Ethan Allen Institute

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February 12, 2002
 

In 1995, following the collapse the previous year of legislative efforts to enact "universal access to health care benefits for all Vermonters", Vermont embarked on a major expansion of Medicaid. Act 14 created the Vermont Health Access Plan (VHAP). Since coming into existence VHAP has provided Medicaid coverage to persons with much higher incomes than those eligible for traditional Medicaid. Currently children are eligible for coverage from families with incomes of 300% of the federal poverty level ($51,000). As a result of Medicaid expansions, some 21% of Vermonters are covered by Medicaid, almost twice the national average. (The leading Medicaid spender, Tennessee, is also currently in a fiscal crisis caused by its TennCare program.)

VHAP was financed from a combination of sources. The federal government pays about 63% of Vermont's Medicaid expenses. To finance the remainder of VHAP costs, Act 14 increased a tax on hospital and nursing homes and on tobacco products. It levied a new tax on sellers of nursing homes. The revenues were assigned to a new Health Access Trust Fund.

An increasingly important issue in Medicaid is the deliberate shifting of costs to the providers - hospitals, doctors, nursing homes, dentists and other health care professionals. Medicare, the federal health care program for seniors, pays well below the actual cost of services. VHAP is paying 88% of what Medicare pays for hospital inpatient treatment and 70% of what Medicare pays doctors. Because of this forced discount for Medicaid, providers have to charge privately insured patients more than cost - 23% more in the case of hospital inpatient charges. This cost shift in turn increases private insurance premiums, leading to more people becoming uninsured.

In the face of sharply rising Medicaid costs, Gov Dean asked the 2001 legislature to impose an additional 67 cents a pack tax on cigarettes. It declined to do so. In his 2002 budget message the governor proposed a $16.5 million reduction in Medicaid spending for FY 2003. This will be effected by eliminating the VScript Expanded program for drug purchases, reducing VHAP pharmacy benefits, and requiring VHAP beneficiaries to pay higher copayments for services.

In February 2002 the legislative Joint Fiscal Office offered a staggering cost projection to the legislature. Its study assumed that Medicaid costs would increase at 8.5% a year, three points below the Vermont Medicaid growth rate in recent years. It projected general fund growth at 4/5% a year, and a 2% annual growth in special fund revenues (tobacco and provider taxes). The result was a six-year state shortfall of almost $300 million. This is clearly unsustainable.

To cover this huge shortfall will require dramatic increases in general fund and/or special fund taxes, coupled with serious shrinkage of the beneficiary population and higher patient cost sharing. One way out would be to convert all but the chronic (nursing home) Medicaid program into a Medical Savings Account-based program. This was cautiously recommended as an experiment by the Hogan Commission. Another way out lies in Federal government action.

The economic stimulus package passed by the U.S. House in 2001 contained a major section on tax credits to assist uninsured families to purchase private health insurance. At the same time a bipartisan group of Senators led by Sen. John Breaux (D-LA) and Sen. James Jeffords (I-VT) developed a similar plan. In his 2002 State of the Union message President Bush proposed an $89 billion program for low-and middle-income Americans who do not have employer-based health coverage.

The President's proposal would give refundable credits worth $1000 for individuals earning up to $15,000 annually and $3000 for families earning up to $30,000. The family credit would phase out to $60,000 income. This is precisely the population that is served in Vermont by Medicaid and VHAP. The President also proposed federal aid for community health centers (eleven in Vermont), more funding to pay for Medicaid coverage for families transitioning from welfare to work, and the expansion and liberalization of Medical Savings Accounts.

With strong support from the House, the president, and a bipartisan group in the Senate, it would seem that the tax credit proposal is an idea whose time has come. If enacted, it would substantially relieve states like Vermont with expanded Medicaid populations and serious revenue shortfalls.

Whether the proposal advances depends on the decision of the Majority Leader of the Senate, Sen. Tom Daschle (D-SD). He has declared that no such proposal will be acted on unless at least 34 of the 51 democratic Senators support it. This in effect gives a veto to liberal senators like Edward Kennedy (D-MA) and Hillary Clinton (D-NY). The policy goal of those senators is the creation of an all-encompassing health care system effectively controlled by the federal government. These senators dislike the idea of millions of American individuals and families shopping in a health insurance marketplace for a policy that best suits their needs, with their buying power augmented by a refundable tax credit.

If the bipartisan tax credit plan is eventually enacted, Vermont legislators will have to restore a competitive insurance market in the state. That will require repealing Vermont's community rating system, creating a high-risk pool for genuinely uninsurable Vermonters, and encouraging Medical Savings Accounts to redress the tax penalty faced by individual insurance buyers. Many of these reforms are contained in H. 616 (Rep. Tom Koch, R-Barre) and H. 658 (Rep. Bill Johnson, R-Canaan).