Monday, February 9, 2015

Legislative Update, February 8, 2015

Rep. Anne Donahue

Legislative Update

February 8, 2015


Once one is plunged into the complex details of our health care system, it can be difficult to take a few steps back and provide a useful “big picture” about the challenges and options we face. At this stage of the session, major bills are not yet reaching the House floor. We are all digging into details in our committees. Mine is the Health Care Committee, so I will try to share some of the facts without going too far into the weeds.

To start: the Governor’s proposal to cut back the cost shift (which contributes to increased insurance premiums) by imposing a payroll tax on businesses (which would, in theory, then result in reduced insurance premiums).

What is the cost shift?

It begins when we, as a state, decide to provide health coverage for those in poverty. That is defined in Vermont as earning less than $15,650 a year for a single person, and $24,250 a year for a family of four. But then we don’t have the money to pay for what we want to buy. So we require health care providers to give the care anyway. They lose money.

They are all non-profits, and can’t just close their doors. So they charge private insurance rates that are higher than what it costs for the service, in order to balance their budgets. (You have probably seen your insurance “explanation of benefits” that lists the discount from the full price of the service. But that is like a store doubling its price list and then giving a 30 percent discount. The price list is far higher than the actual cost.)

The insurance companies (virtually all non-profits as well, in Vermont) set their rates based on how much they have to pay. Thus, anyone buying health insurance is paying a part of the Medicaid budget because of the inflated price charged to the private insurance companies. The cost of the underpayment of Medicaid “shifts” onto the private insurance rates.

This means businesses that provide insurance for employees, as well as individual purchasers. Since most insurance is bought by employers, they are the ones paying most of this cost shift.

Of course, it isn’t really the employers paying. Health insurance is considered part of one’s compensation package, which also includes salary and any other benefits offered. So you, the employee, is actually paying for the cost shift.

Think about the last time you looked for a job. You probably didn’t look only at salary. You looked at whether health insurance was included. Employers compete based upon total compensation packages. As many have become painfully aware in recent years, businesses can’t give unlimited increases in compensation, so as premiums go up, they usually begin to increase the employee’s share of the costs.

Ironically, we, the employees, who pay for underfunded Medicaid through lost compensation, are pretty much the same people as we, the taxpayers, who started the whole cycle by not wanting to pay the full cost (in taxes) for the Medicaid we are buying. This is what the model I’ve attached demonstrates.

This explanation of the cost shift is an oversimplification.

It leaves out even some of the very basic additional pieces: for example, the fact that many employers do not offer health insurance. In addition, the total cost shift is much larger than just Medicaid. Medicare – which is all federal money -- doesn’t pay full cost either, although it pays more than Medicaid.

It also ignores other inequities. If we paid full cost for Medicaid in our taxes, it would be based on our progressive tax rate: the more you make, the higher the percentage of your earnings you pay. When we pay for it through our compensation, the CEO and the maintenance person are contributing the same amount – so it is a much lower percentage of the CEO’s earnings than that of a low wage earner.

So, on to the Governor’s proposal.  

The Governor suggests addressing the cost shift through a payroll tax to begin to increase Medicaid to the Medicare rate (still lower than actual cost.) This doesn’t actually reduce the cost shift. The only way to do that would be to pay 100 percent of the cost of Medicaid services in our individual taxes (shared between state and federal taxes.)

What it does is to make the tax shift more transparent. Instead of being hidden in the insurance rate, the Medicaid shortfall would be paid through the new payroll tax. What it still hides is the fact that you and I are ultimately paying for it, because businesses don’t pay taxes. Only people pay taxes – it’s just that sometimes it’s more hidden because the cost is passed on through higher prices for good or lower employee benefits.

The tax of .7 percent would raise about $40 million. Since it’s being used for Medicaid services, it can be matched with federal Medicaid funds, so the fund becomes about $90 million. The theory is that we can then take the $90 million and use enough of it to pay towards Medicaid services so that insurance rates go down, and thereby pay it back to employers by the same amount as what they paid in the tax. That would still leave us with a lot of extra new money.

One result would be that all businesses would be paying. Those that currently give generous health benefits might save money overall. Those that give none would have a new tax burden, and since these are usually small businesses that couldn’t afford to offer health insurance, they will have a hard time affording the new tax.

There is a very big question involved:

Is the cost shift such a clean money flow that money paid in on the Medicaid side will flow back out to reduce premiums at the same level? The answer is a definite no, as far as an equal dollar-for-dollar, but the unknown is, by how much? Our Joint Fiscal legislative experts say that it is very questionable that it will have a major effect on insurance rates.

And then, this week, we found out how the Governor wants to use the $90 million. Only $25 million would go towards paying health care providers closer to the cost of their services – in other words, towards the existing cost shift, even though employers are paying in $40 million.

About $20 million will go to new expansions of various state initiatives to reduce overall healthcare spending (which could save us some in future cost increases), and $5 million to administer the new tax. There’s $5 million in “unspecified,” which leaves $30 million to go.

That $30 million will go to “new caseload.” That means it will go to the increase in the number of people that have enrolled in Medicaid through Vermont Health Connect.

This increase is generally a good thing. We have cut our uninsured population by almost half in the past two years, mostly through getting eligible people onto Medicaid. But yes, it costs money to do this. We don’t have the money in the state budget to pay for it. So we will use the new employer payroll tax to pay for it.

The Governor’s staff – with a straight face – says that this $30 million counts towards addressing the cost shift, making it $55 million in all, compared to the only $40 million employers will be paying in. Why would it count?

If we don’t have the money to pay, they said, then we would have to balance the state’s books by reducing what we pay the providers even more. That would increase the cost shift even more. So this is a prevention strategy: employers will be paying the tax in order to prevent the cost shift from getting bigger! This is like protection money: pay up, or you’ll get beat up worse.

Why would we do it this way?

Without this payroll tax to pay for the increased Medicaid costs, we would have a $16 million hole in the budget, because this scheme is part of the Governor’s plan to fill our $100 million deficit.

There are only two other ways to fill that hole.

One would be to find other areas to cut back, and live within our means.

The other would be to raise taxes to pay for the increased Medicaid cost, and the Governor says he has heard the message from Vermonters: no new taxes.

Hmm? What exactly is a new payroll tax?



I welcome your thoughts on this or any other subjects before the legislature. You can contact me by message at the statehouse (828-2228), at home (485-6431) or by email (  My complete file of legislative updates can be found at

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