In 2011, the Vermont legislature passed Act 48, a plan to provide universal health coverage to all residents. One of the goals of the law was to ensure greater “fairness and equity” in how Vermonters pay for health care (Agency of Administration, 2012). Implementing a state-based universal coverage plan will entail significant shifts in how health care is financed in Vermont. As the Vermont legislature and administration implement the law, it is important to understand how health care is financed today and the degree of fairness and equity present in the current system.
In this analysis, we estimate total health spending in Vermont in 2012, and as projected in 2017 under the Affordable Care Act (ACA) without additional reforms related to Act 48. We then consider two concepts related to the fairness and equity present in the existing system. The first concept, payments by Vermont residents to support health care, represents what Vermont residents pay for health care in the form of premiums, out-of-pocket spending, and taxes. Payments do not necessarily equal spending, in part because some health spending in Vermont is financed by net inflows from the federal government. The second concept that we consider is the value of health benefits received by Vermont residents, which is equal to premiums, out-of-pocket spending, and the value of any public health benefits that individuals might receive (including Medicare, Medicaid, military health coverage, and other public health services). The value of health benefits received corresponds to total health spending in the state, and can be compared to figures reported in the Vermont Expenditure Analysis, the state's annual public report on health spending (Green Mountain Care Board, 2014). One of the reasons that we focus on payments and the value of health benefits received is to understand whether people in Vermont get more or less in benefits than they are paying for directly or through taxes, and to understand whether this differs depending on people's income.
Below, we define each of these two concepts in greater detail:
- Payments for health care, which consist of
- Direct payments:
- Premiums paid by an individual
- Premiums paid by an individual's employer (following standard methods used by economists, we treat employer premium contributions as direct payments by workers, because they ultimately bear the incidence of those payments through reduced wages)
- Out-of-pocket payments for health care
- Net tax payments:
- Payments by an individual of federal and state taxes to support current health care programs
- Minus federal and state tax subsidies received for health care, including the value of the tax exclusion for employer-sponsored insurance (ESI).
- Direct payments:
- The value of health benefits received, which consists of
- The premium of the individual's health plan
- Out-of-pocket payments for health care
- The premium-equivalent of any public insurance that the individual might receive, such as Medicaid, Medicare, or military health benefits
- The value of any public health benefits the individual might receive, such as publicly funded mental health services, alcohol and drug abuse programs, disability and assisted living services, etc.
We analyze payments for health care and the value of health benefits received in 2012 because this is the most recent year for which there are complete data. Also, by focusing on 2012, we can validate our estimates against the Vermont Expenditure Analysis. The 2017 projections provide a baseline for estimating the impacts of possible universal coverage reforms under Act 48.
We analyzed health care payments and the value of health benefits received using data on individuals and families from the Vermont Household Health Interview Survey (VHHIS), spending information from the Vermont Health Care Uniform Evaluation and Reporting System (VHCURES), and state administrative data on taxes and Medicaid spending. We supplemented our analysis with information from federal data sources, including the American Community Survey (ACS), the Statistics of U.S. Businesses (SUSB), and the Medical Expenditure Panel Survey (MEPS). To estimate health insurance enrollment in 2017, we used a Vermont-specific version of the RAND COMPARE microsimulation model, which estimates how individuals will respond to the ACA.
After allocating spending to residents, we then analyzed which types of individuals pay more or less for care. We consider two concepts related to fairness and equity:
- Vertical equity refers to the degree to which people with higher incomes pay more than people with lower incomes.
- Horizontal equity refers to the degree to which people with the same incomes pay the same amount for health care.
We also assessed how much individuals receive in terms of health benefits, including benefits that they pay for directly (e.g., out-of-pocket payments for health care, premiums) and benefits that are subsidized by others. The value of health benefits received is an important yardstick for measuring whether the system is equitable. For example, if two individuals of the same income level pay the same amount, but one receives a larger benefit than the other, the system is less equitable than would be the case if they both received the same level of benefits.
Our analysis has several important limitations. First, no single database exists that contains all of the information needed to estimate all of the flows of payments for health care services provided to Vermont residents. By necessity, we merged together data from multiple sources, including self-reported information from state and national surveys and administrative information from state government agencies. The process of merging data from different sources adds uncertainty to our estimates. Second, Vermont and the rest of the country are in a transitional period with respect to health care, due to the implementation of the ACA. Our projections for 2017 therefore contain a high degree of uncertainty. Third, among those with two or more sources of insurance, it was sometimes difficult to determine how much of an individual's health spending was covered by each insurance source.
Health Care Spending in Vermont
- Total spending on health care for Vermont residents was $5.1 billion in 2012, according to our analysis. Our spending estimate aligns closely with the 2012 Vermont Expenditure Analysis.
- About 28 percent of spending on Vermont residents in 2012 was financed by net inflows from the federal government; nearly all of the remaining 72 percent was paid for by Vermont residents. Only a very minimal amount of health spending was financed through Vermont state taxes levied on out-of-state residents. Financing from the federal government flows into the state to support Medicaid, Medicare, Exchange subsidies, and other public health spending. Importantly, we account for the fact that Vermont residents pay taxes to the federal government to support health care; the estimated federal inflows are net of these tax payments.
- We estimate that by 2017 total spending on health care for Vermont residents will increase to $6.8 billion. That increase is driven by expanded insurance enrollment from the ACA, health care cost inflation, and the aging of the population. Our estimated 2017 spending is higher than an estimate from the University of Massachusetts (London et al., 2013); the two estimates are not directly comparable, because the University of Massachusetts analysis did not include out-of-pocket payments for health care.
- We estimate that by 2017 the share of spending on Vermont residents that is financed by net inflows from the federal government will increase to 32 percent. The increase in net federal inflows stems mainly from new federal subsidies offered by the ACA and from large increases in the share of the Vermont population enrolled in Medicare. These estimates include reforms related to the ACA, but do not include additional reforms related to Act 48.
Vertical Equity (the Degree to Which People with Higher Incomes Pay More)
- Under current law (the ACA), we find mixed results regarding the degree of vertical equity in the system.
- On average, individuals with lower incomes tend to pay less for health care than individuals with higher incomes. For example, we estimate that someone with income below 139 percent of the federal poverty level (about $35,000 for a family of four) will pay on average $1,110 to $1,570 for health care in 2017, while someone with income above 1,000 percent of the federal poverty level (about $250,000 for a family of four) will pay on average $20,160 to $21,490.
- While lower-income individuals pay less in actual dollars than higher-income individuals, as a percentage of income, low- and middle-income families pay more than high-income families. For example, we find that individuals with incomes below 139 percent of the federal poverty level pay on average 20 percent of their incomes to support health care and taxes for health care. Individuals with incomes above 1,000 percent of FPL pay on average 13 percent of their incomes on health care.
- The value of health care benefits received is relatively uniform across the distribution of income. We estimate that, in 2017, average health benefits received per person will range from about $10,000 to $12,000, with only small differences across income levels. The per person value of health benefits received is slightly lower, about $9,000 to $10,000 on average, when we limit the analysis to individuals under the age of 65.
- Low-income families pay for a smaller share of their health benefits received than high-income families. While the value of health benefits received is relatively equal across the income distribution, families with lower incomes pay for less, and rely more heavily on subsidies, than higher-income families. These subsidies include the value of Medicaid coverage, Exchange subsidies and tax credits, and—in some cases—Medicare coverage (for low-income individuals over the age of 65 and dually eligible individuals of any age).
Horizontal Equity (the Degree to Which People with the Same Incomes Pay the Same Amounts)
- We find that people with the same income levels often pay very different amounts for health care, suggesting that horizontal equity in the state is limited. For example, 27 percent of individuals with incomes below 139 percent of FPL will pay less than 5 percent of income on health care, while 21 percent of these individuals will pay more than 20 percent of their income on health care. This finding is driven partly by the fact that people with the same income levels get health insurance through different sources. For example, a person with income below 139 percent of the FPL could be enrolled in Medicaid, employer coverage, or Medicare; that individual could also be uninsured.
- Different tax regimes for people with employer- and Exchange-based health insurance contribute to inequities. Low- and middle-income families who purchase plans on the Exchange are eligible for tax credits and cost sharing subsidies if they do not have access to qualifying coverage from an employer or another source. ESI is also subject to a tax exclusion, in that spending on employer coverage is not subject to federal and state income and payroll taxes. However, the value of the ESI tax exclusion is smaller for individuals with lower incomes, who have lower marginal tax rates. The result is that subsidized Exchange enrollees in Vermont, who tend to have lower incomes, would frequently pay less overall for health care than individuals with similar levels of compensation who are enrolled in ESI.
- A family of four earning $35,000 to $65,000 in employer compensation (wages plus the employer's share of the cost of health benefits) would pay for about 33 percent of their health care if enrolled on the Exchange. The same family would pay for about 62 percent of their health expenditures if they received employer-based insurance.
After unpacking the flows of health care payment in Vermont to understand who ultimately pays for residents' health care consumption, we come to three major conclusions:
- The federal government makes a significant and growing contribution to fund health care consumption in Vermont. These net inflows from the federal government are due in part to Vermont's growing population age 65 and over, and due to the state's expansive Medicaid program and related programs that are eligible for federal matching funds.
- On average, low- and middle-income Vermont residents pay less in dollar amounts but more as a percentage of income for health care than high-income residents. While the lowest-income group pays less than one-tenth of what the highest-income group pays, low-income Vermonters spend on average 20 percent of their income on health-related payments.
- These averages mask considerable variation across individuals in the amount they pay for health care. While nearly one-third of low-income individuals spend less than 5 percent of their income on health care, about 21 percent of low-income individuals spend more than 20 percent of their income on payments for health care.
- Low-income workers could be better off with Exchange coverage than with employer-sponsored insurance, particularly if employers passed back premium spending to these workers in the form of increased wages. While both the federal government and the state of Vermont provide premium tax credits and cost-sharing reductions to Exchange enrollees, similar subsidies are not available to low-income workers with ESI.
If Act 48 implementation moves forward, Vermont policymakers might look for opportunities to better align the degree of subsidization available for individuals with similar incomes, regardless of whether they are enrolled on the Exchange or in employer coverage. In addition, if Act 48 implementation moves forward, state policymakers would likely want to retain as many of the net federal inflows as possible. Section 1332 waivers offer an option to redirect federal funds for ACA-related policies to Vermont-specific health reforms. However, alternative approaches may be needed to maintain the implicit savings generated from the employer tax exclusion.
Agency of Administration, State of Vermont, Strategic Plan for Vermont Health Reform: 2012–2014, July 2012, 2012. As of December 15, 2014:
Green Mountain Care Board, 2012 Vermont Health Care Expenditure Analysis, March 2014.
London, Katharine, Michael Grenier, Robert Seifert, Thomas Friedman, Julie Peper, Julia Lambert, David Neiman, and Crystal Bradley, State of Vermont Health Care Financing Plan Beginning Calendar Year 2017 Analysis, Charlestown, Mass.: University of Massachusetts Medical School Center for Health Law and Economics, January 24, 2013. As of December 15, 2014:
The research described in this article was sponsored by the Vermont Joint Fiscal Office and conducted within RAND Health.