Center for Studying Health System Change

PAGE
I. Opening Remarks Paul B. Ginsburg, HSC President 4
II. Managed Care 10
III. Q&A with Audience 83
IV. Break
V. Hospitals, Physicians and Pharmaceuticals 93
VI. Q&A with Audience

P R O C E E D I N G S

PAUL GINSBURG: Hello. I’m Paul Ginsburg and would like to welcome you to the Seventh Annual Wall Street Comes to Washington roundtable that the Center for Studying Health System Change convenes.

I know that many of you have made a special point of coming to this annual meeting to get a perspective that you don’t often hear in Washington; namely, how analysts working in the financial markets perceive the changes underway in the nation’s health care system.

Two of our analysts are equity analysts. Their job is to predict the financial returns of companies, and this requires knowledge of the markets that these companies operate in, what their competitors are doing, and what their customers are doing, and what their suppliers are doing, and they tend to have excellent access to the leaders of health care companies to find this out.

Our other Wall Street panelist is an investment banker, specializing in the bonds of nonprofit hospitals. To do his job, he needs to understand the prospect of repayment, which involves knowing hospitals’ businesses in-depth.

The perspectives of these analysts have been valuable to those in the policy world who are concerned not about the financial prospects of companies, but about those market developments that have implications for the public and for particular stakeholders who have influence on health care policy.

After our success last year in expanding the panel to include health policy experts, we are pleased to consider that tradition this year. Policy analysts can help bring out the policy implications of developments in markets. Indeed, HSC sees its niche as the intersection of markets and public policy.

Following this conference, HSC will provide a news release of the highlights of this discussion and a searchable transcript will be placed on our website.

Also, I want to thank the Kaisernetwork.org for webcasting the conference. Webcasts will be available at the end of the day at www.kaisernetwork.org. I have been told to be particularly diligent in calling the names of the panelists so people looking at this on the web can tell who is talking. So, instead of what I normally would do and say, "Hey, you," I’m going to try to call their names.

Later in the summer, HSC will publish an issue brief summarizing the substance of this conference. I want to thank the Robert Wood Johnson Foundation for its support of this meeting and its support of the HSC research and publication that goes into it.

Now I would like to introduce our panelists.

The person I want to introduce first is Roberta Walter Goodman, who is First Vice President of the Merrill Lynch Equity Research Department. She is widely respected throughout the industry, having been named an Institutional Investor All-Star from 1992 to the present. Roberta participated in the first of these discussions in 1996 and has participated in most of them since then. She has provided me much counsel over the years in planning these meetings.

Joe France, at the end, is Director of Equity Research at Credit Suisse France First Boston--no, Credit Suisse First Boston--

JOE FRANCE: I wish it was France.[Laughter.]

PAUL GINSBURG: Maybe in a few years. --covering the health insurance and managed care sectors. He has followed the health care industry for 20 years and currently has responsibility for 15 of the largest publicly traded managed care companies. He was voted No. 1 from managed care in the 2001 Institutional Investor Survey.

Our last participant from Wall Street is Edward Shapoff, a Vice President and senior member of Goldman Sachs & Company Healthcare Group. He also serves as President of Goldman Sachs Housing & Healthcare Funding Company. Shapoff joined Goldman Sachs 22 years ago and served as a health care group manager for 13 years. In addition, he has experience in strategic capital planning and advising clients on merger and divestiture strategies.

I regret that a family emergency has prevented Ken Weakley, from UBS Warburg, from participating in today’s panel.

Also, on our panel is Cara Lesser, who is HSC’s Director of Site Visits. She keeps tabs of what’s going on in the 12 local markets that HSC tracks intensively and will help provide context from our site visit research in these discussions. And in some cases, I will be calling on her first to start out with what we know, before going to the panelists.

Robert Reischauer is President of The Urban Institute. He served as Director of the Congressional Budget Office from 1989 to 1995 and also held senior positions at the CBO earlier in his career, when he did an excellent job of serving as my boss.[Laughter.]

PAUL GINSBURG: We are also pleased to have Bill Scanlon, the Director of Health Care Issues at the U.S. General Accounting Office. Congress often calls on Bill to testify on a wide range of health policy issues. Before joining the GAO in 1993, he was the co-director of the Center for Health Policy Studies at Georgetown University.

If you look at the agenda, you will see there are two sessions. We have a break in between, and we will have opportunities for questions from the audience after each of these segments.

The other thing I want to say that is puzzling me is, when I got up to my place, I saw a bunch of nails, and I figure this must be a message from my handlers about how I have to moderate the discussion. Maybe I need to be tough as nails or maybe it just means the skirt in front of my table is going to fall down because the nails weren’t used there. [Laughter.]

PAUL GINSBURG: But, anyway, I’d like to begin with our discussion of managed care and talk, first, about the loosening of managed care restrictions on the use of services. Here, I’d like to begin with Cara Lesser to give some background.

CARA LESSER: In our 2000 and 2001 site visits, we saw many plans adopting less-restrictive utilization management practices, much like those that United adopted a couple of years ago with great publicity. Many plans discontinued prospective review for hospital admissions, and outpatient tests and procedures and discontinued using gatekeepers for specialty care.

In general, we saw a strong trend away from managing care for the general population, in favor of focusing in on those who are sick or were using services. Some plans implemented more behind-the-scenes efforts, with stationing their own utilization review, nurses and hospitals to help manage discharges and move patients more quickly into less-costly settings.

Generally, plans felt that they were eliminating the utilization management practices that were costly to administer. It really irked consumers and providers, and generally really didn’t save them much, in terms of utilization. But I guess the question we have, at this point, as more and more plans are moving in this direction, will we see a greater effect in terms of increased utilization of services?

We have already seen in emergency departments, for example, much higher ED visits than we have in the past, and many attribute this, at least in part, to the prudent layperson laws and plans easing off of restrictions of these services as a result. So this is really a question for us at this point.

PAUL GINSBURG: So I’d like to turn to the panel to talk about their perspectives on this loosening care. In a sense, have plans made a mistake? Have they been more costly than plans anticipated? And, if so, which aspects of loosening have been the more costly ones?

Ms. Roberta Goodman?

ROBERTA GOODMAN: Thanks, although I think the audience would have figured out that I wasn’t Joe France, at least I hope so.[Laughter.]

ROBERTA GOODMAN: Anyway. I think that the experience with the loosening has really varied a lot among the different companies, and I think a lot of it was from whence they started. I think if you look at, for example, the Blues companies, they have had, historically, a fairly broad range of products and a fairly broad range of things that they have done with utilization management. And to the extent that they’ve had a lot of experience with PPOs that are more flexible and trying to manage those, I think that that has been less of an issue.

Similarly, for United, the utilization management function going away was not just blowing up something, it was actually replacing that something with a fairly intensive effort to identify prospectively patients with chronic conditions that could be more effectively managed.

Conversely, I think if you look at the companies that really did rely on those intrusive practices, there has been a real impact. Utilization rates have gone up. They have had a difficult time, and they have not necessarily had the infrastructure, the mind-set or the labor capability to go in and do the kinds of things that United and the Blues have been doing.

Just for a sense of how effective these things have been, United has had, for the top 20 clinical conditions, decreased hospital utilization for 11, and the top 6, they’ve experienced overall declines for all of the top 6 conditions. So it does show that those things work, but it takes a tremendous amount of data and a tremendous amount of clinical work, not just sort of throwing something in place and saying now we have a disease management program.

PAUL GINSBURG: Joe?

JOE FRANCE: I would just add that if you look at the public companies, actually, the ones that are the most successful in the marketplace these days, and not because of buying share, their margins are basically staying the same, the ones that have lower cost increases are mostly the Blues and United, as Roberta talked about. I mean, the things that were eliminated were, in many respects, gratuitous interventions, and I don’t remember the precise numbers, but I think United was spending $100 million a year and saving $10- or some relatively small number.

ROBERTA GOODMAN: Less than that.

JOE FRANCE: I mean, we actually, we think that the good point that Roberta made about the companies that have been operating PPOs for years, their underlying cost trends are nowhere near those of the HMOs. The big rate increases, the 20- and 25-percent numbers are really companies going from a very tightly managed program, with all of these other things, and loosening them up.

PAUL GINSBURG: Yes. In a sense, we should be expecting a difference going forward, that seeing much higher premium increases for the traditionally more tightly managed plans, because they are being affected more by the loosening, as opposed to plans that have traditionally been more loosely managed and haven’t had as much to give up.

ROBERTA GOODMAN: It is Roberta again. I would say that that’s true, except I think there are also some other issues. If you look at the HMO companies, by and large, the business is highly focused in the large-case business, which would be employers of 500 or more, particularly those with 5,000 or more employees, and they are typically in the slice programs, in which the HMO product that Company X offers is offered side-by-side with Companies Y, and Z, and it’s the same co-pay structures, differences in network, and clearly differences in plan administration capabilities.

But what we have been seeing is a shift away from those slice HMOs by the plan sponsors, particularly the large ones to self-funded programs. And as that has happened, there has been an aging of the population in the slice programs, and that aging of the population does carry with it cost implications, and so we’re seeing a catch-up not only in terms of, in my view anyway, a catch-up not only in terms of the medical management loosening, but also the populations coming to equilibrium.

PAUL GINSBURG: Bob Reischauer?

ROBERT REISCHAUER: Just looking forward, what might we expect? There are really three actors in this game: the plans, the employers and the participants. What we’ve heard from Roberta is that the plans, some plans, in the past decided some of the management and restrictions really weren’t effective cost-effectivewise, and they restructured their situations. How much more of that there is I think is an important question.

Then there were the employers, and as long as premium increases were quite moderate, and they had pretty fat profit margins, and labor productivity was rising at a very rapid rate, they could have sort of "bees" off and say, you know, don’t put all of these restrictions if my participants really don’t like it.

Then there are the participants, and their clout really depends on how tight the labor market is. And so we’ve seen in the last few years, last, really, year and a half, that profits of employers are not what they used to be. Premium increases are higher. The labor market is weaker, and so I think we’re at a point where this situation that we enjoyed for the last three or four years could shift in the other direction.

PAUL GINSBURG: Bill Scanlon?

WILLIAM SCANLON: I think we’re also potentially at a point where we really don’t know yet, in terms of sort of the overall impact of this loosening. As Cara indicated from the work that you’ve been doing in the Center, that we’re seeing sort of a rise in emergency room use. That may not be sort of inconsistent with the fact that the plans that have good disease management programs are controlling sort of the people with specific conditions, but the question may be, overall, sort of whether or not there is going to be creep in a lot of service use and whether or not, in response to what Bob raised, the cost pressures are going to lead to a retightening sort of at some point in the future.

PAUL GINSBURG: Joe?

JOE FRANCE: If I could just add, I want to emphasize, too, that we’re seeing a much greater divergence in performance. It’s going to be more obvious maybe next year than now. WellPoint, the parent of Blue Cross of California, Georgia and RightCHOICE announced yesterday an acceleration in their enrollment, significant acceleration in their enrollment two weeks ago. Oxford announced the same thing. I mean, the fastest-growing companies I think reflect the market’s focus, the employers’ focus of more of their business on fewer plans.

We met with Sprint, the telecommunications company, their Public Relations--excuse me--their Human Relations Department a couple of weeks ago, and over the last five years, they have reduced the number of HMOs they use from 78 to 32, I think reflecting not only the transition of more self-insured business, but also trying to focus their business on the plans that have the largest market share, the lowest unit cost and the slowest trends.

PAUL GINSBURG: Good. Given some of this discussion, and particularly with what Bob said about how employers are likely to be acting differently today now that their profits are a lot lower and the labor markets are not as tight, can one see a revival of tightly managed care?

Roberta?

ROBERTA GOODMAN: I tend to think that we’re not going to go back to the days of intensive gatekeepers and intensive utilization management practices. I think that the markets have to move forward, and I think that, particularly given the explosion in the information technology areas, that you can be much more effective by being targeted, as long as you’ve got decent data on which to work and you have clinicians who are looking at that data and reaching actionable decisions from it.

I think that’s much more effective than telling somebody who may go to a specialist once a year that they have to go through a primary to do it or telling somebody who clearly is going to end up in the hospital anyway that they have to go through a whole rigmarole to get there.

I just want to make one comment about the increase in the emergency room visits. Anecdotally, because I don’t think you can really split out the effects, but anecdotally it does seem that the impact has been far greater from the prudent layperson rules than it has been from the loosening of the utilization management, and I think that’s an example of a regulatory burden, legislative burden, that gets placed on the private sector through the health care costs that are incurred to follow those rules.

And I think that that’s something that, particularly at these times, we should be thinking about.

PAUL GINSBURG: Yes. Anyone else?

[No response.]

PAUL GINSBURG: Good. A lot has been mentioned about care management, care coordination, disease management activities, and this is something where a lot of people are enthusiastic about them. I guess they are given a backlash against managed care restrictions. This is a type of activity that everyone seems to be in favor of, but what I’m wondering about is how important is this going to be? Is this affecting 2 percent of the dollars, 10 percent of the dollars? So, in a sense, how extensive is it today, as far as the actual proportion of the dollars affected, and what’s it potential, say, going out two/three years?

Do you want to start, Joe?

JOE FRANCE: I think Roberta has got--

PAUL GINSBURG: Great.

ROBERTA GOODMAN: I think if you look at the spending distribution, that you would see the top probably 3 percent represent about 40 percent of the dollars--3 percent of the population equals 40 percent of the dollars being spent, and the vast majority of people in the population will tend to consume almost nothing on an annual basis. So you can really target these people.

Now it becomes a question as to when you look at the population and you identify them prospectively, are there, in fact, gaps in the care that they are receiving? If you have somebody who has had a heart attack who is maintaining diet, and exercise, and they are taking their beta blockers, and they are keeping their cholesterol under control, there is not necessarily a lot of intervention that you want to do or need to do.

But, on the other hand, you frequently have people who don’t follow the care plans properly. And United, which I think has done the most in this area, has found that slightly over 50 percent of the gaps between best practice and actual practice lie in the area of medication compliance.

So you are not dealing necessarily with rocket science, you are dealing with some fairly direct issues, and I think that those can--and clearly have in their case--have some real impact. I think the question for a lot of these companies, particularly those that have been built on the HMO platform, is whether they even have the data to do anything, and I think those that are outsourcing those activities are really losing a core competence, off-loading it to somebody else, that should be in place in any managed care company.

PAUL GINSBURG: So, when you said that, well, you can manage 40 percent of the dollars with 3 percent of the patients, are they there yet or are they doing half a percent of the patients, when you think about the overall health care system?

ROBERTA GOODMAN: I think if you look at the overall health care system, we are just scratching the surface, and I think that the research, historically, would show that some 30 percent of care is either inappropriate, outright harmful or unnecessary. So you have people who are not being treated, not complying with medication orders who should be, you have people, women having hysterectomies that are unnecessary.

There’s a whole host of different things that if you go through the literature from Rand and other places, you will find that there’s a lot of excess in the system, and it really does not relate to evidence-based medicine. And, personally, I think that evidence-based medicine offers the most potential to deal with some of the underlying cost issues. But I think, that being said, we’re going to be dealing with health care cost issues when all of us are long gone because the drivers are not going to go away completely.

PAUL GINSBURG: Sure. Bob?

ROBERT REISCHAUER: Yes, I think the potential for care coordination and disease management to improve the quality of care is greater than its potential to save a lot of money. It will save money in areas where applying best practices, as opposed to actual practices, avoid later costly interventions, but there’s a lot of instances in which that isn’t the result, and what you’re doing is providing often more care, care that wasn’t given and increases the cost.

I think it’s probable that it will save some money, but the idea that this is the silver bullet, and it’s going to substantially lower the trend of cost growth, I think is largely wishful thinking.

Ms. Goodman will have to disagree with me. [Laughter.]

ROBERTA GOODMAN: Yes. I think it’s early on. I think the experience that United has had in the reduction in utilization in the top 6 diagnostic categories, and 11 of the top 20, would suggest that there is a lot of room to reduce some of the high-cost portions of the care that is received by those patients. I think also looking at the cost trends that United, in particular, has achieved over the last year or so, those are more stable and lower than what we see elsewhere in the industry. So I think that there is an impact.

I think, in terms of splitting it out in such a way that it would be publishable at this point in a peer-review journal, that would be difficult, but I think that the anecdotal experience, and their experience, in terms of the cost trends, their financial experience, has been positive. I don’t think it’s a silver bullet. I don’t think it’s the only thing, but I think it’s one of the areas in the delivery of medicine in this country that’s just crying out for improvement, and even if it only is an improvement in quality of life, and there ultimately is no improvement in cost, I think that is worth doing. But I do think there will be improvement in cost as well.

PAUL GINSBURG: Let me get back to what I was pursuing before. Take a company like United-- clearly, it’s one of the leaders--and United has worked out disease management protocols for a number of diseases for the diseases they are active in. In a sense, would a company like--what proportion of the gain that United envisions, from what they’re doing now, have they actually achieved?

What I mean is that, is this being applied so extensively through United that they are there now, that they’ve fully incorporated their know-how or are they only affecting 10 percent of the potential people who they are covering, and they have a long way to go.

ROBERTA GOODMAN: I think it’s more a question of how cumulative the care management process is, in terms of the benefit that it provides. If you keep a diabetic more stable, if you manage somebody with heart disease more effectively, it’s not simply a question of, okay, testimony did something this year, and you got some benefit this year, but do you prolong the period that that patient can function without serious health care interventions?

I think that’s--so I don’t think it’s a short-term, one-time fix. I don’t think it’s like the savings that companies realize from moving to an HMO, and you just move down the Y axis and then the slope is the same. I don’t look at it that way.

PAUL GINSBURG: I was thinking more of a, and, Joe, any time you want to jump in, I was thinking more of an operational thing. In a sense, let’s say United expects they have so many diabetics, and they’d like them all to be in their disease management program, and clearly they will get an ongoing return once they get them there, but the notion is so they have all of their diabetics in their disease management program or do they have a much smaller proportion and they have more to go, as far as rolling out their mechanisms?

JOE FRANCE: I honestly don’t know.

ROBERTA GOODMAN: I think--and I spent some time last week with a woman who runs that program, so I’m speaking off of relatively current information. I think that their view is that they can continue to refine the algorithms by which they identify these people prospectively. I think that they view the process as being something that is subject to a great deal more improvement, in terms of how the communications work with the patients and with the treating physicians.

So I wouldn’t think that their view would be that they’ve done everything that they can, and they are now just going to sort of reap what they can from the continuing investment. I think there is still more.

I would also say that this is just one company and most of the companies that we see are not anywhere close to doing these things, so it’s not, you know, I don’t think you can make the judgment that the savings that the system could have financially or the benefits that these mechanisms could have, in terms of quality of life and worker productivity, et cetera, are being fully realized. I think that we’re really at the very beginning stages of that process.

PAUL GINSBURG: Good. That’s what I was looking for.

Joe, do you have a perspective?

JOE FRANCE: Well, I think that it’s clear that the companies, actually, in United’s case, they have found two that you may have, while it’s true that a small percentage of your lives may account for a large portion of your costs, it may also turn out that you’re treating those people correctly, and so the savings could be in some other part. It’s not an easy equation to figure out where the savings might be greatest.

PAUL GINSBURG: Sure. As companies pursue disease management and care coordination, to what extent are physicians or consumers the tough obstacle that they have to work with to make these programs more successful?

JOE FRANCE: Part of United’s focus, at any rate, is just educating the physician to the fact that somebody, for example, who has had a heart attack, is not on beta blockers. I don’t think it’s meant to be so contentious. It’s an educational process as well.

PAUL GINSBURG: Sure.

ROBERTA GOODMAN: And probably the big ones are lifestyle changes, which is the responsibility of the individual, and if the individual isn’t motivated, some of that is an educational process, but some of that is just overcoming the particular individual’s issues, and you may never be able to do that.

PAUL GINSBURG: Let me go to something I read about in the newspaper almost daily, not necessarily in the newspaper in Washington, D.C., but certainly in California newspapers, which is that tiered provider networks, particularly tiered hospital networks, this became apparent to HSC in its site visit research probably about a year and a half ago, and so I want to call on Cara to start and then get the panelists involved.

CARA LESSER: Well, this concept of tier provider networks is really--the idea is taking the kind of three-tier pharmacy concept and applying that to provider networks so consumers pay progressively higher co-pays for higher tiers of providers. So, for example, consumers might pay $250 a day as a co-pay for a hospital stay in the lowest tier hospital and then up to $400 a day in the highest tier.

And the tiers are based primarily on cost, on providers’ rates, although some are talking about including some quality measures also. And this is something that we noted in several markets in our site visits in 2000 and 2001, and plans were really looking at this as a way to improve and stabilize their relationships with providers, and a way to continue to offer broad provider choice, but shift some of the cost of that onto consumers. Premera Blue Cross is one of the first plans in our markets that we heard about that had launched this product, and it was also announced by TOF’s (ph) Health Plan, Blue Cross/Blue Shield of Massachusetts and Blue Cross of California. And recently, you know, we heard about large national plans, you know, United and CIGNA starting to launch these products as well.

But now plans are really meeting with a great deal of resistance from providers, that they’re really finding it difficult to get these off the ground. Teaching hospitals in particular have opposed the plans. They’re concerned that with their higher cost structure, they’re going to be penalized by these tiered products, and especially in products that don’t include quality in the tiering equation, and in general their concerns about consumers’ access to care for a low-income individual to have to pay a $400 a day co-pay to go to a hospital in the highest tier seems excessive.

So, ironically, these products that plans really viewed as a way to appease providers, they’re now meeting a great deal of provider resistance, and just last month Blue Cross of California announced that it’s abandoning its plan to launch this product because they couldn’t get providers lined up in the network.

So this is something that there is a lot of enthusiasm about a year to a year and a half ago, and we’re really unsure at this point to what extent they’ll be able to get them off the ground.

PAUL GINSBURG: Let me turn to the analysts about how important a trend they see tiered networks becoming.

JOE FRANCE: We actually, we believe that a lot of this is an effort by the plans themselves to reestablish the leverage they’ve lost over the providers over the last few years, you mentioned. Wellpoint, in 1995, fewer than a third of their hospitals belonged to networks. Last year more than two-thirds of them did. Excess capacity in the system has been reduced. I mean you don’t see that in the occupancy rates necessarily, but a lot of the beds that were in service are not in service today.

And employers, when you ask them, or at least the ones that we’ve talked to--and I’ve seen other surveys--in general when you ask them about tiering, if it saves you money, would you be interested in looking at it? A large portion say yes, but then as you mentioned, obviously, what gets lost or what they find out in the analysis, that there’s no rational basis for the tiering other than cost, no effort to--no really ability at this point to assess quality, and it ends up delivering a lower standard of care to certain parts of the employment, so I think that the Blue Cross or wellpoint’s abandoning of the effort to tier is instructive, and I think it’s what we’re going to see. The ones that we see that are the most aggressive about it now are those that have the least leverage over the providers.

ROBERTA GOODMAN: I think we’ll see it in geographies that may have a lot of variation in hospital rates or particularly in transient system. I don’t think that you’re necessarily going to see this encompassing a huge percentage of the insured population. I will say the benefit plan that I have available to me, which is through my husband at Vanderbilt, not through Merrill Lynch, which is an example of adverse selection against Merrill Lynch. One of the three options actually is a tiered network, and there are very substantial differences between the preferred in-network, the non-preferred in-network and the out-of-network provider, so it is being used. And this is a plan that’s actually administered by a private PPO that you would never have heard of, that particular one anyway, not the overall plan.

But I do think where you have a provider that says, gee, we’re not going to contract with you unless you bump the rates 30 percent a year or 20 percent a year for the next two years, and we don’t care, we have market power and we’re going to use it, I do think that there will be a defense against that by saying, well, you know, there’s only so much that we will pay towards this.

I don’t think that those that are saying, well, we’re not going to do it, are going to simply continue to do what they’ve been doing though. I do think that there will be an increased effort to communicate the cost of care to patients, and I think most people who have been functioning with no cost or a minimal cost for inpatient services, minimal co-pays for outpatient services, would be stunned to know how much their costs actually are when they use the system. And I think that that may--particularly if the company, by saying, "You use this facility. If you had used this facility or this facility, your cost would have been lower." I think that that could have a sentinel effect on what people do. Maybe not for all. I think there may be in some the view that if it’s expensive it must be better. But I do think that people have been shielded from understanding their costs far too long.

PAUL GINSBURG: And when I first heard about tiered networks, I thought about it as an economist, and really what Joe France was talking about, a leverage, that this is a way to get leverage back. But in recent months I’ve been really struck at the degree to which hospitals have been able to dissuade plans from doing it, reflecting I guess a lot of market power.

Actually, at a meeting I was at over the weekend, an official at Wellpoint was explaining their decision to back off on a tiered network and did it in terms of we really have terrible relationships with hospitals, and we need some better relationships with hospitals to pursue our care management ideas.

Any thoughts on that, Joe?

JOE FRANCE: Well, I think if you look at what’s happened that’s also contributed to the leverage is that at all price points, whether you’re talking about an HMO or a PPO--which is by the way I would say tiering in some respects--all of the products have more choice today. The networks are larger, the leverage has been reduced. So unless you can go back to the old way, it’s really hard to tier them. And this has been occurring at the same time of course that the hospitals have been effectively reducing capacity.

PAUL GINSBURG: Good. Let me move on to provider payments, and they wanted to ask about there have been a lot of stories about hospitals having higher clout, getting higher payment rates from managed care plans. A question I’ve always had is whether the hospital clout is a phenomenon limited to the very prominent hospitals, where their being a network is very important to employers or whether this is a more widespread phenomenon in a sense.

So the question is, we know that some prominent hospitals have a lot more leverage and have achieved higher payment rates. What about the typical community hospital, does it have more leverage too and it is getting higher rates?

JOE FRANCE: Well, I’d just like to interject one thought, and that is we view this whole process as a cyclical phenomena. I mean right now the hospitals have leverage. The last five years the insurers had leverage. The employers maybe are looking to get leverage. But as hospitals begin to build up in various markets, we’ll eventually see an over-capacity situation.

ROBERTA GOODMAN: I would agree with that, and I think that a lot of what we’ve been seeing out at the hospital industry over the last several years has been a recognition that, one, they have the need to cost shift from Medicare and Medicaid programs to the commercial sector, which is a historical phenomena. When government payment rates are viewed as too low, they’re going to increase rates to the private sector, and now managed care represents the overwhelming majority of the private sector, and therefore will be the target of the cost shift.

And I think also--and I think I’ve made this point on past visits--the hospital industry engaged in really stupid pricing during the mid 1990s. There was a view that this was a high-fixed cost, low-variable cost industry, and that the managed care volume would be incremental, and because it was incremental, you could price it below average cost and still make a lot of money on it. And I think in about ’98, ’99, a lot of the systems figured out that this was bad logic, and they’ve been trying to get the rates to more rational levels, and I think we’ve been seeing that.

But I also think at this point we are seeing, particularly in some of the more publicized battles, some fairly egregious behavior on the part of certain systems, not necessarily investor-owned companies which I think have generally taken a longer-term view on these things, but from some of the nonprofits that have local market oligopoly or monopoly situations. So Sutter, for example in California would come to mind.

And I think at some point there will be reaction to this. I think that there needs to be a reaction from the employers, and the employer needs to be able to say I am going to make a tough decision. This hospital may be prominent in the market, but it’s simply too expensive, and we’re going to allow the plan to cut it out.

I also think that it is quite possible that you will see the antitrust authorities looking at some of these local market oligopoly/monopoly situations that have arisen, and seen whether or not, as these hospital systems have come together, they have in fact used that market power to push prices, and therefore harm consumers.

PAUL GINSBURG: Ed Shapoff.

ED SHAPOFF: Yeah, I’d like to comment from at least the perspective of the not-for-profit sector. I don’t know that I share all of Roberta’s views on things, but in answer to Paul’s original question, I don’t think that the leverage exists only with the major sort of well-known institutions. I think as you go out across the country, you’ll find a lot of hospitals that have, at least in the last year or two received better payments from managed care organizations, in part because the managed care organizations’ own profits would warrant more payments coming to the hospital. I think you should also keep in mind that over the last five or six years, hospitals across the country--and again, I speak principally from the not-for-profit sector--their financial position has deteriorated dramatically, to the point that many have gone out of business, many have been forced to merge with others, which I think in part we’ll probably talk about later, has some impact on the capacity component.

But I think institutions across the country, the not-for-profits, need to get back more revenues. I think the cost shifting that Roberta spoke of, you know, there’s a different way of looking at it, and that is that it’s not a zero sum game. The sum of all of the revenues derived by these hospitals still doesn’t cover the costs in their institutions and perhaps even the necessary cost in their institution.

But going back to Paul’s original question, I think that the leverage does not exist just with the large. Certainly they have it. But I think it’s being spread over a much wider base right now.

PAUL GINSBURG: Thanks. Actually, I can add something that I’ve--in other work I’ve looked into data from the Labor Department. There is a fairly new producer price index component for hospital care. It’s very well measured. And that shows, say over the past two years, an increase of about 2 percentage points in the rate of growth of prices that hospitals are receiving from insurers.

And the next thing I want to do is cover--I perceive and talk to people in the industry--that insurers are doing very well now, and their first quarter earnings were up. And I wanted to ask the panel, is their good performance--if I have the right impression--is this the result of cost trends being below expectations or insurers having succeeded in efforts to raise their margins? Joe.

JOE FRANCE: Before we get too excited about the results, we should keep in mind that they won’t know their cost probably till July, August, September. I mean we get a lot of the disappointments on the for-profit side later in the year. They just priced their business in January, but they did it using older data. They did get in general bigger rate increases than we were expecting, but I think it’s fair to say that they don’t necessarily know what their costs are yet.

ROBERTA GOODMAN: I think if we look at the companies that I track, the operating margins for them averaged 5 percent in the quarter, which is certainly respectable relative to what they have been earning, but certainly not one of the higher-margin industries that one would find out there.

Looking at it though, I think it really was more a function of pricing than cost trend. I think that there is something of a perception among part of the Wall Street community, which I guess Joe and I would not share, that the quarter showed a stabilization of cost trends. If you look at cost trends quarter by quarter that the companies were indicating that they were experiencing, they were rising steadily over each quarter of last year, the 2002 cost trends are up from where the cost trends ended in 2001 and also higher than companies were initially projecting for 2002.

So I think it’s been more a function of pricing coming in, and I think also some mixed improvements with reduced exposure to Medicare, and also with, in some cases, reduced exposure to the slice business, which has been I think increasingly problematic.

PAUL GINSBURG: What’s your sense of the outlook for costs? Do you think the cost trend has more to go as far as continuing to increase, or will it taper off at some point soon?

JOE FRANCE: Well, we think that costs are going to continue to rise. We’ve worked with our drug analyst, Ken Coolio (ph), trying to develop an idea of what the impact of all the patent expirations might be, the effect of taking some of the product over-the-counter and not making them prescription only.

But from the industry’s point of view, its biggest problem is that it can’t just raise prices, it has to do that in the context of what costs are expected to be. You can’t go to Sandy Wyle (ph) and tell him you need a 20 percent rate increase, but your costs are only up 14. So the problem for the companies is that they don’t know what their costs are until after they’ve already priced the business, and we certainly know that there’s going to be more pressure on them as the industry or as the employers try to reduce their number, and yet the cost trends we think will continue to rise.

ROBERTA GOODMAN: I would tend to concur on that. I think this year we’re looking at probably 12 to 14 percent with some outliers on either side, and I think what benefits we are seeing from the drug trend slowing as a result of the patent expirations and the use of the three-tiered formularies, probably gets offset by increases in outpatient and hospital costs. People have tended to focus on the fact that drug trends have slowed on a reported basis for these companies. But the problem is if you have something that is 10 percent of your cost structure, growing 20 percent, and that something becomes 20 percent and only grows 10, it’s still contributing 200 basis points to your trend, and that is what has happened with drugs. They’ve grown so much faster than the other components of medical cost, that even though the rate of spending has slowed, it is still an important contributor to overall trend.

JOE FRANCE: I think we should keep those numbers in mind to Robert’s talking about a 12 to 14 percent cost increase which we certainly concur with, so that doesn’t jibe at all with expectations by a number of the companies in some of the recent surveys that rates are going to be up 20 or 25 percent next year. We think that that’s highly unlikely. Companies just paying their own claims, self-insured employers are seeing experience more in the 12 to 14 percent range.

Again, the companies that are raising their rates a lot are the ones that are going from the most tightly controlled programs up to what you can get on the self-insured side.

ROBERTA GOODMAN: Or that they’re trying to restore very damaged margins, so that’s--they’re trying to catch up to where the rest of the industry would be, and that may not be possible given the kind of environment that we’re currently in.

JOE FRANCE: Yes. I think it’s helpful to remember too that although Blue Cross/Blue Shield, which is roughly half of the non-government commercial business such as say enjoying some of the best margins it’s had in years, are not as high as they’ve ever been, but they’re certainly getting up there and that’s usually not a prescription for a rosy outlook for the insurance industry.

PAUL GINSBURG: Yes. I’d like to get into the outlook for margins, but first a little bit more on cost, that some of the people that do forecasts of costs, such as Milliman Robertson, the Office of the Actuary at CMS, use models where the lags growth in income is a very important driver of cost and in a sense in their models, the boom years of the late ’90s really had set the stage for the very high cost increases we’re having today. Given that the economy is softer now, do you see that that eventually leading to a slowing of cost trends and what will the mechanism be by which this happens?

Roberta.

ROBERTA GOODMAN: I think that there is the potential for that, and that’s certainly something that we have written about, but there are a couple of important caveats to it. I think if you look at historically what happens when the economy slows and the fact that health care cost trends decelerate in a period following recession rather than actually during recession, it does reflect that the plan sponsors, the employers in some of the instances and government in others, have made some tough decisions about what they will do with their health benefit programs.

And so far we’re not seeing employers saying, we’re going to go out there and completely overhaul the economic structure of the health care benefit plan to make it more rational.

And I think if you look at the benefit structure as it exists, particularly with co-pays that have failed to keep pace with inflation, you could argue that the structure itself is highly inflationary in the absence of anything else.

The other thing is, if you look at the Milliman data and you look at what they write, they say that this is independent of external forces such as hospitals having more bargaining clout, the impact of benefit mandates and other laws that would affect the ability of companies to manage their medical costs.

So I would ordinarily be hopeful that the cost would improve somewhat, but we’re not really seeing from the purchasing community the kind of dramatic action that I think is necessary to make it happen.

JOE FRANCE: Well, I think we have to start with the fact that the customer, the employer, can’t afford 12, 15, 20 percent rate increases for any extended period of time. In the short run you can’t do anything about a 25 percent rate increase by Georgetown or some major institution in your network, but what you can do is focus more of your volume again on the more efficient of your insurers, the ones that have the larger market shares, presumably those that have the lowest unit cost and the slowest growth. That’s one of the things I think that accounts for the tremendous growth we’ve seen at Wellpoint, and Oxford is another example.

PAUL GINSBURG: Let me go to the other side of the forecast for rates, about the underwriting cycle. This is something we talk about every year.

JOE FRANCE: It’s dead. [Laughter.]

JOE FRANCE: So they say.

PAUL GINSBURG: So they say. Well, I guess that’s what we should talk about. It seems as though insurers’ margins have come back quite a way. They may not be at peaks. I don’t see--I often associate the next stage of the underwriting cycle in a sense when margins are being squeezed, as a time of insurers expanding vigorously, and I don’t see any evidence of that now.

But the questions to you are: are you seeing any evidence of insurers about to become more aggressive, or are we going to be in our current stage of the underwriting cycle for a similar time?

JOE FRANCE: I guess now we’ll find out how much Roberta and I agree.

We think that if you look over the last 10 or 12 years, again using Blue Cross margins as a proxy, the cycle has become longer and the volatility has been reduced significantly. We think this is the effect of managed care companies that have some insurers that have some influence over their liabilities, through the effects of managed care been able to moderate the swings to some degree.

But as we move to a system that has less managed care or less intervention, we think that we’re going to see a return to a shorter cycle to much greater volatility, and it’s going to be exacerbated by the--I mean right now, the last few years, you can just hang out and get a 15 or 20 percent rate increase whether you’ve got 5,000 lives or 500,000 lives. We think that’s going to change, and then we’ll find out how--what is the word--responsible the pricing will be for the smaller insurers.

PAUL GINSBURG: Roberta?

ROBERTA GOODMAN: I guess I’m not entirely convinced of the existence of the cycle. I am convinced though--in terms of classic underwriting. I am convinced though that there are business cycles and that companies make better and worse decisions at different points in time.

If you go back to ’94 most of the managed care companies thought that cost trend deceleration was going to continue and that cost trends in 1995 would in fact be negative, and they turned out to be about 2 to 3 percent, which was incredibly modest, particularly compared to what we’re experiencing now. But for higher than flat premiums. And so therefore there was a period of margin contraction. And given what Joe has pointed out about the timeliness of cost recognition, it took the industry a fairly long time to figure out that, gee, the cost trends were not as benign as they thought they were, and similarly the industry missed the inflection point in late ’96 when the cost trend started to move up.

I think now the risk that I would perceive is twofold. One is that there are a number of companies that think that they are done with the turnaround process, that now think that perhaps its time to grow. And I think related to that, when you go out to an employer with a 15, 20 percent rate increase, that employer is going to look around. If you’ve got players out there that are more interested in getting new business, they will tend to price that new business a bit lower than they’ll price renewal business, and if you have an increased turn in the books, so the greater proportion of a company’s business being new business as opposed to renewal business, I think that there is the potential that they end up hurting their margins without intending to. I really don’t think that the industry sets out to destroy its margins. I think it’s the consequence of basically poor decision making.

And I think the other thing which plays into this is how much credit, if you will, different companies will give for benefit design changes that are intended to moderate the net premium increase to the employer. Just taking a really simplistic way of looking at this, if you think your cost trend is 14 percent and you’re going to raise the rate by 15 percent, but you reach an agreement with the employer that you’re going to increase this co-pay and that deductible and so on, and you give 300 basis points of credit for that, you now know that your net premium yield is going to be up 12 percent. What you don’t know is that those changes will actually have 300 basis points of impact on the medical cost trend. If it does, then you preserve a spread. If it doesn’t, if it only has 100 basis points of impact, then you’ve gone from a positive to a negative spread, but you don’t necessarily figure that out until far later on.

And I think what we’ve seen with this industry is that the ability of companies to understand their cost structure is not necessarily strong across the board. I think it is stronger with those that have historically offered a broader array or products and therefore have an experience level with different kinds of benefit combinations, but I think a number of the companies that have been in the turnaround mode are not necessarily at the point that they have that level of sophistication, if you even want to call it that.

PAUL GINSBURG: Bob.

ROBERT REISCHAUER: I think it’s awful hard to answer your question about whether the underwriting cycle is dead or alive because there’s so much structural turmoil in the market, and you have Aetna pulling in its horns and freeing up a lot of covered lives for others to go out and get. You have the Blues converting to for-profit and consolidating, and this is sort of overlaid on top of the usual pattern that you have, and sort of trying to make sense of the data is almost impossible at this point.

PAUL GINSBURG: That’s a good point. You know one complexity that has come up here that’s quite relevant is that in a sense there really are two distinct causes for margin expansion or contraction. One of it is the inevitable errors in predicting costs when you set a premium because of the, I guess about 18-month or so lag, and for a poorly-run company I guess longer, it takes them longer to figure out what their costs are. But then there’s the other thing about when the insurance industry is profitable or unprofitable, that there are changes in response to that situation. And it’s conceivable that the motivations for the basic profitability could either coincide with the same direction from the cost or they could actually balance it out, and perhaps that’s what makes the underwriting cycle so hard to follow.

JOE FRANCE: Complete in every respect. I don’t have to add.

PAUL GINSBURG: Sure. We are talking about--we’ve talked a little bit before about how employers are responding to the high premium increases that they’re facing. One perspective I have had is that--not just a perspective, but from the good surveys of employers that came out last year, like the Kaiser HRAT (ph) survey, showed that there hadn’t been much change in the proportion of premiums that the--the proportion of premiums that employees are asked to pay, but that there’s been more co-payment, more payment at the point of service. Do you expect this trend to continue as far as the employer response, of emphasizing cost sharing over the employee share of the premium?

ROBERTA GOODMAN: Personally, I hope so because I think premium sharing is a very dangerous tool. It’s simple for an employer to use, but I think it leads to tremendous adverse selection with the risk pool. The young, healthy 25-year-old male is going to say, hmm, do I want to spend 75 bucks a month for this when I may go to the doctor once a year, whereas the 55-year-old with hypertension and diabetes is going to say, hey, I know I need this.

I think one of the big problems has been, in my view in terms of consumer cost sensitivity, has been that the co-pays have actually lagged inflation, and that really started in ’93, which was two years after the end of the last recession, that employers did not move the benefit plan design to match inflation, and instead relied on the premium contribution mechanism. And I think in some ways the old co-insurance mechanism, you paid 20 percent of whatever the negotiated cost is, actually does provide an inflation hedge, and I think that’s one of the reasons that as we look at the PPO environment, it actually has been more stable.

PAUL GINSBURG: Do you expect the change to increased cost sharing to come mostly from rolling out new products, types of plans, like consumer-driven plans, or mostly from just adjusting the benefit structure of existing plans?

JOE FRANCE: Well, I would say that it would come from both. The consumer--what did you--consumer--

PAUL GINSBURG: I mentioned consumer-driven plans--

JOE FRANCE: Sort of defined contribution?

PAUL GINSBURG: That’s right.

JOE FRANCE: The problem with defined contribution is that you’ve got--I had a meeting with the people from Hallmark a few weeks ago, and they have 11,000 employees. I don’t remember how many total beneficiaries. But 4,000 of them don’t even get up to their deductible every year. So under a defined contribution plan, I guess you’re sending them to the gym or something or other for the 4,000 that you weren’t giving any money to, and then it doesn’t do anything to help you manage care.

So we actually think that the more rational approach would probably be a combination of those two other things, primarily the copays, which, as Roberta said, remain quite low.

My wife is complaining about our--I guess to get a prescription, it went from $10 to $15, and that’s a 50-percent increase. And I have to remind her that the drug probably costs $100. So this is a problem, you know, throughout the whole system. I like the coinsurance approach, and, actually, some of the Blues have been talking about doing that, particularly in pharmacy.

ROBERTA GOODMAN: I think that change in health care, with the exception of things that are enacted into law by Congress, tend to happen fairly slowly. And I think there’s a host of reasons for that.

I would guess that the percentage of employers that adopt radically new benefit design structures is going to be incredibly modest in 2003, 2004, and I think there’s going to be a lot of them that sit on the sidelines waiting to see what the actual experience is. And you can look at something like a defined contribution program and say, you know, in a lot of respects it has a lot of economic rationality to it, but the problem that Joe mentioned about whether or not you end up increasing the aggregate cost, at least in the short run, I think is a real one. And if you offer that side by side with other benefits, do you end up with adverse selection against the more traditional programs that you offer?

I think, therefore, that we will see much more in the way of tweaking existing benefit plan structures than we will moving to things that are new and different and dramatic, even though that is where a lot of the consultants make a lot of money.

I don’t think we’re going to see the world turn on its axis dramatically next year.

PAUL GINSBURG: Bob Reischauer?

ROBERT REISCHAUER: I agree with Roberta on that point completely. Going back to your question on whether the increase in costs will be shifted onto workers in the form of higher premiums or higher copays and coinsurance, I think it’s copays and coinsurance for a couple of reasons. One is that while labor markets are a lot tighter than they--I mean, a lot looser than they were, they’re still not sort of real recession levels, and so a lot of employers are worried about attracting and keeping their good workers.

In addition to that, wage increases, because inflation slowed down so much, are fairly small, and to increase premiums a whole lot, you know, would make in some cases wage increases go negative or compensation increases go negative from the workers’ standpoint.

And, third, the discussion of rising costs and the fact that participants in plans are relatively insensitive to the cost has given a justification for employers and plans to say really we should be making people more sensitive to the real burden that this is imposing. And the way you do that is by higher deductibles, higher copays, coinsurance.

PAUL GINSBURG: Bill Scanlon?

WILLIAM SCANLON: I agree with both that we’re not going to sort of see a major revolution in terms of the types of plans as well as this very important need to make people sensitive to the cost of their services. But I think this may take us back to the issue of tiered pricing because that in some respects, if it could be done on a rational basis, would make people much more sensitive to the actual costs of their services.

Right now what we’re doing is we’re raising the copayments across the board, and we in some respects are affecting those people who need the most services as opposed to sort of trying to influence some people in their shopping sort of behavior.

If we could find a basis for incorporating quality and sort of recognizing other types of products that providers supply, such as teaching hospitals, then maybe we could sort of have a much more rational pricing system.

One of the real anomalies of the health care sector is that prices are the same sort of regardless of the cost of production to the consumer, and this just is not what we do in other markets. It doesn’t make sense here. But it’s really hard to move away from it.

ROBERT REISCHAUER: There also is a clear limit to this, and when you begin talking about $400-a-day copays for inpatient hospital visits, you’re really very quickly getting to the level where, for a significant fraction of the population, the insurance isn’t providing the kind of protection that they need if they really get sick.

ROBERTA GOODMAN: Which would tend to argue that you need some kind of progressivity in how the benefit plan is structured, whether it’s through a deductible structure or a copayment structure--not that I like being the recipient of progressivity, necessarily, but I think that in terms of people make more rational decisions, you need the health care costs to be meaningful to them. And what’s meaningful to my secretary is probably not going to hit the threshold of being meaningful to David Komansky, who’s the head of Merrill Lynch. So I think you do need to start moving in that direction, and there have been a few employers that have done it, but it’s--and Merrill actually does to some degree within its benefit programs, for example, but it is a hard thing to do.

I think the other thing that perhaps needs to be done is that there needs to be some move to address whether or not a particular service is life-preserving or life-enhancing. And a couple of the companies have been talking about shifting some of their formulary strategies to pay for relatively less of those drugs that would be life-enhancing--the Prozacs and, you know, what-not of the world--and paying a higher percentage of, say, you know, beta blockers and ACE inhibitors and things that you can look at and say this clearly has a very positive impact and is not merely quality of life related.

ROBERT REISCHAUER: Just a footnote on that. As running an institution which does have wage-related premiums, this is very difficult to do, particularly if we’re on the cost-sharing side of the equation, because, of course, many people, many of your employees are in families, and there’s more than one worker, and you aren’t in a position, nor should you be, to determine total family resources. All you have is the wage of your secretary, who might be married to the head of Merrill Lynch.

ROBERTA GOODMAN: I certainly hope not. [Laughter.]

ROBERT REISCHAUER: You could have lost your job.

JOE FRANCE: I would also add administratively it has got to be very complicated. It’s one thing to have deductibles and premiums tied to your income, salary, or whatever you want to call it. But actually going to the doctor’s office, the chances that she has, you know, the software to decide whether you should be charged a $20 copay or $10 would be quite difficult.

ROBERTA GOODMAN: I think most of those approaches really are predicated on deductibles, and they do tend to be banded. So that, you know, if you make more than a certain amount, it’s going to be here; and if you make between this and this, it will be, you know, at another level.

But I do know one employer that actually does have a deductible structure that’s 1 percent of compensation. Obviously it does ignore if the person has other means. You know, they may be a trust fund baby. They may have a spouse who has substantially more income than they do. But it’s at least a way of saying we’re going to get your attention. And I think it’s equally important to get people’s attention and get them thinking about what their health care decisions are costing as it is to have a very finely calibrated mechanism.

PAUL GINSBURG: Well, you know, certainly what we’ve seen--I’m going to close this discussion--is that ways that cost sharing can be used that are common today in pharmaceuticals we probably didn’t foresee being important a few years ago. And with the direction toward using more cost sharing, being aware of the constraints and issues like differentiating types of services, the resource issue, we’ll probably see a lot of creativity over the next few years as new benefit structures are adopted and probably some of them can spread very easily should they be successful in the way that the three-tiered pharmaceutical copayment did.

I’d like to--actually, before we leave the issue of consumer-driven plans, I was wondering if Bill or Bob could comment on the extent to which policymakers have been talking about this and the perspectives that they’ve had.

WILLIAM SCANLON: Well, I think from--there are two perspectives. I mean, one is the issue of sort of the impact on cost containment. Certainly from a policy perspective, the interest in trying to sort of change the rate of growth of the share of GDP that is going to health care is a major policy question. I guess I’ve been around health for a long time, and I can remember when we were in the single digits and someone said we would reach the level where we would no longer tolerate sort of more of our GDP going to health care and we would stop. And I guess I don’t know sort of how we’re ever going to put the brakes on.

And so I think these kinds of ideas are important as the next generation. I mean, we could go back to--we were talking earlier about the perceptions in 1995 and 1996 about sort of what was going to happen in terms of cost growth and how they turned out to be wrong, and the mechanisms that were in place then turned out to be intolerable.

So now I think we need to think of a new set of tools, but we’ve also talked this morning about a lot of flaws sort of in those sets of tools that need to be overcome before they can be effective.

The other side of this is that we do have these two major public programs, Medicare and Medicaid, that are buying an incredible amount of health care and facing some of the same cost pressures that the private sector has, if not more because of the fact that their populations tend to be a lot sicker. And so the question is: Which of these ideas are potentially transferable? Maybe more of them are transferable sort of in the context of Medicare and Medicaid because we have a population of people, some of whom have resources and could sort of maybe opt to use cost sharing as a way of changing sort of the benefit packages they have.

That gets you, though, to the issue of what’s going to happen to the Medicare Plus Choice program, whether we’re ever going to see sort of plans being in a position to compete sort of for business of Medicare beneficiaries, and that’s a big if, which we may want to go into later.

PAUL GINSBURG: Yes. Bob, do you have any thoughts about the reactions? I gather there’s actually an initiative to change the tax treatment of these plans and savings accounts, so it must be getting on the radar screen.

ROBERT REISCHAUER: Yes. Policymakers on the whole have the freedom to be not consistent over time and not responsible on a day-to-day basis for the impacts of their decisions. And I think on the whole there’s a whole lot more appeal among policymakers for defined contribution type plans, tax credit schemes where people are given a lump sum, than there is among employers or even beneficiaries who have to really deal with these things on a day-to-day basis.

I think what you will find is that as the movement towards increasing the burden on those who are utilizing the health care system increases through higher deductibles, coinsurance, copays, whatever, that, in fact, that will become a political issue and there will be a backlash away from this, and it will be, you know, well, why do they call this insurance? I mean, it is not protecting the bottom third of the working population in America.

And so while we’re right now on the--with the pendulum swinging in the other direction, you know, don’t bet your money that it’s going to keep going that way. At some point it will start back.

PAUL GINSBURG: Bob, when there was a backlash against managed care, many of the responses of policymakers were to restrict managed care plans, tell them they couldn’t this, this, or this.

What can you envision if policymakers become really concerned that cost sharing is getting in the way of a lot of people getting care they need? Would there be something comparable? Or is cost sharing more difficult to have a response to?

ROBERT REISCHAUER: Well, I mean, the logical response to that would be to define some minimal level of protection that is worthy of the favorable tax treatment, that if you call it insurance, it has to provide on an actuarial basis at least this amount of protection.

I don’t think we would ever actually get to legislation that moved in that direction simply because I think the same pressures that would be on policymakers will be on employers as well. And they do have the day-today responsibility and they’re in the business of providing their workers a benefit that the workers feel satisfied with.

PAUL GINSBURG: Let me go on to Medicare Plus Choice plans. The President recently made a proposal to increase payment to Medicare Plus Choice plans, and I wanted to ask the analysts what they see as the outlook. Is this going to have an effect on stemming the plans’ leaving the Medicare Plus Choice markets?

JOE FRANCE: The companies at any rate complain--first of all, it’s a fairly small piece of the public market. I think these companies together have, I don’t know, 3 million lives or 4 million lives. Maybe it’s a little bit more than that, although it’s a large piece of the total, I suppose. But they complain that a lot of times the money that comes into the Medicare Plus Choice program is designed to incentivize people to go into new markets, usually rural markets, the kind of places they probably don’t want to be.

Our own view is that the companies, given the way that reimbursement has worked over the last couple of years, are going to continue to withdraw from the program. And what we’ve seen lately is that they’ve increased the premiums so much that a lot of the people would be your natural members. You know, the savings that they realize by joining an HMO instead of staying in the traditional program are not great enough to justify all of the constraints.

ROBERTA GOODMAN: I would tend to agree with that, and I think the other thing that’s happened over--is this mike on?

PAUL GINSBURG: It should be, yes.

ROBERTA GOODMAN: Okay. The other thing that’s happened over the last few years is that with the erosion of the drug benefit, there’s less reason to go into this program.

Personally, I don’t have a lot of optimism for Medicare Plus Choice. I think even if you move Medicare Plus Choice to 100 percent of fee for service and let it rise with fee for service, which would obviously be negatively scored, it still would not address the underlying issues with the program. And I think that the problem at this point is that the rate increases that the Medicare Plus Choice participating plans face from their contracting providers exceed the rate of increase that Medicare is able to achieve through administered pricing. And because of that and the lack of ability to reduce volume to offset it, I think that we would be looking at margins continuing to deteriorate even if there was a really dramatic change to the program’s funding made, number one.

Number two, I think that it’s probably unrealistic to expect Congress to pass that without putting some fairly tight strings on it, which has happened with the most recent round of givebacks. And I think particularly given the criticisms of the industry for the withdrawals and so on, that it would be unlikely in my view--and I’m not a political analyst, but I’m just sort of looking at it, you know, and judging from history--without some kind of constraints, that if you take this that you’re going to have to agree not to reduce benefits or to stay in the market for a certain period of time. And I think that that would be very hard for the companies to agree to given the lack of predictability on costs over an extended period of time.

So I’m not at all optimistic on this program.

JOE FRANCE: I would add, too, I mean, we spent part of this morning talking about how HMO’s promise is not being realized right now on the commercial side, so it’s a little bit difficult to know for certain that it’s going to work on the public side either. A lot of the companies are, as Roberta mentioned earlier, moving away from the risk-based HMO and putting most of their--more of their lives into the self-insured pool. So maybe the HMO’s promise in Medicare is not--maybe it’s not the right approach at all.

PAUL GINSBURG: You know, that’s a point that often doesn’t come up which is very relevant, that looking at the overall market away from HMOs, and, you know, the Medicare program, I would say that the Medicare program, the traditional program really is the PPO that people may be moving into in parallel of what they’re doing in employer-sponsored care.

Bob?

ROBERT REISCHAUER: Yes, I think the real question is the same one that it’s been for a number of years, which is whether the Medicare Plus Choice plans can offer an expanded, consolidated product that is better or cheaper than fee-for-service Medicare plus Medigap. And so a lot of the question depends on what happens to Medigap premiums over the next three or four years, and if they begin rising at 10 percent a year, there’s going to be a window of opportunity for the Medicare Plus Choice plans to put together quite an attractive product, I think. But it will be a very different market from what it was before, which is I want an expanded benefit with no additional premium. It will be I want an expanded product, and I admit I’m going to have to pay $150 a month to get it.

PAUL GINSBURG: Bill?

WILLIAM SCANLON: I was actually going to make the same point that Bob just made. I wouldn’t want to contradict the pessimism of Roberta and Joe about plans coming back into the market. But at the same time, I think that the market could change if there’s a change in expectations on the part of consumers. We were dealing with a totally sort of unsustainable situation when plans were giving away about $120 per month in free benefits to consumers. But if a consumer looks at a Medicare Plus Choice plan compared to fee for service and understands that in fee for service they don’t have any catastrophic protection, they don’t currently have a drug benefit, though they may have trouble getting one in an M-plus-C plan, and that they’re paying a lot for sort of first dollar coverage if they buy a Medigap plan, it’s already in some respects, if somebody would offer an M-plus-C plan with a reasonable premium, it already is a better deal than Medicare plus Medigap.

But I don’t think we’re there yet in terms of consumers’ expectations, and whether we’ll get there and whether the plans are going to be willing to sort of play then is not clear.

I guess I think in terms of the fact that the plans are facing costs that are going up faster than sort of Medicare’s current costs, Medicare fee-for-service current costs increases, I guess I wonder about whether that’s a temporary phenomenon. I mean, we have this issue of turmoil in these markets all the time, and we’re now talking about some catch-up in terms of providers dealing with HMOs, whether sort of we will see that sustained over time or whether or not the plans can sort of get rates of increase that are more comparable to Medicare fee for service. I’m not sure.

PAUL GINSBURG: Actually, if you recall the recent issue brief from HSC, No. 52 really talks about this, how in the mid-1990s the opposite was happening, where the payments from Medicare were going up faster than the costs facing plans. And I guess the question is: If this reverses down the road, will the experience of this period, you know, be remembered well enough, will this preclude plans from jumping back in?

JOE FRANCE: I think they make the same mistakes again and again. [Laughter.]

JOE FRANCE: They’ll decided that it’s an attractive business. I mean, I sort of look at it, when you bring it down to a personal level, my mother every year is complaining about her health plan, you know, and I said, well, why do you keep joining it? You know, the HMO. You know, because next year, you know, the premium is going to be a lot higher, the drug benefit’s going to be reduced, whatever, and at least notwithstanding your excellent points, I mean, the traditional Medigap and Medicare program are sort of predictable, at least from my mother’s perspective.

PAUL GINSBURG: I have just one more question on Medicare+Choice, but I was about to turn to the audience for questions. So if you could start thinking of questions and coming up.

The thing I wanted to ask is--you know, Ken Thorpe put out some results that got a lot of attention about how the clientele for Medicare+Choice tends to be lower-income people predominantly, you know, not low enough to be eligible for Medicaid, but not high enough to be able to, say, afford a Medigap plan. Is there any chance that Medicare+Choice plans could start becoming sort of a niche thing, in the sense of, you know, trying to appeal to that segment of the population?

WILLIAM SCANLON: Well, I was going to say, I mean, I think one of the things that runs counter there is that in the past it’s been the additional benefits that may have been the attractive feature for people with, sort of, moderate incomes because their alternative, the Medigap policy, is actually are already pretty expensive. So therefore, even if plans are starting to charge premiums, their plans are a lot lower than Medigap.

Now, whether a sustainable Medicare+Choice plan with a reasonable premium for the additional benefits that it offers is going to be as attractive to people with moderate incomes is not clear. I mean, they may be willing to make the sacrifice because, I mean, health care is very high on consumers’ lists in terms of their priority for spending. And they may recognize that this is still a better deal than Medigap.

ROBERT REISCHAUER: But their other alternative is going bare.

WILLIAM SCANLON: Right.

ROBERTA GOODMAN: Then they become the so-called no pay/self pay--you know, somebody who has income of $15,000 a year or whatever goes into the hospital and there’s a big deductible, the hospital is going to write off most of that, if not all of it. So they don’t actually end up paying for that care.

PAUL GINSBURG: Good. Well, I’d like to invite the audience to come up to the microphones and ask a question on anything we’ve covered so far.

QUESTION: [Off-mike] Marsha Gold, Mathematica Policy Research. Just on the Medicare+Choice issue, I found the discussion good and pretty consistent with things we’ve looked at. I just wonder whether--you’re treating it as if it’s an individual market, and in fact the Medicare supplemental market is quite complex. And one of the reasons, I think, you end up with the findings that Ken Thorpe and we and others have come up with is that there’s higher-income people more likely than ever before [audio break] supplemental plan--at least now. I know it may disappear in the future. And that means they have much less price incentive to choose the higher price plan, as well as more income to do it.

And so, in effect, I think you’re probably talking about a smaller subset of people who you’re trying to figure out which plan is in which, and I don’t know what the answer is, but I’m not sure that the Medicare+Choice product always has competed against Medigap; maybe some, but it may depend on the income and how big a difference it is and what the incentive is to give up your choice, versus the Medigap product. So I think that’s why you end up with some of the results that you do.

PAUL GINSBURG: I think that’s more of a comment than a question.

QUESTION: [Off mike] [inaudible] people’s reaction as to what you think that means, because there seems to be in all of this group products out there, there’s less--the capacity of the Medicare+Choice program is in any case smaller.

JOE FRANCE: Actually, that’s an interesting question. Does anybody know what percentage in the Medicare+Choice program are new each year, as opposed to people who joined it awhile ago and are still there?

QUESTION: [Off mike] [inaudible] it’s been hard, because for the last few years there’s been so much [inaudible]. I think the general thought has been that once people join, assuming the product’s stable and the plan’s stable and they’re still there, they stay with it. And then there is some influx. What we’ve seen from some of the industry folks is that new people who are turning 65, who really are people you used to market to, are increasingly tending not to join Medicare+Choice because they’re afraid of the instability, whereas those who are already in it will stay with it as long as it’s there. Because they had more choices on Medigap when they turned 65.

ROBERTA GOODMAN: Personally, I’ve always felt that the Medicare+Choice program was going to be more appealing to people who were going to be in the lower portion of the income pool, as opposed to the higher portion. And I think what happens is you raise--as Joe mentioned earlier, when you raise the supplemental premium there’s going to be more and more of those people who just get priced out of the market and they don’t really have another option to pick up the pieces that Medicare doesn’t cover.

PAUL GINSBURG: Yes, sir.

ROBERT REISCHAUER: But, I mean, we have a known deterioration in the availability of employer-sponsored retiree policies. And what this is going to do over time, albeit quite slowly, is increase the pool that Medicare+Choice plans can appeal to. But we’re a long way to go.

WILLIAM SCANLON: It’s also true that some employers choose to use Medicare+Choice plans because they find that this is their mechanism in terms of trying to maintain some of the care management and other cost control techniques that they’ve had for their under-65 population.

PAUL GINSBURG: Okay, next question.

QUESTION: Good morning. You’ve raised the subject of Medicaid but haven’t discussed it much, and I’d like to raise a question about Medicaid. Medicaid is a government program that does have some prescriptions as to rate-setting and reimbursement for implementation by both the federal government and the states. There is a recent phenomenon of national companies becoming involved in Medicaid management in numerous states, and I wondered what the prognosis of the panel is for the evolution of these companies with a national objective to address Medicaid.

JOE FRANCE: You’re talking about the companies that just have gone public over the last year?

PAUL GINSBURG: Well, actually you might go broader, Joe, because there also are--I think WellPoint and United have major Medicaid managed care operations, as well as new companies.

JOE FRANCE: Well, they have a lot, but I mean in the context of the overall business, it’s actually quite small. The Medicaid businesses for these companies is--the average analyst looks at the industry and sees that all the major public companies in the past have failed for a variety of reasons. I think part of it is that the Medicaid market is a different market than the commercial market and even Medicare. I mean, I go to the same doctors that my mother would. So it’s a completely different business.

There has been a number of companies--I guess two are public, another one is contemplating going public--that is focused strictly on Medicaid. They have focused on a limited number of states; they hope at some point to expand it. From an analyst point of view, I don’t regard it as a particularly promising business because it’s so political. Remember, it’s jointly funded by the states and the federal government, and so the state, unless you want to monitor the capitals in all the states that they have business in, they can change the--you know, the reimbursement tomorrow.

I just--I think two weeks ago or three weeks ago I was reading, I believe it was Missouri has stopped paying refunds for overpayments of taxes. So in an environment where revenues are down all over the country, I would think the Medicaid business is not a very good place to be for a publicly traded company.

ROBERTA GOODMAN: I completely agree.

PAUL GINSBURG: Yes.

QUESTION: I wanted to know, I guess, if you could just comment more fully about the potential for the idea of linking copayments and deductibles to income for the Medicare population. I guess we’re talking on the fee-for-service side. I wanted to know if you could comment about that, especially from the perspective of attracting plans to the program. I wanted to know if you had any thoughts about that.

ROBERT REISCHAUER: Is that a policy question?

ROBERTA GOODMAN: I think it’s a policy question.

ROBERT REISCHAUER: The question was what the possibility was of transforming the Medicare program into one in which copayments and coinsurance were income-related?

QUESTION: The applicability of that to--

ROBERT REISCHAUER: Well, I think the political applicability is close to zero, and the practical applicability is lower. You know, because we don’t--the vast majority of Medicare participants don’t file income tax returns, which would be the logical way of gathering that kind of information. And I just don’t think that it would be either a good policy or capable of being implemented. I mean, you would get into lots of sort of issues, "I paid my HI payroll tax and I’m paying the same premium as others and you’re giving me a different benefit." I think a much more practical solution would be to have the premiums vary by income, and those who wanted to have reduced premiums would have to file income tax returns even though they don’t do so now.

PAUL GINSBURG: Yes, I remember that the income-related premiums for Part B have come up from time to time. But I haven’t heard much about it for a long time, which suggests to me that it’s just not a very appealing political idea.

Yes?

QUESTION: Don Antonucci, Horizon Blue Cross Blue Shield New Jersey. I’m just curious--with some of the major key trends going on, such as consumer-driven culture, the baby boom generation, use of technology for health insurers, what are some key ways that you see health plans, either now or in the future, differentiating themselves in the marketplace?

PAUL GINSBURG: That’s a good question.

JOE FRANCE: It’s a good question.

ROBERTA GOODMAN: Well, I think we’ve been seeing differentiation in the marketplace. If you look at the disparity in enrollment growth results for the Blues as a group and then a handful of other companies, versus some of the companies that have historically been more restrictive in their networks and more restrictive in their medical management practices.

So I think that there’s the--the question is how well companies gauge the markets and respond to those markets in terms of the plan designs that they offer, the way that those plans are administered from a customer-service standpoint, the kinds of information that they make available to the members to help the members make good decisions about their health status, programs such as the care management programs that we discussed earlier, the kind of network access that they have--you know, things of that nature. And I think at the end of the day there’s been a tremendous variability in performance, and I think that that will probably continue, given the companies’ very different abilities to invest in technology infrastructure, clinical infrastructure, and service capabilities.

JOE FRANCE: I think I would add that the chief, certainly, financial value added of an insurance company is the ability to help an employer understand what a change will do to its costs. It doesn’t do the employer any good, if they’re trying to plan, if one year they have flat rates and the next year they’re up 20 percent and the next year they’re flat again or down or who knows whatever. And I think that part of the consolidation that’s going on in the marketplace reflects the variable talents on that score in the industry.

And obviously--you said you were from Horizon--obviously the brand name helps a lot. I think that’s the second best known brand name after Coca-Cola. So that’s one way to differentiate yourself.

PAUL GINSBURG: Well, this would be a good time for us to take a break. We’ll take a break for about 10 minutes and we’ll come back and turn to hospital issues.

PAUL GINSBURG: I’d like to begin the second session now. Please take your seats.

Thank you. I’d like to begin this session talking about hospital issues, and we’re going to focus mostly on the issues of hospital capacity and capital investments. I’d like to begin this session by Cara Lesser talking about site visit findings about the hospital capacity crunches.

CARA LESSER: One of the things that really surprised us in our site visits in 2000 and 2001 was to learn of these emerging in-patient capacity constraints. I mean, for the longest time in health care, the issues has been excess capacity, and when we were in the field recently, it really was an issue of not having enough capacity to serve the population.

We saw overcrowded emergency departments in many communities, delayed elective surgeries in many places, and extensive expansion plans, both to add ER services and to add more profitable services, specialty care like cardiac care or oncology.

So this was something that was really striking to us was this sudden emergence of in-patient capacity constraints, but then at the same time, we continue to hear about excess capacity in other places. I mean, Little Rock is one of the markets that we track, and it still is very much an outlier in terms of the capacity per population there.

Michigan, I know, just recently released a report saying that, statewide, two out of five hospital beds go empty on any given day. So, I mean, it’s this real contrast between the need to build up capacity that we hear a lot about from any hospital administrators, and then this, on paper, what still looks like excess capacity.

PAUL GINSBURG: I’d like to turn to Ed Shapoff for a general sense on this issue.

DR. SHAPOFF: Let me respond to this by saying that, as a banker focusing on the not-for-profit sector, I certainly would echo Cara’s comments about capacity. The vast majority of hospitals that we cover are building. I think we believe we’re at the beginning of a building cycle and addressing capacity is just one of the reasons for that building cycle. Likewise, I think more out of just having wandered around many, many hospitals over my business career, have seen obviously an upswing in the increase in capacity and use of emergency rooms.

But I fear that there’s probably no way to generalize exactly what’s going on. Obviously, if you go visit hospitals in locations where there’s been an upswing in population growth, you may well see some constraints on capacity. If you go to urban environments and you go to an emergency room, what you see are patients who are largely using the emergency room as their primary care physician.

And even though you may have a decline in population in an urban center, you might not have a decline in the emergency room, and the emergency room becomes the vehicle through which hospital admissions are taken.

I think the other issue, and at the break Bill and I were talking, and he made a very interesting comment, which I’d like to sort of pass on to you, and that is that in a hospital building not all beds are equal.

So, while you hear of capacity constraints, you might have an OB Department that’s 30-percent utilized in one location and a med-surg floor that’s 120-percent occupied, and if a patient comes in, it’s inappropriate to put, let’s say, a medical-surgical patient on an OB floor or a psychiatric floor.

So that, at any given point, depending upon the service that’s being rendered, you may have capacities broken down by department, as opposed to by a physical facility or a city. Clearly, across the country, there are cities, counties and locations where we have an excess number of hospitals.

We also, and use New York for example, we have hospitals within the City of New York that some are at 80-, 90-, 100-percent occupancy overall and probably within some of those departments 120-percent occupancy with patients in the halls, and you have other hospitals within the same city that are at 30 or 40 percent, and you say, how can this be?

Well, as a potential patient, you may choose not to go to one of those hospitals that is at 30- or 40-percent occupied. They may have no cash to provide equipment or personnel may not be clean, may not have the state-of-the-art facilities available, and so that you may choose, as a patient, to go where you think you’re going to get the best care, and that may be a hospital whose physical facilities are constrained at the moment.

PAUL GINSBURG: Following up on that, in our site visits in Boston, we saw that there had been a major movement in patients away from community hospitals toward the teaching hospitals, so that we have this phenomena of the teaching hospitals being as crowded as anything and some community hospitals going out of business from insufficient patient demand.

Is this something that, in a sense, is a phenomenon we should be more focused on; maybe people making different choices and focusing more on the hospitals that appear to be those that are the most capable, the highest quality?

DR. SHAPOFF: That’s an interesting question, and I’m just--I’m curious because I actually do follow Boston, and I don’t know that I would have necessarily seen the same thing.

We have, I think, across the country, many communities, smaller communities, suburban settings, where you have three or four hospitals, when, in fact, you might have a need for two. You also have, as the population ages, as the number of medical devices and ability to treat more serious illnesses as it becomes more available, you may find that a setting in an academic medical center may be a better place to be and so that perhaps there’s been a movement towards caring for some of the more tertiary practice in the urban setting.

But I don’t know, across the country, that I’ve seen a downsizing of suburban hospitals, other than a right-sizing within the community, moving, say, from three or four down to two, but I haven’t seen a wholesale shift into an urban academic medical center.

PAUL GINSBURG: Cara?

CARA LESSER: But I think there has been this phenomenon of what you were alluding to before of increased investment in specialized services so that the capacity that’s there is really dedicated to particular services and types of patients, and it results in much, much less flexibility for the hospital in dealing with the full range of patients that are coming their way.

So, while you might have the capacity on paper, in reality, you don’t have the capacity to serve the range of patients that are coming to your door.

DR. SHAPOFF: Maybe my response back to that would be that I think that probably what we’ve seen, and I think it’s been talked a little bit about in the morning session--this is still morning, the early morning session--was this concept of maybe the creation of some specializations or centers of excellence and maybe delivering health care, rather than it being on a horizontal basis, more vertically integrated sort of within either a disease category, and maybe that’s a more efficient way.

Again, I’m not a policy-maker or an analyst. I provide funds to hospitals that are worthy of providing funds to, but I do think that we see, through our client base, as well as essentially the hospitals that we cover, and as does Roberta’s firm and Joe’s firm, that they are all moving to create an identity.

I’ll use the term "center of excellence." I’m sure there are half a dozen other terms that really mean the same thing, and that is that they become the cardiac center or the cancer center or they’re an orthopaedic specialization, and we’ll talk probably in a few minutes about physicians going out on their own and creating their own specialized centers, either in combination with hospitals or competing with hospitals.

But I think all of this is to create a focus so that you, the hospital, become, if you will, the player of choice in the minds of a patient or a managed care company because you’ve got that particular disease or condition, you’ve got it covered from every medical and surgical aspect.

CARA LESSER: Right. I mean, I think that we really see this phenomenon as a return of the "medical arms race" type behavior, competing for those high-end services, and we see this in a lot of communities. Indianapolis is one of our markets, and right now there are four cardiac construction projects underway in Indianapolis at each of the major hospitals. One is the Indiana University and Methodist Hospital there just established a 190-bed cardiac care facility, and then each of the other hospitals has another 100-bed cardiac care center that’s competing with us.

The Children’s Hospital just launched a pediatric cardiac center. I mean, it’s just, you know, it’s unbelievable the competition over a specific service line.

And then on the flip side, you have the public hospital there trying to raise money to upgrade the Burn Center, which is one of two Burn Centers in the state, and they can’t raise the $12 million for that, when there’s been over $200 million invested in these cardiac care centers.

PAUL GINSBURG: Yes, Bill?

WILLIAM SCANLON: I think this goes to the heart of sort of a really fundamental concern about hospital capacity. Hospitals really provide two different sets of services: One is to the people that are in them today and getting actual treatment; the other is being there in case tomorrow some of us may need those services.

You often are inefficient, in providing the services to people that are there today, in having the capacity to be there tomorrow. And so as we put pressure, in terms of costs, on hospitals, and they have found ways to be "more efficient" or some entrepreneurs have found ways to split off services that are potentially more profitable, we are potentially threatening that second set of services, the sort of capacity to serve demand in the future, and it’s something I think we need to be concerned about.

Economists sometimes have talked about this is why we have nonprofits, that they have organized this way because they’re not going to be efficient. They are going to provide something that is not sort of in line with what ordinary markets might value because you and I are not paying today directly for that capacity to exist. We pay through insurance, but as insurance becomes more focused on what the efficient price is, we stop paying for that capacity for the future.

DR. SHAPOFF: I feel the need to respond at least to one point about efficiency in the not-for-profit sector. Again, my focus is the not-for-profit sector, and I know that, since Roberta and I had worked together previously and she focused at one point in her career on the for-profit sector, she’ll have something to say.

First, I think maybe one bit of clarification for the audience, and I don’t know how many of you know sort of the configuration of the hospital marketplace in the United States, and my statistics are sort of just general. There are approximately 5,000 hospitals in the country, and about 80 percent of the beds in those hospitals are run by not-for-profit hospital systems or freestanding institutions.

The largest sector of the not-for-profit hospital community has been the large Catholic systems which, over the past five or six years, have consolidated many either smaller systems or freestanding institutions.

The largest, obviously, aside from the Department of Veterans, the largest for-profit system in the country is HCA, followed by Tenet. If my statistics are generally correct, HCA is about $16 billion in revenues and about 200 hospitals--I’m sorry--about 165 hospitals, and Tenet is about $10 billion in revenues and about 110 hospitals. The largest Catholic system is about $6 billion in revenues and about 50 hospitals.

Interestingly enough, the three top Catholic systems operate in about the same number of states as Tenet and HCA, roughly, 17 to 20 states, they just are smaller, but the individual size of the hospitals on the not-for-profit side tend to be somewhat larger per unit, just smaller systems in general.

Of the 25 top health care systems in the country--and top being measured by size of revenue base--18 are not-for-profit, and of those 11 are Catholic systems and 7 are nondenominational not-for-profit systems and only 3 for-profit systems are in the top 25.

So it’s a landscape dominated by the not-for-profit provider. And hospitals, I would venture to say, 50 to 70 percent of all not-for-profit hospitals in the country now belong to some form of a system, whether that is a multi-state system or a single-state system, but there is at least some aggregation. It’s not a universe populated by freestanding institutions, as a rule.

On the other hand, and not to sound as if I’m talking out of both sides of my mouth, there are thousands of smaller hospitals, rural hospitals that are 60 to 80 beds or 30 beds, across the country that perform an incredibly valuable service in that they are typically sole-community providers. They might be the only hospital within 40 miles.

And as Bill says, they have to provide, more as a safety net, a very broad range of services or be ready to provide a very broad range of services for that eventually of someone coming in and needing something and then finding out that, in their case, then they’re going to move that patient to a facility that can provide the proper care.

But I think it’s not--I want to just go back to the issue of efficiency. I have been sort of following the not-for-profit hospital side for nearly 30 years, and I would not say that there is an intention to be nonefficient or inefficient. I would say that a hospital is a very complex building with a lot of activities going on inside, and some folks that influence your day-to-day lives that are not your employees, and those are the physicians that kind of wander the halls, and order services and do things to provide care to patients, and you as a hospital or a hospital administrator have to have the personnel in place, you have to have the supplies in place, and the equipment in working order, and a facility that is clean, and it is not an easy assignment.

I think that it’s a fair characterization to say that the not-for-profit sector has not enjoyed the highest level of efficiency, and I think they have learned a lot from the for-profit side, but I will tell you that the vast majority, if not 100 percent of the hospitals that we go out and call on, are very smart financial individuals, very smart operators trying to provide a quality service at a respectable price.

PAUL GINSBURG: Let me turn to Bob Reischauer.

ROBERT REISCHAUER: I’d like to just disagree a bit with Bill Scanlon. Demand is unpredictable and lumpy, and you want some excess capacity for that reason. You don’t want to run your hospital system in Indianapolis at 98 percent of capacity year in and year out.

There are seasonal variations, there are variations in demand associated with when flu epidemics occur, there are variations across the days of the week, and so you need a good margin, but that doesn’t mean that you need to build 500 cardiac beds, when the average in the community demand is 300. I mean, you can be a community with a heart and still operate with maybe 350, but plan over a longer period of time to build that capacity that you will need for 2010. Technology is going to affect what you really need 10 years from now, and you don’t want to invest a whole lot in facilities that turn out to be unneeded.

This, it seems to me, to argue for some kind of regional health planning, rather than allowing all of these decisions to be made individually by competing hospitals, each one wanting to be the cardiac center for Indianapolis.

WILLIAM SCANLON: I don’t mean to take it to that extreme. The issue is that we need some additional capacity. We obviously don’t need excess additional capacity. The question is sort of how can we arrive at that level which meets our demand sort of at the peak moments and doesn’t sort of overinvest.

I think the important thing, though, is that when there are two products, you can be efficient in producing those two products, but it’s more expensive than producing one. And that’s the point I think we need to focus on, because in putting pressure on hospitals, if they are only focused on the product today, services today, and they become most efficient at it, we may lose the additional capacity that we need. We don’t want a lot of excess capacity, but we do want some additional cushion that is important.

Now, a problem we’ve had here in this country is we have no mechanism--and remembering the certificate of need days, we had no mechanism then--that effectively regulated capacity. I mean, we used to worship the average in those years, that if you weren’t at the national average, you weren’t at the right level. And there was no sense that the national average was right, but that was what was guiding a lot of certificate of need decisions.

So we need--we cry out for a mechanism, I would say--rather than we need, because we may never be able to get it--to regulate capacity or to determine capacity, but it’s not clear that it’s on the horizon.

PAUL GINSBURG: Actually, Roberta will--I think we’ve progressed to regulation a little bit earlier than I had planned to, so, Roberta, I wanted to get back more to what hospitals are doing, and then we’ll go back to regulation.

ROBERTA GOODMAN: I think Cara raised an important point. The reason that everybody’s building cardiac facilities is that cardiovascular services are probably the single most profitable product line, whereas burn centers tend not to be because of the patient mix and the immense amount of labor that goes into them. And I think that that does raise an issue that goes probably outside of my scope as an equity analyst, but, you know, in the scope of somebody who has been in health care for over 20 years, you know, how do you make sure that the mission-critical services are, in fact, being provided to a community and balancing off the economic issues? Because you can probably guarantee that not all of those cardiac units are going to be fully utilized. You can probably guarantee that only, you know, two or three of the four, if that, will actually have superior outcome statistics. But everybody’s going to want to have that, and nobody’s going to really want to do the burns.

PAUL GINSBURG: Let me actually pose a question to Ed. The perspective that has come up here is that hospitals are being very selective now in what they want to expand. They all want to get into cardiac services, some of the other profitable ones. There’s concern about burn units and some other services, not exactly profitable.

Is this the way it’s always been? Or are, you know, competitive forces or what drives, you know, nonprofit hospitals, is it different now? In a sense, are we going to have more worries about service availability being uneven than we have in the past?

ED SHAPOFF: I don’t want anyone to think that I’m a shill for the not-for-profit hospital sector. I’m not. But I really think we’re--I would not want to use an isolated example in Indianapolis and, therefore, simply say that this is the way it is across the country.

I don’t disagree with Roberta that cardiac services are highly profitable and, therefore, why would one of three hospitals in a community want to cede that practice to its two competitors. But I would tell you that I have seen a great deal of community or, I would say, regional planning going on at the hospital level. These are not stupid people that run these systems or hospitals, and I think they take a good, serious look at who they are and what service they can provide versus their competitors in the community. And I do think--I’m not saying it’s 100 percent efficient across the country, but I don’t see as prevalent an arms race going on as your survey might suggest.

You know, on the bottom line, if you’re the fourth in the community in a service that doesn’t need four, it’s going to cost you a great deal of money and eventually you’re going to decide you shouldn’t be in that business. And you just don’t see that, and you don’t see a lot of hospitals that have a lot of excess cash. We talk about capacity. We don’t have a lot of hospitals across the country that have a lot of cash to make foolish investments. So I think they’ve got to be smart about what they do. They don’t always make the right decision, but I don’t think we’re seeing the same build-up in the form of an arms race. I think they’re taking an honest look at what they think their mission is and the population base they serve, and they’re trying to provide an appropriate range of services.

You certainly see more rational--I mean, in communities there are a lot of hospitals that have decided they cannot provide the range of OB services, and so they will cede that to, you know, one of the hospitals in the community that will become the OB center. And, yes, it is the lowest margin business, so it’s not a bad business to be out of. But there I think was at least, you know, an effort to rationally plan the kinds of services that are available in a community.

PAUL GINSBURG: Yes, Cara?

CARA LESSER: Well, one thing I think that is different today that complicates this picture some is the competition that hospitals are facing from physicians, and you mentioned this briefly before, but, you know, it’s really difficult for a hospital to sort of control the set of services that they’re going to provide relative to their competitors when they have these new competitors knocking on their door with physician entrepreneurs saying that they’re going to branch out and establish their own heart hospital across the street and leave the full-service traditional hospital in favor of that. And I think that in a number of communities we’re seeing a lot more of that as physician fees are under pressure and they’re looking toward facility fees as a way to supplement their income.

PAUL GINSBURG: Yes, Bob?

ROBERT REISCHAUER: Judging from my mailbox, I think there has been a tremendous increase in direct-to-consumer marketing of hospital services, and these little fliers you get suggest that what the hospital is trying to do is show that they have capability in an area where the procedure is complex and it’s familiar to many people--cardiac, cancer, orthopedic surgery--and, therefore, I think this is a top-notch hospital when something else happens to me. So there’s a reason for them to invest in a few of these areas because it’s sending a message that really they are capable of serving my broader needs.

ROBERTA GOODMAN: May I?

PAUL GINSBURG: Sure.

ROBERTA GOODMAN: One thing that is interesting about this focus on physicians trying to carve things out is that this actually really isn’t anything new. Physicians actually built and operated hospitals back when hospitals were far less capital-intensive than they are today. Physicians drove the development of the ambulatory surgery center business, infusion therapy businesses, et cetera. I think physicians have always been looking for ways to maximize income.

I do think that there are troubling aspects of this, though, because I think when you start building a heart hospital that does nothing but heart, that is not going to be a full-spectrum facility. So the higher-acuity patients with multiple morbidities are not going to be appropriate for that facility. They will get presumably skimmed off from the hospitals that have a broader set of capabilities, and I don’t know that that addition of cost to the community is necessarily a good thing from the standpoint of the overall health care system.

PAUL GINSBURG: All right.

ED SHAPOFF: I wanted to comment that while I would agree with Cara that it is, in fact, a phenomenon that is sort of increasing, at least in visibility, again, I would say that it’s not something we see as widespread, although just within Goldman Sachs we’re probably working on 50 projects at the moment, four of which are joint venture facilities, cardiac or cancer facilities, but our client hospital is really the deep pocket working in conjunction with a group of physicians in that. So it’s not physicians that are sort of splitting away from the hospital, but they have at least found a reason to create a highly specialized facility for the care of a particular range of diseases.

PAUL GINSBURG: Let me back up a little bit. One thing I wanted to ask Ed earlier is kind of a general question about the hospital capacity expansions that he and his colleagues have brought to market or are working on. How would you describe in general--in a sense how many are general? How many are very specific for services like cardiac? And what’s driving hospitals? How much of it is their capacity is squeezed as opposed to their capacity is not squeezed but they have a forecast and they want to get out in front of the marketplace?

ED SHAPOFF: Paul, actually, that’s a complex question because I think it runs the gamut. And, again, I don’t think that what we do at Goldman Sachs is any different than what is being done by all the other Wall Street firms. So I’m guessing that what we’re seeing is generally a trend in many different directions, if that doesn’t sound illogical.

In California, just to use an example, we have SB1963, which is a seismic legislation which is mandating massive amounts of either renovation or new construction for all hospitals across the state. There are numbers like 20 to 40 billion dollars of costs associated with making hospital buildings earthquake-proof.

In those cases, the majority of hospitals have decided to rebuild facilities rather than to try to renovate sort of in place. The cost of renovation is higher than the cost of new construction. So I think that at least on the West Coast you’re seeing that as a building factor.

There I would say you’re seeing largely the rebuilding of hospitals not with a particular emphasis towards a type of specialization.

The other factor I’d like to comment, which is certainly national, is that we have seen over the past few years sort of a decline in capital in terms of building going on. And buildings wear out, and so you have facilities that are in general need of repair. We’ve gone through a cycle some years ago where this excess capacity issue existed where a lot of beds were taken out of service and converted to ambulatory facilities. Buildings were reconfigured to, in effect, right-size the service that was being offered.

Now with an increase in inpatient capacity seemingly on us, a lot of hospitals are now beginning to either reopen beds that have been closed or have to rebuild. I’ve also seen quite a few start-up hospitals in communities, which is something I haven’t seen in probably at least a decade. And I would say there that’s more a function of population shifts moving to communities where there, in fact, has been not enough health care facilities available and so, you know, a system client might choose to build in that community to meet an unmet demand.

PAUL GINSBURG: Okay. You were starting to mention before about hospitals’ ability to raise funds, and you mentioned that the ability is not so great. I remember the recent report from CMS, Tom Scully, showed that, you know, a lot of hospitals don’t have good credit ratings, and the implication is that they would have difficulty obtaining capital.

Would you say that the credit quality has declined and it’s more difficult for the typical hospital to raise funds now?

ED SHAPOFF: Again, I think some generalization is difficult because the hospital that Wall Street covers is typically a ratable--has a bond rating or is at least considered financially feasible. But that as a percentage of these 4,900 hospitals that I spoke of before is a relatively small subset.

I would guess that the entirety of Wall Street and commercial banks across the country, we knock on the doors of probably 1,000 hospitals, and there’s at least 1,000 other hospitals--frankly, that I’m far from expert to discuss--that don’t have the financial capacity to go to borrow, other than perhaps through a local bank who’s willing to, you know, provide something. Certainly they don’t have access to the public markets.

Of the subset that we cover, there has been a massive decline in credit quality since 1995 or ’96, and it is certainly not a surprise to anyone in this room or any of the panelists, and a lot of it has to do with the level of Medicare payments as well as commercial pay and managed care. And I think that the rating agencies--Moody’s, Standard & Poor’s, and Fitch--have reported, beginning in 2001 and moving into 2002, a sense of stabilization, that is to say, that the margins have sort of stabilized, they’ve come down from 3.5 percent down to 1 percent. That is not to say there are not an enormous number of health care providers across the country that are losing a significant number of dollars on an operating basis.

The decline in the stock market over the past couple of years has not helped health care generally in that many hospitals across the country have subsidized losing operations with a healthy stock market, and when those returns are down, their bottom lines are gone. And so--but I do think we’re seeing, at least at the operating level, a stabilization, although at a much lower level.

The median hospital that is rated by Standard & Poor’s, Moody’s, and Fitch, interestingly, they’re all at about the A-minus, Baa 1 level, which is a level higher than all of the for-profit hospitals taken as a whole or individually.

The other factor addressing access to capital--there’s two others that I’d like to comment on very briefly. One is sort of investor attitudes. With the fortunes of hospitals declining so rapidly over the past five or six years, a lot of investors have sort of fled the market and have said they won’t invest in health care bonds, or they’ll only do so with a significant premium associated with the debt. So that health care is considered in the tax-exempt arena the most volatile sector and, therefore, the sector that has the highest premium possibly next to nuclear plants. That’s probably the highest and health care is second.

The other force in the industry that sort of altered access to capital was that for the better part of five or six years but building up over the last decade, private bond insurance has been the backbone, 60, 70 percent, maybe 60 percent of all health care tax-exempt issuance. Of this subset of hospitals that access the public markets have been privately insured, to an investor it’s a AAA rating on the bonds, and the private insurance company is taking the credit risk on the hospital.

That has virtually dried up. I would say that the private insurers are cherrypicking. Instead of looking at what once was an A-rated hospital, they’ll now try to insure an AA or maybe a very high rated A hospital. But essentially the premiums have tripled, and the availability of the insurance is probably, you know, one-quarter of what it once was. We’re now probably seeing less than 20 percent of the bonds that are being sold to finance hospital projects that are privately insured.

And so hospitals are now taking their story directly to the investor in the form of just, you know, hospital debt that is based on the credit of the hospital, and the investors have become a lot smarter over the last five or six years in terms of asking the kinds of questions many of which have been asked here today. A lot of the questions that have been asked about capacity and about planning and about managed care are questions that come up in discussions with rating agencies and hospitals.

PAUL GINSBURG: So this picture of declining credit ratings, et cetera, is something that perhaps could temper the potential for a very dramatic expansion of hospital capacity.

ED SHAPOFF: I think if one were to read the writings of all three rating agencies, you’d find that the single largest reason for a downgrade in ratings today, in 2002, and starting in 2001, has not been sort of the day-to-day operating fortunes or misfortunes of hospitals, but has been sort of the incurrence of debt. Hospitals were left with weakened balance sheets over the last five or six years, a lot lower liquidity. They had not been to the debt markets, had not replaced facilities, and now they’re coming--now they need to, and they’re coming to the markets layering on more debt.

There is no--unlike the for-profit sector, there is no equity market. The equity market is philanthropic contributions and what you can generate sort of from your day-to-day operations. If you’re operating with a 1-percent operating margin, internal operations are not rebuilding the facility, and certainly in the last couple of years with stock market declines, philanthropy has been diminished. So most hospitals’ ability to finance construction and to finance meeting this increasing capacity really comes from the debt market.

It continues to be an issue. I would not--I think for more than two decades, I’ve heard the term, you know, crisis in access to capital. I’m not sure I’ve ever believed that. If you have, you know, a worthy case to make, if you are financially sound and it’s prudent and you can demonstrate that you can borrow and can prudently pay back the debt, interest rates fluctuate. We happen to be at a time when interest rates are at historic lows, both in the fixed-rate market and the variable-rate market. And so one would think that hospitals could take on more debt now because they’re taking it on at interest rates that are two or three hundred basis points below where they’ve been.

PAUL GINSBURG: We need to move on, but I want to give Bill or Bob an opportunity to bring the policy, the regulatory issue back, maybe to comment on the likelihood of governments being called on to support capital expansion for services that are not attractive ones, and, you know, we’ve certainly seen that there’s been a lot of discussion in some states that have dropped certificate of need about putting it back in.

Bill?

WILLIAM SCANLON: Well, I think there’s no issue that there’s a considerable concern about maintaining capacity. I mean, I think we see it particularly in rural areas in some of the discussions about what do we need to support rural hospitals, recognizing that they have unique circumstances given their small size, that there’s economies of scale that go with that, the critical sort of nature of the services. And so that’s one focus of a lot of discussion.

We actually are working now on looking at sort of some of the specialty hospitals and what kind of impact they may sort of have on the market. And I think this is kind of at its inception in terms of being an issue. You know, is this something that’s going to affect the overall capacity of community hospitals? And is there or should there be sort of any type of government intervention? Those are very, very open questions.

First of all, we don’t know yet the answer to how much of an impact these are going to have. The Indianapolis case or sort of other--

PAUL GINSBURG: Pull the mike closer.

WILLIAM SCANLON: Or other cities sort of--we don’t know sort of how widespread this is, what kinds of consequences they are going to have for the market. And then once we have some of that information, then I think the policymakers can face sort of that kind of choice.

I think going back to the exchange with Bob earlier, I mean, we do have this issue of there is no control sort of over the capacity in this area. And we have the risk of the pendulum swinging back and forth, having sort of overcapacity and undercapacity at different times and in different areas. And that may be sort of the best we can do because we don’t seem to have the mechanism that calibrates things very well.

PAUL GINSBURG: Okay. Bob?

ROBERT REISCHAUER: I think basically that this set of issues is pretty far down the policy food chain and--

WILLIAM SCANLON: That’s the kind of work we do.

ROBERT REISCHAUER: --the ability for policymakers to focus on more than one issue at once is always difficult, and we certainly have prescription drugs for the elderly, the uninsured, and rising costs ahead of this as well as an aversion to regulation that’s fairly bipartisan at this point.

It also takes a long time for policymakers to realize that underlying circumstances have changed, and I think there still is a widespread perception that we have great overcapacity in this sector, and to the extent that we don’t, it’s in certain areas of the country and under certain circumstances. And I would not expect a lot of attention to be paid either at the congressional level or in the executive branch.

PAUL GINSBURG: Thanks. Let me move on briefly to talk about pharmaceuticals, and we’re going to do this from the managed care perspective. I’d like to ask Roberta or Joe about their perspective on the experience with the three-tiered benefit designs in pharmaceuticals.

I saw data presented from someone from Mercer which implied that perhaps about 50--over 50 percent of employees have a three-tiered aspect of their pharmaceutical benefit in their employer-sponsored health insurance. So any comments about is this having an effect on pricing by pharmaceutical companies? Are employees accepting it now that the incentives have grown?

ROBERTA GOODMAN: Well, I think the three tiers have clearly been helpful to mitigating the drug trend, but you have to look at that in combination with the patent expirations and the availability of more generics.

I do think--and I don’t have hard data that would pass peer review scrutiny, but I do think that the use of the three-tier formularies and moving the brands onto the non-preferred tier when they go off patent has probably accelerated the adoption of generics. And so there is actually some behavioral impact. I think there probably is some impact on pricing, companies wanting to get their drugs on particular tiers. But I think most of it is probably at this point cost shift, because even when you look at the top tier on the formulary for most of the plan designs, the drugs are not really that expensive.

And we were talking about this up here after the last session. I think it’s important to remember that for most people the copays that they’re being expected to pay for various health care services are modest relative to what they pay for a lot of other things. So if you’re paying a $10 copay for a drug, that’s basically the cost of going to the movie. That’s not a lot of money. And moving that from $10 to $20 to $30 or $35, again, that is not a huge amount of money in the context of most people’s budgets.

I think the issue with the hospital tiering is that the potential financial ramifications are just substantially more and the care is far more critical at the time that you’re receiving it, and you may not have as much ability to say, well, I’m going to go to this facility rather than that facility to take advantage of the lower copay.

But I do think that this has been helpful, and I think the mechanism will continue to be refined over the next several years. I think that the challenge is keeping it straightforward, and I think that some of the talk of going to four and five tiers is probably getting beyond the level of complexity that most people want to deal with in their day-to-day lives.

PAUL GINSBURG: Joe?

JOE FRANCE: Well, since I got out of pharmacy school 25 years ago, we’ve been trying to get a handle on drugs, or various people have, and they continue to be obviously one of the major contributors to growth in spending for all these companies. We certainly see, as Roberta mentioned, more interest in raising the copays, additional--companies adding coinsurance. Actually, some of the plans, a couple of the Blues, have even started putting in fairly significant deductibles. Humana’s working on those as well.

There’s obviously two things that we have to consider. I mean, just the straightforward cost shifting to the workers is certainly going on. I think the companies run into a greater risk when they start trying to influence behavior, but ultimately that’s what we have to do.

PAUL GINSBURG: Bob?

JOE FRANCE: Actually, could I just say one more thing? I’m sorry.

The companies that we talk to, I mean, the employers, rather, the things that they’re doing--if you look at the most successful company in the industry, I would argue is United, and their cost trends have been way below everybody else’s, and that’s largely because of great contracts with PBMs, trend guarantees. They sold a PBM, I don’t know, eight or nine years ago for a lot of money and then had a sweetheart contract and--

ROBERTA GOODMAN: 1994.

JOE FRANCE: 1994.

ROBERTA GOODMAN: For $2.3 billion.

JOE FRANCE: I thought it was three. But, whatever, it was a lot.

ROBERTA GOODMAN: No, $2.3 billion.

JOE FRANCE: It was a lot of money for, I think, $100 million in sales or something?

ROBERTA GOODMAN: 140. I was--

JOE FRANCE: Bill McGuire’s a great stock market guy as well as running a great company. But then when that contract expired, they set up another contract with Merck which has contributed to it.

So many of the companies are also--in addition to these other things that we’ve talked about, the copays and coinsurance, they’re also looking at rebates, banding together, forming coalitions, and just, you know, trying to exact a greater share of the rebates.

I’m sorry, Bob.

ROBERT REISCHAUER: Yes, I guess I’ve learned never to use a number in front of Roberta. [Laughter.]

I don’t know the answer to this, but I suspect that as important as the incentives with respect to tiers is the availability of mail order and the incentives that are provided for people to go into mail-order purchase of drugs, which is particularly important with respect to those who have chronic conditions, and it offers much more of an opportunity to effectively manage, you know, exactly what you’re taking and call up the physician and ask if some other prescription isn’t equally effective. And, you know, with chronic conditions and opportunities either to pay lower copays or to receive larger numbers of pills, we could see this as an important trend to controlling costs.

JOE FRANCE: We’re actually seeing some companies that are talking about in terms of ’03 mandating, for example, generics, I mean, not even--sort of going the other way, I guess, from tiering, but mandating not even given you the option to buy the branded drug.

PAUL GINSBURG: Certainly we see a lot of wild benefit structures in the Medicare Plus Choice plans, which are, you know, much more pressed to control drug spending.

One more question I wanted to ask on pharmaceuticals is the extent to which companies are using administrative controls, you know, as far as approvals to use certain very expensive drugs or--I know we see a lot of it in Medicaid managed care, but is it important in commercial products as well?

ROBERTA GOODMAN: I think only to a limited degree. I think there have been, say, on Viagra limits on the number of pills per month that will be covered, and certainly with the Vioxx and Celebrex coming onto the market, there were some preconditions to coverage that some of the companies put in place to say that the person has to have either had a gastric condition that would suggest that they would be having problems with the NSAIDs, or that they actually tried the NSAIDs and that those were not working.

And I think you’ll also probably see it for some of the very high-cost biologics, but I think a lot of it will be through plan design kinds of issues. There’s been some talk about botox and the potential that botox could be theoretically beneficial for migraines, although as a physician I was talking to last week pointed out, migraines are vascular and botox does not impact the vascular system. [Laughter.]

ROBERT REISCHAUER: Details.

ROBERTA GOODMAN: Yes, details. That you would look very, very closely at the extent to which you would have coverage for some of these new and potentially very high-cost things, and I think that to the extent that drug costs have been such a hot-button issue for really the last six or seven years, that there’s more proactive thinking about what’s coming down the pipeline and how that might be incrementally better or not than existing drugs than there was when some of the drugs that are viewed as being problems in terms of the cost contribution first came on market.

PAUL GINSBURG: Our time is getting late, so I’d like to be sure to call on the audience for their questions if people have questions on particularly this segment of the session. Yes?

QUESTION: The discussion that you--this is Cheryl Peterson, American Nurses Association. The discussion around hospital capacity was interesting, although I think it was a little narrow. You spoke to hospital capacity meaning beds and buildings, and there’s a whole other piece of that that was left out, which is do you have the workers to be able to provide the services that your new building or your new beds are going to--do you have those workers to provide those services? And I think that it’s interesting, and the discussion around infrastructure, as I understand Mr. Shapoff, was that there hadn’t been the investment in buildings, and maybe that’s because the reimbursement rates were not sufficient to allow for it. But I think I would argue also that there hadn’t been the investment in workers or employees, and both of those pieces appear to be coming home to roost at about the same time.

And I’m wondering, as you look at your investment opportunities, how do you assess the ability for a particular venture to meet both the needs of the building or the bed capacity, but also do you take into account the ability for the services to also be provided?

ED SHAPOFF: I absolutely agree with what you’ve said, and I’m sorry that I hadn’t mentioned that sooner. I certainly think that one of the constraints to the capacity issue is, in fact, the workforce, not nurses alone but a lot of other technical workers to meet those demands.

How do we look at it? Well, I think we look at it in terms of an institution’s ability to respond to its marketplace, and if it doesn’t have a workforce that’s available, then it obviously can’t bring into the facility the demand that might be there to expand. But I certainly agree that I think it’s a significant issue that’s facing every hospital in America.

PAUL GINSBURG: And have there been projects, you know, recently built things that have in a sense fallen into some financial problems because of inability to staff the new services?

ED SHAPOFF: I can’t say that I’ve seen issues of an inability to build something because they couldn’t staff. I think that what you tend to see is either in the case of nursing, much higher use of agency nursing, which drives the bottom line down significantly, or you frankly see in patient surveys massive dissatisfaction with sort of the patient-nurse ratios. And then that probably has a profound effect on the hospital’s future ability to attract patients, but, no, I haven’t seen projects not go forward because there was not sufficient staffing.

PAUL GINSBURG: Joyce?

QUESTION: Yes, Joyce Frieden with Internal Medicine News. On kind of a related note, can you talk about any trends you’re observing in physician supply? We’ve been reading a lot lately about some doctors who went out to open boutique clinics and not dealing with the whole managed care scene anymore. So I’d be interested if that’s impacting both the hospitals and system generally?

PAUL GINSBURG: Actually, that recalls a question I was going to ask but didn’t have time to as to whether managed care plans are noting, you know, more physicians opting out of their networks and, if they perceive that as a problem, what are their plans to address it.

JOE FRANCE: I can’t think of a specific example. I’m sure that Roberta’s got two or three. But we did--certainly the clout of the physician has picked up enormously. We had a meeting with a guy who does benefits for Villanova, and there’s a half a dozen hospitals on the Main Line that account for about half their enrollment. And the anesthesiologists wanted a 42-percent rate increase every year for three years, and that’s the--I mean, that’s an unusual situation, but not far off the mark if you look at a lot of the major urban areas.

ROBERTA GOODMAN: I think if you look at the physician component of trend, it’s been the portion that has been the most under control. I think there have been particular issues in situations in which companies are going off of capitation and the reimbursement rates have to rise to more market levels and that the utilization also moves back up to the market level. And I think that probably--and I think there are areas specialty-wise and geographically that you’re going to see issues. But I think, by and large, the physician marketplace has remained a lot more fragmented than the other components of health care.

JOE FRANCE: Wellpoint has actually suggested that, you know, whereas hospitals certainly have picked up considerable clout over the last few years, they think it will be another maybe ten years before they have, you know, the same kinds of pressure from physicians.

PAUL GINSBURG: Yes?

QUESTION: Audrey McDowell from the Centers for Medicare & Medicaid Services. Cara had touched on previously kind of the gap sometimes between what the actual quantitative data says about, you know, whether there’s excess capacity in a community versus kind of what’s being found with these anecdotal and, you know, survey-based methodologies.

I’m wondering if the investment banking community is using any different, I guess, criteria at this point in this marketplace for evaluating demand, you know, from a financial feasibility perspective, or are you still kind of going with the traditional factors or indicators that you would use to measure in a community whether you can actually, you know, generate enough demand to pay for a project?

ED SHAPOFF: That’s another good question. When you’re financing in the public markets, there’s a significant amount of available information in public disclosure, and I would say that I don’t think investment bankers are doing anything different than they’ve done for years. I think the data is probably more readily available to assess the likelihood of success of a project. But you still have accounting firms and feasibility firms and planning firms available. You have rating agencies that have very astute analysts that understand the markets. But I don’t think that we are particularly doing anything other than we’re reading a lot more carefully about the information that’s available in order to make that assessment.

PAUL GINSBURG: Good. Well, let me, before I close the meeting, mention a couple of points that came up in the first half just to help you leave with a sense of some of the things we talked about. I hope I’ve got these right.

One is that we talked about the loosening of the restrictiveness of managed care having the greatest effect on those plans that were most tightly managed, and this is leading to higher premium increases for these plans than for less restrictive plans.

The care management is probably only scratching the surface at this point, and we didn’t get a clear consensus as to the overall ability of care management to control costs, how important it’s going to be.

Tiered hospital networks are off to a shaky start, and I didn’t get a sense from the panel that that was going to become, you know, an extremely important phenomenon in the health care markets, although with the general trend toward more patient responsibility for costs, whether with tiered networks or not, that patients are ultimately going to become better informed about and more sensitive to cost differences across hospitals.

We’re not likely to see employers change benefit structures very radically. We’re seeing a tweaking of existing structures and increasing copays and deductibles or moves to coinsurance from copays. And there’s talk about the need ultimately to make consumers more sensitive and aware of the real costs of care, but there are some real constraints in doing this. Basically you don’t want to get to the point particularly with people of lower incomes that cost sharing is the equivalent of not being insured.

The outlook for Medicare Plus Choice is pretty uncertain, not much optimism for the program’s future, certainly not that it’s going to become as important a part of Medicare that might have been envisioned five years ago.

I’d like to take this opportunity to thank a number of people that worked hard in making this conference a success. First, I want to thank the panelists who I think have done a great job--and I didn’t need these nails, I guess--in discussing these issues and a number of people on the HSC staff: Joy Grossman, Richard Sorian, Alwyn Cassil, Tad Lee, Detra Stoddard, Bridget O’Leary, Roland Edwards, and Terry Armstrong. All worked, some at the desk, many behind the scenes, to put this on.

I urge you to take a moment to complete your green evaluation forms. We really do--you know, we’re researchers. We do surveys. We really do use these evaluation forms. We really are sensitive to having a higher response rate. It makes them more valuable. But these do go into improving our conferences, so thank you very much.

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The Center for Studying Health System Change Ceased operation on Dec. 31, 2013.