On July 10, 2024

Rising health care costs, rising taxes, we are not powerless

By Doug Hoffer, Vermont State Auditor

The 2024 legislative session started and finished the same way — with universal concern about significant looming educational tax increases. Original estimates indicated average property tax bills could rise 18.5% for the upcoming year. In the end, using one-time stop-gap funding that defers the financial reckoning to future years, the actual increase was lowered to a still-significant 13.8%.

A primary driver of rising education costs (and the taxes that pay for them)? Teacher health care costs. Just this year, they’re estimated to grow a staggering 16%. 

It doesn’t need to be liBoth the state employee and teacher health care plans pay a wide range of prices for the exact same procedures.ke this.

In 2021, my office recommended to the governor and the Legislature a strategy used by other states: reference-based pricing, which would lower these costs, and which could be applied to both teacher health care and state employee health care. 

Unfortunately, until this year even efforts to study this approach have been denied. Three years later, the opportunity for savings are even larger, and the costs to Vermont taxpayers of policymakers’ inaction mount by the tens of millions of dollars.

You may be wondering how much teacher health care costs are to begin with. 

According to the Vermont Education Health Initiative, through which most teachers receive their health benefit, the plan’s costs grew from $194 million in FY10 to approximately $266 million in FY23. FY24 costs are expected to exceed $300 million, and that does not include the state’s share of most retired teachers’ health benefits.

State employee health care faces the same pressures. Total spending for the Vermont state employee health plan has, with the exception of a Covid-related dip in 2020, risen consistently and dramatically since 2010. 

In 2023 it jumped by the highest single year amount ever to $196.6 million. The cost of the state employee plan has now grown by 109% since 2010, while the number of covered lives has grown just 19% in the same time period. These figures do not include prescription drug costs, which rose from $22.9 million in 2010 to $59.2 million in 2023.

Must these price increases eat into public education and services, or result in large tax increases? 

The short answer is “no.”

Our 2021 report projected that reference-based pricing could save as much as $16.3 million each year just for the state employee health plan. Given its larger size and costs, even larger annual savings would be possible in teacher health care.

How would “reference-based pricing” work? 

In the simplest terms, reference-based pricing establishes a fair price for a particular medical service, and then pays only that amount (or a fixed percentage of it) to any provider performing the services for people on the health plan. In other words, it sets a maximum price for which the plan will pay for a service rather than merely paying the byzantine prices negotiated by insurance companies and hospitals regardless of whether they are excessive.

What’s the problem reference-based pricing solves? 

Both the state employee and teacher health care plans pay a wide range of prices for the exact same procedures to the state’s hospitals. For example, we found that the difference between the highest priced provider for a CT scan received 5.8 times more than the lowest priced provider!

A study of reference-based pricing in Vermont has finally been approved and will be released by December.

The state is self-insured, which means that it pays a la carte for every medical service utilized by a state employee. When a state employee unknowingly chooses a relatively high-priced provider, the taxpayer funded plan pays the high price; when the same employee chooses a lower-priced provider, the plan saves money.

Have any other states adopted reference-based pricing
and, if so, has it worked? 

Yes, and a resounding yes.

The state of Montana has used reference-based pricing for inpatient and outpatient services at acute care hospitals for their state employees since 2017. Independent researchers determined Montana saved $47.8 million in state fiscal years 2017 to 2019 (avg. $15.9m per year).

The state of Oregon has reported on its experience with reference-based pricing for state employees and teachers. The audit they conducted based upon 2021 claims estimated $112.7 million in savings for their plan due to reference based pricing.

In both states, there was no reduction in health care choice for state employees or teachers, and no observed impact on hospital operations.

A study of reference-based pricing in Vermont has finally been approved and will be released by December. If Montana and Oregon are illustrative, we can expect interest groups to fight this important cost-saving reform. But if Vermont chooses to pursue this strategy, and the Scott administration, the Legislature, school administrators, and the unions representing the state employees and state teachers resist the guardians of the status quo, the taxpayers they serve will reap significant financial benefits.

In short, we do not have to sit by and let health care cost increases raise taxes and strain public education and state budgets.

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