HSC's 18th Annual Wall Street Comes to Washington Conference

Conference Transcript
Nov. 21, 2013

P R O C E E D I N G S

Paul Ginsburg: I’d like to welcome you to the Center for Studying Health System Change’s (HSC) 18th annual Wall Street Comes to Washington Conference.

I’d like to thank the Jayne Koskinas Ted Giovanis Foundation for Health and Policy for sponsoring this conference. Through research and projects like this conference the Foundation hopes to foster discussion about cost reduction, expanding access, and improving quality.

The purpose of this meeting, as it’s always been, is to give the Washington, D.C., health policy community better insights into market developments that are relevant to policymaking. And discussing market developments and their implications for people’s health care is a core HSC activity.

I see this conference as an opportunity to tap a different source of information, equity and bond analysts, on this topic. And, in fact, the first time this conference was done, it was done in private, just for us to learn from. We learned so much from it, I got the idea of “let’s do this in public, let’s do this in Washington.”

The equity analysts advise investors about which publicly traded companies will do well, which ones will not.

And bond analysts advise on the likelihood of debt repayment by various organizations—in this case, not-for-profit hospitals and others that have borrowed money. Just as analysts get a thorough understanding of health care markets through the companies they follow, the better ones follow public policy very closely, because it often has important implications for these companies.

So today’s conference is really an opportunity for these equity and bond analysts to take a break from assessing the profitability and solvency of companies, and bring their understanding of market forces to bear on key health policy questions that this audience is particularly concerned about. And we also include a Washington-based health policy analyst on the panel, who helps further tie market developments more closely to the health policy issues.

The format for this meeting is a roundtable discussion. It’s going to be based on a series of questions that I developed and circulated to the analysts in advance so they could think about them. And there will be two opportunities for audience questions and answers, first, before we take a break at 10:30, and the second, before we adjourn at noon.

Note that the analysts are not permitted by their employers to answer questions about the outlook for specific companies.

And, again, I want to thank the Jayne Koskinas Ted Giovanis Foundation for Health and Policy for sponsoring this conference.

We will be posting a conference transcript on both the HSC and the Foundation websites early next week. And you can also access a webcast of this conference from either website.

Paul Ginsburg: These panelists don’t need a lot of introduction because they’re in your materials, but the panel is terrific. Most are veterans of previous Wall Street Comes to Washington Conference: Matt Borsch, of Goldman Sachs, Carl McDonald, to his right, of Citi Investment Research, Sheryl Skolnick, right next to me, of CRT Capital Group, and our policy expert, Bob Berenson of the Urban Institute. And we’re delighted to welcome a new panelist—he’ll have to speak first on all of the questions—Jim LeBuhn of Fitch Ratings.

So, let me get right into the discussion. And I want to begin with how different the situation is this year. Last year, the context was uncertainty about the Affordable Care Act regulations, and state decisions on Medicaid expansion and insurance exchanges. Also, there was a sense that Congress and the administration might act on the federal debt, bringing tax increases and spending cuts into the mix. There was also a lot of enthusiasm about the rolling out of Medicare provider payment reform pilots, such as accountable care organizations (ACOs).

The context today, not entirely different, but, of course, this intense focus about the uncertainty and functioning of the federal and state insurance exchanges, especially in light of the cancellation of individual health insurance policies that do not meet the standards of the Affordable Care Act, the political reactions to the sticker shock, some of which is caused by community rating approaches used, and some by the higher standards for health insurance plans, and also the degree of adverse selection by individuals’ buying coverage on the exchange.

So, let me start with a group of questions about insurance exchanges under the Affordable Care Act, and I’ll begin by asking the panelists: What is your take on the ability of the federal and state exchanges to function smoothly enough for enrollment to be in the ballpark of what was projected two months ago? And do any of you have a prediction of the number of people enrolled to start coverage on January 1st, or by the end of the enrollment period on March 31st?

I’ll look right, first, to the managed care analysts to see if they’d like to start.

Carl McDonald: Sure—yes, I guess I would say no to the first part of the question, enrollment projections aren’t going to get where we thought a couple of months ago.

My specific projection, and I’m in print saying that there was going to more than 7 million people enrolled in exchanges by the end, at March 31st—different composition, though, than I think what CBO was looking for.

So, CBO had talked about 7 million exchange enrollees next year, the breakdown there, 4 million previously uninsured, 2 million people who have individual insurance today switching over, and then a million people getting dropped by employers going to the exchange.

I thought the "previously uninsured" number, the 4 million was too high, but I thought that individuals switching over to private exchanges was much too low. There are 10 million people in the individual market today, half of them are eligible for subsidies, so I thought you could potentially could get 4 to 5 million people that have individual insurance that switch over, and that would push the overall number above 7 million.

But where things are today, with the issues that we’ve had, I think it’s going to be a challenge to get anywhere near that number.

Matthew Borsch: And if I could just add to that—we have a forecast, and it was also, like the one Carl was using, 7 million, because that pivots with where the CBO projection still is, because I don’t think they’ve put out a revised projection.

Having said that, four weeks ago we revised our projection for exchange enrollment down to 5 million. Now, honestly, there’s no science here. It’s really just making a guess. But at the same time, it seemed to fit. We really needed to factor something into our forecast for all of the problems that the exchanges encountered, and the fact that even if those issues are resolved quickly, that you’re still probably not going to get as much enrollment as we would have expected. So, we’re down to 5 million, and that’s 2 million from the uninsured, and 3 million switching from existing plans.

Paul Ginsburg: What are the indications about the mix of younger and healthier people enrolling before the end of the open enrollment. I noticed a Wall Street Journal from early November indicating that early enrollment was mostly older people.

Anyone have indications of, in a sense, how bad the adverse selection might be?

Carl McDonald: Yes, I mean it’s going to be bad, but I don’t think that should really surprise anybody—at least at this point. You see the statistics—the one that everyone’s talking about is Connecticut, and I think the number there was 40 percent of the people are above the age of 55, in terms of those that have enrolled on exchanges so far. But I don’t think that should really be a surprise. I think, particularly given the website issues, if you’re sick you are willing to sit there, every day, all day, and wait and wait and wait to try to get through that, where if you’re healthy, you’re just not going to. So, yes, I think that’s not surprising.

What was interesting to me, though, is the number of people that got exchange coverage that weren’t subsidy-eligible. So, from the national statistics, 30 percent of the people that have signed up got no subsidies. On the California exchange, I think it was only 16 percent or so of the people were subsidy-eligible. So, very, very low numbers. That part was actually, you know, somewhat surprising to me.

So, again, it gives you an indication that people that are signing up, most likely probably not great health status.

Paul Ginsburg: And actually, Bob, what are the scenarios that you can envision let’s say adverse selection turns out to be pretty intense of how government would handle this?

Robert Berenson: Well, I guess the one tool that’s been talked about is the risk corridors which basically would protect plans who have adverse selection for the amount of risk that they have. So, I think that’s already been talked about, is sort of providing more protection there. And, already, that’s become a political issue. I believe that Sen. Rubio has come out and opposed the notion of what he called "bailing out insurance companies." So that is a tool.

I suppose you could do some tweaking of the risk adjuster, also. But I don’t think that’s ready for prime time.

Paul Ginsburg: Thanks. If the individual mandate were delayed, say, by a year, would that have a significant impact on the degree of selection?

Matthew Borsch: Well, Paul, let me just say on that question, also, just with reference to the last one, as well, that I don’t know that the individual mandate would have that much impact on enrollment at this point, just based on everything that I’ve read.

The point that I wanted to address on the prior issue is what is going to be the real, or could be the real dilemma as we get into next year, is if we have a very skewed insurance risk pool, the actuarial tendency, then, of carriers will be to price higher for that risk. Let’s say, for the sake of example, 20, 30 percent rate increases, which somehow, that has to be avoided. Because that will only make the problem—as most of you in this room probably know, the way insurance risk pools, that could only make the problem worse.

And so there probably will have to be some measures taken if the skew is that strong, to prevent that from occurring—new money to subsidize the pool, or something like that.

Paul Ginsburg: Yes, and I think there’s even a possibility that even if the government puts in new money, probably its spending would still be lower than projected because of the lower enrollments of healthier people who won’t have to be subsidized.

Matthew Borsch: That’s a good point.

Paul Ginsburg: Given the political climate, are you expecting any near term legislation or regulatory decisions in response to these developments?

Carl McDonald: Yes, I would say that it all comes down to November 30th. If the website is not functioning on November 30th, then I think you see a stampede of Democratic legislators in risky elections this year filing legislation as fast as they can to delay the individual mandate, you know, extend the open enrollment period, all of those things.

And I think the scenario that everybody’s worried about is, you know, somebody whose insurance has been canceled, who can’t get coverage because the exchange isn’t working, so they go uninsured on January 1st, something bad happens to them on January 2nd—they end up in the hospital with a $50,000 bill.

If that happens in your district, game over—at least that’s, I think, the feeling that a lot of people have right now.

Now, obviously, there’s a long time between now and the election so, you know, various things could happen.

But I think that’s going to be the fear that the Democratic legislators have if this website isn’t working by November 30th.

Sheryl Skolnick: So, I can make a couple of observations, because I cover both the hospitals and one managed care company, UnitedHealthGroup which happens, as some of you may know, to be the owner of OptumInsight which is the owner, in turn, of QSSI, which has the dubious honor—this is how corporate structure works—which has the dubious honor of being the general contractor assigned or tasked with finding out what’s wrong with the exchange website and managing the process of getting it fixed. Notice I said "managing the process of getting it fixed," different than "getting it fixed."

So, I find it very interesting that this all comes down to the capability of a general contractor owned by a managed care company that has elected to participate in only four individual exchanges, and 12, in total.

They know something about their risk pool. They know something about their benefits business. But they went out and bought the company that had the contract for the data hub, and one other piece, the front end enrollment piece.

So the observation that I want to make is that from a technology perspective, we are very much reliant on the ability of United to get this done. And they may well be the only entity that understands enough of what’s going on to be able to get it done—in order to know whether or not we’re going to have a turnover in the Democratic Party. I mean, their role is absolutely crucial in this. They’re going to determine what happens in elections. They get it done, and maybe the Democrats don’t stamped towards the exit on the ACA, and people actually get insured. They don’t get it done—I don’t want to know what’s going to happen to their Medicare Advantage reimbursement next year, they’ll probably get dinged even more.

But, something is going to happen here, and it’s going to be very dramatic.

From a hospital perspective, I have to tell you, we analysts following the hospitals have all assumed that this was going to go fairly smoothly— not perfectly smoothly, but fairly smoothly—and we’ve put some pretty rich numbers into our estimates for next year as, relying on—we do our own projections for exchanged-based coverage, for Medicaid expansion coverage, and for the Arkansas solution, which is sort of neither, and we come up with some numbers that look pretty robust, if you actually got to anything close to the CBO numbers. You know, a billion dollars in incremental profit for HCA alone, if you get to the CBO numbers. So, you don’t put quite that much in.

But we’re at a very tender point right now, both for the managed care companies, and for the hospital stocks, with this massive uncertainty, and this reliance on November 30th, which happens to be the Saturday after Thanksgiving. Okay? So it also falls on a weekend.

So, this is setting up to be quite an eventful holiday (laughter), and, yes, I will be cooking despite that. But then, after that, we’re all going to be waiting and watching and wondering what’s going to happen on Monday. Because I don’t think any of this is going to away until January. I think the reactions are going to be very swift and very acute.

Paul Ginsburg: Yes, speaking of November 30th, this isn’t like seeing where the Standard & Poor’s average is on the 30th. In a sense, making an assessment of how well is this exchange working not a simple thing.

I’m wondering if there would be any good information at that point, or a week later, to actually make judgments of is it doing its job?

Sheryl Skolnick: There better be. There has to be. They’ve created the expectation that on November 30th, we’ll know, and we’ll get a report. And, I think it’s fair to say that, as Paul suggested, it all comes down to what happens November 30th. We better find out something.

Carl McDonald: And one thing I think that at least people should be thinking about is just the number of people that will be visiting the website. Let’s say we get the all-clear sign, "It works," on November 30th. They said healthcare.gov was originally scaled for, I don’t know, 50,000 simultaneous users. The first couple days after October 1st, it was 250,000. That created some problems.

You’re now basically taking a month-and-a-half worth of open enrollment and trying to cram it into the first two weeks of December. So, is it conceivable that you could have a million, 2 million simultaneous users on the website at a time? I have no idea.

But, I think, from a scaling perspective, when you give that all-clear signal, you have to make sure that you can handle very, very significant volume, because you can’t have a situation where you say it’s fine, everybody goes on, and it crashes again because then you will see the legislative response.

Paul Ginsburg: Good. Let’s turn to employers. People always speculated about what are small employers going to do? Are they going to stop offering coverage--right now, in year from now? Let’s forget about 2014. I don’t think any employer that cares about having their employees continue to be insured would drop out at this point. But let’s say for 2015, do you expect some major changes in the behavior of small employers?

Matthew Borsch: If I could just offer—I mean, probably, if the exchanges are functioning over time, we will see some migration. It’s going to depend—if you think about it on two dimensions, if you will, the one question being the tax preference which goes to those who purchase coverage through the employer, and that’s the advantage to keeping coverage at the employer level, or at least one of the big advantages, the other side being the subsidies that are available on the exchanges—and only on the exchanges.

So, just to state the trade-off that many of you are already familiar with, as you move down the wage scale, the value of the tax preference decreases and, obviously, the subsidies come more and more into play. And so, I think, wage mix, as well as profitability is certainly going to be a factor in determining which employers push their employees into the exchanges as an alternative.

And it can be a win win, the way that it’s structured today, if it stays that way.

Carl McDonald: And I think you will see some employers drop coverage even this year. So, if you think about the 20 million people with small-group coverage today—CBO is projecting a million of those would move into the exchange. You know, if you’re a micro-group, so, you have two employees, or eight employees, you really can make that decision December 26th, or December 28th. You don’t need necessarily a lot of lead time. So if the website is working by then, or you happen to be a small group in California, or a state where the website is actually working, dropping coverage, I think, does become a more viable option.

And, I think to Matt’s point, my view is if you’re a small employer, and your average wage is $25,000 or $30,000, it’s really hard to see why you would continue to offer coverage, relative to all the free money that the government’s going to give you. I think that will take a couple years to happen, but I do think, the lower-wage, small-group employees will ultimately find themselves in an exchange.

And as the larger employers, as you get some of the Home Depots of the world that do it, it becomes more acceptable as a benefit program to push people into the exchanges.

Paul Ginsburg: That’s right, what about small and medium employers’ converting to self-insurance to avoid the community rating and the health insurance tax? And do you expect states to be actively engaged in blocking this?

Matthew Borsch: If I could just offer one point, just as background, it’s only—correct me if I’m wrong here, but I believe it’s only that the truly small employers, who are now nationally subject to community rating, and that only has impact in states where they weren’t already subject to community rating. The medium-sized employers are not actually subject to community rating.

Having said that, clearly, there’s been a shift toward self-insuring in what we call the "middle market," say, employers with 500 to 1,000 employees. Above that level, it’s been predominantly self-insured. So there’s been a conversion into self-insurance. I don’t know what the exact proportions are. I think it’s still more lives in fully insured status.

Will that continue? What we’ve been hearing from some of the companies that have the closest view of that is that this shift has been continuing at about the same pace.

So we have not actually seen an acceleration—it surprised me a bit—we have not actually seen an acceleration ahead of the implementation at January 1 and, of course, the imposition of surcharges for—well, notably, the surcharge for the insurance tax. Because the reinsurance surcharge applies to all employers, self insured and fully insured.

And as far as states enacting more statutes like California has, to bar the small—you know, maybe at the truly small end, from self- insuring, or making it effectively difficult—some will, no doubt. I don’t have specific predictions there.

Carl McDonald: And, my perspective, it’s a factor, it’s not a decider, for a medium-sized employer to go to self-funding. So if you were already thinking about doing it, maybe this is what pushes you over the edge. If you weren’t thinking about it at all, then this tax alone isn’t going to cause you to switch to self-funding.

One other point to think about is, we’ve seen a lot of news about private exchanges, the Aon exchange, in particular, and self-funded employers moving over to risk status. You know, so that would be sort of a counter example to that.

Paul Ginsburg: Yes, that’s actually something I’d like to get into later in the session.

Let’s talk about Medicaid expansions. And, of course many states have not expanded Medicaid, although we recently saw Michigan and Ohio join as a result of strong pushes from their Republican governors.

What are you expecting over the next two to three years, as far as additional states’ joining?

Carl McDonald: Yes, I mean, my perspective is that it will happen. I think a lot of the opposition that you saw to Medicaid expansion, at least initially, was a lot more politically driven than it was financially driven. And so I think as those issues start to come up—so, hospitals that are still caring for uninsured people are not getting paid what they could be getting paid, employers that would have had employees that would be Medicaid eligible that the employers are still having to pay coverage for -- I think over time you’re going to see more. And that’s sort of consistent with what you saw Medicaid initially. Initially, when Medicaid was rolled out some states did it, a lot of them didn’t. And over time, ultimately all of them ended up with a Medicaid program.

Sheryl Skolnick: So, if I can just make an observation from a for-profit, publicly traded hospital perspective, there’s really only a handful of states that matter — Texas and Florida being the two biggest that matter.

I think the political climate in Texas has to change a lot for Medicaid to be expanded there. They seem to be very well satisfied to have the poorest of the poor remain uninsured—which seems to me to be an odd policy for people to get re-elected. But that’s just me.

On the other hand, Florida, I think could prove to be more interesting. That’s a place where you had the governor adamantly opposed, and then reverse himself, and then staunch opposition from the Republican House prevented the expansion from happening in the first go round. We’re getting some sense that it may not be completely dead, just mostly dead. And it probably will come back.

But I do have to wonder whether a failure of the exchange would make the question somewhat moot.

James LeBuhn: I tend to think that you are going to see—I agree, I think you’re going to see an expansion. I think the dollars that are available are just too great to pass up. And I think, in terms of those states that choose to expand, versus those that don’t, I think the political pressure is going to increase as you hear some of the stories about the populations in Georgia, Florida, Texas, and the impact of not expanding—what that means to the uninsured and the poor.

Paul Ginsburg: Well, for those states that are expanding Medicaid, have there been important shifts toward managed care? Or changes in the approaches to managed care?

Matthew Borsch: If I could just offer —I mean, I think, in general, the push and then enactment of health reform is essentially embracing managed care plans in its structure for insurance coverage expansion has, I think, provided a push to, at the state level, toward managed care for the Medicaid and dual-eligible population—as has much of the dialogue around long-term entitlement control plans and trade-offs. I think that’s fed into it.

And so you are definitely seeing—you have seen, and I think it will continue—aggressive activity by states to push, if they’re not predominantly in managed care, to push there. Or what’s more relevant is taking the high-spending, more-vulnerable cohorts of the Medicaid population that haven’t been in managed care and converting them into managed care plans.

Robert Berenson: Yes, if I could jump in on this one—I think the duals demo that has been started at the Innovation Center, which, as I understand it, now five pretty large states are using a Medicaid managed care strategy for duals: California, Massachusetts, Michigan are significant. And, it’s called a demo, but when you’re moving a couple hundred thousand people in LA County into Medicaid managed care, it seems to be a little more than a "demo." It sort of reflects a wave—I don’t know how you undo it if, in three years, you decide it hasn’t worked out. So that’s a major impetus, at least in those states.

And another factor that’s going on is the move in—at least in a few states, toward ACOs, including Medicaid as, in some cases, as sort of the catalyst. So, Oregon, Colorado, Minnesota are three states.

The SIM grants, the State Innovation Model grants, that the Innovation Center has awarded to a number of states, either for feasibility, planning, or implementation, a lot of those proposals had to do with delivery system reform, with Medicaid playing a central role. So I do think there’s a lot of activity in this area.

Sheryl Skolnick: One of the things we were hearing early on, as the states were kind of trying to figure out how to approach this once they decided to opt in, was that they realized that the federal monies coming in for the expanded lives might actually provide them with the ability to segregate newly covered lives from the existing lives through different managed care plans, and actually pay the plans a little bit more. Because there was a fundamental problem of: What does this population look like? How acutely ill are they? What are their utilization trends going to look like?

And the way they thought about doing this was actually pay the plans more, to pay the providers more—not per unit, but because there was going to be more units of care delivery. And I thought that that was kind of an interesting move. I heard about it for about two weeks, and then it vanished.

So, there may still be new payment models out there for, as we said, segregating the population, but it may be segregated not by ill/not-ill, but by new versus old.

Paul Ginsburg: That’s a good point. Now, what Oregon’s doing with its coordinated care organization, are other states likely to follow that?

Carl McDonald: Yes, I think it’s probably still a few years off before you see that. So I think other states would want to see some definitive evidence that what Oregon’s doing is actually having a meaningful effect before they would go there. And I think it’s a little bit difficult to go from a state with a Medicaid managed care focused model to what Oregon is doing. So you’d have a pretty big shift there.

So, I doubt you’d see states ultimately go through with it. And I think before any of them do, I think they’d want to see some real evidence.

Paul Ginsburg: HSC did a study of the Portland, Oregon, insurance market, heard a lot about the coordinated care organizations. And what strikes me is that the delivery system in Oregon, in the major cities in Oregon, is really quite different than most other areas. It’s very integrated. Almost everything is in large organizations. Physicians are already integrated with the hospitals.

So, in a sense, this idea about coordinated care organizations probably would not fit very well in a more typical delivery system.

Robert Berenson: Yes, that’s why one of the other states that is doing this is Minnesota, which also has that kind of organized medical group delivery system.

Paul Ginsburg: Sure. How is the uncertainty about expansion affecting Medicaid managed care plans? And how much interest do the for profit, Medicaid only plans have in getting into the commercial market by the exchanges?

Matthew Borsch: Well, I think that that remains to be seen, is the answer. What we’ve seen from Medicaid plans, both for-profit and not-for-profit, is, in many cases, putting offerings on the exchanges that seem initially designed toward the very low income part of the commercial population that may cycle back and forth between Medicaid and commercial. And it makes sense for them to have the plan offerings there so that they can stay with that same health plan as they move back and forth between the thresholds.

Now, what will be interesting to see is, in many cases, these plans are the cheapest ones available—not in every case, but in many cases they are the cheapest, or at the lower end of the costs on the exchanges. And there’s nothing to prevent, moderate or higher income individuals from choosing those plan options. The tradeoff is typically more restricted networks, networks of providers that have historically been more oriented toward a low-income and Medicaid-serving population.

And so, whether that would work for a higher-income segment of the population will determine if you’ll see, I think, an expansion of the plans into the commercial arena more broadly.

Paul Ginsburg: Yes, that’s a good point. So, in a sense, the initial entry into the exchange, commercial market, is really to continue to meet the needs of the population they’re familiar with. And that’s probably a lot easier for them to do than to go up market, since everything has been designed with limited networks to keep costs really low— unless middle-market people are so desperate to save money, as well, that they are willing to put up with the restrictions of those plans.

Matthew Borsch: Right. And that’s not really tested.

Paul Ginsburg: That’s right.

Carl McDonald: One thing that I’ve noticed, going through the exchange buying process in a number of, you know federal—well, I haven’t actually got through the federal exchange, but on some of the state exchanges, is it is almost impossible to figure out who’s in and out of network.

So, if you’re a consumer, and you’re buying on the exchange, all you see is the Molina plan—it might be $50, or $100 cheaper than anything else out there, and you pick it. And it might not be until after the fact that you find out that the only providers you can see are in the inner city, and you don’t necessarily want to drive there. So that would be an interesting dynamic, to see how that plays out.

I think another interesting dynamic from a Medicaid perspective is how do you deal with out-of- network spend? So if you’re Aetna, and you have a limited network, at least you have commercial contracts with everybody. And as, you know, a worst-case scenario, you have a PPO arrangement with the provider. So you have some type of contracting arrangement that you can point to if somebody goes out of network on an exchange product.

If you’re a Medicaid company, you don’t necessarily have that. So, there will be some interesting dynamics to see how that plays out, you know, when you do have some of these Medicaid exchange plans, or enrollees, end up out of network and end up with some giant bills.

Paul Ginsburg: And how do provider payment reform models, such as medical homes, bundled payments, ACOs, fit with Medicaid managed care? In a sense, is it something where the state program is saying, you know, we’re going to do this and, you know, each of the plans has to play their parts? Or does it actually come more from the plans?

Carl McDonald: Yes, I mean, to date, other than some of the states that Bob mentioned where it is more top down, it has very much been left to the plans to do.

But it’s a lot harder, at the Medicaid level, to get into a lot of those arrangements. So, think about an ACO. You walk into a hospital or a doctor, and they say, “Okay, our baseline is we lose 40 percent on these Medicaid members. So you want us to enter into a ACO where now we’re going to take risk? And, best case, we’re still going to lose money?” (Laughter.) There’s not a lot of receptivity to that.

I think it’s a little bit harder, given the payment levels in Medicaid to make some of these different provider reimbursement methodologies work.

Sheryl Skolnick: And I have to say, from the hospital perspective, they are—a lot of these risk-oriented, or innovative, or more coordinated programs are still just—to be kind—they’re still very much on- the-drawing-board ideas. I mean, there are clear examples of collaborative models and risk-bearing models, clinic models that are successful. But, by and large, it’s not happening on Main Street.

And the reason it’s not happening on Main Street is that hospitals have learned to take a very cautious approach to bearing risk. And so there are certain risk bearing arrangements that they’re engaging in. There are some ACOs out there.

But most of the hospitals are still taking very much of a "We’re interested in taking risk if it’s the right arrangement"—and that’s almost always on a commercial, or maybe a Medicare Advantage—but almost on a commercial contract with a particularly innovative employer, and a particularly robust clinical and financial information at the hospital (inaudible) with their downstream providers.

Paul Ginsburg: Well, Sheryl, I wonder if the typical hospital that might be interested would be one that’s already done a lot of this with commercial payers, with Medicare, ACOs, and says, well if I’m changing the way I deliver care, I want to get as many of my contracts aligned with this.

Sheryl Skolnick: Right. It is more likely to see that. I mean, where we are seeing it, where the physicians and the hospitals are already integrated, they’re already functioning as a clinic, or as a system, sort of replicating Kaiser without being Kaiser—so, vertically integrated as well as horizontally integrated. And I can think of a couple of systems in Florida, and a few others around, that are very well positioned to do that.

And it does make a lot more sense. It’s a lot more efficient if you can treat your patients all in the same way, so that you don’t have to direct your clinicians:

"Be very risk averse with this one, and go for it with that one." It’s really hard to direct that kind of decision making.

James LeBuhn: Yes, I was going to say, I think perhaps the—and I don’t know how you feel, Sheryl—on the not-for-profit side they’ve been maybe a bit further ahead, they’ve been—

Sheryl Skolnick: Much more willing.

James LeBuhn: Exactly. And I think, but I agree with you, they’re kind of dipping their toe in the water to kind of get a sense to develop that skill set. But, as you know, they’ve been straddling this fee-for-service versus trying to adjust and move the organization toward fee-for-value, or payment for value.

I think the medical home—medical homes are a very interesting (inaudible) that there’s a lot of focus. It makes a lot of sense. I think the ACOs and the bundled payments—again, the ACOs kind of—I think the feeling, in terms of the not-for-profits that the ACOs, because you can’t attribute those patients to your organization, they can kind of move in and move out, has really been sort of a letdown. And there’s, I think, organizations put a lot of time and effort into it, and they didn’t see a lot of value out of it. And there are just some concerns about the way the whole program was set up, in order to get the benefit of changing that population health.

But I think the medical homes are an area of big interest for organizations moving forward.

Paul Ginsburg: What about primary care supply? We have some states, very large expansions of Medicaid and how are the plans coping with the prospect of having a lot more people and having a stagnant managed primary care supply? And how do you think this will fall out?

Carl McDonald: It’s—I mean, I think it’s going to be a challenge. And to your point that the pool of physicians isn’t changing, the population is—I think plans look at the experience in Massachusetts, where you look at how much emergency room utilization increased in the year after health reform was implemented in Massachusetts. Some of that was consumers’ not actually understanding they now had a primary care physician, so some of it was behavior changes. But in many cases, it also was access issues, particularly in some of the more urban areas.

James LeBuhn: I think it’s interesting. I think primary care, there’s a big—we’re kind of back to the ’90s, where everybody’s sort of scrambling for primary care.

You’ve seen some of the big insurers out in California (inaudible) the lack of primary care is the gatekeepers.

I think, going forward, there are some policy issues—and perhaps the AMA, in terms of what physicians actually have to do. Right now, it’s so physician-centric. And I think, going forward, that there’s just got to be a way that you can leverage primary care physicians, their time—whether that’s through allowing nurses to do more of the routine care for people that come in, or using telemedicine. I think Kaiser’s done a great job in terms of using technology to be in touch with patients, but not have those patients come into the office.

You can answer routine questions that normally people would come in.

So I think there are technology issues, and I think there are also policy issues that can be used to leverage the use of primary care physicians.

Robert Berenson: Yes, it’s one of the sort of underlying theories of the medical home, would move—I mean, I guess the phrase everybody uses is that they have lots of different health professionals practicing to the top of their license, with the implication that the physicians don’t have to see every patient all the time.

The early results are mixed in terms of the success of medical homes, although, sort of anecdotally, the practices who were the early adopters sort of like it. It’s not clear what the impact is going to be.

And for the most part, I think it’s true to say that insurers are still in the demonstration phase and not sort of throwing big money into the medical home, or primary care pot. I think Anthem has gotten a little further but not in a huge way. So, I think it’s still in the trial phase.

Sheryl Skolnick: There has been sort of a series of arms races within the for- and not-for-profit hospital sector to acquire certain to types of assets, or build certain types of (inaudible), or start certain kinds of programs. And the latest one is kind of a back-to-the-future scenario to buy physician practices. And a couple of the times we’ve done this, it’s been "let’s buy specialist practices." Now, it’s really focused on primary care. And one of the companies that was leading that charge was actually Vanguard Health Systems, which is now part of Tenet Health Care.

And they have, especially in their San Antonio market, really focused on acquiring those practices that are primary care, because they understood pretty early on that primary care was going to be the key to all of these innovative arrangements, as well as to being able to have better negotiating leverage with the managed care plans.

So, it’s interesting that it occurred in Texas. It didn’t occur at Detroit Medical Center, where they had the pioneer ACO, which I’m not sure worked so well.

Paul Ginsburg: I’ve actually seen in some of the site visit work we’ve done in California an interesting dynamic where a lot of the care for low-income people has moved into community health centers, and rural health clinics, and all organizations capable of paying primary care physicians more than say an independent practice can earn seeing low-income patients. And I think, as Sheryl mentioned, I think it will happen in hospitals, too, with hospitals recruiting primary care physicians, paying them more, because they know how important they are to the delivery models they’d like to pursue.

And I guess it will be awhile before we know who gets left out with no chair, as all these dynamics work through.

Let me change the topic to the outlook for spending trends. And we talked about it last year. And since then, low-spending trends have continued—maybe even gotten even lower. And maybe the major event of the year is all the attention it’s gotten, from researchers like in this venue, very interesting Altarum Institute conference that a number of people here, fittingly, went to a few months ago, about this.

And so let me just open the question to the panelists again about what do they see as the key factors behind the last few years of relatively low spending trends.

Matthew Borsch: Paul, if I could just take a stab at addressing that one. I think most people looking at it will ultimately say multiple factors are at play here. You know, one of the struggles is to identify how much of the slowdown relates to the broad economic environment, the Great Recession itself, and then the slow recovery and lagging employment picture. I think the answer is a great deal of it, but not all of it.

Of course, as we’ve looked back over multiple decades, and building on some of the work that the Milliman actuaries did back in the ’90s, we’ve looked at the relationship between economic cycles and health spending trend, where you have— this, of course, is a generalization, but there is, you see this pattern occur in the ’80s, in the ’90s, to a lesser degree in the last decade, where the health spending trend slows, really starting at the end of a recession, and that slowing, or period of depressed health spending growth continues for several years—maybe four or five years. Before then, you start to see a pick up. We saw that following the ’82 recession, with the pick up coming in the late ’80s. We saw that, certainly, after the early ’90s economic slowdown, with the pick-up coming there in the late ’90s. And, again, I think it’s still there to a lesser degree in the last decade.

And the driver there each time is long—partly long lags of employer responses to the economic pressures and health spending trend being one of them, and changes to benefit plans, whether it’s shifting into managed care, or an accelerated push to higher cost sharing with consumers sensitive to that in a tough economic environment.

Those things then have a multi-year impact on the health spending trend.

Paul Ginsburg: So, Matt, you’re thinking that that’s the core reason that we’re seeing slower trends. And at what point—of course, we don’t know what the economy will do today, but given the economic performance so far, what’s baked into the future at this point?

Matthew Borsch: Well, I will— the interesting thing is we built a multi-regression model—again, this is originally work that the Milliman actuaries had pioneered back in the ’90s. But we took it forward to the present. And this was actually almost two years ago we introduced this model, and what it predicted was continued sluggish spending in ’12, and then actually a dip in 2013, and then a pick up in 2014.

Now, you know, this is a model. It’s not looking at current predictors, really, it’s looking at the lag between this recession and how that relates to the pattern that we’ve seen in prior economic cycles.

It was interesting—and, frankly, I didn’t really embrace it, but it was interesting that the model pointed to further slowing in 2013, which, arguably, is what we’ve seen. Now the question is will we see some pick up in 2014, irrespective of health reform implementation? You know, the pattern suggests we will. What may significantly dampen it is the model doesn’t really take into account that this has been a much slower and less strong recovery than the prior ones that we looked at.

Sheryl Skolnick: So, can I ask a question? Are you looking at spending from the perspective of demand, or are you looking at it from a perspective of price—and price controls and reimbursement policies?

Because it’s somewhat of a self-fulfilling prophecy. If you live in an environment—as I used the phrase last year— starvation in the land of plenty, lots of old and sick people, and no money to pay for them, and you also have budget crises, it shouldn’t be a big surprise that the cuts that you put in place to pay for reform and everything else, have an impact on the level of spending. Because, you know, everyone’s pulling in their horns.

The other thing I’ve seen from the hospitals’ perspective is that the managed care plans are increasingly managing care. And they are affecting and influencing consumers’ decisions, patients decisions, and directing patients to not only a narrowed network, but within that network, to site of care. So, it’s not even just a site of care, inpatient versus outpatient, but which outpatient provider.

So the level of sophistication in directing where care takes place, and therefore, presumably, not just the price per unit, but the cost of the episode, is getting pretty intense right now. And the hospitals certainly are feeling it on the issues of observation stays versus short-stay admissions, and we’re clearly seeing a conversion of inpatient to outpatient. Technology does play a role in this, but not always to lower price, just to change site of care.

But the hospitals, in response, are having empty beds. And so they’re having to cope with the fact that their high-cost environment has to have some revenue from someplace, and they’re shifting also into the outpatient world. So they’re becoming more accepting of the shift and the managed care.

So, I would say, in addition to everything that Matt said—which I agree with wholeheartedly—I’d actually argue, in the absence of reform, next year is not going to be (inaudible). Just from the perspective of what’s happening, I don’t see any real change in underlying fundamental demand. We all wonder where the elective patient went. And we all wonder where, you know, the hips and knees are, right? I mean, we’re getting older, where are all the hips? And where are all the knees?

And we’re seeing a little bit of that, but we’re not seeing nearly as much as we should be with the demographics.

So, I think there’s an awful lot going on that, at the intersection of managed care, and the practice and site of care—in addition to the fact that you’re just squeezing down price.

Paul Ginsburg: Sheryl, along those lines, just to—I’m curious, you know, anecdotally, I think, in the not-for-profit space, what we’ve heard is I think there’s been a large impact, or a large effect from the high-deductible plans

Sheryl Skolnick: Yeah, when you’re self-insured, it matters.

Paul Ginsburg: You know, when you’re paying the first $5,000, I think people, say to those elective surgeries, "I can wait." So that’s one thing.

I think, also, hospitals have taken it upon themselves, there are penalties now for readmissions. I think you’ve seen better clinical care. And, so some of those readmissions that you were getting paid for by Medicare, you’re not getting paid for now. And I think in the not-for-profit and for-profit space, the improvement in clinical quality has had some effect of it.

And then, lastly, particularly in the not-for-profit space, when you look at spending, supply costs have been a huge area where they’ve been looking to come together. And in the not-for-profit space—for lack of a better term—you know, (inaudible) taken advantages of by suppliers because of the fragmentation in the market. And I think with some of the consolidation in the industry, as well as movement at banding together on group purchasing organizations, they’ve really been able to squeeze down prices that suppliers have been charging. So I think those supply costs reverberate through the system.

Sheryl Skolnick: (Inaudible), but, of course, with hospitals being price-takers in almost all of their business line. The only one that really matters, where they have some negotiating is in that market share in managed care, they go up against their companies.

And there, I think we’re seeing a little bit of a slowing. The range is still the same, it’s still like 5 to 7. But we’re not seeing a 5 to 7 percent rate increase over here, but we’re not seeing that range change much —which tells me it’s moved from the top to the bottom, maybe. And, you know, if you really want to crack the code, I think what you’ll see is the 5 to 7 doesn’t need to be there, because you don’t have to cost shift quite as much. And then we’ll see another step down at the levels (inaudible).

Robert Berenson: All right, let me just make just a couple of points. One is that this use, flattening of use of services, not only, presumably, from high-deductible plans, managed care, but it’s also happening in traditional Medicare, which doesn’t have high deductible, and it doesn’t have utilization management—although there might be some spillover from what’s going on in managed care. But it’s flat there, as well, and has been flat for about four years.

So something, I think—I don’t think we fully what the answer is to why our use is down.

Second, I was interested in your comment about 5 to percent. You’re saying that hospitals are getting 5 to 7 percent

Sheryl Skolnick: Some are.

Robert Berenson: Some are.

Sheryl Skolnick: Some are. Some of the publicly traded companies will tell you that they’re still kind of in the historic range of price increases (inaudible).

Robert Berenson: Because I’ve been reading monthly reports on pricing, and from about the summer of 2012 through today, prices are—that hospitals are getting—seem to be 1 to 2 percent. In fact, for the first time in years, the utilization increase outpaced the price increase.

Now, I want to make one caveat on that. I was talking to an insurance executive just the other day who said, yes, the prices are down but the incentive payments that were given to hospitals is what’s making up for that.

Sheryl Skolnick: You’re going to get what kind of a rates—I was going to say it’s also in the terms, and it’s also in the quality. And more of the contracts are shifting over to pay-for-performance. So there are some quality bonuses there (inaudible)

Robert Berenson: So, it’s not in the rate increases.

Sheryl Skolnick: And, also, remember, when you average all this in, you’re also averaging in the hospital with the largest networks, and the number one market share in most of their markets, namely HCA, which tends to raise the average.

Robert Berenson: Okay. But in any case, in terms of just understanding what’s going on here, we have to see if some of the payments are not being captured in price.

And the third point I would make—and it’s timely because the Council of Economic Advisors just released a report yesterday, sort of congratulating the Affordable Care Act on restraining health care spending. And I think it’s a little too soon to say that ACOs have made the difference, which was in there. I think it’s more straightforward than that, and it’s partly based on work that MedPAC has been doing, and Chapin White of the Center has been publishing in recent years, is that when Medicare cuts its prices, which it absolutely did in the Affordable Care Act, hospitals reduce their scale of operations. And so, and they don’t cost shift to the private payers, they cut back.

So, when Medicare cuts prices, that has a restraining impact, and then the hospitals are in a position where, if you go all around the country, hundreds of people are being laid off at every health care system—who, in many cases, are, I think, in pretty good shape, and yet they are feeling pressure to scale back.

And I think it may be more directly— it’s, you know, when—a traditional impact of what Medicare does, rather than new, innovative, payment models.

Matthew Borsch: Robert, if I could just offer one other to that, which is that that all make sense. I just want to comment that we looked back in patterns in the past.

The correlations aren’t as strong, but we have seen slowing in traditional Medicare utilization correlate with economic cycles, as well—which might seem somewhat counterintuitive. But, interestingly, there’s actually some academic research that there’s even some of that correlation seen in single payer systems, where you wouldn’t expect to see any—and so just to point to that as a factor in this.

Robert Berenson: And that could well be the case.

Carl McDonald: One more thing I just want to throw in is within the employer market, cost trends aren’t really decelerating anymore. 2013 was really a flattening in cost trend. So you’re still seeing it in health care spending, broadly, because hospitals, and doctors, and Medicare, and Medicaid never get a rate increase. But within the commercial group population, that deceleration of cost trend that we’ve seen in the last couple of years really hasn’t continued.

And, the example I would give you is if you look at managed care companies, sort of what people expected them to earn a year ago, versus what they actually earned, that number is only up about 5 percent. If cost trends were really decelerating, or you look at periods of time historically when cost trends are decelerating, managed care companies beat their earnings projections by 10, 20, 30 percent. You know, it just sort of gives you a perspective for how much that—or how little cost trends actually have improved.

Paul Ginsburg: As I’ve been listening to this discussion, which is a phenomenal discussion. One thought that’s going through my mind is that the relationship between cyclical and secular, that, you know, you think of the high-deductible plans. I mean, clearly the cycle accelerated for those high-deductible plans. But, once you have a situation where a lot of people have high deductible plans, you start affecting the norms in the health care system start changing.

You know, these high-deductible plans aren’t going to shrink into low-deductible plans if our economy is stronger. They’re probably going to stay that way.

And what Sheryl was mentioning about the steering of patients—again, you know, I think the weak economy, it’s provided a good opportunity to do that, but if it works, it’s going to be a matter of what kind of backlash now that there was in the ’90s? I don’t think there will be.

But if it works, in a sense that again becomes a secular change, and maybe it’s advance is slow, but it keeps advancing even if the economy gets stronger.

And, of course, the Medicare cuts that Bob mentioned, it seems that they’re locked in for a long period of time, no matter how the economy does.

So one thing—I think we’ve covered a lot of my questions, although the one thing I often like to ask, and usually don’t find much, and maybe also won’t find much, is that because it’s so hard to get insights into what is happening with technological change, in a sense. Are there important technologies that are perceived as likely to expand spending or reduce spending, that anyone is aware of?

Sheryl Skolnick: Well, I can identify one that’s in progress, and that is, under the high-tech provisions, and where the hospitals have to spend a ton of money on it, implementing an electronic health record, both within their four walls, and for physicians who practice with their facilities. And then there is both a carrot and a stick: If you do it, we’ll subsidize. If you don’t, we’ll penalize. So it’s working.

And, so that certainly— if you can get the data out of that, and then analyze that data, and then formulate a view of who you’re taking care of, and how to improve the care you’re delivering, it speaks to being able to take risk, because now you know who you’re treating and how much it costs to treat them. But it also speaks to being able to change practices, practice patterns, physician practice patterns, quality of care, all the rest of that, as well as your cost structure—and, importantly, the work flow through the hospital, which oftentimes is the biggest source of inefficiency and excess cost that I see.

So, that, I would say, is one element of technology—not a medical technology, per se—but it’s one way that technology is fundamentally changing the way in which hospitals spend their money today and, hopefully, in the future.

You know, we’re taking a good look at the use of robotics, that’s robotic-assisted surgery, just because it’s kind of—anecdotally, the hospitals will tell you they hate those things because they don’t get paid for the cost of those surgeries. There’s been some—then there’s been, of course, some concern about safety and efficacy of some of the things, and the training of the physicians, and we’re right back to where we were with the medical device companies in that past, having very, very persuasive marketing, and maybe some physicians are doing (inaudible) procedures they shouldn’t.

But those are the kinds of things where technology is sort of a double edged sword. You know, this is this great, wonderful innovation that should be brilliant—and, in fact, we find out it comes at a significant cost.

Other than that, I don’t—you know, the other place I would say, more in you guys’ spaces, to the extent that, you know, technology plays a really blindingly obvious role when it doesn’t work —i.e., accessing insurance. But, for the most part, it plays a really important role in the normal course of business, with the health plans, because of the way they interact with the consumer these days.

Carl McDonald: I mean, the only thing I would say, what I hear consistently from companies, not necessarily new technology, per se, but specialty pharma is really the one sort of constant that you hear about, you know, companies that are worried about what’s coming. So it’s interesting, Joe Swedish, who is the CEO at WellPoint, was at a panel at the Cleveland Clinic a couple of weeks ago—WellPoint and Blue Cross Plan s have more exposure to health reform than any other companies that I cover. And everybody on the panel got that normal question of "What keeps you up at night?" And his answer was specialty pharma. He said, like, "I know you guys think I’m going to say health insurance exchanges, it’s not. It’s specialty pharma."

And so you’ve got the question of sort of how do you manage the cost of that? But then he also brought up an interesting point, too, which is that the managed care industry really hasn’t come up with a good way to determine who should get these drugs. So, right now, most of the decisions around specialty pharma are cost based. There’s no—little being done from a value perspective, or—he didn’t use the word "deserve" the drug but, you know, basically along those lines. So, that’s what I would say would be one sort of big cost driver that a lot of companies are thinking about.

Paul Ginsburg: Yes, I know when I’ve looked into this what I see is a very high rate of growth, and the base is growing. So it’s becoming a more serious issue. I haven’t really seen much progress as far as tools that insurers have been able to use to address it.

Carl McDonald: It’s tough, because the typical tools that insurance companies use are things like co-pays.

Paul Ginsburg: Yes.

Carl McDonald: Which, if you’re talking about a specialty drug that cost $100,000 a treatment—like, all right, fine, you put whatever co-pay you want on it, but after one dose, you’ve already reached your out-of-pocket max. So, those sort of normal things that the plans do don’t necessarily apply to the specialty pharma.

Paul Ginsburg: Yes, because if they’ve blown past use of incentives, then it really becomes a matter of, "Are we going to allow you to have this or not?" Which insurers have not had to face, for the most part, before.

Robert Berenson: So, there might be a desire to sort of, in that area, move to bundled payments, and put the provider at risk. And I know there’s increasing talk about doing that for cancer treatment. But I have trouble sort of—I mean, I hope they can figure out how to do it. But, you’ve now shifted that decision about whether to use the drug to the physician treating the patient, and I don’t know how you—how that works in a bundled payment situation. You know, that’s where you actually.

Sheryl Skolnick: You want to be careful about what incentives you’re going to set. Right now, in many cases, as someone unfortunately said, you’re paying oncology doctors to be drug pushers, because they get paid more if they prescribe a higher-priced drug. And that’s clearly not an optimal model.

So what you want to do is pay them for their expertise, and reimburse the drug separately, which is a pilot that United instituted. We never actually heard back on how successful that was, but I think they did ultimately expand it.

But I think that’s one thing that we need to do, is make sure that the incentives, both for the physician and the plan, are aligned in the best interest of both the patient and the sustainability of the benefit.

Robert Berenson: Yes, the concern is paying the doctor not to prescribe the drug, and that’s the concern about moving to a pure bundled-payment model.

James LeBuhn: What I was going to say, I think, you know, as you sort of look towards the future—and I do think the future is hospitals’ and physicians’ being under the same umbrella. And I think that that is an area, like you said, where it takes the incentive for that physician to prescribe the brand name drug, the specialty drug, because they make more, where there will be more of an effort to look at the efficacy of the drug, and see if there’s any alternatives that don’t cost as much, but provide 95, or 90 percent of the efficacy of those drugs.

And I think, as you look at physicians, as they interview new physicians coming out of medical school, I’ve heard 80, 90 percent want to—prefer the employed model. And so I think, over the longer term, I think when you get the hospitals and physicians aligned, then their incentives will be aligned.

Paul Ginsburg: Good. I’ve got a couple of questions about large-employer health benefit strategies. And the first is: To what extend—I’ve heard anecdotes about large employers taking steps now in anticipation of the Cadillac tax. And I wondered if anyone had given any thoughts on that.

Matthew Borsch: You know, this is hard to measure at this point, so it is anecdotal. But large employers are definitely focused on this. And it’s—they’re not focused on the exchanges to a large degree. Maybe that will change—and I mean, the public insurance exchanges. They’re focused on the Cadillac tax.

I think it is influencing some decisions. They may not be presented as having been influenced by looking at a bridge that keeps them below the radar, or less than the radar of the Cadillac tax, but I think it absolutely is a factor at play out there among large employers, from everything that I’ve gleaned anecdotally.

Carl McDonald: Yes, if by "taking steps" you mean thinking about it and talking about it, then yes. In terms of any real definitive action, I’m not so sure we’ve gotten there.

So, yes, I think everybody agrees that you can’t pay the Cadillac tax. I may mess these numbers up a little bit, but it’s basically like a 40 percent tax on every dollar over the cost threshold. So it’s prohibitive to actually pay the tax, versus, okay we can’t pay the tax.

But the employers that are in danger of paying the Cadillac tax are generally cities and states, so it’s negotiated, union-dominated benefit. So it’s not like the employer can just unilaterally say, okay, we’re changing the benefit. It’s a negotiation process that you’ve got to go through with your largely union-based employees.

And so that’s a process. But everybody agrees you’ve got to do something.

Everybody agrees that you need to do it now. You want to make gradual changes over the next couple of years, as opposed to just falling off the cliff in, you know, 2018, or whenever that tax actually takes effect.

Matthew Borsch: Carl, I just would disagree with you a little bit on that one in that I have seen some real anecdotal evidence that private employers not dealing with unionized work forces, that it is actually influencing, you know, not any radical steps, but on the margin, it’s influencing some steps that they’ve taken with benefit plans. And I think we should watch for more of that, going forward.

Sheryl Skolnick: To that point, I’ll offer you both just a piece of anecdotal evidence. There’s a firm in our business on the West Coast that has about 300 employees. So, they are—they have been very generous with their benefits and, in fact, much to their surprise, found out that they are going to be subject to the Cadillac tax.

And what they’ve chosen to do this year for their enrollment is to maintain that plan for this year, but to offer a high-deductible plan as an alternative, where they will actually pay part of—as my firm does—pay part of your HSA contribution to fund that deductible, as a temporary transitional step. So it is affecting people in our very business, because we’ve been so generous with our benefits to our employees. And I can tell you it’s buy-side, it’s not sell-side. They don’t (inaudible).

Paul Ginsburg: You know, one of the ironies with the Cadillac tax is the crazy way it was drafted. And I think the thought was that this is a tax that insurance companies paid, not a tax that employees will pay.

And they actually wound up with something where there is a really hard cap on premiums, as opposed to capping the tax subsidies to employer-based health insurance.

And it’s probably really difficult for actors to decide whether, you know, it would seem to me what an obvious problem, whether that will be fixed. Because it can be fixed without losing revenue, as opposed to, well, you know, some people, when it was passed, said, oh, it will be repealed. But I don’t see that because of the huge revenue hit that must add to the uncertainty so much, because it is—that can be fixed without a big revenue hit, and to move over to the model that economists have advocated for 40 years.

Okay, let’s talk about private exchanges. My sense is that most of the private exchanges that large employers have contracted with are actually putting employees into fully insured products, which cost a lot more than self-insured products.

I just want your views about why is this happening, or what is it that is offsetting that higher cost?

Matthew Borsch: I wouldn’t necessarily say that it’s higher cost in the fully insured products. It doesn’t have to be, by structure—although, you know, it is counterintuitive in that you’re directly taking on, for example, the health insurance industry tax that applies on the fully insured side. So, now is sort of a funny time to see it happening, in that sense—and, of course, as you usually do with fully insured, some other state level charges, as well.

But if you think about the purest model for a private exchange, which may or may not be what emerges from all of this private exchanges could fizzle. But the purest model would be one where you have many different employers really outsourcing their entire benefits and human-resource function to that exchange benefit manager —Hewitt is the most widely cited—and then you have a wide range of carriers, ranging from big nationals, multiple site, to ones organized around relatively narrow delivery systems, and hybrids in between, offering different levels of coverage to that big pool of employees. And that is a model that isn’t incompatible with self-insurance, but it works much better in a fully-insured model, particularly when you then think about that as defined contribution to all the workers and their dependents that are in that pool.

Just remember that there’s a structural element to this that private exchange sponsors have to be very careful to maintain, and that is the employer has to still have enough of a connection in there to retain the employer tax subsidy, because that is so often crucial.

Of course, we’ll see where this goes. If private exchanges work well, and public exchanges get the problems resolved, we may be having a debate a few years from now whether the two should merge, and we get rid of those barriers, or not.

Carl McDonald: Yes, so I would say private exchanges, I think, are interesting for a certain piece of the employer population. So, like, most employers that I have talked to have said if we move to a private exchange, it’s going to be anywhere from 5 to 15 percent more expensive: Industry tax, state mandated benefits, health insurance industry fee—all those things.

Now, you do have the plans competing against one another on the exchanges, and so that takes the price down a little bit. But, you know, Darden, which is a marquee Aon client this year was very explicit in saying this private exchange through Aon is going to cost us more in 2013 than staying self-funded.

But they don’t care. All they care about is that they’re setting a fixed amount that they’re going to give their employees. I’m making this number up, but, "We’re going to give you $300 a month to go out and buy your health insurance." The key to this whole private exchange is, five years from now, they’re going to give their employees $300 a month to buy their health care coverage. That’s all they care about.

So the way that I think about who it’s attractive to is that if you’re an employer with a lot of low-wage, high-turnover employees—Darden, Sears, you know, restaurant, retail companies, that have largely dominated at least the Aon exchange, you can be really committed to saying "We’re going to keep that fixed contribution."

When I talk to Citigroup’s benefit manager about private exchanges, she says, "No way. We’re not—why would we pay more over these next couple of years without the visibility of being able to maintain that fixed contribution." I mean, if health care cost trends rise a lot over the next couple of years, we’ve got unhappy employees, because they’re now paying more, a lot out of pocket. If the labor market tightens and we start losing employees to Goldman, and our CEO comes to HR and says we’ve got to do a better job retaining people well, guess what, that health care contribution’s going up. I think for that segment of the employer population, private exchanges—you know, probably, at least, as they’re structured right now are not as attractive.

Matthew Borsch: Could I just offer one follow up to that, which is the feature that could be a key dynamic in private exchanges, which can work outside of private exchanges, but if this is the best structure to drive people toward less expensive, tightly integrated provider systems and to do that as part of channeling payments tied to that population so that those integrated systems manage the whole medical budget, then it potentially becomes a very powerful cost driver.

And, some of the issues of worker dissatisfaction can certainly be overcome, depending on how the funding is managed over time. So, we’re just going to have to see how it evolves.

Paul Ginsburg: I was going to raise a skeptical question about couldn’t your typical large employer who wanted to put in some defined contribution principles just create a high deductible plan, and peg his contribution to the high deductible plan, or change it over time leave the regular plan as an alternative to it if the employees pay more, and avoid the higher cost?

Carl McDonald: Yes, it’s doable. The only thing the private exchange does is that it sort of diverts the blame, in a way. So, the employer is doing this to me, they’re making me worse off, whereas in the private exchange, it’s not quite as direct.

But, yes, I don’t think there’s any reason why you couldn’t accomplish many of the same things.

Matthew Borsch: But, again, I would just offer, in the private exchange, if you think about the pure version, where you’ve got a large population there, that may be a more efficient mechanism for channeling pieces of the population to different delivery systems because you get a lot more scale involved that way.

Paul Ginsburg: Yes, so then you could offer a plan built around a delivery system that you could never offer as your sole company plan, or even as just one or two company plans.

This would be a good time for us to switch to questions from the audience.

Paul Hughes-Cromwick: Hi, my name is Paul Hughes Cromwick, from Altarum Institute.

The question I have is, if they’re aren’t legislative changes, or weakening at the knees, and we’re into ’14, and the risk pool is bad, don’t the insurers still have to respond to the prospective increase in the individual mandate penalty, and therefore take into account that the risk pool will, by itself, start to improve that way, and therefore end up with premiums less than would otherwise be the case, given that they got this crappy risk pool?

Matthew Borsch: If I could take a quick first answer at that—I think you’re right, that’s a good point, and it’s a factor. But it’s probably only a factor in the mix.

It’s hard to see that a step up in the individual mandate, which I think most aren’t looking at, is hugely effective to begin with, is going to ...in and of itself, be something that really fixes the risk pool, particularly if you had a situation where, again, the actuarially normal thing to do would be to put through 30 percent rate increases because of the pool. That’s not going to be overwhelmed by the step up in the mandate. It seems unlikely.

Carl McDonald: And I would just add to that—so, from a pricing perspective, plans historically very much like to take the view of: When we actually see it in the numbers, then we’ll put it into pricing. We’re not going to assume that it’s going to happen.

The other thing to think about is just the timing of ’15 exchange pricing. So, you’re going to need to submit your rates for ’15 exchange pricing in April or May of ’14.

So, from a plan perspective, you’re going to have maybe one month of real exchange claims experience because of the lag, to set your pricing for 2015.

So, yes, to Matt’s point, like the mandate increase will be a factor, but far bigger, I think, in terms they think about the price, and the fact that they only have one month of ’14 data, and if things aren’t looking great from a risk-pool perspective, that will be dominant.

Sheryl Skolnick: And that’s why some the actions over the last week, while one might understand the liberal objectives, kind of eviscerating the risk pool, or attempting to do so, in order to keep a promise is really potentially, long-term, very damaging to the state of reform. Because if these plans have a very short window to make a decision about ’15, what if they give a party and nobody comes, okay? Now you’ve got yet another problem, which is not just that you can’t get the members on, now you only have a few plans. And in some markets, you don’t really have much choice still.

So, I mean, this is—it’s still November 30th, it’s still gotta work. I mean, it’s gotta work, not just for this year, but I think also for ’15 and beyond, because of what Paul just said.

James McGee: Yes, my name’s James McGee, and I am from the Transit Employees’ Health and Welfare Plan. So we’re a plan sponsor providing benefits to the bus and subway operators, for those who took the bus and subway here.

And we are going to be paying about—on the subject of risk pools—about a million dollars in reinsurance fees this year. And, as a non-profit, we have a hard time swallowing that as a subsidy for for-profit, mostly for profit insurance companies.

So I’m hoping somebody there can explain to me why I’m doing this?

And, secondly, what should happen if the insurance companies don’t need it? Can I get it back?

Sheryl Skolnick: When was the last time you got something from an insurance company?

Matthew Borsch: Unlikely, I guess to answer the second part.

But, really, I, you know, I wouldn’t, personally, I don’t think it’s really a payment to the insurance companies—certainly not directly. It’s, as you know, it’s going to fund reinsurance within the individual market which has actually taken on a great deal more importance now that we’re looking at the skewing of the risk pool, and plans are getting more and more worried about how much money are we going to lose here, and will we have to pull out of this market?

Now, you know, it’s taking from Peter to pay Paul, or the other way around. Whether that’s the right way to do it, I don’t know. But the need for that money to offset the risk skew that was already, to some degree, contemplated going in—and the idea was, okay, let’s offer this reinsurance, which kicks in when an individual reaches, I think, it’s $65,000 is the spending threshold, and goes up to $250,000, that allows the carriers to price the exchange premiums at a lower level than they otherwise would have.

And, so that’s been key for the price shock at least being less than it would have been otherwise—and some of the prices looking actually quite reasonable on the exchanges. But, of course, it’s going to phase down and go away by the end of 2016.

Paul Ginsburg: What I would add to that is that the structure of the Affordable Care Act was designed to be self-funded, it wouldn’t increase the deficit. And that’s how CBO scored it. And I would say that part of it is casting around in lots of different places to find money. And the thinking behind the reinsurance tax, applied broadly, is that the people in the individual exchanges are going to be sicker than average, and they’re going to cast broadly, as opposed to narrowly, to look to find the revenue for that.

So, it’s really almost a payment for something you’ve always had, was perhaps healthier than average enrollees.

Barbara Tomar: I’m Barbara Tomar, from the College of Emergency Physicians. And I had a question about people getting to the exchanges, buying some of the lower-end plans, with tremendously high deductibles.

If they are so stuck by the sticker shock of what they owe before their policy kicks in, do you think there will be a lot more bad debt, both to hospitals and physicians? And then how will that affect physicians’ willingness to continue to play on the exchanges?

Sheryl Skolnick: I think the answer is that Wall Street has assumed that all bad debt for hospitals just goes away. And that’s just simply wrong. Bad debt has nothing to do with treating the uninsured, it’s an accounting treatment, okay?

So, the real question you’re asking is: Will we still have no-pay heads, rolling, walking, riding through our doorways, and the answer is yes—you will.

And, you know, it is a little bit frightening to see the numbers of newly insured who use the emergency room, and then look at the high-deductible nature of this and you say, okay, well how much of that out-of-pocket is going to be fully subsidized by the subsidy payments, and how much isn’t? And much of it is going to end up with the hospitals.

I mean, as I modeled out the revenue and EBITDA impact to the hospitals, I assumed that 5 percent—basically, 5 percent of these newly generated insured revenues would be the balance after insurers’ payments are received that’s still due and not collectible. But that’s just throwing a dart at the board, because we don’t have a good feel for what it’s going to be. We know it’s going to be there, and especially with the higher out-of-pocket nature.

Carl McDonald: And I would say, as I think about things that could potentially be another public relations nightmare, this, I think, is one of things that would be that next shoe to drop, as people don’t realize that if they’re buying a bronze plan, that they do have to pay $5,000 out-of-pocket before it contributes a penny, and have 20 or 30 percent coinsurance.

I think from the provider perspective, the question will be if you had somebody that was uninsured previously that comes in and racks up $100,000—all right, fine, you write off the $5,000, but you’re getting paid 95, so who cares. Or does health reform bring in a lot of people that were previously uninsured that now come in and have $1,000 or $1,500 bills, and so you’re just writing those off because if they make $15,000 a year, they’re not paying a $1,500 bill.

You know, if it increases those to a significant degree, then I think it will be more problematic.

And one thing I didn’t totally appreciate is, from the physician perspective, a lot of times physicians don’t necessarily understand what networks they’re in, and what they’re getting paid. Like hospitals, you have a contract, and it’s not straightforward, but it’s easy to understand, where you are, and what you’re getting paid. A lot of time the contracts physicians sign basically say, "Anything we offer as the insurance company, you’re in unless you opt out." So you may have some situations where physicians find out, the early part of next year, that they were getting paid 100 bucks for a commercial member, and now they’re getting paid 60 bucks for an exchange member. So you may see a little bit of disruption, as providers start to figure that out.

Sheryl Skolnick: One thing I want to mention is that the way the hospitals—Carl’s absolutely right, there is going to be the sticker shock, and there are going to be these issues. And, hospitals should be grateful for that $100,000 patient, because that patient was going to show up at their door anyway, and they were going to have to pay for them anyway. So, the notion that all—or all things from (inaudible) good for the hospital goy its root in that. That’s not true, but it got its root there.

One of the things hospitals can do to mitigate the impact of getting low-spending, uninsured with high deductibles—so, low-spending, from the hospital’s perspective, like the $5,000 you expend for a $5,000 deductible, and then someone else gets the benefit of the insurance. One of the things they’re doing is really targeting the frequent flyer. They’re targeting— they know who the uninsured are, they’re probably the one entity in the entire system who sees the uninsured on a regular basis, and knows exactly who they are, where they live, and what’s wrong with them. And they’re using that information in a HIPAA-compliant and legal way to say: You are exactly the folks that the ACA was designed to help. And, you know, you can now enroll.

Now, they’re not sending out the 35,000 flyers that LifePoint, or the many multiples of that at HCA, because the exchange isn’t working. But as soon as it does, they’re hitting the mail. So, you know, don’t expect mail to go through Nashville,Tennessee, after November 30th.

But that’s what’s going to happen. And they’re really going to try to manipulate their own risk pool, as it were, to optimize their ability to get paid for the services.

Paul Ginsburg: Good. Do you have anything? No? Okay. So, the final question.

Alexa Page: Alexa Page, West Health Institute, and the American Academy of Orthopeadic Surgeons.

I wonder if you could help me with what I see as a conundrum between the narrow networks that are being issued on the exchanges—and to speak to Mr. McDonald’s point, many of my surgeon colleagues are very surprised, and are very worried about finding out that they’re in these networks. But what is also happening is the consolidation of hospitals and markets, so that suddenly you no longer have that, so, a shift between the hospitals, and how that fits with the pared network, the narrow networks?

James LeBuhn: We’re, obviously, in the not for profit space, we’re seeing a lot of consolidation. I think I would expect that to accelerate, or at least continue abreast. I mean, in the not-for-profit space it’s been very fragmented, and you haven’t seen consolidation because generally it’s been financially driven. I think now you’re seeing it’s strategically driven.

There’s still a lot of consolidation to take place. And I think, in terms of the narrow networks, it really depends on each market that you’re talking about.

At this point, I don’t know, Sheryl, what you’re seeing, but the narrow networks, we’ve seen a lot of interest in that, a lot of discussion about that. But in terms of where they’re getting set up, I think it’s stillsort of in its infancy stage right now, in regard to what organizations are setting those up, and what they can negotiate with the payer, at this point.

But I think it’s going to be coming, and it will probably accelerate as you see more consolidation, particularly in the not-for-profit space, where you can get good coverage. I’m from Chicago, and so if I look at Advocate, for example, Chicago’s a very fragmented market, Advocate, they’re the biggest provider, but they still only have a market share of maybe 18 percent in that marketplace. But if you look at where they’re located, in the suburban areas, they’ve got a good opportunity to really drive change there and consolidate that market because they’re the clear leader in very good marketplaces.

Sheryl Skolnick: So, we’re seeing all different kinds of consolidation, and I would argue, all of this is driving hospitals towards, capacity going and leaving some markets, and be built in others, because we’re not a (inaudible) population, and that’s part of it, too, is when—especially in the markets where there’s excess capacity, especially of inpatient beds—and not enough capacity of other outpatient (inaudible).

But, what I think we’re still seeing is, while consolidation is certainly playing a role, the hospitals have been very reluctant, on exchange-based contracts, the for profit hospitals, they have the—I mean, on every conference call they (inaudible) because we need it, we want to know it—they get up there and tell us how many contracts per hospital they have, with the second lowest priced silver, or the bronze, and how much narrower the network is. And so they’re all engaged in more or less one contract of a narrowed network type per hospital is what they’ve told us—maybe two, at most, but not many more than that, which I guess makes sense. If you had that many narrowed networks, how narrow is the network, really, okay?

But the hospitals have been very reluctant, on the exchange-contract side, to give anything up, because no plan can guarantee them volume. So why would you agree to give pricing up if they can’t give you the volume? So the reason that they’re even thinking about these narrowed networks, and why these contracts got signed, is because they understand that this is the first step on a path toward being able to get assured volume, and they’re not going to give up much in terms of price, or terms of the contract, to get volume that doesn’t yet exist.

That could change over time. And those networks could get much narrower—to the point where, you know, it becomes almost vertical.

Paul Ginsburg: Good. I think it’s time for us to take a break.

Paul Ginsburg: I want to turn to something we’ve briefly touched on, but to look at in a more comprehensive way that innovative contracting between Medicare, private health plans, and providers.

And I want to begin by saying I read a very interesting Health Affairs blog a week or two ago that was talking about a tapering of growth in ACO contracting. And I forgot who the author was the author may even be in the room was describing it as a tapping out of the pioneers, of the organizations more attuned to being pioneers, and because we don’t have a lack of a proven model, not yet bringing the followers in.

And that’s just a way of introducing where I think we are. It has been really a very large amount of Medicare activity, a fair amount of private plan contracting with providers, as well.

But turning first to the providers, what are the challenges that are uppermost in their mind when they look at opportunities to contract with plans on an ACO or bundled payment, medical home basis?

Sheryl?

Sheryl Skolnick: I’d be happy to take that. So, the first challenge when a provider system, or when a provider seeks to undertake risk in any model be it a Medicare, ACO, or even a risk based contract with a private insurance company is to first of all understand whether or not they are a system. Do they control either physically control, through ownership, or virtually control through contract enough of the continuum of care, and the environment in which care is delivered, to be able to undertake that risk?

The second thing and it follows on very, very quickly is do they really understand what the cost and utilization trends are within the population that they envision taking risk for? And after considering those two elements, most provider systems stop.

Many have data, but they don’t have analysis or analytics. If they have analysis and analytics, they are not truly systems. Because while they’re when I was a young, bright eyed analyst we were all talking about integrated delivery systems, very few of them actually got built. Or if they got built, they got disbanded. And that’s part of the natural process of build it up, and contract into one entity, and then expand like a beating heart. That’s what happens in my space.

So, right now, we’re kind of in a mismatch. There’s a demand for, on the part of hospitals, they are actively interested in taking risk. And it’s not just the hospitals. In fact, we have a home health company, Amedisys, which claims to be wanting to manage the entire post acute spectrum of care for bundled payment networks, and other at risk arrangements.

So, those are the things that they start looking at first.

If there is a system out there that is enough of a system, or can construct enough of a continuum, including physicians which is a key element of this and they feel that they have enough of the data, then the question is do we really understand how to underwrite risk? And I think it’s a little bit flippant to say, well, all they have to do is hire actuaries from the insurance companies. There’s a lot more to it than just that.

But there clearly have been some systems that have said, yes, we have all the necessary elements in place, and we can do that. And I’ll go back to Detroit Medical Center, the one that comes to mind as having been a pioneer ACO. Clearly, they believed that not only are they an inner city, and somewhat integrated medical center they’re an island n midtown Detroit they are also affiliated with Wayne State Medical School, and they have a very sophisticated electronic health record and clinical information system, and a very sophisticated approach to evidence based practices. So, those are, I think, some of the elements.

It’s very difficult for hospitals to successfully take risk. It is a behavior that is not natural to hospital administrators. And it’s not just the taking of the risk, it’s, more importantly and better said, it’s the managing of the risk once you take it.

So, I get very nervous when any of my companies tell me that, "I’m a provider, and I’m going to be a leader in taking risk." I think there are a few systems out there that can do it. I think they’re few and far between. And I don’t think that’s going to change for a very long time.

James LeBuhn: But, Sheryl, let me ask you: Do you think you touched on it because I think one of the big changes now is IT. And we hear a lot that being able to understand and manage, sort of, the clinical care as they build up those data bases, that over the longer term that they’ll be in a better position for a given patient population to maybe make that transition into taking on more risk. I mean, currently, right now, they just don’t have the depth. And we hear a lot about big data, and mining that partly to take out the variation in clinical delivery, but also, if they build up that patient population but they just don’t have the loss data. And, obviously, the insurers, there’s no way they’re going to give that up.

Sheryl Skolnick: Right or, if they had it, they haven’t converted it into something that they can actually use to understand the trends, and then price it, and mitigate the trends.

One interesting development, though, that kind of gives me hope in this direction HCA’s a very large organization. They have over 30,000 beds. They have millions of patient interactions a year. They have tons of data terabyte whatever the big number of data is. I’m not a data person.

But they have a data warehouse that they’ve now just constructed. They are building additional patient data centers for some of their customer interactions through Parallon. They’re a GPO/revenue cycle management company. But they’re doing a lot of things now to really focus on building up that data warehouse, and then moving beyond that to mine that data, as you suggest.

And they are a large enough scale organization to be able to ultimately, if they do this right, compete with any managed care organization, in terms of their ability to understand trends, price them, and risk them accordingly.

James LeBuhn: Yes.

Sheryl Skolnick: And I think you need that kind of scale if you’re a national health system. Say, take a Tenet, with 50 hospitals, versus an HCA, with 160 hospitals.

I think that HCA is much easier it’s easier to see HCA being successful at it than Tenet.

However what they are doing is there is a willingness to take risk on a sliver of a population. So, for example, if you’re dominant in women’s health in a market, you might actually take a risk contract to handle every single maternal child health case in your service area, and would probably want to do that. Because if you’re the dominant provider, and you’re seeing these patients anyway, you might as well take a piece of the risk return.

James LeBuhn: Right. And I think one of the other things that’s going to be interesting is obviously, in the not for profit space, we’ve seen the FTC come in and block some mergers. And, part of what we want is better scale, and better efficiencies, how to better size. But there’s also some regulatory and legal roadblocks. Because, I think as organizations look to take risk, it’s not having size and scale, but it’s also having focus and presence in certain markets. And right now, that’s a big question mark.

Sheryl Skolnick: Yes, it’s not the first time that we’ve seen antitrust policy not be aligned with payment policy and it probably won’t be the last.

Matthew Borsch: One other factor I want to throw in on the Medicare ACO side is my anecdote was a couple months ago I spoke at a meeting of 60, 70 ACOs that are now members of a new national association of ACOs, and we were talking about the weakness of the shared savings, upside only model, and when were we going to two sided, or maybe even something stronger than that.

And what, basically, the question the moderator asked the crowd is: How many of you are interested in taking risk? And basically the answer was one, and that was and what became real clear is that a retrospective assignment approach to determining who you’re responsible, who you’re taking risk for, is not compatible with taking risk. And they all said that "We don’t know who we’re taking risk for." It affects all the stuff that’s going on all year, until CMS decides that you were taking risk for that person. The patient goes to the hospital, the hospital doesn’t know that this ACO is responsible, et cetera, et cetera.

So, I just don’t think we’ll go very far in the Medicare context until we change that retrospective assignment model. Clearly, on the commercial it’s not the same, and there’s somewhat more risk taking.

The other observation I would make is that there are more physician ACOs, or would be ACOs than I had expected. It’s not all dominated by hospital ACOs. That even exacerbates the problem of management, and scale, all that stuff. And so, relationships between physician groups and insurance companies Universal is one that sponsors more than 30 ACOs right now.

So there will need to be some mechanism for supporting, both financially, and with managerial know how, physician groups who want to take risks. I mean, the advantage they have over the hospital is that probably the earliest, or the lowest hanging fruit, is keeping people away from the hospital.

Robert Berenson: And so, that’s in some ways and I think the early results from the Alternative Quality Contract in Massachusetts is that physicians begin to get some leverage over the hospital, and can move patients, and get some negotiations over prices by moving patients from the Brigham to Deaconess Beth Israel, not only did, I think it was Atrius, save some money on their ACO contract, but they got Brigham back into the game of bringing their rates down a little bit.

So the issue there is Paul and I contributed to an article about the California situation: Do you move sort of monopoly pricing down from the hospital to the medical group, is, I guess, the question that happens if you have a dominant medical group in an area. But I think there’s probably more competition on the physician side than, at least in some areas, on the hospital side.

Sheryl Skolnick: So, you mentioned the business about the retrospective. When the regulations first came out, the title of the report that I wrote was, "We Must be Missing Something," because we can’t understand how any rational provider would ever sign up for this model that was sure to lose them money.

And, you know, the other interesting thing was that managed care companies were specifically excluded from the Medicare ACO model. They cannot be a part of it. You can only be a provider to be in a Medicare ACO. And yet, all of the experience, and all of the knowledge and understanding and data, quite frankly on managing risk, and undertaking and all of the knowledge and learning, and actual practical application of managing patients, and directing where they go resides with the managed care companies or at least allegedly resides with them. And, you know, they were specifically excluded.

So, I sort of step back as being a Wall Street person, and not being an inside the beltway person, and say: What on Earth were they thinking? Who was going to join up? I was shocked that there were as many pioneer ACOs, and there were as many ACOs who signed up.

Now, the final regs were somewhat mitigating some of those issues, but not nearly enough. And so, you know, yet again another missed opportunity to maybe innovate in some way to build a better quality, lower cost system.

Paul Ginsburg: On this issue of retrospective assignment of patients, do you thing prospective assignment would be enough? Or do we need to really start thinking about enrollments?

Robert Berenson: At the very least, you need to have sort of a Medicare or PPO kind of platform, where you have benefit design incentives where you do somewhat better. I mean, the issue there is you have to work, then, with the supplemental wraparounds, and actually have that incentive play out at the beneficiary level.

Ideally, I think we should be moving into the direction of enrollment. At this point, you really, in traditional Medicare, can’t talk about limiting choice. But I’d start with benefit design, and maybe move towards a kind of

I mean, it’s interesting, some countries in Europe France, I know, in particular, has moved to what they call a soft lock in. You can go to a specialist, but you have to designate a primary care physician, and some citizens have changed their care seeking behavior by first going through the primary care physician, but it’s not a formal gatekeeper system like a number of European countries have.

I think we need to sort of think about a middle ground between a firm, "I am a member of X health plan, and I’m locked into that network," and full freedom of choice, which is, in some areas, if you’re Geisinger or Scott & White, it’s probably pretty good to have freedom of choice, because you’re Geisinger or Scott & White.

Sheryl Skolnick: Anyway that’s exactly right.

Robert Berenson: In Boston, it’s not the same situation.

And so I don’t think we’ve spent enough time thinking through how we sort of balance the desire for beneficiary choice with the need for an organization to know who it’s responsible for and to have an alignment of the patient and that organization.

Sheryl Skolnick: You don’t save money unless someone in the system is accountable for the spending of money. And in an ACO, there’s no one who’s really, up front, accountable, and therefore having the incentives to take rational actions.

Robert Berenson: And as we were talking during the break with I’m sorry, what’s your name?

Alexa Page: Alexandra Page.

Robert Berenson: Yes, okay so we were talking about an orthopedist. If an orthopedist is in an IPA, or a PHO, and is still getting fee for service revenues so I can either do my I’ll take some liberties, here my unnecessary hip replacements

Sheryl Skolnick: "Unncessary."

Robert Berenson: And get full reimbursement, and the ACO won’t do as well, or I can get some infinitesimal share of some shared savings in two years, if I hit if the organization, which I barely know exists, hits some threshold. You don’t change behavior.

So, I don’t think it’s actually surprising that the physician group practice demo sites didn’t bring in the orthopedists and the cardiologists, and all of those people, and say we don’t want you to be generating the services you’re generating to the hospital. They tried to put in congestive heart failure programs, did some things at the margin. And it wasn’t a huge success, I mean, because I think I understand the arguments that you’ve got to take baby steps and all. You know, people don’t want to take risks. But I would have mitigated the risk with risk corridors, and things like that, but moved to actual risk bearing, with a prospective, at least assignment and, ideally, moving in the direction of an enrollment, rather than what they came up with.

Sheryl Skolnick: Why don’t you just have provider based Medicare Advantage?

Robert Berenson: Well, we called that "provider sponsored organizations" in the ’90s, and three showed up in the history of the program.

Sheryl Skolnick: But if you did it with the but, I mean, that’s essentially what you’re arguing. I mean, this is trying to do managed care without the managed care entity.

Robert Berenson: Yes.

Sheryl Skolnick: And guess what, guys, it’s not going to work. Somebody’s got to manage the care if you’re responsible for the risk.

Robert Berenson: Yes, I was

Sheryl Skolnick: And with that comes limitation.

Robert Berenson: But in California, you do have at risk, capitated medical groups who put in a managed care structure

Sheryl Skolnick: But and they’re regulated as insurance companies.

Robert Berenson: Well, that’s exactly right. So, I’m just

Sheryl Skolnick: They are insurance companies was my point.

James LeBuhn: I was going to say, I think, what we heard is with the pioneer ACOs, I think Banner down in Arizona, they put a lot of time and effort into it, andthe fact that those patients couldn’t be a attributable to them. And even if they were to get some benefit on it I was surprised how, I mean, with all the work, and time, and effort that went into it for very little upside, to me sort of made me scratch my head.

So, I know Banner sort of looked at it and just said: Without being able to attribute the patients that are in our ACO, it doesn’t make sense for us. And they got together with Aetna on a MA plan, and they said we like that a lot more.

Sheryl Skolnick: Yes.

Paul Ginsburg: Yes, I think that is a trend. Let me turn to the private plans what’s their interest activity in doing these types of contracts? For under 65 people?

Matthew Borsch: "For under 65..."?

Paul Ginsburg: Well, actually, you could answer it either way, or both ways.

Matthew Borsch: Because I was about to jump in to Medicare

Paul Ginsburg: Medicare

Matthew Borsch: where we’ve seen

Paul Ginsburg: Well, let’s do that first.

Matthew Borsch: you’ve seen the most rapid shift is in Medicare Advantage. I don’t want to exaggerate it, and it’s happening faster at some companies than others. But they’re clearly, clearly trying to well, they’re trying to downstream the risk where they can, because the risk isn’t as good as it was recently, and we’re going to be probably going through the toughest piece of the reimbursement changes affecting Medicare Advantage over the next two years.

You know, now, smart provider groups aren’t going to say, oh, no, okay now I’m suddenly going to take that percentage of premium from you, with the toughest two years coming up. But on the other hand, there are ways of getting incentives in place, shared risk, that does make sense to the extent it’s going to lead to you know, assuming you’re not compromising quality, to successful cost containment under this reimbursement.

So there’s a lot of activity. They’re talking to it to a great degree, on the commercial side, with some companies like Aetna using ACOs in shared risk arrangements to drive new market entry.

But, at the end of the day, what I can’t point to is exactly what percentage of the commercial spending let’s say, outside of California, or even in California has really moved to risk, and is now in risk. It’s still certainly the minority of spending.

And, despite all of this activity maybe you know off the top of your head, Sheryl but the percentage of the bed days that are paid for on a risk versus fee for service basis at some of the hospital companies, it’s still overwhelmingly fee for service, to my knowledge.

Sheryl Skolnick: It’s only in local markets. So, Orange County, it stands out pretty much as the exception, especially for where the for profit hospitals are. Orange County stands out as the exception, because that is where you have the largest capitated groups, and the biggest influence from them on the nature of the contracts.

But, ever since the late ’90s, when global capitation blew up in everyone’s face, the hospitals have been very, very reluctant to enter into those kinds of contracts. And so, they much prefer to give their biggest customers, their biggest managed care customers a price discount, rather than take the risk. So it’s still quite small.

Carl McDonald: And, I mean, I’d say medical cost trends, as we were talking about before, are at some of their lowest levels ever, at least from a rate of increase perspective. So managed care companies would gladly give risk to anybody who wants to take it at this point in the cost trend cycle. But, as we’ve sort of touched on here to make this really work, you effectively have to transfer the underwriting and the actuarial capabilities from the managed care companies, down to the provider level.

And, managed care companies have been doing this for, you know, 20, 30 years, and they still mess up on a very regular basis.

So the idea that you can just transition this down to the provider level, and everything’s going to be fine, I think is a little short sighted.

The other thing is we’ve talked about this need to take data and transition it into something useful. I think that’s hugely important, and I don’t think you should overlook how difficult that is. Think about Health Care Partners, which is probably the most successful company taking risk, and you hear about just the excruciating process that they went through, from sort of beginning to where they are now, to make all this work. So, I guess the example would be: It’s one thing to have an electronic medical record. That’s nice. It will tell you every health thing that I’ve ever had in my life, but it doesn’t really tell you what to do.

I think what Health Care Partners and what other successful companies have been able to do is, if you’re a physician, you walk in in the morning, you have a to do list that’s already been prepared for you: This person hasn’t been in to see you in more than a year, have somebody in the office call them and set up an appointment.

And this other person’s prescription has expired, call them, get it refilled.You need to have those action items to really make it successful. And getting that kind of infrastructure has proven very, very difficult to do.

Matthew Borsch: If I could just add one point to that havingworked as part of a provider organization that did take risk unsuccessfully in the ’90s, I would venture to say it seems like the nature of the risk contracting has changed quite a bit from what it was back then, where there was perhaps a naive belief that this was not so hard to do. I think some of that had built on the early success of the model in California, where even in subsequent years there it proved tougher than it had seemed at the time.

And, also, the managed care companies, on their end, were taking a simplistic view of, well, if we can get the provider organization to take, 78 percent I once heard 72 percent of premium, and, they’ll have all the risk, and we won’t it won’t be our problem anymore. And that, obviously, is at one end of the spectrum.

But today, it does seem like many, many more of these steps forward are truly partnership oriented, in the sense that, putting aside all motives of the spirit of partnership that, at the end of the day, that certainly the managed care companies have a broader awareness. You know, they are staked to the outcomes here, and they have to help the provider groups make it work. Because if it fails, they’re in it, too, regardless of what the terms of a risk contract may say.

Sheryl Skolnick: So, one of the things that put that into practice and conversations with United about what they’re doing with their they don’t get along with hospitals too well. And I don’t know that they get along with any provider too well, but I know they don’t get along with hospitals too well. And, one of the things that they were trying to do was to work with the hospitals who did want to take risk in a very constructive way.

I think the list of questions, when a hospital would come and say, "We want to take a risk contract," the list of questions was two pages, single spaced, back and front. If the hospital could go through that questionnaire and answer in the affirmative to all of those questions, then the hospital was essentially ready to take risk.

And just by presenting them with basically all of the necessary pieces that need to be in place in order to be a successful risk taker made many of the hospitals step back and say, wow, you know, we thought this was going to be hard, and we know we’re not ready.

In some cases, depending upon the provider group, United will actually work with them and I’m sure the other health plans are doing exactly the same thing they will actually work with the provider group to get to the point where, say they could it was about 50 multiple point questions long for this questionnaire. If they could get to "yes" on 45, and they only needed 5 more, then it was in everyone’s best interest to work on the 5.

But it also places a burden on the plan, because there are some services that the plan has to also provide, that the hospital and the physician groups typically were aligned in this can’t provide. And so it has to be collaborative.

Paul Ginsburg: Good. Let me move on to network innovations. And one thing that came up a little bit in our first session was narrow- or limited-network products. And let me start by asking about how are plans building limited networks? I mean, in a sense, what are they looking for as far as which providers would they like to have? How sophisticated are they in assessing the value of different providers?

Carl McDonald: I can go quick: Price. I’m done.

Paul Ginsburg: Okay. Actually, how sophisticated is the price?

Carl McDonald: Sorry? "How sophisticated..."

Paul Ginsburg: How sophisticated is the price? Is it price per episode? Is it simply, you know, unit prices?

Carl McDonald: Yes, I mean, generally it’s going to be the unit price, or price per episode.

Matthew Borsch: Let me just offer one thing that’s happening. This is not quite to the tiered-network strategy, or narrow-network strategy, per se, but it’s topical right now in that you’ve seen some of the health plans in Medicare Advantage taking some pretty strong steps to narrow their networks. On the physician side, it’s been the most notable. In fact, there was a there’s been some communication about that. There was a letter that was posted yesterday from the health insurance industry to CMS, stressing how important it was for the plans to be able to make these network exclusions. But obviously, for doctors who’ve been, you know, contracted in Medicare Advantage to suddenly be, to be terminated, where, in most cases, they continue to participate on the commercial side, has created some real blowback.

Paul Ginsburg: I had noticed that, and was wondering it sounded to me that this was different way that a plan pursues a more limited network.

Matthew Borsch: It is.

Paul Ginsburg: It seems as though and I saw The Wall Street Journal article a week or two ago about United, and it almost seemed as though they were trying to get their star quality scores up by culling out the physicians who contribute to low scores. And is that what it’s about, Matt?

Matthew Borsch: Well, the truth is we don’t really know.

Paul Ginsburg: Yeah.

Matthew Borsch: You know, that that is, from our perspective, somewhat of a black box, in terms of the decision making there. There are multiple criteria. There’s how each physician group feeds into the star quality scores. There are utilization, efficiency metrics that they can run on a broad you know, larger companies can run on a broad set of claims data.

There’s also, frankly, the consideration of which Medicare Advantage members are assigned to those physician groups. And again, I’m not pointing to any one of these three as a factor but there you could possibly have some effort to change the risk distribution of the underlying membership.

Sheryl Skolnick: So, just to put this in context, Medicare Advantage rates are coming down very significantly next year. They’re actually going down next year from United’s perspective what? about 3 1/2 percent or so.

And when your rates go down, some of your plans, and some of your providers in those plans will have to be terminated, because you need to essentially shrink to a profitable size, or a sustainable size. So that’s part of what you’re seeing, is instead of the proactive "We’re introducing a new benefit plan, we’re going to build a narrow network," now you’re seeing the reactive effect of United’s always been a very inclusive and broad based network. They’ve had some issues of adverse publicity in St. Louis and some other places when they’ve tried to narrow the network based on quality. There is a lot less push back on that sort of thing now.

But they’re getting some push back on this one because in Connecticut alone, for example, it’s 2,000 providers. That’s a lot in Connecticut. It’s not that big a state.

So, what you’re seeing is, first, the unwinding. Second, I agree with you completely, I think it is absolutely a strategy to get their star scores up, because they’re a major embarrassment. And they’re clearly, from their last conference calls, a focus of the company strategy for Medicare Advantage for the next couple of years, is to get the star scores up.

But I also, I agree with Matt, that there are many other factors at work, most notably that they need to get all of these markets that they’ve expanded rather broadly toget rid of the marginal plan, to get rid of the marginal provider and, in some cases, the high cost member.

Robert Berenson: But I think it’s important to point to a major difference between the Medicare managed care situation and commercial, which is that in Medicare, out of network services are paid at Medicare rates, so that changes the whole leverage situation. And it’s the reason, I think, that hospitals basically are in network at Medicare rates, or near to Medicare rates, because they don’t have the leverage.

Balance billing is a whole different situation. I’m actually surprised that MA plans weren’t more aggressive in the past, because they have the protection for the out of network care. And others, there won’t be such push back from the beneficiaries hit with the complete balance bill, if their physician is not in network, or something like that.

Carl McDonald: Well, there won’t be as much, but we’ll see as we get into that.

Matthew Borsch: Yes.

Paul Ginsburg: So, getting into the employer based, the commercial space, you know, it looks like there’s been substantial growth in small group plans to have narrow networks. And, of course, so many of the products of the exchanges are narrow networks.

And, any comments about that strategy, how it’s going, is there going to be is there going to be push back by the public?

Carl McDonald: Yes no, I think definitely much more in small group and in the individual market than large group. So, if you think about an employer like Citi, there’s no way you could take what we have today and move that to a limited network. There would be so much disruption from that. I think it’s much easier with a smaller employee population particularly if you’re the business owner, and you can say, all right, well, our choices are we either go to limited network or we don’t have health insurance. What do you want to do? , I think it’s a little bit easier to swallow that. So I think it is going to be much more predominant in the smaller end of the spectrum.

Sheryl Skolnick: For a long time the hospitals were telling us that while Wall Street was busy talking about the narrowing of networks, hey weren’t actually seeing it.

It was only when the exchange contracts came up that, even in the beginning, there was some concern that some of the contracts that were being signed weren’t narrow-network contracts, in the very beginning of the contracting. Towards the end of the contracting for reform these are commercial, by the way, these are fundamentally commercial contracts. So, by the end of the contracting, though, almost all of the contracts being signed were for some sort of a narrowed network.

So, I think there was a very quick evolution in the thought process of the plans in negotiating these things, where they very quickly realized: This is one of the very few levers we have, we better pull it.

Paul Ginsburg: Yes. And, to what extent, as they form these networks, to what extent are the savings going to come from keeping high cost providers out, or getting discounts from providers?

Sheryl Skolnick: Yes. Yes.

Paul Ginsburg: Which is the dominant piece, or are they both very important.

Sheryl Skolnick: Very important.

Paul Ginsburg: Okay. That’s the answer. Has anyone seen much tiered network activity in the commercial space?

Sheryl Skolnick: Not in years.

Matthew Borsch: There’s been less focus on that. That was certainly a topic that there was more discussion around maybe four or five years ago. I think as plans were looking at tiered networks as a way, perhaps, of, you know, the gradual shift, more gradual shift to narrow networks.

Paul Ginsburg: Yes.

Matthew Borsch: Still, there’s activity going on around that. I think one of the issues there is one simply of complexity, that a tiered network, is in between a broad network and a narrow network and, you know, you have to A & B.

But, we’ll see what happens. It’s certainly an innovative approach that structurally makes sense. So we may hear more about that.

Paul Ginsburg: Yes.

Robert Berenson: I was just going to add that I think one of the realities on the ground around tiered networks is the powerful, the must have hospital systems that don’t want to give concessions on price also don’t want to be in a disadvantaged tier. And so the health plan might have an interest in moving to a tiered network, but they often can’t pull it off because of resistance by must have providers.

Paul Ginsburg: And, Bob, are you familiar, at this point, about any states other than Massachusetts that have addressed that through policy?

Robert Berenson: I only know about Massachusetts, but we’re going to be doing a survey of that for a project I’m doing with NASI, and we’ll have a better answer for you.

Paul Ginsburg: Yes. Now, reference pricing has gotten attention recently by what CalPERS has done with joint replacement, and they also do it with some outpatient services. And reference pricing is really a more aggressive form of tiered networks. And do you see this as potentially important, or very limited, because it’s never going to affect that big a piece of spending?

Carl McDonald: Yes, I mean, I like it conceptually, but implementing, I think, has been a challenge. So, that’s one major issue is that how many different procedures can you actually do reference pricing for? And the second is that it’s a tremendous amount of work, administratively, to set that up so that you can have a situation where your employee can go to a website and know instantaneously, if I’m getting my knee replaced, these are the four facilities I can go to that will be below that set price. And to do that for all of these different procedures, it just, it takes a fair amount of work to get that done.

Matthew Borsch: It does, although I would just say there’s obviously an empirical and you touched on this an empirical appeal to that. It’s something that we always sort of talk about, this is where we’d like to be, where you have packaged end to end pricing that you can compare price and, if you have it, quality information across different provider systems.

And so, to the extent that it is working to some degree, as I understand, in California, with the CalPERS demonstration, I guess you might call it, that I think certainly it seems like there will be an attempt to take that more broadly.

Robert Berenson: Yes, I think, conceptually, it’s very appealing. The concern, I guess, that I have is it moves I know, right now, we have sort of a view with durable medical equipment and clinical labs as sort of commodities, where you can actually try to negotiate on price because the product is pretty well standardized. It moves, sort of, clinical service into the commodity arena you know, joint replacements, colonoscopies, MRIs are the ones that I’ve heard about are in it.

I think it puts a greater burden on CalPERS, and the others offering it, to really develop the quality metrics that they can at a service specific level, not sort of prevention measures and HEDIS, but really, does this MRI meet quality standards. I got quoted in the paper about six months ago saying, "Is an MRI, is an MRI, is an MRI?" And there’s actually a company in New York that doesn’t believe an MRI is an MRI is an MRI. And the equipment is all different. The fellow was telling me that in Japan, they actually have different reimbursements for different kinds of MRI machines and CT scans. And then the quality of the So, I think it’s a good thing if it’s accompanied by a real commitment to telling the beneficiary, the member, that we can guarantee a certain level of quality at this price, rather than and I know CalPERS wants to do that. I think it does

So, in addition to sort of the operational challenges, I think I’m adding another one, which is actually being able to guarantee a certain level of quality and safety.

James LeBuhn: Well, I think the whole idea of quality is something that’s evolving. Because how do you overcome the expectation, the reputational pull that most of us have about certain institutions? You can tell me all you want about quality, but if you’re in Northern California, Stanford Hospital and Clinics is considered the best. Now, you may be able to show quality things, but it’s hard to overcome those, among patients that want to get the best care that they think they can get.

Paul Ginsburg: Good. You know, Bob and I have, over the years, written a lot about health plan-provider leverage. And I just wanted to ask the panel if they what they see as the current trend direction? Is provider leverage vis a vis health plans increasing? Or is it in retreat? Or can’t you tell?

Matthew Borsch: I guess I’ll just take a stab at this, and it’s my sense that the provider leverage has been increasing more rapidly than on the plan side. Obviously, there’s been a lot of consolidation on both ends.

But I think that with the ACO concept, that has given some cover. Sorry, that’s probably a cynical way of saying it, but I think what you have are hospital systems’ acquiring physician groups and other hospitals horizontally because it achieves multiple directives. One, it brings them closer to having the scale and the scope of capabilities to be a true accountable care organization and that’s great. But in the near term, it also gives them increased market power.

And, so to the extent that the ACO gives them cover to move in that direction, and they can achieve both objectives, that’s great. And I think that’s more of what we’ve seen.

Sheryl Skolnick: I think it still depends on who you are, and which toys you own in the sandbox. The more toys you have, and the more attractive they are to the other kids, the more leverage you have okay?

So, to put it in business terms, there are hospital systems, with or without physicians attached, in markets where you have a dominant Blue Cross/Blue Shield plan, who will never have pricing leverage. Health Management Associates is in a very bitter contract dispute in Jackson, Mississippi, with 10 of their hospitals having been they felt they were getting insufficient reimbursement, they filed suit against Blue Cross/Blue Shield probably not wise, given how dominant they are in the state, something like 85 percent of all the small group lives go through Blue Cross/Blue Shield at some point in time. And I think it’s 57 percent of the individual lives which I was actually surprised it was that low.

And so, they’re having a major contract dispute there over payment rates that the governor actually had to get involved, and sign an executive order, forcing Blue Cross to take the 10 hospitals back in. And then they threatened to sue, and later rescinded it. So it’s a soap opera, it’s Peyton Place, and it goes on.

But that’s you know, this is 10 hospitals that are, if not dominant, than important, especially on the OB side. And it didn’t matter there, because the payer is so dominant. In other markets, you still have dominance by the providers.I think that that leverage, and that dynamic, continues to exist.

Where I think the health plans clearly lost leverage I don’t know what we were saying a year ago about what was going to happen to provider rates under exchange contracts but, my group, one, managed care group, zero. It was you know, that’s the score. The hospitals clearly won that battle.

I think there are a few hospitals in Louisiana, I know of, for sure that are getting Medicaid or slightly less than Medicaid on some of their exchange contracts. And those are the only ones in the country I know of. There may well be others, but those are the only ones I’ve heard of. Everyone else is at or near commercial. So they won that battle pretty soundly.

Carl McDonald: And I would say, I mean, hospitals, I think, still have the leverage. WellPoint every quarter reports their cost trends, and they break it out by component, between unit cost and utilization. Every single quarter inpatient unit costs rise 5 to 7 percent. You know, mid to high single digit. It doesn’t really change.

But the one thing that has been a modest adjustment over the last couple of years is the giant hospital rate increases. So, with a hospital that would come in and say I want a 60 or an 80 percent rate increase, and, in years past, managed care companies would just sign. I think there is more willingness to push back on that now. Some of that may be related to the 10 percent rate increase threshold, and some of the regulatory pressure that the plans are facing. But that’s the only area where I can say I’ve seen any real significant change.

Sheryl Skolnick: I would say, among the publicly traded hospitals, the reason that you were seeing those was because you had a hospital system like Tenet, that might have been subject to stress, and therefore had below market rates in many of its markets. That’s a nice way of saying going through a scandal where they overcharged, and then they had to give money back okay? And so once you do that, you’re kind of behind the eight ball with the managed care plans, and then you have to go and beg for more money.

So they did, but only after they fixed the system. In those years, you were seeing those kinds of 50, 60 percent increases in some of their markets, because they had frozen their rates. But you’re not but I would agree with you, you’re not seeing those kinds of things, especially among the publicly traded hospitals, because they’ve gotten to parity, unless it’s in and this is the real battleground that I see the newly acquired hospitals, where the systems, you know, there is a community, or a Tenet, or an HCA especially if it’s HCA trying to get their pricing applied to either the physician group that they’ve just acquired, or the hospital that they’ve just acquired. That’s the real battleground, especially on the, "We own the hospital, bought the physician group. We want this group to get the same benefit of our contracts," and the health plan says no. Then it all blows up.

James LeBuhn: Yes, that’s a good point, Sheryl. Because I think, before, it was well, we’ll bring this hospital into our system, and we’re just now they’re at our rates.

Sheryl Skolnick: Yes. And the health plans are clearly pushing back.

James LeBuhn: But I think, over time, I think that that dynamic, I think the hospitals if you’re looking at a teeter totter, I think the hospitals are gaining more leverage, if you will, and more pricing power, just through consolidation. I think insurers for a long time have been able to take advantage of fragmentation in the marketplace, and you’re beginning to see some of the big systems in a place like Seattle Boeing put their contract out, and they’re looking to go direct to the providers.

And I think as you see further and further consolidation, you’re going to see more of that, where providers are willing to go direct, and sort of bypass the insurers for that function.

Paul Ginsburg: You know, about the experience so far, in exchanges, I think one of you mentioned earlier in the meeting that plans are in a weak position now because nobody knows which plans are going have the volume. And that could be a very different situation next year.

Sheryl Skolnick: That’s right.

Paul Ginsburg: Yes. Let me talk about hospital employment of physicians. And I’ve just been struck at how quickly this is moving, and just want to get started with let me ask you, what are the really important drivers of this trend?

James LeBuhn: Well, we’ve seen it a lot on the not for profit side. And I think, really, it’s market by market. One of the credits I rate is Aurora, and they had a strategy where they really went in and consolidated a market. And it was an easy market easier, because there were some large, multi specialty physician group practices there, so they could go in and do that.

I would say, in the probably as you move from the West Coast to the East Coast, you’ve seen it, obviously, more on the West Coast. I think, on the East Coast, generally speaking, it tends to be more community based physicians, smaller groups.

And it really depends on how competitive a market is among the provider community. So, for example, when we went in talked with Lakeland Hospital and they’re in St. Joseph’s, Michigan. They’re the only hospital in town. So we’re going through our checklist, and said, well, what about physician employment? They said, "We don’t need to employ the physicians. They don’t have any place to go."

So, I think, you’ve seen that as a competitive response, to align those physicians to get those admissions. I think a lot of that’s happened. I think, like you said, Sheryl, on the specialist side, they’ve kind of lined up their specialists.

I think now it becomes a question of, well, how do we align them without employing them? IT is a great way to do that you know, providing some of that back office business function to a physician group without actually employing them, so that way, you know, what you’re doing is your aligning them with your organization, but you’re not picking up their you’re not paying them and picking up their salaries. But, hopefully, you’re going to get the downstream revenue from that.

Paul Ginsburg: So, Jim, you’re suggesting that perhaps the trend might slow because hospitals are getting better at recognizing and, I think, at least achieve some of the integration without employing the physicians.

James LeBuhn: I think that I don’t know, I think it depends. I wouldn’t be surprised to see it slow a bit. But, again, I think in the East Coast, I think you’re going to see, probably, there’s some further consolidation happening there. I think the other question is, is what happens on the not for profit side, if hospital margins start to get squeezed. You know, will they be in a position where they want to take on those physicians. That becomes a big wild card.

Sheryl Skolnick: So, I agree with you, the driving force is volume?

James LeBuhn: Mm hmm.

Sheryl Skolnick: Volume capture. And, you know, full beds make you money, empty beds don’t. The competitive dynamic of, "I need that group. I don’t want my competitor to get it."

But, also, what scares me about this is, they’re still losing money on those practices. That hasn’t changed. So, these guys never learn. And it’s really frustrating because we’ve seen this play out badly for them before.

So I’ll say yet again because I think I say this at every conference, and at every opportunity would you please learn from your past?

You know, I’m not sure we even understand what the goal and aim is of owning the physicians. What’s the strategic end game of owning the physician practices? If it’s just simply to control your volumes, and control your destiny okay, I get it. Then that’s a cost of doing business, and maybe those losses, if you can minimize them, are acceptable.

But if it’s some notion of a risk based plan that is not well, you know, formulated, and sort of this nebulous thing out there, if there’s really not that much competition, you shouldn’t be owning the practice I would agree. And those are going to unwind.

The think that the publicly traded hospitals tell us that really is driving this is physicians who are new graduates, and physicians who have been around for awhile, want this. It’s being driven as much by the physician, and with great reluctance on the part of, I’d argue, arguably the smarter hospital systems, who are employing these doctors reluctantly because it’s the only way they can get their services.

Robert Berenson: Yes, if I could jump in there, I do think that’s a driving force--younger physicians who want shift work. They don’t want to be on call 24/7, and they don’t want the headaches of running a practice. They’re looking for employment. So who employs? Hospitals is who’s employing. We’re not having a major expansion of multi specialty group practices. We may see some.

So, I think that’s going on. And I just want to say, put in a I’ve seen reports of 50 percent of docs now employed by hospitals, or something. That’s a wild exaggeration. I mean, the data, the better data is I’m just reading from an AMA survey from 2012 60 percent of docs are still in groups of nine or less, 20 percent of those are solo, they’re in independent practice.

There is a move towards group ness. Docs can you know, a single specialty group that’s a price taker, it’s accepting the Medicare fee schedule or less, decides to consolidate to have more leverage on that price. Or, some of them can see that as a benefit of going to the hospital.

But this is not quite the shift that it was portrayed. There was an early phenomenon not early, about five years ago the phenomenon of cardiologists wanted to all move because of provider based payment, well, cuts in their payments, and the fact that they were in a good bargaining position because of the substantially higher payment for the facility fee. But that’s going to be corrected at some point.

So, I think there is a sort of a broad trend toward docs not wanting to be in independent practice. But wouldn’t exaggerate how much, you know, this is sort of happening.

James LeBuhn: Well, and I think you bring up a good point. The whole idea of -- we’ve seen some hospitals and one of the offsets to employing the physician is the hospital based billing on the ancillaries, that helps offset that. And I think as that gets taken care of, that’s going to reduce their you know, maybe that cost offset.

And then also, the whole idea of the SGR cuts. If that does go through, which I think is they seem to pull it out from the fire at the last minute. But I think that becomes, maybe, a bigger risk, given the current environment in Washington.

Sheryl Skolnick: With very big ramifications for lots of other providers, and some, even, elements of the hospital, as well. So it’s or, it would not be fun, but it would keep us employed.

Robert Berenson: And then, just one final point to make, to Sheryl’s point about what did they learn from the ’90s? What I learned from interviewing hospital people is they thought they were going to solve this problem the second time around by paying docs on RVUs generated on productivity, rather than giving them a salary.

And so that’s what they think they’re doing to try to get better performance. I was struck by the well, I don’t know if it’s "incompatible," but there’s some dissonance between wanting to be a population based ACO, and bringing docs in and paying them on RVUs and without sort of recognizing that dissonance. I mean, it was just like we’re doing both things.

So, I have also heard that it’s still not a sustainable business strategy to be doing a lot of employing. So I’m interested to hear that confirmed.

Paul Ginsburg: So, are they doing anything? What are they you know, besides getting volume, there’s also this notion of well, if we’re going to integrate care, we’ll have more control over employed physicians.

Sheryl Skolnick: Yes.

Paul Ginsburg: But are they actually have they actually figured out a way of doing that?

Sheryl Skolnick: You know, some of the hospital systems have. There are a couple of initiatives out there three or four. You’re trying to deal with evidence based practices, and changing the way people behave in the hospitals. First of all, you have to show them how they’re actually behaving. So you actually have to give them the data that says, you know, if you want to be high quality, low cost all the way out on the right hand side of the graph, towards the bottom, you know, where horizontal is quality, and vertical is cost you want to be to the right, on the bottom.

And if you give physicians the data, they’re very competitive. And they are occasionally rational, so they understand, you shouldn’t be the guy who is doing a really bad job and costing them more, besides, paying more for the privilege.

So that is actually going hospital by hospital, doctor by doctor. This is very, very time consuming. It’s very difficult to drive this kind of change. But if you do, it really works.

And the first place you see it is in supply costs. Because, actually, the easiest thing to change is to standardize on a set of supplies. Some of the harder things to change are technique okay? So you’re still going to get variation in outcome because you have variation in people performing the services.

But if you employ the physician, it is much easier to say to them, when you’re the chief of the medical staff: If you come and practice in my hospital, you have to abide by these standards of care. And then, having standards of care, and having standard operating procedures and this is one place where having the electronic health record the clinical information system, more precisely that actually does help you go through that decision tree, does tend to standardize the care at a higher level. And you can effect change.

It is much, much easier especially if you think about it, you know, where you’re a very large organization, like an HCA, with well over 30,000 community based physicians who are affiliated, and 5,000 at the time this data is about a year old and about 5,000 employed physicians, hospitalists, in particular -- it’s much easier to communicate changes in best practices to 5,000 people across 160 hospitals, than it is to 32,000 people.

Paul Ginsburg: Jim you were going to

James LeBuhn: Well, I was just going to say when we talk with a lot of hospital systems, they think that’s a big area of cost efficiency, is taking out the variation just like manufacturing. And I guess it remains to be seen, but, intuitively, I think that it makes a lot of sense. And that’s where the IT systems clearly can make a difference in terms of those physician behaviors.

Because before, in the ’90s, you’d go to a physician, and he goes, "Well, I have sicker patients," and there’s no way a hospital could come out and could determine that. And now they’ve got the empirical data to say, "No, you don’t."

Sheryl Skolnick: Yes.

James LeBuhn: And, you know, "You’re using up much more OR time, you’re using much more supplies. And the results, the health profile of your patients isn’t any better."

Sheryl Skolnick: Right. So, there is actually data from Tenet Health Care that actually is spectacularly successful. They originally projected, from the first five DRGs that they did this on, the big five, they projected about $50 million a year in cost savings, and it’s now well in excess of $80 million a year, and still growing. And that’s for the system as a whole.

Paul Ginsburg: The final question I wanted to ask, and then we’ll go to the audience for questions is: What about the implications on payment rates, from employment of physicians, and the sense that how large is the bump that, you know, it’s the higher rates that hospitals negotiate compared to what independent practices do? And does this have an effect on the rate for the hospital services, as well?

Sheryl Skolnick: So, I would say that the notion of physicians’ being aggregated under the banner of a local hospital system that gets good rates is in part, you do that as a physician organization, you sell your practice to the hospital so you’ll get higher rates. And that is a big motivating factor because you are giving up your independence and, to some extent, your choice in how you practice medicine, to join this organization. And you better get something out of it. And the "something" that you get is, they’re not the ones who have to do the negotiating okay? So they’ve outsourced that to their hospital parent. And when the hospital parent does it, they’re doing it for many more physicians and so, theoretically, buying premiums should accrue to the hospital. That’s the theory.

I think it’s hard, in practice, to get that. And I think that the stickiness on some of the health plans, even where the hospital is dominant, is still very, very firm on the issue of the physician reimbursements.

SPEAKER: Where do you see the Medicare Advantage market being two to three years from now, once the toughest phase of cuts has gone through?

Matthew Borsch: I’ll take a stab at that. So, I think what we will see, first, on the membership side, definitely a very much slower rate of growth, but probably still growth in the current open enrollment period.

That’s yet to be confirmed, but I think, despite the fact that there have been some shaving to benefits, that there’s been some narrowing of networks, the demand for Medicare Advantage is still there. And the value proposition to middle class and lower middle class seniors is absolutely there.

It’s harder to tell, as we look ahead to going into 2015, because you’ve got a program that’s already, from ’14 and reimbursement changes that occurred earlier, I wouldn’t say stripped down to the bone, but it’s been under a lot of pressure. And now you’re star demonstration program expires in 2015, your industry fee goes up by more than 40 percent. You have the next in, really, the largest final raft of the reform benchmark phase ins, and some other technical factors. You know, what we don’t know yet is what trend rate we’re going to get from CMS in February that will be finalized in April.

But all of this just to say there may be more significant cuts to benefits, and maybe more plan cancellations maybe unveiled in October of next year, going into 2015. So you could actually see an outright decline in Medicare Advantage enrollment, possibly.

And then I think from there, probably you’re going to return to pretty robust growth. By ’16, you know, maybe ’17, because the payment transition will be mostly behind us, and the program should, in theory at least, then be growing by the Medicare rate of inflation. And, of course, the big tailwind at that point is going to be the demographics, where the baby boom generation turning 65 peaks in 2021, I believe, and where that demographic is increasingly less likely vanishingly less likely to have private sector, employer paid retiree supplemental coverage, certainly, and also more familiar with plan selection and managed care dynamics.

But you’ll have a lot of plan consolidation during that tough period, in all likelihood.

Carl McDonald: And also, very quickly I mean, so I’ve got industry’s growing Medicare Advantage 10 percent this year. I’m assuming it’s going to grow half of that in 2014 because of a lot of the changes that Matt mentioned.

You know, one thing that’s been interesting to me is Humana, one of the largest Medicare plans, really not cutting benefits in 2014, despite those rate cut much larger reliance on medical management savings than actually raising premiums and copays. You know, I would argue, a riskier strategy for them but, something that will help their membership grow.

And just a broad point is, we’ve seen time and time again, once somebody’s in a Medicare Advantage plan, you can basically do anything you want to them and they will not leave. When you cut benefits, it makes it harder to attract people out of the fee for service program into Medicare Advantage. But, really, the only time you ever see somebody leave Medicare Advantage is when their plan exits and they don’t have anywhere else to go.

Robert Berenson: Well, except for the I mean, there’s a small turnover, but that turnover is sicker. So, people who leave Medicare Advantage plans, presumably because of a new illness or something, back into traditional Medicare. I mean, there is still a risk selection issue going on there.

Sheryl Skolnick: Yes. If you become institutionalized, you have to leave.

James McGee: Yes, James McGee, from the Transit Employees Health and Welfare Plan again.

Earlier, you were talking about the risk models. And our carrier is aggressively pushing patient centers and medical homes. And although we are convinced that, in theory, this is a good model, I think one of the panelists used the phrase about "directing risk at bedside."

And one of our questions is how this works in a multi payer environment? How do these physician practices differentiate our carrier from the other carriers, in terms of how they practice medicine? This is something that the carrier itself has not been able to demonstrate adequately to us. And I was wondering if you could comment?

Paul Ginsburg: It’s a great question.

Carl McDonald: Yes, I’m going to say CareFirst has spent a ton of time and money doing this is that your carrier -- and they seemingly have had some pretty good success with it. But, you know, we’ve talked about running a mixed model, it seems to be a very, very difficult thing to do from a provider perspective, to be able to differentiate and use the data for a specific group of patients, as opposed to, you know, a big change in the practice.

Sheryl Skolnick: I mean, it almost argues for vertical integration of the payer and provider in order to do that.

Robert Berenson: My comment would be that Medicare, a couple of the Medicare demos are trying to be multi payer, and have Medicare, Medicaid, and at least the significant commercial insurers, all agree on sort of the approach to supporting the medical home. It’s difficult. They’re competitive organizations, those commercial payers, and often want to sort of disappear.

So there’s been mixed success. And Medicare’s not, also, the greatest partner, typically. In this one, they have actually been relatively good.

But you’re absolutely right, to provide the the medical home wants consistency across all the providers, they want common, sort of, an assessment tool to certify that they’re medical homes. They want common quality metrics. They would like to have all the payers one of the positives that I’ve heard on my site visits is care coordination. They like the idea that there’s some financial support for bringing in a nurse case manager to work with chronic care patients. But some of the payers are leaving. So, it’s ideal to move in that direction. It’s hard to pull it off.

Paul Ginsburg: Yes, just to add something -- in our complex system, you can have a carrier decide that they want to do this, they want to but then, you know and so, for their fully insured business, then, it’s part of it. But then they still have to go employer by employer, like to you, and say get their permission to pay this different way.

And I spoke to one carrier who was saying it hasn’t been a problem. But, I’m sure that that’s not always the case.

We’ve run out of time. And I want to end by thanking the panel, who did a phenomenal job. I want to thank the HSC staff for the work they’ve done to make this such a smooth operation, and thank the Jayne Koskinas Ted Giovanis Foundation for Health and Policy for sponsoring this conference.

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Participant Biographies

Robert Berenson, M.D. - Institute Fellow, The Urban Institute

Robert Berenson, M.D., is an institute fellow at the Urban Institute and an expert on health care policy, particularly Medicare, with experience practicing medicine, serving in senior positions in two presidential administrations, and helping organize and manage a successful preferred provider organization. From 1998-2000, he was in charge of Medicare payment policy and private health plan contracting at the Health Care Financing Administration (now the Centers for Medicare and Medicaid Services). He served as an assistant director of the domestic policy staff in the Carter Administration. He was also national program director of IMPACS—Improving Malpractice Prevention and Compensation Systems—a grant program funded by the Robert Wood Johnson Foundation, from 1994-1998. A board-certified internist who practiced for 12 years in a Washington, D.C., group practice, Berenson is a fellow of the American College of Physicians and a graduate of the Mount Sinai School of Medicine. He is a former vice chair of the Medicare Payment Advisory Commission.

Matthew Borsch, M.B.A., M.P.H., C.F.A. – Vice President, Goldman Sachs

Matthew Borsch is a vice president and senior investment research analyst at Goldman Sachs, covering the managed care and health care provider sectors. Before joining Goldman Sachs in February 2001, Borsch was an executive in the managed care industry for six years with Physicians Health Services, a health insurance company, and Telesis Medical Management, a physician management company. Previously, he spent seven years as a management consultant with Accenture. Borsch has ranked among the top three research analysts covering the health insurance and managed care sector in Greenwich Associates investor polls and runner-up under the 2008 and 2009 Institutional Investor survey. Borsch is also an adjunct professor at Columbia University, where he has taught graduate-level courses on the managed care industry since 1997. Borsch is a chartered financial analyst. He received two master’s degrees from Columbia University in 1994, an M.B.A. and M.P.H., and a joint B.A./B.S. in economics and mathematical sciences from The Johns Hopkins University in 1986.

Paul B. Ginsburg, Ph.D. - President, Center for Studying Health System Change

Paul Ginsburg, a nationally known economist and health policy expert, is president of HSC, a nonpartisan policy research organization in Washington, D.C. He also serves as research director for the nonprofit, nonpartisan National Institute for Health Care Reform. Ginsburg is a noted speaker and commentator on changes taking place in the health care system. His recent research topics have included provider-plan leverage, cost trends and drivers, Medicare physician and hospital payment policy, and competition in health care. Ginsburg has been named to Modern Healthcare's 100 Most Influential People in Health Care list eight times. He received the first annual Health Services Research Impact Award from AcademyHealth, the professional association for health policy researchers and analysts. He is a founding member of the National Academy of Social Insurance, a public trustee of the American Academy of Ophthalmology and served two elected terms on the board of AcademyHealth. Before founding HSC, Ginsburg was the executive director of the Physician Payment Review Commission (PPRC), created by Congress to provide nonpartisan advice about Medicare and Medicaid payment issues. Under his leadership, the PPRC developed the Medicare physician payment reform proposal that was enacted by Congress in 1989. Ginsburg previously worked for the RAND Corp. and the Congressional Budget Office. He earned his doctorate in economics from Harvard University.

James LeBuhn – Senior Director, Fitch Ratings

James LeBuhn is a senior director and sector head of the not-for-profit health care group in Fitch Ratings’ public finance department, where he is responsible for analyzing hospital and long-term care credits as well as managing the personnel, policies and procedures within the department. Prior to joining Fitch in March 2005, he worked in the health care investment banking group at Cain Brothers & Co. in Chicago. He was involved in the structuring of debt financings for hospitals and continuing-care retirement facilities. Prior to joining Cain Brothers, LeBuhn was an institutional salesman at Ziegler Capital Markets Group in Chicago where he was involved in the structuring and pricing of more than $5 billion in new issue underwritings, including many lower investment grade and non-investment grade health care borrowers. LeBuhn has more than 20 years of experience in analyzing, structuring and/or selling tax-exempt health care debt. He received a bachelor’s degree in economics and political science from Northwestern University. He is a member of the Chicago Municipal Analyst’s Society.

Carl McDonald, C.F.A. - Director and Senior Analyst, Citi Investment Services

Carl McDonald is a director and senior analyst covering the managed care industry, having joined Citi Investment Research and Analysis in June 2010. He has followed the managed care industry for nearly 15 years, previously with Oppenheimer & Co., CIBC World Markets, Morgan Stanley, Banc of America and Credit Suisse First Boston. He was named a top three analyst in the managed care sector in Institutional Investor's 2013 All America Research Survey, was the second-ranking managed care analyst in the 2013 Greenwich Associates survey and was the No. 1 earnings estimator in the health care providers and services industry, according to the 2011 Financial Times/Starmine analysis. McDonald received bachelor’s degrees in economics and American studies from Brandeis University. He is a chartered financial analyst and a member of the CFA Institute and the Boston Society of Security Analysts.

Sheryl Skolnick, Ph.D. – Managing Director & Co-Head of Research, CRT Capital Group

Sheryl Skolnick joined CRT in 2006 to provide equity and credit coverage of health care services companies and rejoined in 2010 after a short tenure at Pali Capital. She became CRT’s co-head of research in September 2011. With more than 25 years on Wall Street, she has been named The Wall Street Journal’s Best on the Street in Healthcare Providers on several occasions. She is known for her differentiated research, unique perspectives and client service. She has provided differentiated health care services investment research at Robertson Stephens and Fulcrum Global Partners, a top independent research boutique, among other sell- and buy-side firms. In her early career, Skolnick was an economist for the U.S. Department of Labor and the Antitrust Division of the U.S. Department of Justice. In addition to her roles at CRT, Skolnick is an adjunct professor at Columbia University’s Mailman School of Public Health and is a featured speaker at several annual health care conferences, including the University of California-Irvine’s Paul Merage School of Business’ Health Care Forecast Conference. She is a frequent guest on CNBC and Bloomberg TV and is a widely quoted expert on health care issues. Skolnick earned her doctorate in economics from Washington University in St. Louis where she was an Olin Fellow