State of Reform
October 25, 2022
Good afternoon. Thank you for inviting me to join you today. I haven’t been able to attend all the sessions but I assume you have spent a lot of time talking about our acute workforce shortage, the hospital discharge and capacity problem, and the growing realization that the cost structure of our health care system is no longer financially sustainable. And, of course, this set of daunting challenges is unfolding against the backdrop of a polarized electorate and deeply divisive election cycle.
For those of you who were in Oregon a decade ago, you’re probably feeling like we’ve been through all this before — or in the immortal words of that great philosopher Yogi Berra, “It’s like déjà vu all over again.” In 2011, Oregon was in the depths of the Great Recession, faced not only a polarized electorate, but high unemployment, a divided legislature, and a $3 billion revenue shortfall — over a third of which was in the Medicaid program. This should have been the formula for political disaster in anyone’s book. Instead, it turned out to be a triumph of good policy over partisan politics… and offers important lessons that we can use today.
Instead of balancing our budget by dropping tens of thousands of people from Medicaid, or by cutting provider reimbursement rates – we looked instead at the delivery model, asking how could we get more value for each dollar spent. The result was Oregon’s new care model, Coordinated Care Organizations, which now provide quality, affordable care to over 1.4 million Oregonians, while operating in a global budget indexed to a sustainable growth rate.
But the aspect of the CCO story that is most relevant to our situation today, was the handshake we had with the federal government. In exchange for a commitment to reduce the Medicaid cost trend by two percentage points, while meeting rigorous metrics around quality and outcomes, the federal government gave Oregon a $1.9 billion, five-year investment to help us make the transition to the new payment model. As a result, we were able to enroll another 385,000 people under the ACA Medicaid expansion, and realize a cumulative total funds net savings of over $1 billion.
This outcome was the result of courageous leadership from the health care sector—and a willingness to subordinate parochial differences in the larger interest of what was best for Oregonians. We are going to need same kind of solidarity and collaboration today if we hope to successfully make the transition to a more stable delivery system. Today, I will use my time to describe one way to do that, starting with the recognition that there are two significant differences between 2012 and 2022.
First, a decade ago the crisis was focused largely within the Medicaid program. Today the entire healthcare system is being impacted. Second, healthcare employment and healthcare expenditures continued to rise during the Great Recession—in other words making margin was not part of the recessionary picture for hospitals. That is not true today. Oregon hospitals saw $103.5 million in operating losses in the first quarter of 2022, and another $111 million in the second quarter.
This negative fiscal picture is being compounded by a hospital discharge crisis. As of this morning, there were 450 people sitting in acute care hospital beds that needed to be discharged, but without a place for them to go – and 223 people being boarded in ERs that need to be admitted, but there are no beds available.
This situation is due to a number of factors including structural problems and misaligned incentives between hospitals and insurers, and between our acute and post-acute care systems. But the largest contributing factor is a preexisting shortage in the health care workforce that was exacerbated by the pandemic. The enormous stress on nurses and other front-line workers—including emergency responders— led to burnout, forcing hospitals to hire expensive contract labor to backfill those who retired or took less stressful jobs.
The convergence of these factors has become increasingly lethal. Oregonians are dying, and will continue to die and/or suffer avoidable harm, due to the hospital discharge situation and the staffing crisis. People in rural Oregon who need a higher level of care cannot be transferred because there are no open beds. Ambulances are being diverted. And those being boarded in the ER are cared for by an overburdened staff who are also responsible for addressing all the medical and surgical emergencies that come through the door at all hours of the day and night.
Today, hospitals are faced with the perfect storm: falling revenues and escalating operating costs. The revenue loss comes both from the inability to discharge those who no longer need hospitalization and from having to pay back the federal loans that helped tide them over during the pandemic. At the same time, inflation has increased the cost of supplies and equipment. But the cost of labor is by far the largest driver of hospital operating budgets—both from the use of high cost staffing agencies, and collective bargaining agreements for existing employees.
The sobering fact is that the cost structure of hospitals—and of our larger health care system— is unsustainable. We have known this moment would come for a long time, but we have been politically unwilling to face the realty—aided in our denial by debt financing at the federal level and the infusion of public dollars that temperately propped up the system over the past two years. Those resources have come to an end and the stark reality of our fiscal situation can no longer be avoided. I am reminded of the passage from Ernest Hemmingway’s novel The Sun Also Rises, when Bill Gorton asks Mike Campbell how he went bankrupt. And Mike replies: “Well, two ways. Gradually, then suddenly.”
The pressure on the system is compounded by Oregon’s Health Care Cost Growth Target program. Established in 2019 by SB 889, the program has set a cost growth target of 3.4% between 2021 and 2025, and 3.0% for the next five years. In order to reach this 3.4% growth rate, virtually every payor and provider organization signed a voluntary compact in which they agreed to achieve a set of targets for increasing the use of advanced VBP (value-based payment) models during the next five years.
Payer and provider organizations who fail to meet the cost growth target in a given year, are subject to a Performance Improvement Plan—and if they fail to meet the cost growth target in three out of five years, they may be subject to a financial penalty. The compact was signed last year —but given the current fiscal pressure on the system, and a national inflation rate of 8%— these targets are, for all practical purposes, unattainable, exposing payers and providers to both Performance Improvement Plans and financial penalties.
That is the landscape before us as we approach the 2023 legislative session. It is uncharted territory fraught with risk … but also filled with opportunity because the only way it can be successfully navigated, is to navigate it together.
That journey begins with a clear-eyed recognition that the challenge we face is not cyclical (as with the economy). Nor is it situational (as with the pandemic). It is structural … and it is not going away without changing the structure itself in a way that reduces cost. The only question is whether we have the courage and the wisdom to do what it will take. Right now, payers, providers, labor, long-term care and the post-acute sector have all retreated to their respective bunkers, ignoring that they are all part of the same larger system, in which their fates are inextricably linked.
Maintaining this posture is analogous to all of you in the same canoe, drifting towards the lip of an enormous waterfall. Your response is to grip your stakeholder paddles and desperately try to keep your end of the canoe headed upstream— comforted by the knowledge that those in the other end will go over the precipice first. We can do better and we need to, because the real losers in this scenario are the very people we are supposed to be serving: our fellow Oregonians who need and deserve timely access to quality, affordable health care.
The question staring us in the face at this difficult point in time is simply this: are we going to lead or react? Will be the architects of the future or its victims? We get to choose. I am here today because I know we have the capacity to make the right decision. I am here today because I believe in you, because I believe in us. Because I believe that in the midst of this toxic, bitter, hyper-partisan environment, we all yearn for a sense of community, for a shared identity as Oregonians, for a path forward built on collaboration, not conflict.
A decade ago, it was our shared commitment to put the interest of Oregonians first, that led to the overwhelming bipartisan support for the bill that launched the CCOs, a bill that passed with a vote of 57-1 in the House and 22-7 in the Senate. When have you ever seen this kind of a majority for a major piece of health care legislation in Congress or, for that matter, in any other state? I share this simply to remind you of what we are capable of, something that is important to remember during this difficult time.
It is imperative that we put aside our past animosities and come together—as we did a decade ago—to address not only the immediate crisis, but also to develop a path forward that stabilizes the delivery system over the long term. Although there are many moving parts here, let me focus on the two which I think are most essential to our long-term success: workforce and the need to realign the incentive in the delivery system to reduce the total cost of care. These two challenges are closely interrelated and cannot be solved in isolation. Let’ start with workforce.
As we discussed earlier, the cost of labor is the largest driver of hospital operating budgets. For most hospitals, the cost of labor accounts for over 55% of their operating budgets. At an academic institution like OHSU, it may be over 65%. And that’s brings us to the rub. How can we reduce the hospital cost structure—in order to keep these institutions solvent, so they can continue to provide the care that Oregonians need—when over half of that cost is in payroll and benefits?
Answering that question is central to our success—and it must be answered not in the abstract, but within the context of what our health care workforce has been through. And over the past two years these workers have been battered.
In the depth of the pandemic—month after month, surge after surge—they shouldered the stress and the human tragedy of the COVID 19, risking their lives, working hours and days at a time, often lacking adequate protective equipment, as well as oxygen and other vital supplies, to save lives and keeping the rest of us safe. And I am referring not only to the doctors, nurses, respiratory therapist, and all those involved in direct patient care, but also the housekeepers, janitors and food service employees, who also risked their lives to keep hospitals running during those dark days.
These workers deserve to be paid, and to be paid well. In fact, I don’t think anyone who works for a hospital—or for any other part of the health care system—should be paid so little that they qualify for the Oregon Health Plan. One way to ensure good pay is through labor unions and collective bargaining agreements—both of which I have supported throughout my career in public service, and continue to support. But the simple fact is that we are facing a math problem: the cost structure of hospitals is unsustainable, and nearly 60% of that cost is labor.
Right now, we are in a crisis mode and the relationship between labor and hospitals is largely confrontational. Many payers—who are generally better off financially than hospitals–are on the sidelines. The reality, however, is this: in the absence of new revenue and/or structural changes, anything that increases the cost of operating a hospital will impact patient care by reducing access or compromising quality.
Mandatory, minimum staffing ratios, is a case in point. Staffing ratios are important, and I support them. If the patient to nurse ratio is too high, it undermines the quality of care, compromises patient safety and contributes to burn out. But we are in uncharted territory. Mandatory, minimum staffing ratios, introduced into an environment where many hospitals cannot fill existing nursing positions, could negatively impact care. If a hospital is unable to meet the staffing ratios because they simply don’t have enough nurses, their choices are limited.
Once choice is to hire more contract nurses, further widening the gap between operating revenue and operating expenses. Another choice would be to close some existing beds in order to meet the ratios, further compromising access to care by reducing capacity, which is already strained. Both choices exacerbate the current crisis, and ultimately will not serve the long-term interests of labor, hospitals or our fellow Oregonians who cannot access the care they need and deserve.
The Chinese General Sun Tzu wrote in The Art of War, “He will win who knows when to fight and when not to fight.” The “enemy” here is not better pay for the health care workforce, nor is it hospitals trapped in a business model that is no longer fiscally sustainable. The enemy is that payers, providers and labor continue to operate in silos, when only coordinated action can create a path forward.
Addressing this problem is going to require a “safe forum” — framework that engages all the relevant players, provides a larger common context, and makes explicit how the consequences of different individual choices and strategies by payers, providers and labor will play out over time. A framework in which there is shared responsibility and accountability for finding a sustainable path forward.
The North Star for this framework – the outcome that should guide all the individual strategies — is the ability to provide timely, affordable, quality health care for all Oregonians, in a system that is both equitable and fiscally sustainable.
I am not suggesting that we reduce what we pay our health care workforce, nor that we shouldn’t take a look at mandatory minimum staffing ratios. What I am saying, is that these conversations cannot take place in a vacuum, because they are all interrelated. What we need is a place for labor, providers and payers to come together to work out a collaborative way to address both the immediate crisis in workforce, access and capacity, and the need to change the underlying health system cost structure to reduce the total cost of care overtime.
This framework for collaboration is the single most important step we can take to address both the immediate workforce crisis and to craft a long-term solution. Creating this “safe forum” must be a top priority for Oregon’s next governor and legislative leadership. And we cannot afford to wait until next year to start this conversion. It needs to start as soon as possible — in fact, it should have started months ago.
Solving our workforce shortage, and changing the cost structure of our unsustainable delivery model are closely interconnected and require two concurrent and converging strategies.
The first strategy involves focused investments over several biennia to expand the capacity in our system of post-secondary education to train more health care educators and more health care workers —not just nurses, but also community mental workers, peer support specialists, child care workers and those providing home health services to an aging population. This must be a well-paid, professional and stable workforce that can expand our capacity to maintain people in the home and community, rather than in the acute care medical system.
At the same time, we have an immediate workforce challenge, which will require an emergency 24-36-month effort to significantly increase the number of CNAs, LPNs and RNs graduating from our universities, community colleges and training programs. The effort must be intentionally connected to a longer-term strategy that increases the number of advance-degree nurses and nurse practitioners in Oregon, who will play a crucial role in helping to counterbalance the projected future decline in the number of primary care physicians.
Successfully designing and implementing these interconnected workforce strategies will require trust, innovative and collaboration between payers, providers, labor and the Oregon State Board of Nursing within the framework described above.
Paying for the necessary investments that will required is where the workforce strategy intersects with the need to reduce the total cost of care.
As discussed earlier, Oregon’s current health care cost growth targets are simply unattainable given the current fiscal pressures on the system. Legislation is being drafted to exempt payers and providers from being subject to a performance improvement plan or financial penalty if their cost growth above the target is “driven by costs incurred to meet the community’s need for access to health care.” The problem is that this legislation, if passed, would effectively eliminate Oregon’s cost growth targets without offering an alternative path to reduce the total cost of care… apparently on the assumption that the public sector will continue to subsidize an unsustainable business model.
It should be clear from the federal resources that propped up the system during the pandemic— and last month’s $40 million Emergency Board appropriation—that the current health care business model is not sustainable without ongoing public subsides. But given the other demands on public budgets, not to mention a national debt that now exceeds $30 trillion, believing that the Oregon legislature and/or Congress will continue to prop up this hyper-inflationary business model, is magical thinking. We clearly need to modify the unrealistic growth targets and timeframes established by SB 889 … but there has to be another side to the handshake.
The only way that additional public resources will be appropriated over time, is if they are used to fund a true transition from our current system to one that is that is fiscally sustainable. This will require, a shift away from fee-for-service to some form of prospective payment in a global budget, indexed to a sustainable growth rate. Indeed, the SB 889 Commission expressly directed the Oregon Health Authority to help move the market to value-based contracts— where payers and providers share true upside and downside risk for the total cost of care, in a global medical budget.
The implementation of our CCO model a decade ago offers an illustration how this transition could take place. Remember, that Oregon’s commitment to reduce the Medicaid cost trend rate by two percent below medical inflation, allowed us to pay back the $1.9 billion federal investment over the first five-years of waiver, and still realize a cumulative all funds savings of over $1 billion.
It is the delta of savings that accrues from reducing trend, that creates the opportunity we took advantage of ten years ago. In 2012 we were dealing only with the Medicaid program, so the “handshake” involved a $1.9 billion investment from CMS, in exchange for a commitment by the state of Oregon to pay back that investment with savings that would result from reducing the cost trend within Medicaid.
Today the entire health care system is impacted—not just Medicaid, but the commercial market as well,—which is also subsidized with federal dollars thorough the tax exclusion for employer-sponsored coverage. This creates the potential for a much larger initial federal investment that would be paid back with savings that would accrue from reducing the cost trend across all markets, which is essentially the goal of the Oregon Health Care Cost Growth Target Oregon program.
In this case, we would structure the investment to help address both the acute and long-term workforce shortage, and the related labor issues that are driving much of the current fiscal crisis. This would also create a bridge, or “transition,” in which to redesign the financial incentives in the payment model to reduce the total cost of care growth trend over time, thus generating the savings with which to pay back the federal investment.
In a collaborative framework in which labor, providers and payers share the responsibility for finding a sustainable path forward, we could stage and phase in, both the immediate need to stabilize the workforce and fund collective-bargaining agreements, and the longer-term investments necessary to increase the health care workforce itself.
But time is not our friend here. The $40 million health care package approved last month by the Emergency Board will run out in six months. If we don’t act soon—very soon— to create a framework for resolving the long-term structural problem in our health care system, this issue will explode in the middle of the 2023 session, when the legislature is struggling to address a host of other issues: from the crisis in our behavioral health system, to houselessness and chronic housing underproduction, to the impact the pandemic has had on our children and their teachers…and quite possibly, a recession.
We can do this. We have done it before. We are limited only by our own imagination, by the depth or our commitment to one another, and by the degree to which we are willing to let go of a health care business model that is simply not working for us. Clinging to that model is no longer a life vest … it has become an anchor. And none of the issues we have been discussing this afternoon are Republican issues or Democratic issue. There is no partisan solution to any of them. There are only solutions that recognizes that we are all in this together.
In this divided state of ours, we must never forget that we have a choice. Partisanship is a choice, and so is civility. And we have a choice about what we want our state to be, about who we want to be, as Oregonians and as fellow human beings.
It is a choice to put understanding before reaction; to put collaboration before conflict; to put reconciliation before recrimination. Reconciliation begins with each of us; it begins in the heart of each individual, animated by a desire and a choice to make our community better; and to repair the fabric of our society and of this special place we call Oregon.
 Employer-paid premiums for health insurance are exempt from federal income and payroll taxes, and the portion of premiums employees pay is typically excluded from taxable income as well. IN 2022 this amounts to a $350 billion public subsidy of employer-sponsored health insurance coverage