.  In this and subsequent posts, Tim and I will address many of these issues. Some of our posts may be fairly meaty and full of detail. Others will be of a lighter nature. Feel free to email either or both of us with your questions and concerns. We look forward to your feedback.

 

The Health Care Cost Shift

 

This January one of the important and vexing issues that both the Health Care and Ways & Means Committees are studying are the bills we pay for health care. One key component of what we pay is what is called the “cost shift.” That is the amount of unpaid or underpaid health care costs that are shifted from Medicare, Medicaid, free care and uncollected debt to health care premiums that are paid by individuals. The reason that Medicare and Medicaid programs contribute to the cost shift is that the federal and state governments significantly underpay the providers the full cost of care, leaving doctors, hospitals and those with private insurance to make up the difference.

 

Currently the total annual cost shift in Vermont is estimated to be about $393 million, of which $175 million is attributable to Medicare, $150 to Medicaid, $26 million to free care provided by doctors and hospitals, with the balance due to bad debt. As some of you may know, Medicare is entirely a federal program, while Medicaid is a joint federal/state program to help children, the disabled, and low-income folks pay for health care. And we can play a significant role in reducing the Medicaid cost shift by reimbursing providers at a rate that is closer to the real cost of care.

 

In his budget address, Governor Shumlin proposed paying down part of this cost shift through instituting a 0.7% payroll tax. The money from the tax would be used to reduce this cost shift, and if the money flows as the governor intends, annual increases in health care premiums should decrease by about 5%. That is to say, the governor's intention is that the new payroll tax should lessen the burden that families and individuals pay for health insurance.  The additional state money dedicated to reducing the cost shift will have the additional benefit of attracting more federal funding for Vermont’s Medicaid program.  For every additional $1 Vermont advances toward Medicaid providers, federal funding will match that advance with $1.10.

 

During the next few weeks, Ways & Means will be examining the real effect of the proposed payroll tax. Among the questions that need to be answered are: exactly who will pay the tax? What will the effect be on employers both large and small? What will be the actual benefit in terms in reducing health insurance premiums? Will the trade-off of a new tax vs. cutting health insurance premiums really produce a net benefit to employers who would pay the tax? We will need to be assured that the benefits clearly outweigh the costs before we proceed. If the numbers don't add up, we'll have to return to the drawing board. But one thing is clear, doing nothing is not an option.

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