Wall Street Analysts Bullish on Managed Care, Bearish on Revolution Health Care Information Technology

Conference Executive Summary
June 22, 2000

SHINGTON, DC – Insurance premiums are rising faster than provider payments and other costs, putting health plans in their strongest position in years, according to a panel of Wall Street analysts convened by the Center for Studying Health System Change (HSC). At HSC’s fifth annual Wall Street roundtable, health industry observers predicted that premium growth would peak at about 10 percent in the next two years, and that purchasers will largely tolerate the higher rates, because their employees fear restrictions on their health care choices even more than higher costs. "People want more freedom and corporations have been willing to go along with that because it has been an unusual period of prosperity in the economy," said Alliance Capital Management Senior Vice President Norman Fidel, one of five health industry panelists.

Other panelists at the HSC conference were Dennis Farrell, managing director of public finance with Moody’s Investors Service, Roberta Walter Goodman, managing director with Merrill Lynch, Geoffrey Harris, a managing director with Warburg Dillon & Read, Samuel Murphy, III, vice president and senior equity analyst with American Express Financial Advisors, and Joy Grossman, associate director with HSC.

Plans are passing less than half of their premium growth on to hospitals, Farrell said. That, combined with Medicare budget cuts in the 1997 Balanced Budget Act, has caused many hospitals to suffer. Those faring the best are rethinking their internal operations, refocusing on their core business, and divesting themselves of money-losing physician practices. "Hospitals are going back to calling themselves hospitals," said Farrell.

Physicians, perhaps even in weaker shape than hospitals with respect to bargaining power with health plans, are looking for new power on Capitol Hill. But opposition by a wide array of stakeholders, including consumer advocates, is likely to kill a bill by Rep. Tom Campbell (R-CA) that would give doctors collective bargaining power. Finally, capitation, which was seen by many as a way to restore provider autonomy and profits, will not reverse its decline. "It’s another failed experiment in American health care," according to Murphy.

The most recent strike against managed care is a series of class action suits charging plans with a wide variety of wrongs, from malpractice to racketeering. Panelists do not expect such suits to succeed or to lead to important changes in health plans, except greater disclosure about plan policies. Some health plans have taken steps to respond to consumer and physician concerns about restrictions on care, clinical micro-management and administrative hassles. United Healthcare, for example, recently replaced its utilization management programs with less intrusive, retrospective reviews, in hopes of demonstrating that it "can have a positive impact without being in the face of the provider," Goodman said. It remains unclear whether such strategic moves will make care more efficient or mollify doctors and hospitals.

Some plans will take advantage of their strong economic position to pursue mergers and acquisitions, which are easier to effect in times of positive cash flow. The pace of such expansions will vary market-by-market, panelists said. The difficulty of merging data systems can make such expansions risky, but mergers can enhance leverage in negotiations with providers when the plans involved share overlapping territory. "My guess is that the newer mergers and acquisitions will do well, because the [economic] wind is at their back," said Harris, adding that mergers without overlapping territory have little upside potential.

Pharmaceutical spending grew substantially in 1999, but the rate of growth is likely to top out at about 15 percent and may even decline, as the flow of blockbuster drugs slows and some key drugs go off patent, said Fidel. Among methods of cost control, three-tiered copayment schemes are proving far more popular than closed formularies, as consumers continue to demand choice, he added. The debate over a new drug benefit under Medicare remains a wild-card in determining the future strength of the drug sector, panelists agreed. A Medicare drug benefit would expand drug makers’ market enormously they say, but price controls or other schemes to keep the costs of the program from spiraling out of control may offset the effect of more prescriptions.

Contrary to widespread hopes, the internet will aid and accelerate evolutionary trends in health care, filling important niches but not revolutionizing the industry, the panel concluded. Existing companies that use the internet to improve their operations will have a greater impact on health quality and costs than pure-play internet health companies. Administrative costs won’t be squeezed out until standards are set for transactions, and those are slow in arriving. The other side of information technology, which tends to bolster consumer awareness of and demand for therapies is probably increasing health spending, Goodman said.