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Can Market Competition Cure an Ailing Health System?

A Joint Conference of HSC and Health Affairs

Conference Transcript
March 12, 2004

March 12, 2004
9:00 a.m. - 2:15 p.m.
Registration and continental
breakfast at 8:30 a.m.
Welcome and Overview

Paul Ginsburg, president, HSC
"Are Market Forces Strong Enough? Confidence is Waning"

Len Nichols, vice president, HSC
Panel DiscussionEmployer and Health Plan Perspectives on Competition

• Robert Hurley, Virginia Commonwealth University

• Sally Trude, HSC

• Christy Bell, Horizon Blue Cross Blue Shield, Newark, N.J.

• David Garratt, William M. Mercer, Cleveland, Ohio

• John Iglehart, editor, Health Affairs (Moderator)
Questions and Answers
Panel DiscussionHospital and Physician Perspectives on Competition

• Mai Pham, HSC

• David Dranove, Kellogg School of Management, Northwestern University

• Nancy Auer, Swedish Hospital, Seattle, Wash.

• David Delaney, Community Health, Indianapolis, Ind.

• Paul Ginsburg, HSC (Moderator)
Questions and Answers
Policy Perspectives on Competition

• Jack Meyer, Economic and Social Research Institute

• Bill Scanlon, General Accounting Office

• Sarah Mathias, Federal Trade Commission

• Marilyn Dahl, N.J. Department of Health and Senior Services

• Len Nichols, HSC (Moderator)
Questions and Answers
Summary and Discussion


Paul Ginsburg: I want to welcome you to the conference entitled Can Market Competition Cure an Ailing Health Care System? This is a joint effort by the Center for Studying Health System Change and Health Affairs.

After each round of community tracking study site visits that HSC does, we’ve held a conference to present the key findings, and this is the fourth round of community tracking study site visits that we’ve completed. But this conference is structured differently. For one thing, there is a core of seven articles from the effort that are published or were published earlier this week in the latest issue of Health Affairs, which is a thematic issue on market change, and this conference is focusing on the findings that are relevant to the question of how competition in the health care system is playing out around the country.

One of our studies, published in Health Affairs, focuses broadly around this issue concerning competition, and we’ve structured the conference around this article by Len Nichols and four of the other researchers from the study team. And our diverse respondents are reporting to us that competition is not doing the job of containing costs and promoting quality of care.

Let me give you a few words about HSC site visits. In each round, we go to 12 communities which are on the map, which were chosen randomly to be representative of metropolitan areas in the United States, and we go back to the same ones each time. We define this communities as Metropolitan Statistical Areas or Primary Metropolitan Statistical Areas, and they range in size from Boston, our largest, to Lansing, Michigan. They are drawn from all regions of the country, as you can see. Some of a strong presence of managed care and others much less. Each one, we have found, has interesting features in its health system.

The site teams that go and do these interviews are composed of HSC staff, staff from our affiliate Mathematica Policy Research and academic qualitative researchers. Many of these people have worked on the project for multiple rounds. We interview leaders in health care from all of the segments involved with the financing and delivery of acute care, which is employers and people who work with them, health plans, hospitals, physician organizations, public policy officials, consumer advocates.

We use a technique called triangulation that we depend on responses to the same questions from people with different perspectives on the health system to give us a sense as to whether something is really factual. And we put out a large number of publications from these site visits, including community reports, a report on each of the 12 communities and what we call cross-cutting analyses, which draw from across the 12 communities, and we put them out either as HSC issue briefs or as articles in peer-reviewed journals.

Here’s what we’ll do with this conference: Len Nichols will begin by presenting the highlights of his Health Affairs article, and then, two panels will go into the issues raised by this paper in more depth. The first panel will be about employers and health plans and the second about hospitals and physicians. And a third panel will focus on the policy implications of these findings.

Now, thinking of the first two panels, we have a mixture on each of those panels of researchers and health care executives. Three of the researchers are members of the HSC site visit team, and a fourth is a non-HSC contributor to the Health Affairs issue who is a real expert on a number of these questions.

The health executives are all respondents from our site visits. We chose them because they were knowledgeable and articulate. The researchers will go into more depth on their findings that are related to the points raised in the Nichols paper. The executives will discuss these issues in terms of developments in their particular communities.

Then, the policy panel has perspectives from both the state and Federal levels. The state perspective, actually, is from a study respondent, and also from a specialized segment of the policy world concerned with competition and antitrust policy.

There will be opportunities for audience question and answers after each of the three panels. We are going to use a mix of question cards and questions from the floor, and on each of the--since each of the panels has four people, after the fourth panelist makes their remarks, that would be the time for you to fill out your question cards and hand them in. Staff will be picking them up, so that once the discussion among the panelists finishes, the moderator will have the Q and A.

I would like to thank some organizations and individuals for very valuable support in making this conference possible. For one thing, I wanted to thank the Robert Wood Johnson Foundation for providing the funding to HSC for the site visit research and funding to Health Affairs for the thematic issue. I’d like to thank the researchers who are not on the panel who made important contributions to the analyses that you will hear about. I’d like to thank Cara Lesser for the extraordinary job she’s done as HSC’s director of site visits. And I also wanted to thank Senator Grassley and Senator Baucus and their staffs for sponsorship of our use of this conference facility.

This conference is being Webcast live by the Robert Wood Johnson Foundation. You can access it at, and I’m sure you also can on A transcript of this conference is being created, and it will be made available on HSC’s Website in a very short period of time.

I’d like to begin by introducing my colleague, Len Nichols, who is the vice-president of the Center for Studying Health System Change.

Len Nichols: Well, thanks, Paul. I appreciate the introduction. While you absorb this title slide, I want to say two things about it. First, without question, this is the fun part of my job. I get to tell you how I spent last summer’s vacation; what I’ve learned lately from the site visit research itself as well as from the distinguished colleagues and coauthors I was privileged to work with.

The good news is it’s quite rewarding to write a paper with a team like this. The bad news is when you’re coauthors are this smart, it takes more than a couple of drafts to get consensus on what withstands knowledgeable scrutiny. But the final good news is that working it out to the precise satisfaction of these coauthors improves the chances that even skeptical Health Affairs referees will accept the gist of the arguments, as they ultimately did.

The second thing I wanted to say, and this is probably more important: this paper was not planned. It grew out of our post-site-visit conversations, and it sprang, really from the common respondent reports across employer, plan and provider teams, which made us realize we had something here that we ought to try to talk about.

I’m going to very briefly remind us of the goals of our health care system and some competing visions for reaching those goals; spend a bit of time talking about the growing perceptions of unease that we noticed among our respondents in the site visits; spend some time talking about the barriers to efficient health care systems that underlie the respondents’ pessimism; and then spend a little time talking about the prospects for policy responses, and since we have no silver bullet--I’ll give you the punch line now--we don’t know what to do; we have some ideas, and you’re going to hear a lot more about that as the day goes on, we’ll conclude with some common threads across communities that may be portents of solutions.

The goals are fairly noncontroversial, but I want to make it clear that when I’m speaking about efficiency today, I’m not talking about it in the economists’ sense of essentially what people are willing to pay for but clinical value per dollar. I’m talking about technical efficiency of the health care system. Any appraisal of the United States, with the amount we spend and the level of quality we ob tain on average, would conclude we have a ways to go to get an efficient system.

Equity, of course, is in the eye of the beholder, but it typically means reasonably fair to people with different incomes, and quality, everybody is for and no one seems to know how to obtain it. I put a question mark by for all, because it seems to me the fundamental question about health policy is often how much deviation from equity and quality for all are we willing to tolerate? And those are the parameters in which we actually make policy.

There are three competing visions of how to achieve these different goals, and I would say they are, in many ways, starkly different. The one that has gained the most credence lately and may be on the ascendancy is individual empowerment, which is essentially--there are lots of ways to talk about it and lots of technical details--but essentially, it puts money and decision making power in the individual’s hands as opposed to the employer’s hands or the Government’s hands.

The 180-degree polar opposite would be single payer or what’s sometimes called Medicare for All, that is to say, to expressly have the Government be our buying agent and our regulating agent for us. And then, in many ways, in my view, anyway, managed competition is kind of a third way. It’s kind of something in between. What managed competition was about is to let health plans compete on price and quality for employers’ and consumers’ business. Government and employers would set the rules, try to get the incentives much better shaped than they are now, but then let the market work; let the markets reward winners and penalize losers.

Now, what we notice, as I said, from the different respondents from across the different groups, from the different survey teams, were these growing perceptions of unease. And first and certainly foremost, there’s widespread awareness of the cost or affordability problem for workers and for employers, and that awareness extends both among employers and providers and plans, and I think it’s fair to say the agents are worried about people, but they’re also worried about the potential for ill-conceived health policy. There’s not a great deal of confidence out there that what will come in response to this malaise is going to be wise.

At the same time, and to me, at least, this was surprising and new. A surprising number of communitywide employer groups are increasingly aware, as they study their local economies, they need health industry jobs. They need those jobs to make those local economies strong. One employer coalition leader said to me, you know, we used to think we could just beat up on the hospitals and get some money back, but if we do that now, we’ll actually hurt our local economy, so we know we can’t do that.

So in a sense, this mutual self-interest is dawning on people on either side of various transactions, and this is a key theme I want to come back to.

There is considerable worry about health care costs being so high it’s reducing competitiveness in the marketplace for their products, not just internationally but also locally. It seems like sort of every employer thinks every other employer gets health care cheaper. That’s kind of a natural thing about life; it may be true some way, you know, from their point of view. But the point is it does have them quite worried about their ability to sell their products in a competitive marketplace.

And many respondents--and I think this was the thing that resonated across all of us--they voiced concerns about the current path being unsustainable. In a sense, something like this: I know how to protect myself. I’m not sure the system can stand me protecting myself that much longer, but I don’t know what else to do but protect myself.

So what are--why are the market respondents so pessimistic? What we tried to do was identify some barriers to efficient health care systems, and I’m going to talk about four, and they really are sort of of two types. The first type is what I will call facts on the ground, and the second type, the second two, are more like behavioral realities that affect other elements of competitive potential. And here’s my one high-tech device. Roland showed me how to do whatever that is.


Len Nichols: Provider market power. And this, in my view, is perhaps the most important barrier. And what provider market power is really about is it stems from the absence of effective substitutes. The vision of managed competition, if you remember, was that excess capacity among providers and manifestly efficient practice styles would provide leverage to health plans as the employer’s agent, and that leverage would be used over providers to force them to be more efficient and to set up different kinds of plans among which people chose. People would choose the most efficient, and everyone would then have to adopt the most efficient style.

But it turns out a few things happened on the way to Nirvana here. One, people didn’t like the idea of switching physicians. And they didn’t like the idea of being told they couldn’t go to hospitals or shouldn’t go to hospitals that their doctors told them they should go to. So this fundamental sort of allegiance to providers became an early kind of impediment.

Early in managed care’s manifestations and spread across the country, of course, they did have the upper hand, and providers responded. They reduced excess capacity with some alacrity, and that tended to turn the balance of power back toward providers, and then, of course, there was a fair bit of consolidation among providers, which enhanced their market power.

And then, I think it’s fair to say, the sort of upshot of all of the consumer preference manifestations, at the end of the day, a large firm with a broad set of heterogeneous workers collectively want very broad networks. And if that’s true for a lot of different firms, and it’s true for a lot of different work forces, then, ultimately, the withdrawal of support for selective contracting took the main tool away from managed care they could use.

And this market power among providers has been strong enough in some instances to explicitly negate contractual arrangements that might improve efficiency, like tiered networks, and we’ll talk about that as we go on today.

The second barrier to efficient health care systems is an absence of efficient delivery systems. Let’s go back and remember that in many ways, the vision for a more efficient system depended upon these integrated delivery systems. They were widely seen as the best device for improving efficiency. The idea was one system would be completely independent of another. There would be no overlapping, and the best system would win.

It turned out, of course, these are expensive and difficult to develop. The cost of integration, care coordination, information infrastructures are very high, and it turns out the basic building blocks weren’t present in a lot of our country. Multispecialty groups are nonexistent in many communities, and it’s very difficult to respond, to create an integrated delivery system in response to a new entrance health plan’s vision if there is not already a base of large, multispecialty groups who are comfortable bearing risks, frankly, and health plans built on that delegation business model.

So without multispecialty groups, the potential to implement payment incentives for economizing on global resource use is severely limited, and of course, providers who weren’t part of the multispecialty groups didn’t exactly enjoy the loss of autonomy. Examples of this integrated delivery system do exist around the country, but they appear to be quite difficult to replicate.

The third barrier I want to talk about, and now, we’re moving into the realm of behavioral realities, employers failed to demand efficiency. Now, failure is kind of a loaded word, and I think it’s difficult and maybe even impossible to sort out the full calibration between absence of will and an absence of power. But what is cle ar, when the going got tough, many employers retreated from demanding efficiency through tightly-managed networks. And if you read Alan Enthoven’s comment on this article, you will see just exactly how angry that failure has made some people.

Employers quickly retreated from managed care when workers complained. Now, remember, labor markets did get tight, and I don’t mean in any way to say employers made the wrong tactical short run decision. Keeping a worker happy and working for you in a time of high profitability may very well have been a smarter move than continuing to hold the line and make them unhappy and force efficiency down their throats.

Bottom line is, people don’t like efficiency in some ways, and that’s a shock to economists to hear these things.


Len Nichols: But it turns out it may be reality.

Most employers never really implemented the key tools, and this is Enthoven’s legitimate complaint. Many employers don’t have choices of plans; extremely few actually implemented the defined contribution, which would put the real marginal cost of a higher cost plan on the employee. And probably the path to efficiency was impeded by an absolute absence of comparative price and quality information.

Consumers felt the networks that were being thrust upon them were based solely on cost and not on quality, and they reacted to that. And, of course, it’s not the employer’s fault. The proportional tax preference through our system was never changed, so the degree of subsidization of expensive plans was the same as for less expensive plans, and so, the Government didn’t exactly help make the incentive stronger here.

But we also noticed a decline in local leadership, and this could be partly due to an increase in mergers and a lack of--people care the most, apparently, employers care the most about where their home base is, and where they are a satellite, they don’t tend to get involved. But also, there were some early failures in employer coalition and engagement in various quality and purchasing cooperative arrangements, which may have reduced cooperation.

The interesting thing about recently, as the labor market began to soften, and as we finished our site visits, it was indeed softening. Employers did not seem to use this increased leverage, if you will, to go back to tightly managed care. They are looking much more at just reducing the actuarial value of plans, either buying down benefits, increasing cost-sharing, but they are not terribly optimistic, as we will talk about a little later, that these sorts of increase cost sharing things are going to work.

Okay; the fourth barrier is insufficient health plan competition. Remember that vigorous health plan competition is a prerequisite for market forces to deliver more efficient health delivery systems within the managed competition vision or within the vision that was dominant in the midnineties.

It turns out these kinds of real health plans face high market entry barrier costs. Network building is expensive. Ask anyone who has tried it in a place where there wasn’t one before. Care management infrastructures, we talked about before, is expensive to build. Establishing a local brand name so that local providers and local employers know who you are, trust you in the same way they trust the incumbent plans, made it much more difficult to enter for managed care plans than was the case for indemnity plans offering all providers and fee-for-service kinds of arrangements.

And I think it’s fair to say the preference for broad networks meant without too much delay, plans essentially became indistinguishable. And when that became true, the competition was essentially over who could get the greatest price discounts. As the balance of power toward providers was improved, from the provider perspective, the ability to get those price discounts essentially dried up, and so, the potential for delivering cost savings evaporated, and the selective contracting tool removal basically made it impossible to continue.

So, as Bob’s paper will talk about, and as Bob will talk about, it turns out we kind of like PPOs, but PPOs don’t manage care. Maybe that’s why we like PPOs.


Len Nichols: So what are the inferences we have from these barriers and this analysis? I would say if you think about the Clinton plan, and I would recommend not doing it too long--


Len Nichols: --but if you think about the Clinton plan, the core was the health plan was the key change agent. It was a manifestation of the managed competition vision. The health plan was going to go off and do the employer’s bidding.

Well, we would observe, based upon the way the world is apparently structured at the moment, health plans cannot be the key change agent. They cannot do what employers and enrollees won’t let them do. They are not the catalytic savior we thought they were 10 years ago.

Provider switching is not popular. You know this. But it’s not even credible unless you have extremely good quality comparative information that’s acceptable both to providers and to the patients. It’s only acceptable to the elites, providers will always undermine it to the patients, and if it’s not acceptable to the patients, it’s not going to work.

Therefore, transparent price-quality competition, the essential core of what was going to drive the system to efficiency through the market forces unleashed by managed competition, is not occurring anywhere. And then, quote, reputation competition, which is essentially what we have now, is notoriously inefficient. So there you are.

Okay; so, what are the prospects for policy responses? It seems clear to us that with the barriers and the inferences we just drew, we have to figure out how to create more effective countervailing power against provider market power than employers and employee patients and their agents, the health plans, turned out to provide. Given that, we’re not optimistic that just a reconfigured managed competition redux is going to do it for us.

Some good ideas will come out of that basic principle, that is, making people pay more for more inefficient systems, and tiered networks offers a tool that could be useful in the long run, but we don’t expect to see a wholesale call for more managed competition. Consumer empowerment means many different things. In many ways, it’s a many-splendored term as consumer-driven health plans are one manifestation of that and maybe the most popular. The notion of the health savings accounts that were in the Medicare bill is part of this as well. And the fundamental notion is, again, to put more decision making power and more incentive in the hands of consumers.

The good news here, it seems to me, is that we may very well get a great deal more demand and maybe even supply of comparative price and quality information. Those systems cannot work without that.

And also, it’s likely we might move a step or two, although I wouldn’t bet we’d go real far, but a step or two toward more efficient financial incentives, toward a better set of incentives. But I have to report most of our employers that we talked to were not optimistic that the high deductible kinds of health plans are going to be their solution. They’re certainly willing to think about them and try them; some of them have done the numbers already and concluded various things. Sally Trude will talk more about that, but I’d say there’s not a lot of optimism at the moment. HSAs may make it better.

Antitrust enforcement, in some ways, if the problem is market power, then, the solution is surely antitrust. We were struck at how many different respondents sort of mused at the end of the interviews, sort of, what happened to antitrust anyway? Where did it go?

And the answer, of course, as our article points out, and as I think Sarah Mathias will talk about later, the FTC actually tried really hard and brought a number of cases. Logically and sort of law professorlike expected to win. And they lost them all early on because judges seemed not to take the notion that nonprofits might actually use their market power to price in a way that was injurious to consumers. Local judges tended to rule that way and, you know, got stuck.

Okay; and it’s also true, the best the FTC can ever do, the best antitrust policy can ever do, is bring out the potential for competition where you are. In some markets, sports fans, it’s going to be hard to get more than two or three hospitals or hospital systems, and in those situations, there’s just not a whole lot you can ever really hope for.

Now, economic regulation has a number of fans. It has the one success story in Maryland. John Colmers can now stand up and take a bow. It does seem to work in Maryland. I’ve noted it’s not for everybody, and I think it’s fair to say that when regulation was mentioned, it was usually negative but resigned, sort of like, what else can we do? This is what we do in this country. Look on page 18 of the paper. There’s this great quote; I won’t read it, but essentially, it says, you know, what we always do is overreact; I’m afraid what we’re going to do is essentially turn back to Government, because we don’t know what else to do, and that’s fundamentally, I would say, the consensus of what we heard.

Okay; so, what are the common threads? Well, as I said, I have no road map to Nirvana. If I did, I’d tell you; we’d all go home and be happy. But we don’t. We didn’t find that. No solution is evident, accepted or expected. I think the pessimism about the potential for government action was stronger than the optimism by far.

But at the same time, there is a clear recognition, and I think that is our main reporting duty here, that market forces alone have limited capacity to transform the system to better achieve our objectives; in other words, market forces need help. If you go back to the theory of managed competition, the notion always was the government sets the rules. We may need a new set of rules to make market forces work to improve us all.

I would also say it’s pretty clear, everybody is in favor of better information. The evidence-based medicine movement is being noticed. It’s taking hold. There’s not a lot of proof out there that a number of things that are being tried: disease management and so forth, are actually going to work, but there’s an awful lot of people trying hard to make them work. Technology assessment, the elites and policy wonks have always been in favor of this. We notice that political leaders sometimes are not.

Comparative quality information is clearly an essential fact if we’re going to achieve any kind of market-based system; again, we may have more stronger forces advocating for that in the future, and that is the hope.

What roles for government? I think it’s certainly out at the moment. But I would say this: essentially, the state of pessimism and the state of worry is so great out there, I would offer, we may be ready to finally have a serious conversation about the roles that government might play in providing the catalytic help to market forces that we think it needs to do so, in a way that we were not really ready to have this conversation in 1993 and 1994, and, frankly, probably won’t be ready in this election year, in 2004, either, to have a serious conversation. But after that, well, stay tuned.

Thank you very much.

Paul Ginsburg: Thank you very much, Len.

I’d like to turn to John Iglehart, who will moderate the first panel.

John Iglehart: Thank you, Paul, and good morning.

As I told Len before we started, this is as close as I was ever going to become to being called Mr. Chairman.


John Iglehart: So, please, in deference--


John Iglehart: I would like to open the discussion by pointing out one of the papers in our issue of the journal that was not part of the HSC package, but I think resonates, at least with me, in terms of Len’s comments, and that’s the paper that Jamie Robinson authored on the fall and rise of Aetna.

I would urge you to read that closely, because obviously, there’s not a lot of enthusiasm, as Len, indeed, reported, a great deal of pessimism in the 12 communities about the potential and likelihood for constructive policy action in the future. But you also have to at least pause and think about private sector and private corporate behavior as well, since, in this case, Aetna’s, obviously, prime loyalty is to its stockholders.

And so, as it decided how, or as Jack Rowe decided how he was going to turn around the Aetna flagship, you can read how he did it and conclude for yourself whether this is broadly in society’s interests, mostly in Aetna’s interests, or where it might come out and go forward.

With that, I would simply like to say that it’s been a great pleasure to work with the folks at HSC, not only on this project but throughout their eight years of existence, and what attracted me so fervently to this center is it’s really the only center in the United States where a group of nationally-respected health services researchers and policy analysts with all of the necessary academic tickets and experience in not only government but in private sector organizations has come together and taken a very hard and close and continuing look at what’s going on at the community level.

And that’s very unusual in the grand scheme of health services research and health policy analysis in the United States. So it was a great pleasure to team with them, as Len mentioned, take their papers through rigorous external peer review but have them come out on the other end in a positive fashion and end up in this issue of the journal.

So with that, I would introduce Sally Trude as our first panelist on this panel talking about employer and health plan perspectives on competition and then move to David Garratt and Bob Hurley and Christy Bell.


Sally Trude: Thank you, Mr. Chairman.


John Iglehart: I like that!

Sally Trude: During the last round, we found that employers were hesitant to make dramatic changes, due to the tight labor market. So when we were going back this last time, we expected really big changes, because here, we saw continued rise in premiums in a loosening labor market. But we didn’t find the dramatic changes.

It turned out the health benefit managers or the employers were still hurting from the managed care backlash, and they just weren’t about to go back to the managed care restrictions or the narrow networks. But it may have helped a little bit to change their focus to the squeaky wheel, and so, now, the focus went away from competing health plans to having the worker pay a little more and especially at the point of service.

So what we saw universally across the communities was a move to increase cost-sharing, higher co-pays, deductibles and some movement to coinsurance. And so, there weren’t really any big benefit redesign. And one way to think about these changes is if you imagine a staircase, and employers are on different parts of the staircase, and if they were at a $5 copay, they moved to $10. If they were at $10, they moved to $20. And they may have added more copays like for emergency room and the like. If they maxed out on the copay, they took the next step over to coinsurance, but there weren’t very many at that point.

So even with the loosening market, the steps were still incremental and no major redesigns of the benefits. Part of that may have been due to the large numbers of layoffs and wage freezes and a not willing to rock the boat for those reasons.

Given that, we also didn’t see--we saw few employers adopt the very well-understood consumer-driven health plans, and I don’t mean that as a joke. When we got there, the health benefit managers really had done their homework and did understand the concept behind the consumer-driven health plans. And those are the ones with the spending accounts.

And their choice to not pursue this was not philosophical bu t really due to the devil in the details. And like I said, they had done their homework; had their consultants do the numbers; and like the largest employers didn’t see savings. There were also concerns that you give a spending account to a healthy worker who has little to no spending in the year, that might actually entice spending. So if you have a healthy work force, you would be a little hesitant.

They didn’t see an advantage to the consumer-driven health plan, because it didn’t have an advantage for taking care of the catastrophic care. And then, in some instances, like in Syracuse, the national vendor didn’t have the clout with the providers to get a good provider discount, like you could get from the Blues, so one of the employers planning to adopt a consumer-driven health plan said, oh, we would lose our savings to paying doctors more. So they sort of put that on hold.

So, then, there were also concerns about the level of education associated with these. So in that sense, tiered networks looked more favorable, because then, the health plans would have to do more of the education and decide about the quality, but employers really weren’t interested in setting that up unless they saw sincere efforts at developing quality information.

So I feel like I’ve let everyone down a bit. I guess Len started it.


Sally Trude: The only place where we saw some hope was in terms of the largest employers were starting to think that maybe they should take on more of the health screening, the wellness programs and customized disease management. So that’s probably what we’re going to go looking for next time.

John Iglehart: Thank you, Sally.


David Garratt: I spent most of my time working with employers in the trenches. Probably 80 percent of it is spent advising employers on what to do with regard to health care strategy from a design perspective, from a cost and funding perspective and from a vendor selection perspective.

I think what’s interesting is that there is a clearly a trend underfoot with regard to changing the way that plan designs are structured. Sally mentioned consumer-directed health plans, and I’ll mention some Mercer statistics. Some of you may be aware that Mercer has an annual health care survey of employer-sponsored health plans, and we released the results at the end of last year. And what we found is that as has been reported in some of the articles that the PPO is by far the dominant health care delivery plan out there. There’s roughly 51 percent of employees enrolled in PPO plans around the country.

What’s interesting is that from consumer-directed plans’ perspective, we now have roughly about 1 percent of the enrolled population in consumer-directed health plans. And John had mentioned Aetna as a case study. Well, Aetna, as of January 1 of this year, has 78 percent of their employees in a consumer-directed health plan.

So I think clearly, there is a message here that employers recognize that they cannot control health care costs by themselves, and I’m a big proponent of what I would call health care consumerism, basically empowering the individual consumer to be able to make educated decisions about what services to have and what doctors to go to.

Now, that is a big challenge, and it is not going to happen overnight, but I think clearly, this is where the movement is headed. What concerns me to some extent is that, you know, employers have been shifting costs to the consumers, and we’re at the point now where if you consider contributions that employees pay and the amount that they pay out of pocket and plan design, cost sharing, they’re looking at roughly about a 40 percent share of the cost.

And I think we’re at the point where that cost shifting has reached a pinnacle where I think employers now are looking at what other things can we do to really control the costs? And I think we have to look at the provider community as sort of the next wave, and this gets back to the comments that some of the folks have made about tiered networks.

We are seeing a lot of activity around the country in terms of, you know, of tiered networks, high performance networks, whatever you want to call them, but basically, it’s looking at how do you drive individuals to go to more efficient providers? And we did a study in Cleveland that showed that there was roughly about a 300 percent variability in provider efficiency, looking at physicians and the way that they practice. And when you start to look at some of those numbers, you come to the conclusion that there is a tremendous amount of waste in the provider side of the cost equation. If we can figure out a way to improve efficiency in the way that health care is delivered, I think that is clearly one of the answers here to controlling health care costs.

But I also think that it’s a complicated problem, and if we avoid engaging the consumer, I mean, that the consumer is ultimately the end user of health care services, we have to figure out a way to better educate them so that they can make the right decisions. And I think that is the point where most employers are today in terms of they’ve pushed costs out enough on their employees. They’re starting to look at disease management programs, and I think, you know, those programs are still somewhat in their infancy. We’re starting to see research coming back that says that there are significant returns on investment that you get from implementing disease management programs.

But I think the problem requires a bunch of different focuses. One has to be on improving provider competition. One has to be on encouraging greater health care consumerism. I think new plan designs that incentivize employees to choose the right providers I think is the key, so it is a very complicated problem. Most of the clients I work with, though, feel that at the end of the day, thinking that the Government is going to step in and be the savior is not the real accurate solution. I think that we’ve got to look at maybe a private sector solution first.

John Iglehart: Thank you, David.

Bob Hurley, Virginia Commonwealth University.

Robert Hurley: Thank you, John.

I told Len earlier this morning that after all of his pessimism, he at least should have concluded by saying that he saved $200 on his car insurance or something like that.


Robert Hurley: But no takers.

I’ve been a senior research consultant on a health plan team for the last two rounds, and I can quickly lay my cards on the table by telling you that I’ve taught a course in managed care to grad students for the past 17 years, and after going on six of the 12 site visits this past round, I’ve decided the time has come to probably sunset this course.


Robert Hurley: I think there’s a widespread and perhaps accurate perception that health plans are having a sharply diminished impact on the health care marketplace, and as my colleagues on the health plan team have reported in a variety of publications, there are several notable developments in the past round that reveal this. Premium increases, of course, as Len has already pointed out, have been increasing, premiums have increased sharply, and there is very little price competition. There was very little price competition evident among the plans when we were in the field in the last round.

The discounts that the plans are extracting from providers have shrunk, and many though not all plans have basically avoided contracting confrontations that might destabilize networks. Member migration to broad network limited management products like PPOs has continued apace. Almost no one was actively selling the traditional HMO product when we were in the field in the last round, and a number of plans have largely shelved this product altogether. The only real exception to this is in the Medicaid market, which has been well-detailed in an article by Debbie Draper in this Health Affairs issue.

The plans are indeed experimenting with mechanisms like tiered net works and performance-based incentive compensation to try to recover some traction in provider negotiations, but these experiences, at least when we’ve been in the field, still seem largely tokenistic and generally unproven thusfar. So again, more experience with them may lead to a different prognosis.

There has been considerable investment in disease and intensive case management initiatives, but participation in these programs is very small. While some large employers appear to be enthusiastic about these programs, most of them remain tepid and skeptical about the cost-saving potential associated with them. And, of course, as was just pointed out, the search for credible return on investment in these programs continues in most quarters.

Certainly, the most pervasive trend that we observed from the health plan perspective has already been commented upon: the collaboration between plans and employers to engineer more cost participation between consumers or by consumers and employees. And these range all the way, I think, from a spectrum that includes expanding tier drug copays on to the full-blown consumer-directed product designs.

We characterize this as managed care under new management, but in many respects, this trend seems to be as much the product of desperation as inspiration. In fairness, however, I think it’s simply too soon to say how this will affect use and cost and market dynamics over the longer term, since we’re all going through a learning experience right now in terms of what it means to have to place valuation on the care that we’re consuming and the money that we’re spending.

There was some competitive maneuvering among plans on the reduction of administrative burden and improved customer service through the enhanced use of technology, though generally, this probably doesn’t gain new business as much as it prevents its loss, and ultimately, it can lead to lower plan administrative costs, which I think will be the case over the longer term.

But perhaps the most notable development on the health plan side hasn’t been mentioned yet; I think it’s not really a sign of competition at all but an indication of its decline: the growing dominance of the Blues plans relative to their competition in our markets. In eight of our 12 markets, the Blues plans are the market leader, and in two of the other markets, Orange County and Seattle, they would be if the Blue Cross and Blue Shield plans were not separate.

This leadership is largely uncontested in five of our 12 markets. In the four small markets that we have, the Blues have clear and far and away clear leadership. The Blues have strengthened in their position and expanded market share in virtually every market, in part because they have the strongest PPO product; they possess the broadest networks and best provider contracting terms; and they have the Blue Card advantage, about which we heard a great deal in this round, that bolsters their ability to attract multimarket accounts more effectively than ever before.

This means that many Blues plans gain subscribers and negotiating leverage each time another Blue plan lands a multimarket account. As the Blues plans and the Blue Card access reaches 85 to 90 million persons, we really are seeing being put in place one sure antidote to provider monopolies and cartels: monopsonist power, a further indication that our expectations for market dynamics need to be reconsidered.

But one should also recognize that, as was pointed out to us by many observers, the Blues in a number of markets really are not managed care companies as much as they are discount management firms. This means their ability to deliver value hinges almost entirely on the discounts that they deliver relative to the competition.

And I think, in conclusion, this minimalist view of contemporary managed care typifies the evolution we’ve observed over the last several years and tried to discount in what we’ve written.

Thank you.

John Iglehart: Thank you, Bob.

Last panelist, not least, of course, Christy Bell from Horizon Blues.

Christy Bell: Thank you, Mr. Chairman.

I’m not sure whether I feel better or worse, Bob.


Christy Bell: As one of those plans, we’re not quite--you know, we have, along with Aetna, probably the largest concentration in New Jersey, and actually, as senior VP, I head up the market development, which means I have most of the hospitals, all of the physicians, most of the ancillary providers angry at me at any given point in time, and I can appreciate a lot of the comments made previously.

I have to agree with virtually everything written in the paper, which is probably a good thing, since I think I recognize some of the quotes in there.


Christy Bell: And I can’t disagree with it. But I think I see a slightly different environment out there right now. Clearly, in the late nineties, we moved away from managed care. It was very popular to bash managed care, and we moved away from it. This was stimulated, in part, by attorneys; to a great extent, by the media, by the legislators. In New Jersey, one legislator commented that I love you; you’re doing a lot of great things for us; in fact, you cover me, but I can’t say enough bad things about you because the more negative things I say, the more campaign contributions and votes I get. And I think that typified where managed care was.

We haven’t redefined or redesignated the term HMO yet, but we are trying desperately not to be called HMOs any longer.

But the problem with that is we moved away from managed care, and we moved into a void, a vacuum. Really, we weren’t moving towards anything; we weren’t moving towards a better idea; consumer-directed health care was unheard of then. It’s still untested now. PPOs were able to negotiate fairly good discounts; in fact, could be more efficient than some of the managed care plans. And when you combine that with benefit buy-downs that the employers were doing, large deductibles and copayments, in fact, you could bring the cost almost underneath a well-run HMO.

So we moved towards PPOs, but they didn’t hold much promise to change the direction of cost or the trend of cost. They weren’t able to manage the care. And I think we’ve seen the double-digit rate increases that have, in some sense, paralyzed a lot of employers out there as a result of the PPOs. They are very popular. They don’t manage care nearly as much, and that makes them popular, but they don’t control costs, and that doesn’t offer a solution for employers.

So we’ve really moved away from tightly managed care, but we haven’t moved towards anything yet. The consumer-directed health care, some early signs are positive, but it appears moreso that there is a lot of favorable selection going on, and it doesn’t take a genius to figure out that if you’re building an account at an employer’s expense, if you delay elective surgery for a year or two if you can, you let the employer pay for it and not you, and that makes a lot of sense to defer elective surgery, so that may help with their risk selection as well.

So we’ve got to find something that fills the void. Employers are very frustrated. They’re looking for solutions. Consumers are even more frustrated. They’re bearing the cost implications; in fact, consumers are not so unhappy with some of their old HMOs now. The regulators are frustrated, because a lot of pressure is falling on them, and politicians are concerned, because people are actually starting to look to them for solutions, and that’s never been a strong point.


Christy Bell: So there’s really nothing with clear appeal out there, and there’s no clear direction that we’re moving. We can look to government for solutions, but I think if you look at the history of Medicare, and since 1967, and Medicaid since that time, the Federal employees’ plan, VA, they’re all good programs; they’re all very stable, reasonably stable; they don’t make a lot of people happy; the doctors are very unhappy with Medicar e right now in terms of reimbursement. The health plans were unhappy with Medicare until very recently, especially around the Medicare risk products.

So there’s a lot of ups and downs, but generally, they offer reasonable stability, and they’re reasonably fair. But on the other hand, none of those programs have really set out to improve quality, even though they’ve had a full control of the rules; they’ve been able to set the incentives; they’ve been able to set the rewards, the penalties, the rules; we really haven’t seen Medicare and Medicaid drive positive change in health care, and I think with 40 years of opportunity, it tells us we shouldn’t be looking to the Federal Government for solutions right now based on that track record.

But what is true out there is the frustration with consumers and employers is very real. And frankly, in the small employer market, they really don’t care much about quality or cost or even network size as much as they do about cost. The quality-cost equation, they care about the cost, what’s the bottom line to them, and the small and mid-size employers will do a lot to drive their employees if you can give them something acceptable for those employees.

And, you know, I think all of us are struggling with the solution. So I have to agree with the statement that what we’re looking for is a broad-based solution, and market forces do need help in intervention. And I do think it’s time to begin that dialogue around what we can do, and I think there are some very positive roles for the Federal Government that we need to look at, and we need to encourage that dialogue among the various forces.

We can agree right now that we are in a place and time where large networks are important. That also gives a lot of leverage to the providers. In fact, even as a plan with almost a third of the market share in New Jersey, we do have providers come to us and say this is the rate you will pay us next year; it will be a 15 percent increase next year and 12 percent the year after that, and you can take it or leave it, because we have 60 or 70 or 80 percent of the births in this geography, and without us, you don’t have a network, and you don’t have members.

So we feel the stress of that. Now, if we feel the stress of that with 30-plus percent market share, consider the smaller payers and the leverage that they lack, and frankly, the same hospitals and others are telling us that they’re getting bigger increases, and they’re not even fighting. They don’t even have the chance to fight.

So it appears that the broad networks are here, but we do need some, I think, market reform to keep the playing field somewhat level for all of us, and I’m speaking as one who has probably more clout in the market than most. I probably shouldn’t say that, should I?

But I think what we can agree on is that we need to move in the direction of uniform quality information available to consumers. We think that this is something that a number of plans, Pacificare, a number of the plans in New England; Aetna is beginning; United; we’re doing it, we’re trying to make quality data available. Quality data exists around the hospitals right now. It is a little uneven. We need to work on that quality data, but there are four or five places that can get fairly uniform and consistently reasonably good quality data, and this is a case where we shouldn’t let perfect get in the way of progress.

But what we lack is physician data going along with that. We can tell you the best cardiac centers to do cardiac cavage surgery, but we can’t tell you which doctors are getting those good results. And as you look deeper, and as you separate some of the data out with the hospitals, you find extraordinary variation among the 12 cardiac surgeons who, in the aggregate, are getting very good results but not uniformly.

We need that quality data available for both hospitals and doctors, and we need a public-private partnership, including the regulators and the politicians but most importantly the media to say that it’s okay to look at this quality data, and we’re working on getting it to be meaningful, accurate, reasonably accurate. But people should look at this. That’s what’s going to make a difference, when people can believe the quality data that’s out there, and we find that there’s a bit of an anomaly. People say, well, only 5 percent of the consumers actually go online and look at this quality data. Well, that’s true, but only 6 percent of consumers are hospitalized each year on average in an employed population.

So it may be that the greater the disease, the more likelihood people are going to go online and learn about it. And as my brother, the doctor, tells me, one of the things that he is very nervous about is when patients come in with reams of Internet data, because it means they know more about the disease than he does.


Christy Bell: And people will go online; in fact, health care is the second most visited site, after pornography, in America.


Christy Bell: Not sure what that says about us either.

So quality data is first and foremost, and we have to cover the media because the media has to make it acceptable to look at it, and we need to tackle another problem with quality data and which is around efficiency data. There is extraordinary variation in efficiency out there, but consumers and regulators, politicians and many others don’t necessarily agree what those differences mean. And the public still believes the more costs, the better, often, it is in health care. And if it costs less, I’m not getting something I’m entitled to.

And we see often, because we pay for a lot of clinical and medical errors out there, that the higher the costs, the worse the quality. And that is not something generally accepted in the American public, and we need to change that dynamic as well.

We also, I think, can agree that we need to move to evidence-based medicine. I think AHIP, the new health plan association, combination of AHAP and HIAA, strongly endorses this. Together, they cover about 200 million people. And we need to drive to evidence-based medicine. Americans get about 55 percent of the preventive services they should get; about 30 percent of the care is contraindicated on an inpatient setting, and that should disturb people. I’m not sure it does, but it should disturb people.

So we really need to find those doctors. We need to create not cookbook medicine but guidelines that should be followed, and we should not only encourage it, but we should publish those physicians and clinicians who are able to follow those guidelines and get good results and understand the efficiency quotient.

We need more comparative research done, and this is something the FDA and the Federal Government can take on, around prescription drugs; their efficacy. We’ve seen recently something that will actually have a chilling effect, I believe, on this research around Pfizer with Lipitor, BMS with Pravacol, where BMS funded the study and came out the loser. Their stock went down; Pfizer’s went up. But on the other hand, it demonstrated that there were significant differences in the clinical outcomes, and that wasn’t known. And with cholesterol and statins being the most widely-prescribed drugs in America, we ought to know what works for Americans and what doesn’t work, and we shouldn’t wait 5 or 7 or 10 years, in fact, to learn that. We should know that up front, and we should have the doctors prescribing based upon the best information available.

This also applies to the devices, and we see extraordinary costs with medical devices coming in. One thing we know a new device will be is expensive. We don’t necessarily know that it will improve clinical outcomes, and we certainly know it won’t do it at a lower overall cost. And that goes for therapies as well, and one of the great examples of therapies I would point to today is bariatric surgery, where there is a wide controversy, in part because of the significant risks associated wit h bariatric surgery but also because we’re not sure of the outcomes, and several insurers--and I’ll avoid the names, because we don’t want to go after them, because they may be correct--but several insurers have already said that they are not sure that this is an efficacious form of therapy for Americans, and they’re not going to cover it, so that we shouldn’t be guessing about that.

As a health plan, I would revel in a uniform national policy around investigational procedures, experimental procedures and clinically-proven procedures, and I will be the first to say that we will cover all of those things that are clinically-proven. We need help with investigational and experimental, because we are often forced to cover those because of trial lawyers and the media, who wants to hold up some therapy that may never have been done before but is someone’s only hope. Well, at several hundred thousand dollars, that may not be good public policy, but I would welcome the opportunity to cover everything that is efficacious for patients, and maybe we ought to do that uniformly in a combination of academic medical centers and manufacturers and others along with the Federal Government and really consolidate that information so we can uniformly understand what should be covered and what shouldn’t.

That way, we still have the medical miracles that go on that we want to see and the innovations and breakthroughs, which are great, but we have a more systematic way of approaching them and a more, I think, appropriate way, balanced way of paying for them.

So we need to find out what will help us be more efficient and more effective. We need, I think, to drive in that direction. I think employers are absolutely willing to move in that direction. If you recently read, General Motors now believes their cost of retiree health care is a $60 billion nut that they have to carry with them with every car that they manufacture in the future. They can’t afford that any longer, and they’re not alone. I think retiree health is a huge burden for a lot of companies.

They’re ready for innovative solutions. And I think those innovative solutions are not necessarily return to managed care, as we knew it, but I think to level the playing field, to establish a better dialogue nationally among government, the private sector, the provider community with what can be done and be done, I think, reasonably well, we need to, then, look for more evidence-based medicine, more uniformity in terms of the new policies and procedures that are out there, because we have to drive efficiency and effectiveness, effectiveness first. Good clinical outcomes cost less. We need to drive that. We need to drive more patients and members towards places that achieve those. We have to get more uniform agreement with that around the American public around what is efficiency and is it good or bad.

And I think, then, we can move the ball on the cost crisis, because we can cover more people if we have more efficient and more effective care, and we know where that is, then, we can begin to tackle the nut of the 44 million Americans without insurance, because there is, I think, more money available in the system to do that. So it seems like a rational approach; let’s get to efficiency and effectiveness first, and then, I think we can broaden the coverage for all of us.

So I think I’m actually optimistic, not pessimistic, but we are right now looking at a huge void out there, and we need to fill that void.

So, John, let me turn it back to you.

John Iglehart: Thank you.

Christy, how much driving does Horizon do today with one-third of the market share in New Jersey?

Christy Bell: Well, there are some people from New Jersey here that, in the last several months, you can witness that we’ve been in a position, actually, to stand up to several hospitals that we thought were asking for exorbitant increases and I think took some very significant heat publicly for that, paper, press, et cetera.

And so, it’s hard to stand up, even at our size, and likewise, the smaller ones have been rolling over. So it’s not what I would necessarily say a level playing field. I think that by demanding larger networks, more open access products, we’ve actually seen a balance of power shift back to the providers, and I would say with someone our size, it may be a level playing field. The two behemoths can go at each other, and there’s no winners or losers.

But for smaller plans, clearly, they don’t have that luxury, and they’re being steamrolled.

John Iglehart: What was the end result of your standing up to these hospitals?

Christy Bell: I think by court-appointed mediation, I’m not exactly allowed to divulge the specifics.

John Iglehart: But they’re still in your network.

Christy Bell: They are still in our network. We resolved one fairly amiably, and the other went through court-appointed mediation, we got resolved. And we’re not, I would say Horizon is not unhappy in either situation that we’ve been able to balance the needs of consumers and the hospital’s needs to increase costs.

But like I said, with our market share, we could get that balance. Anyone smaller than us doesn’t seem to be able to do that.

John Iglehart: Thank you.

I will give the panelists a chance to respond to their fellow panelists’ comments before we turn to your questions and comments, but I would ask them to be brief.

Len, we’ll start with you if you have any thoughts you’d like to add.

Len Nichols: I was just glad to hear Christy basically agree with--and David, too, and I mean, I’m always impressed with Bob. I left you the joke, Bob, because you thought of it. I thought you deserved it.


Len Nichols: I think that was fair.

But I guess what I would probe on both David and Christy is I heard everything you say; I think I agree with most of what you said; why are you optimistic?


Len Nichols: We need to be optimistic in this town, so help us.

Christy Bell: I’m optimistic because people are looking for solutions. I’m optimistic because employers are actually having the dialogue around quality and cost initiatives. You look at Leapfrog, and you look at other coalitions who have employers, they’re looking at the right things, and I believe they’re willing to back up those right things by shifting the employees in the direction of those plans that can produce that information.

I think it has become politically acceptable for them, because we don’t--we’re not calling it HMOs any longer, so it’s kind of managed care lite is now acceptable. Employers are also looking at shifting towards smaller networks and tiered networks. Those haven’t proven beneficial yet. They don’t seem to be winners in the marketplace, and I think the Boston situation, where partners said we’re not playing, made it clear that certain providers can just opt out, and I think Blue Shield of California has 85 percent of all their hospitals in their preferred tier now, some through leveraged force and others through concessions by the hospitals, but everyone is ending up in that tiered. So tiered networks don’t seem to be working.

But right now, no one can stand 10 to 15 percent rate increase, and they are frankly looking for solutions. Medicaid cannot stand huge increases. They are actually allowing us more flexibility in New Jersey to do things with formularies and other aspects of Medicaid we had not been heretofore able to do, and in fact, we have more flexibility with Medicaid in New Jersey to introduce drug formularies and tighten policies than we do with our small employer market, which is heavily-regulated in New Jersey, and formularies are banned from those markets.

So there’s some interesting dichotomies going on. So I do remain optimistic.

Sally Trude: One of the distinctions I think we need to remember when we talk about consumer information is whether or not there is someone like a health plan to coordinate the data versus the concept of the consumers will somehow f ind it out by digging for it on the Website, because I think without plans or some other entity, we aren’t going to get that cost-quality transparency.

Christy Bell: Let me add to that one very important role in a public-private partnership: the last place consumers want to go for information is the health plans themselves. So we are looking for independent validation, whether it be CBEMO or Health Grades or someone like that, where the data can be aggregated, and it’s not our data. We’ll put ours in. We’ll make all that data available, but it needs to be independent, because if it’s ours, it’s suspect, and it’s very important, and that’s a place where we can cooperate and I think create meaningful data.

David Garratt: I’m optimistic, Len, because I tend to be optimistic to begin with. The other thing is that I think this issue has gotten to the point where it is now a C suite issue with a lot of employers. So what is happening is a lot of the CEOs, chief financial officers, are really taking an active interest in trying to make the right decisions to deal with health care costs.

I think three or four years ago, it was still an HR issue, and HR people generally don’t tend to want to rock the boat. I think now, we’re seeing a lot more innovation. We’re seeing a lot more employers look at their alternatives, make some tough decisions, and, you know, I think that we’re moving in the right direction.

Robert Hurley: I guess the one question I’d sort of raise would be with our real world people would be I think from the plan standpoint, there’s been a sense that they, I think Len characterized this, they’ve been sort of left out there on the ledge by themselves in terms of the employers sort of gave them a difficult job to do, gave them a handshake and sent them out into the marketplace and then sort of left them.

The remarks I’ve heard this morning seem pretty generous to the employers in terms of their level of engagement or attention, and I just wondered if our health plan, our benefits consulting person would like to respond in any way to that.

Christy Bell: I would actually, Bob, I would agree with that. I think we were a little abandoned by the employers. They wanted to move away from the HMOs, and they were very happy with the PPOs, managed care lite. I think they are coming back now and realizing that it’s not going to work that way, and they’re going to have to make some tough decisions. And the economics are such that some of those companies are threatened. They can’t go forward where they are; they don’t want to go all the way back to managed care, so they’re desperately looking for something in between that gets them a little more choice and a little more rationality, and they’re willing to take some pain to do that.

David Garratt: Yes; I mean, I would just--my comment, again, about this has now become a C suite issue, the other thing that I failed to mention earlier is that the health savings account legislation, I think, is very interesting to a lot of employers. In fact, you know, I can see a lot of employers jumping into health savings accounts beginning January 1, 2005, not that that’s going to be a solution, but again, that gets us more along this continuum of getting more engaged consumers in the delivery process.

John Iglehart: Thank you.

Paul Ginsburg: John?

John Iglehart: Go ahead.

Paul Ginsburg: Yes, I’ve got a question for David Garratt. You know, in our work this round, we saw in I guess at least half of the sites, there were tiered hospital network products available. And that looked impressive, but then, what was very unimpressive is the low takeup by employers when those products existed, that often, the health plan would show that it’s really at the forefront, but very few employers would take it up.

And I was wondering if you could help us understand that phenomenon, David.

David Garratt: Well, I think the whole tiered network concept is--it’s relatively new. I think the issue has been, you know, do you tier at the hospital side, or do you tier at the physician side? And I tend to believe that it’s easier to tier at the physician side. Physicians control 70 percent of health care expense, and I think with employees, it’s a lot more difficult for them to make decisions based on going to hospital A or hospital B.

I think if you give them the information about which physicians to go to, and those physicians will then, ideally, direct you to the hospitals, I think that’s a better way to go, and we’re seeing a lot more interest now in these high performance networks that are focused more on the physician side and looking at physician efficiency levels than we are on the hospital side.

Paul Ginsburg: Isn’t that limited by the data on physician quality?

David Garratt: Yes; I mean, I think that gets back to some of the earlier comments. I think one of the things that the Government can do is provide some kind of standard requirements or guidelines on providing quality and cost information. I think, for example, in the State of Ohio, the only data that we can get right now is Medicare data. We can’t get any commercial data on quality and cost information.

So I think there is a good example, and whether it’s done at the state level or the Federal level, I think we have to provide some way of getting more information out in the public domain.

John Iglehart: It’s now your opportunity to ask questions or make comments. I have plenty of questions. That’s what journalists do, ask questions. But I’d rather have you engaged here. So there are microphones; if you have questions, please identify yourself and your organization and ask.

While you’re getting there, I’ll ask David a question. How did Aetna get 78 percent of its employees in consumer-driven health plans? Is that all they offer?


David Garratt: Well, that’s a good question. They do have a vested interest, since they do have the Aetna Health Fund, but I think what we’re finding is that in general, we’ve had two or three years now of consumer-directed health plans being in existence, and what we’ve found is that over that two or three year time period, the number of people who are enrolling in those plans, if they’ve been offered for a couple of years, is increasing significantly.

So I think that, you know, Aetna has clearly a vested interest in pursuing their health fund product, but I think it’s also an indication that employees have accepted it.

John Iglehart: Yes, sir?

Tom Miller: Tom Miller, Joint Economic Committee.

Len, I’m looking forward to your next paper and conference, which should be titled, can government regulation and increased subsidies for third-party payment cure our ailing health care system? Although I gather we did most of the work on that back in 1993 and 1994, but it would be good to revive it one more time.

Particularly since there’s credible evidence, not yet in the literature, but in Congressional testimony that the net burden of Government health services regulation is about $125 billion to $130 billion a year, but let me ask about kind of the general taste of some of the panelists for declaring an early crib death for consumer empowerment or consumer-directed care.

We have about roughly 25 to 30 years of trying HMOs before we got tired of them. We’ve got about 40 years with Medicare and Medicaid. We’ve got about 60 years with the employer-sponsored health system. We’ve got maybe two or three years of fledgling steps toward consumer-driven health care, and we’ve declared it’s a failure, at least some panelists.

Could we have a little discussion about what might be the next stage of that type of consumer-driven care? There have been hints of it from some of the other folks, which would involve ways to integrate what might be a managed care lite on the upper end catastrophic coverage side and perhaps taking advantage of the joint employee-employer funding, which is available for HSAs but not HRAs, to deal with, in effect, the wrong subsidy for healthy people and, in addition to that, some freedom for employers if they so wish to give selective subsidies for folks who, in effect, need more, but they’re prohibited by current rules to do that in a straightforward defined contribution.

Len Nichols: Well, Tom, I would remind you that I said this idea is on the ascendancy. I think in many ways, you’re right, that we’ve tried everything else. It reminds me of Winston Churchill’s comment about Americans: you can always count on Americans to do the right thing after they’ve tried everything else.

Well, you know, this is the last arrow in the quiver; I’ll give you that. There’s no question about that. What I was reporting, though, was a little bit less than the initial characterization there. What I was saying was employers that we talked to were pessimistic that the kinds of devices that were on their table when we were there were going to be wildly successful. I think the HSA is a different animal. It was not on the table when we were there. As Joe talked about, there’s a lot of interest at the C suite level; I haven’t heard that term before, but I now think I understand it; in trying to make some bold moves, but I think there’s a long history as well of states offering bare-bones products that didn’t seem to be attractive, so there’s a real question about whether we can move from a world where we pay $10, $20 copays to a world of $1,000; $1,500; $2,000 deductibles; whether we’ll take that as a nation.

Sally Trude: And I guess I didn’t mean--my negativity probably reflected the respondents, and that was just that I guess the point I would like to make is that a lot of their concerns were very specific to the implementation of current products. And like tiered networks, there creates problems for some national employees, whereas the consumer-directed health plan with the spending account is more appealing to a national employer.

So I think what we will find is that there won’t be one solution that fits every single employer, because they have such specific needs for their particular work force.

David Garratt: Yes; I think consumer-directed health plans, I think, they aren’t the answer to the overall health care problem. I think what they do address is discretionary spending, and if you look at some of the results that have come back from employers that have had the plans for a couple of years, they’re showing significant improvements in generic drug usage; less physician office visits; more use of nurse help lines.

So I think we’re starting to see some improvement. I think where consumer-directed plans don’t necessarily help is with the large ticket items, and I think that’s where you get back to disease management, utilization management kinds of programs.

Robert Hurley: I guess I would just point out, since we did probe on this in 2000, around three visits and then again on the round four, clearly, the thing that I think was one of the notable developments was that the mainstream managed care plans had added this to their product portfolio in a way that they hadn’t done two years earlier. At that time, it was still the kind of freestanding, as people called them, the turbocharged TPAs that were out there launching them.

So I think that’s notable. I think the other thing that is interesting and will be worth pursuing in this next round is the degree to which many health plans have developed a more finely-graded range of product options, of customization. I think that we’ve made reference in a few of the things that we’ve published to Anthem By Design, but that happens to be their version of what other companies have done as well, where you could actually see this spectrum or this array of products where this CDHP fits in at one extreme, and the migration is a little more fluid than it has been in the past, so operationally, I think the plans are better-positioned to be able to go down that road.

Whether it leads to a kind of dialectic consumerism or not, I don’t know, but I think that we clearly see the plans more engaged in this than they’ve ever been before.

Christy Bell: Dialectic consumerism? Okay; I like that. That’s good.

I think I agree with that. A couple of things from the insurance perspective, Tom. One is I think there’s unanimity around all of us agree that we need to take more responsibility around our own health, and whether that’s plans that are offering disease management programs, you know, obviously, obesity is a national crisis; we need to do more and be more responsible around our own health issues.

I think the problem with the consumer-directed plans, right now, in terms of ramping up and really taking off is we need the tools; we need to develop the tools that consumers can use, and I’m not sure we have the tools. And I’m not sure consumers are really comfortable utilizing them yet in terms of what the data is out there saying, and I think that will evolve over time.

So I think that will improve; the tools will improve, and their acceptance of the tools, consumers’ acceptance will improve, and that will make consumer-directed health care, I think, have potential to take off.

The other issue is that there’s--Aetna and others are now getting involved, where it was the early adopters were out there, and the turbocharged TPAs, there were few early plans. They didn’t have good network discounts. So when you look at the plans that were doing it initially with, say, 80 percent of charges, and now, you have plans at 40, 50, 60 percent of charges doing it, I think when the Aetnas and the Blues and others develop their consumer-directed plans and refine them and then combine them and find a way to effectively combine them with the disease management programs, then, I think that we may have a winner there, and I think that has a lot of potential.

Jim Cantwell: Hi, I’m Jim Cantwell, a budget analyst with the House Budget Committee.

Years ago, I would have introduced myself as a health economist, but then, I came to work for government, and so, I’m a budget analyst.


Jim Cantwell: And so, my question, I guess, comes about because of these distant memories as a health economist that markets should matter, and prices should matter. And therefore, my question, based on my training years and years ago as a health economist, it’s basically, should markets matter, and should we try to get prices that will matter, particularly for institutional, nongovernment providers. And I’m thinking here about hospitals and other long-term care facilities.

I ask the question because when Mr. Bell talked about getting tough with the hospitals, the thought that came to my mind was, gosh, maybe we’re just shifting these costs to the uninsured and to those with less market power. Is that the kind of world we want?

So my question is should insurers be competing on maybe the service they provide to their insured? To the information they provide to the insured? To their coverage decisions? New products they develop? Or should they be competing by shifting costs to those with maybe no market power, no resources, and just less market power?

I’m thinking of a world where maybe--and I hate to say this--where government might require these providers to present uniform prices to all who come through their door, so, I mean, you might even see a billboard saying St. Mary’s Hospital, room charge, right there on the billboard.

Right now, if you ask what is the price that a hospital charges, there’s an array of prices depending on the market power. So my question to Mr. Bell is, what kind of world should we be moving forward to?

Christy Bell: Boy, okay.


Christy Bell: Actually, we deal with this question quite a bit, and we see the extraordinary variation in the hospital prices, and I share your concern.

Just so you know, we have a fairly standard philosophy is that hospitals shouldn’t lose money in our business, but we do have a public responsibility to try to weed out some egregious inefficiency we may see between those hos pitals, and that presents some consternation. So we’re not trying to get--and nor should we ever ask for--services below cost. It’s how much of the other costs should be shifted to us, or should some hospitals be allowed to be significantly less efficient than others?

And that used to be a regulatory issue, but now, we’re actually, we think, in some respects, doing some of that work in the absence of other regulation. And I don’t have a problem with having a uniform price, frankly, that all of us would pay. You know, I think that it would, I think, set the public straight in terms of what they’re paying for and what it costs, and we could see the efficient and less efficient--the public doesn’t understand what that means, though, right now.

So they see a hospital that charges or needs to get $4,000 a day, and they think they’re getting better care than a hospital that would do the same service for $2,000 a day. So I’m not sure we’re quite there in terms of what it means. But no one should use market clout to get services below cost. I think that’s a disservice. I don’t know if that answers your question but--

John Iglehart: I wonder if perhaps the economists on the panel could also weigh in.

Len Nichols: Well, Jim, it’s interesting how you--when you said sort of God forbid government should require this, you just described Maryland, of course, that indeed, you can do this. It is possible. It does violate certain people’s hair on the back of their neck, but it nevertheless seems to be a system that could work.

I think the broader question, though, is can we move from a system in which, I think a number of people would agree, the vast majority of us would agree, never had prices either transparent or right; can we move from that system to a system in which the prices are somewhat better?

We’re never going to get to Nirvana, and we’re never going to get to actual marginal costs being revealed everywhere to every provider. In general, I think that economic theory would suggest that if you got prices closer to marginal costs, and you allowed price discrimination according to elasticity of demand or market power, welfare is actually enhanced if you do that. If you force one price, you’re not going to get some of the cross-subsidies that happen now to help people who can’t pay.

What’s complicated is when you don’t have the prices revealed to the buyers, then, they all get frustrated with what they’re paying, because they’re not paying the right price, and the wrong incentives are set for resource allocation. And I’m sure these guys can tell you lots of stories about exactly the consequences of that.

So I guess I come down on the side of it’s hard to believe it’s a bad idea to move closer to where prices reflect costs, but I will certainly agree, the theory of the second best would give me caution; we could do worse by not moving all the way, and I think that’s fair to say.

Paul Ginsburg: Yes, I have a comment, Jim, from an economist’s perspective that, you know, in economics 101, we assume that all people in the market are operating efficiently. And I think, you know, realistically, throughout the economy, but especially in health care, we’ve seen evidence that when, say, firms have pressure on their prices that that’s what motivates them to make significant changes and achieve higher quality, more efficiency.

So I would never want to get away from, whether it’s through negotiations with insurers or by a more competitive market with information, that I think everyone needs to be facing pressure on their prices that prices, perhaps, aren’t as much as they think they should be, because I think that’s where real progress gets made.

MR. CANTWELL: I’d like to thank Len for clarifying; perhaps I wasn’t clear. I would not have government set prices. I live in Virginia, not Maryland.


MR. CANTWELL: Let the hospital set their own price, but let it be a single price.

Thank you.

John Iglehart: Yes, ma’am?

Kate Baker Carn: My name is Kate Baker Carn. I’m from Blue Cross and Blue Shield in Massachusetts, and I’m interested if anyone in the panel could talk a little bit about a private and public partnership that has helped another industry besides health care with transparency of pricing and quality of its product.

John Iglehart: Good question. Anybody?

Paul Ginsburg: I mean, I would say that certainly, I mean, certainly in other industries, like take--and often the private sector has done this. Take automobiles. I mean, what Consumer Reports does about product quality, I’m sure has profound impacts on the markets, even if only 10 percent or less of prospective car buyers are reading it, that that’s enough.

So I think there’s certainly--and I think that’s what’s been the problem in health care is that it’s so much more difficult to get meaningful information on quality, both because of the complexity but also because we have allowed the data to stay away from the public.

Christy Bell: I think probably the airlines industry is an example, somewhat of an example of public-private partnership where the safety concerns were so overriding that the airlines have achieved a level of safety that is probably unparalleled. You know, I think that we use the example, or some use the example, in some of the quality coalitions that preventable medical errors kill the equivalent of one or two, I forget which one it is, planeloads of 747 passengers every day, and if a 747 crashed out here every day, someone would finally take notice.

Well, that’s just the preventive medical errors. That’s not even due to the hospital-induced infection rates that are around there that probably have another 50 percent, would add another 50 percent more to those preventable medical errors, so that we haven’t really taken notice of some of the effectiveness issues nationally, and I think we could do a better job of that.

Michael Cannon: Michael Cannon with the Cato Institute.

My question is for Len: there are a lot of us who think that health savings accounts are going to fundamentally change the market for health insurance. They’re going to introduce more market incentives, more price sensitivity. And they haven’t taken hold yet. They weren’t on the table, as has been mentioned, when you went to talk to the people in these communities.

Will you be going back next year, in 2005, and in 2006 and 2007, and asking the same sorts of questions about health savings accounts specifically?

Len Nichols: Yes, yes, yes, no question we’re going back and no question it will be on the table, and as David pointed out, if it’s at the C level of interest, then, we could--we should be able to pick it up when we go back.

David Dranove: Thanks; I’m David Dranove from the Kellogg School. I’ll be a panelist later, but I do want to respond to the really interesting question about whether the government has ever facilitated price transparency.

I think, actually, if you think about markets in which the government has facilitated standardization of products, as a result of that standardization, you have seen price transparency, and a good example would be in the home mortgage market, where there has actually been government regulation requiring that the mortgage rate information be of a certain form, with interest rates and points, without other add-ons, and that, I think, has been very beneficial to consumers.

I’m not advocating government regulation here. But it’s better to give you at least one example than leaving us to think there were none.

John Iglehart: Thank you.

Yes, sir?

Barry Zallon: Hi, I’m Barry Zallon. I’m a medical director at Blue Cross in Massachusetts.

I have a question about our concept of the market here. The patients, I don’t see as consumers with free will in the sense of somebody who goes out and buys a refrigerator. We, as patients, rely on a relationship with a physician. And we don’t think of choosing our rabbi or our pastor or our religion based on market forces. We don ’t look it up in Consumer’s and make a decision or look for information about costs, because it’s an intimate relationship.

And given that I hope we keep the relationship with our doctors an intimate one, then, it means that the patient is never in the driver’s seat, at least not alone, and given that, should our focus on the market be on the physician, not on the patient, and should it be on the relationship between plans and government and the physician and not on the patient?

David Garratt: Let me take a quick shot at that. I mean, I think to some extent, I agree with you, but I think when you deal with elective procedures, I do think patients have some degree of control.

If I know I’m going to have to have knee surgery, I have the ability to pick what specialist I want. Now, my primary care doctor may have somebody that he recommends, but I ought to be able to figure out whether that physician is a good physician and what’s the likely outcome of me being treated by him.

So I think when you’re talking about elective procedures, I think you do have a lot more, you know, an interest from the consumer’s perspective in choosing a physician.

Sally Trude: There’s also a concept of the patient in an emergency situation, but even if you have a coronary problem, there’s probably been a chronic corollary to that. So it seems to me if the disease management phase of things got bolstered, and we had a little bit better tools for chronic care, you hopefully could be looking at the quality information about the doctor you might go to see for the specialty care earlier than once you hit a catastrophe.

John Iglehart: Let me take a question from the blue card here for David Garratt.

How do you define more efficient provider, and what data do you use to make your decision? Should that data be made publicly available?

David Garratt: I think that’s a good question. When we talk about efficiency, we’re really looking at resource consumption, and I think in the past, too much emphasis has been placed on unit cost. And what we’re trying to do now is look more at the episodic cost of treating a particular ailment, so that you’re looking at what’s the cost from the point that that condition is diagnosed to when it is finally treated.

And the one issue that I think is important is that, you know, efficiency by itself doesn’t provide good quality indicators. And so, what we’re looking at now is trying to figure out a way to get more information on quality and outcome, so that we can look at peer efficiency and then marry that with outcomes and quality information. And that’s the kind of data that I think the consumers need to be aware of.

John Iglehart: Thank you.

A question for Bob Hurley: do you agree with the notion advanced by David Garratt that information on physician costs and quality is a solution? And if so, how will we get there, and how long off might that golden age be?


Robert Hurley: Well, I think that there is certainly validity in terms of raising that that is a better locus of information than the hospital for the average consumer, and certainly, in California, if you’re aware of the activities that have gone on out there, there has been much more progress, partly because there’s large medical groups in which aggregation is possible and metering is more meaningful.

I guess I’m a little more--and I guess I would endorse also the notion that episode of care, which I think is pretty much the state-of-the-art today for analytical purposes, is moving ahead. Ultimately, whether or not that really motivates behavior and provides a mechanism for changing behavior, I guess I color myself a little more skeptical of this. I think it is clearly worth pursuing. I think we see some of the market leader plans have embraced this notion of going to these high performance networks that are built around high-performing physicians, but in some respects, it resonates to what we heard about PPOs 10 or 12 years ago, the P in PPOs, preferred, sort of never came into being, and I think we remain to be seen whether or not we turn the corner to be able to produce that.

John Iglehart: Last question?

Dave Crowder: Dave Crowder; I’m a retired surgeon, and when I retired, I had two choices: one, either to be a greeter at Wal-Mart or become a consultant.


Dave Crowder: So I went with the course that took the least training and became a consultant.


Dave Crowder: And I work primarily with Peabody Energy Company and with RAG Coal American, and we kind of stumbled onto a program through trial and error that we started about a year and a half ago, and it’s based on four different parameters. The first is empowerment. And I go out and talk to the miners. We’ve probably got, now, 3,000 miners between--plus their families--between Colorado and Wyoming that probably know more about health care than the average physician as far as health care policy.

The second thing that we really went to immediately was a centers of excellence program, and there’s no all-payer reporting in Colorado or Wyoming. We’ve been trying to get the legislature to go with that. So we have to go through institutional outcomes, and we work with Health Grades as far as that is concerned.

And we know, for instance, that from a cost and quality standpoint that we can send a patient for a microdiskectomy from Gillette, Wyoming, about 300 miles south to Fort Collins, Colorado, and go to a five-star rated institution with about a 2 percent complication rate versus a double-digit complication rate at home, as well as the fact that we save $12,000 off the top just in the difference in cost; rural providers are just--if you think it’s expensive in the city, wait till you go to a rural provider.

One of my mines has about 1,000 employees. We’re self-insured. We’re looking at $14 million in health care costs this year. And this is really work, because one of the things we’ve found is that the good providers also seem to be nicer providers. You really can find excellent people out there that cost less. With the excellent providers, we find that they’re working with companies like Avatar as far as working on their interpersonal relationships as well as just their technical quality. And this has become a self-referral type of thing now.

The other thing is my job with the companies is to act as kind of your friend in the medical business, and our miners and their families can call me if they need help on access and things like that. As a surgeon, I don’t know squat about the big name drugs and stuff, but at least I can try to find them people who do.

And we’ve been doing it a year and a half, and it’s worked neat. What we’re adding now is disease management, and we’re adding prevention. With the mines, it’s a lifelong occupation for these people. Our median age of our miners is 48, with a physique kind of like mine, and what we’re trying to do is to get these people away from cigarettes; work on obesity; work on exercise. Surface mining is really a non-labor-intensive type of occupation. You just crawl in a haul truck and sit and listen to your stereo and sit in your recaro seat.

And it’s something--I really do believe in empowerment. These people want the information. I mean, they come to our dependent meetings, and they want to know about this. And they want more and more information. And I think it’s something that can be done. I think it’s useful. What I’d like to see is a geezer program for old docs like me.


Dave Crowder: Where we take kind of an elder statesman type of thing and teach these physicians to be interface professionals. I learned all these new words when I became a consultant like paradigm and interface.


Dave Crowder: And, you know, when I tell an employee it’s okay to question their doctor, and if their doctor gives them a lot of ego problems that it’s okay; that their ego is more important than the doctor’s ego, that’s more significant than wh en somebody who hasn’t actually been out there does it.

And the other thing I do is if the doc does have an ego problem, since the level of hostility of most surgeons is fairly high, it’s easy for me to handle that and not feel a lot of discomfort.


Dave Crowder: But I think we talk about this stuff a lot, but I think we really need to start applying it.


John Iglehart: We’ll accept that as a constructive and interesting comment, since we’re five minutes over our schedule here, and thank the panelists.


John Iglehart: And take a break until 11:00. Thank you.


Paul Ginsburg: Like the first panel, we have a mix of two researchers and two executives from hospital and physician organizations in the sites. And I’d like to introduce the first speaker, who is Mai Pham, who is a physician, a senior health researcher, at HSC, and a part of the CTS site visit team.


Mai Pham: Since there is so much beating up on providers in the first panel, I thought I would start by offering a summary of what we thought respondents were saying about the provider perspective on the need for more intervention in the health care markets.

And I would start by saying that in general, providers are feeling across the markets negative consequences of instances where competition has gone awry or the needs of providers are not being met through the marketplace, and there, some specific issues come to mind, such as medical malpractice costs and hospital capacity constraints in particular.

But beyond that, I would argue that what we actually saw and heard was a lot more variation across providers on their perspective for the need for intervention, basically divided along lines of haves and have nots, winners and losers. Among hospitals, for example, those that have been more successful in technology arms races, who have managed to grow in markets without much competition, probably would not invite more regulation of investments that they have made recently in specialty services.

And among physicians, those with less market leverage, like primary care physicians in particular, feel very strongly that the system is imbalanced, and they would favor a revision or a second look at the current payment systems, which they think undervalue their particular services, while specialists, in general, who have been very successful, who are much more successful, are taking advantage of the current payment systems and investment opportunities, would favor less intervention.

Which leads into a second theme that we heard about in our site visits, which is the ascendancy of providers’ entrepreneurialism. In particular, we heard a lot about hospitals focusing on specialty service lines, ambulatory surgical centers, either alone or in joint ventures, for example, and particularly in cardiac care, orthopedic care, and physicians increasing their investments in ancillary services: specialty facilities also, alone or with hospitals in joint ventures, and then, in smaller niche services like concierge care, directly retailing medical products or charging new fees for services they had always provided without fees.

So it is competition. It is very active competition but perhaps not necessarily the kind that we want in the marketplace, and I think it is a good demonstration of how providers’ market power derives, in part, from their new focus on marketing directly to consumers, bypassing health plans and employers, and in some cases, inducing demand, which we had heard about a decade ago.

In summary, consumers are not rewarding efficiency, and providers know that, and they respond accordingly. Providers would agree, I think, that they have gained significant leverage over the past few years, hospitals perhaps more so than physician groups, which still tend to be small, the majority of them, because physician markets are diffuse, with the demise or leveling off of multispecialty groups.

In a few markets, like in Orange County, IPAs are still important, and in other markets, too, in very select specialties, such as orthopedics or gastroenterology, cardiac care, but for the most part, physicians are still in small groups.

Hospitals, in contrast, some postconsolidation activities but others, just because they find themselves in geographic or specialty niches within markets, find that they have an easy time marketing themselves to consumers, particularly if they hone specialty service lines like oncology care, cardiac care, and then, plans find it very difficult to exclude any particular one or to make credible promises of significantly increasing patient volume in exclusive contracts.

So how are providers responding to changes in the market? The efforts by employers and plans to move the market along? Well, in terms of extensive patient cost sharing, providers and especially physicians, we found, are wary of any process that requires more effort on their part to collect payments from patients. They already feel that they are being paid neither efficiently nor accurately, and the thought that this might increase their potential bad debt burden is really not appealing, nor is watching staff costs rise, as might be necessary to effectively collect payments.

Proposals for performance, although in theory, providers are very much in favor of these plans, suffer, from a provider’s perspective, from two general deficiencies: one, as was extensively discussed with the last panel, performance measures, especially for clinical quality on the physician side and especially for individual physicians, are still highly imperfect, and secondly, that providers doubt very much that plans and payers will be able to attach meaningful incentives to these programs to make it worth providers’ worthwhile to put up the capital investments necessary to implement some of these quality improvement activities, such as very expensive clinical information systems.

And as an example of the relative value of regulation versus market forces moving providers, I would just talk about briefly hospital patient safety activities, because in that particular case, according to our respondents, there’s been a disappointingly little effect from Leapfrog and other employer-based initiatives on provider behavior. Rather, the patient safety improvement activities that are going on have been in response much moreso to JCAHCO and the Institute of Medicine report, so external forces that are not driven by consumers or payers or plans; you know, it’s the sticks that have worked rather than any particular market carrot that has been dangled out in front of providers, and I think that that’s important to note.

So I think I’ll stop there.

Paul Ginsburg: Thank you, Mai.

Now, we’ll hear from Nancy Auer, who is an emergency physician and an executive at the Swedish Hospital System in Seattle.

Nancy Auer: Actually, I’m happily schizophrenic, because I’m kind of the replete person in that I am a physician; I’m a hospital administrator; and I also sit on the board of an insurance plan. So I kind of have had the opportunity to see what’s happening in my market from many perspectives.

From the hospital perspective, indeed, there has been consolidation in the Seattle market, and there’s a very good reason why, and that is in the late nineties, the insurance plans had most of the power, and they used it quite aggressively with the hospital systems, so that in the year 2000 in the State of Washington, there were only three hospitals that made a profit off of operations. Now, granted, there is inefficiency in markets, and I think that hospitals can do more to be efficient, but there’s something there when only three out of 200 hospitals is making a profit from their operations.

So, when consolidation occurred, a couple of things that did happen in hospitals, one which was good, and it decreased what I would call the arms race. It decreased the number of CT scanners, the number of MRIs, the number of huge capital investments that hospitals had to make. But on the other hand, it gave the hospitals that it consolidated more clout in the marketplace to go against the insurers, so that in a couple of years ago, in Seattle, one large hospital that I’m intimately involved with was able to go to one large insurer, whose first initial is A, and the last initial is A, and just canceled the contract.

And this hit the newspapers, and finally, the insurer blinked. And so, we were able to raise our prices. But what has happened, because in the physicians--the physicians in our marketplace also have had a decrease in real earnings over the past few years. Only last year did they even see a slight increase. But they have started looking around for how they can make more money, so they have come to the conclusion that they see that the hospitals are doing well on facility fees, so they want some of that revenue as well.

So not only are they getting into ancillary businesses or testing such as ultrasound in their outpatient facilities; they’re starting ambulatory care centers and specialty hospitals in our market as well.

Now, I can see how a physician feels threatened if you look at what’s happening, just with overhead, to the physicians in the market, back in 1990, the average practitioner had three support people in their practice. Now, because of the burgeoning paperwork that the physicians have to deal with, they have an average of five support people for every one provider.

So that’s a significant increase in the overhead. So now, they are also buying their MRIs and their PET scanners, so some of the capital investments that you would see a consolidation and an efficiency in the marketplace is starting to be a higher cost driven competition on the part of the physicians with the hospitals.

Now, what has happened with the insurance plans? Well, you see consolidation in that market as well. A lot of the national plans and smaller plans came into the Seattle market when managed care was very attractive. But as that became less attractive, and people didn’t want those products anymore, the smaller plans left the state, and the local market insurers gained dominance. So that now, as one earlier speaker said, the two Blue plans, the Regents Blue Shield and the Premier Blue Cross, are the dominant plans in the marketplace.

So what are the employers doing? Well, the employers have not driven the marketplace very heavily in the Seattle market. They have been somewhat complacent over the years, and I think initially, this was driven by the fact that on the West Coast and in Washington State and the Seattle market in particular, costs across the board have been somewhat less than they have been in other markets.

So the employer base was relatively satisfied with the costs that they were getting, but as costs have escalated, they have become more interested in decreasing those, and they’re looking at different ways to do it. We definitely see the shift from defined benefits to defined contribution in our marketplace, but we’re also seeing one major employer, who I won’t name, but they make airplanes--


Nancy Auer: --who has really gotten on the quality bandwagon, and they’re working as one who is trying to implement the Leapfrog initiative in the Seattle market.

Now, an earlier speaker said that the Leapfrog hadn’t really done anything yet, and I agree with that. It has not so far really shown a big increase in quality initiatives, but you have to remember at least in our marketplace, the time frame for implementing some of the Leapfrog initiatives is out into 2005 and 2006, so it is early to see those kinds of shifts that are beneficial to the marketplace.

Now, as far as I am concerned, I don’t think we are ever going to see significant change or help in the marketplace until we do a couple of things. One is we need to have dramatic change. Right now, we don’t pay for health in our country. We pay for illness. And until we have some kind of shift that develops a health policy that’s more focused on paying for health or paying for quality, we’re going to see a fight over the dollar to see who can pay our--get paid more for taking care of ill patients.

Now, I don’t think we’re going to see sweeping change in our health policy. I do think we’ll see incremental change, and I think that that change for efficiency can be and should be driven by implementing quality initiatives. And Leapfrog is doing this, but you also see it from the CMS standpoint with their introducing the core measure sets.

One problem with any kind of quality measures is how are these measures being performed? We don’t have a very good vocabulary or definitions of how we do our measurements right now. One very good example is a major hospital in the Seattle area, again, one that I’m intimately concerned with, came up very high on the mortality scale.

We looked at our mortality data and were very puzzled by it. And then, what we realized was we didn’t have a quality problem; we had a documentation problem. And we really weren’t documenting the acuity and severity of the patients we were taking care of. When we corrected our documentation problem, we corrected our mortality problem. So that’s just one example of how we need to be very careful of what we’re measuring.

Furthermore, the public, so far, is unable to really look at quality measures. They’re confused as well. They’re more interested in brand and market clout than they are real quality measures, so I think one role that government could play is being sure that we have definitions that are uniform and providing information to the public where they can accurately judge the quality that they’re getting.

Thank you.

Paul Ginsburg: Thank you.

Now, I’d like to turn to David Dranove, who is an economist and a professor at Northwestern and known nationally for his work on hospital consolidation and other industrial organization issues.

David Dranove: Thank you, Paul.

I have studied hospital competition for a long time; in fact, my first publication about PPOs and hospital competition appeared almost 20 years ago. In that paper, we forecast that prices would go down. That was the easy part. But we also anticipated the result would be consolidation and price increases, perhaps suggesting that it is possible to use economic models to understand what, to many people, is a market that defies economic analysis.

I have paid close attention ever since then to hospital consolidation, both as a researcher and sometimes as a participant in antitrust actions. The Federal antitrust agencies, in fact, have a checkered history when it comes to addressing allegedly anti-competitive mergers. During the 1980s, the Department of Justice and Federal Trade Commission won every challenge to hospital mergers, but beginning with the Roanoke case in 1989, the tide turned, and during the 1990s, the agencies lost five consecutive challenges, including the infamous Grand Rapids and Long Island Jewish cases.

Well, this has distressed economists, because research indicates that hospital price cost margins are positively correlated to market concentration, and there are also numerous anecdotal stories about market power and price increases and I’m sure virtually everybody in this room could tell us some.

Both the research findings and the anecdotes have had little bearing on what goes on in the courts. When assessing mergers, the courts follow very strict rules about how to analyze their effects. These rules involve such archaic concepts as market definition and measuring concentration, and the rules that are generally used are rules that were developed for analyzing commodity markets, which is anything but what a health care market is.

Tools for assessing differentiated goods markets or markets with third-party intermediaries such as managed care have been missing thusfar, and on the empirical side, the courts would have liked to have seen some studies that directly measure the effects of consolidation on prices, but past rese arch offered them no such study. So lacking either--well, lacking both theoretical guidance and the appropriate empirical tools, the courts decided time and time again in favor of the hospitals.

Several economists, including myself and Bob Towne at the University of Minnesota have tried to fill this void, developing new theoretical models for analyzing mergers and as well as providing empirical evidence that directly looks at both costs and prices. The good news is that out and out mergers where two hospitals give up their license and act as a single legal and financial entity do seem to lead to lower costs, but consolidation into systems doesn’t seem to have any effect on costs whatsoever.

On the price side, I just published in the current issue of Health Affairs a study providing what I believe is the first evidence of its kind on merger effects, a study that looks at actual prices paid by PPOs to the hospitals. The study is new, because heretofore, researchers were stuck using charges and discounts as reported in secondary data, and this really isn’t up to the task.

So a new study with my colleague Cory Kapps uses localized measures of market concentration that were first developed by Jack Swanziger and Glenn Melnick but have since widely been adopted in research, and if these measures do turn out to be predictors of prices, it would invalidate the methods that are being used by the courts.

And in fact, we find that they do predict. The bottom line in our study is that most of the mergers we looked at led to higher prices relative to trends and that the marketwide measures of concentration used by the courts are not valid.

Now, the Federal Trade Commission seems poised to embrace ideas such as the ones that I have been developing, that Bob Towne has been developing, and ironically, as it turns out, the first Federal Trade Commission challenge to a merger this century has singled out hospitals in Evanston, Illinois, where I work, and Highland Park, Illinois, where I live.


David Dranove: It’s not lost on me that the results of my study are not exactly favorable to their cost, which reminds me that I need to drive very carefully on the way home from work on the off chance that something happens, and I need hospital care.


David Dranove: In the time that I have left, I briefly wanted to comment about a couple of points in the community tracking study. A major theme in the study appears to be disappointment with the results of competition. And look, I’m a Chicago sports fan. I know pessimism!


David Dranove: But what I’m hearing between the lines is not dissatisfaction with competition, per se, but the failure of--I can’t say the word failure--of certain organizational structures to emerge, structures that had been anointed by several respected analysts as the key to the salvation of the health care system. I think this is a dangerous confusion, because the failure of these structures to thrive in competitive markets tells us a lot about whether they really were any good to begin with, and let me give two quick cases in point: there has been a lot of hand-wringing over the failure of integrated delivery systems. Now, vertical integration and competition are obviously not kit and kin. For example, in the highly-competitive automobile industry, 70 percent of the value added is outsourced. There is not vertical integration in that industry whatsoever. It’s just the opposite. It’s very competitive.

A few folks who have studied organizational structures in other industries--Rob Burns at the Wharton School comes to mind--have long questioned the merits of vertical integration in health care, and I believe that the fact that IDS has failed in the past decade really says a lot of positive things about market forces. It says that an institutional forum that maybe was introduced before its time had truly come just wasn’t ready to serve us, and without competition, without market forces, we never would have learned that.

Another example is the dominance of broad networks. Consumers have spoken, and for better or for worse, they have expressed very strong preferences for access to whichever doctor they have been seeing and whichever doctors their primary care doctor wants to refer them to. There are not enough people like the gentleman from--was it Wyoming? Colorado? Who has been helping patients maybe make their own decisions and not always rely on what their primary care physicians are telling us.

This leads to higher costs, of course. Well, you know, in automobiles, consumers, it turns out, prefer sport utility vehicles over Hyundais. This leads to higher costs as well. Competition doesn’t guarantee you’re going to get the lowest cost products; it does tend to guarantee that you’ll get products that consumers want to buy for better or for worse, and maybe we should understand why it is that consumers have not moved in the direction that we, as self-anointed experts, think they ought to move rather than to suggest that competition by itself has failed.

Thank you.

Paul Ginsburg: Thank you.

Now, we’ll hear from David Delaney, who is an executive at Community Health Hospital System in Indianapolis.

David Delaney: Thank you.

I’ll give a brief perspective on Indianapolis. Over the years prior to the last couple, Indianapolis systems, there were four systems in town. Those four systems dominated the market and kind of controlled separate segments of the market. Competition was alive and well but probably almost in a passive manner as opposed to an aggressive manner.

A couple of years ago, outside of the market influences, the for profits came into town; started talking to physicians, and today, Indianapolis is probably one of the markets that might be the most interesting for the Center to continue to study in the near years coming forward. We have two brand new heart hospitals that have been opened, joint venture facilities between existing networks and physicians. We have two other heart entities at the other two major systems being separately identified as centers, if you will.

We have an orthopedic hospital being built. It will be open--should be open next year by physicians, and we have an acute care facility being built on the north side by our inner city system that is being built in the most competitively growing market in Indianapolis.

For years, the passive competition probably helped control the price that we saw. Hospital rate increases were somewhere typically in the 5 to 6 percent range. In recent years, with the need to invest more capital, with the recognition that open competition and keeping in mind that we do not have a CON law in Indiana, that open competition was actually going to spread resources thinner, the cost for clinical services of professionals such as respiratory therapists and nurses will undoubtedly climb 15 to 20 percent in the next couple of years. Those costs, obviously, will be passed on to consumers.

Additionally, we all question whether more services in the market, while it may lower unit costs, will those services through joint ventures with physicians drive utilization? We all like to talk about unit costs and unit costs in efficiency, and operational efficiency is very important. However, we must keep in mind that efficiency in controlling overall costs is sometimes largely driven in a fee-for-service marketplace like Indianapolis is. We have very low HMO penetration; that that efficiency can be offset by increased utilization being driven by the suppliers themselves.

And a major question coming to us in Indianapolis from employers, some of the national major employers, the auto makers were very dominant in that fact, is are we going to be able to control utilization, and that is a question, I think, that from an overall perspective, the control of health care costs in this country has not addressed, because we still are a unit-based, almost manufacturing environment process. Nancy’s comment a minute ago abou t needing to deal and manage illnesses on a broad perspective and get payment systems in place that will adequately reimburse hospitals for that type of change is imperative to controlling costs.

For instance, we all know that the implementation of programs to control heart disease and other wellness can save millions of dollars. Yet, today’s reimbursement systems do not adequately reimburse hospitals for those programs, because they don’t have a specific CPT code, or they don’t have a specific HCSPCS code. The point is, as medical delivery system improve efficiency and lower utilization and costs, they still have a level of fixed overheat that must be met.

There’s almost a direct disincentive to become efficient in the utilization of certain resources and certain services if those services are billable services. And it’s a critical problem that we face from the hospital and the medical side and the provider side of the industry.

Also in Indianapolis and across the country, the hospital providers continue to face significant problems in dealing with higher drug costs and higher technology costs, which clearly are an expectation of the American people. In Indianapolis also, with the four major systems, we have done a great job in building customer loyalty. Employers in Indianapolis still allow that marketplace to be an access-drive marketplace. There are no products to speak of in Indianapolis that do not include every major medical system as an offering in that network product.

We that negotiate contracts understand that that gives us significant leverage, because to give a lower price to simply get no more market share is not a very smart thing to do from a business perspective.

I believe that what we are going to have to see is some fundamental changes in the way we move and manage health care costs in populations. Today with the systems in Indianapolis, we do not have population management because we’re basically a PPO state. Pure competition, while it may drive lower unit costs on some services, does not address how we’re going to continue to control overhead costs from a global perspective in each one of the major systems.

And I would sit here today and tell you that competition, open competition, will not do anything to control costs. It will still allow hospitals and medical delivery systems to compete on customer service and hopefully to compete on quality. And while that may help mitigate the cost trend, it will not satisfy the employers in regard to what they’re looking at in regard to the next four to five years, because in Indianapolis, Indiana, and across Indiana, hospital systems are very profitable. We are not like Washington, where only three hospitals make money. The majority of hospitals in Indianapolis and Indiana make money.

It’s going to be important, though, for all of us to consider how much competition is good competition, because unlimited competition the way the American public buys health care today is not going to control costs.

Paul Ginsburg: Well, thank you.

I’d like to get some discussion started, and I heard at least three of the panelists saying something related to problems with pricing. And, you know, the first issue about problems in pricing was that, you know, some services are more profitable than others to produce. In fact, I recall, and I think we published this in one of our papers, maybe in Len’s paper, a CEO in a hospital system in Little Rock saying that the hospital’s entire margin came from cardiovascular services. And, you know, that’s been a fact on the ground for a long time.

So in a sense, there’s, you know, one thing would be if the panelists could talk some more about what role--the extent of pricing distortions and what role they feel that the pricing distortions are playing in, say, entrepreneurialism or the initiatives to develop specialty hospitals.

And the other thing is what was just mentioned by David about the fact that our pricing is all unit pricing, and the fact that we pay for things that have codes, and we don’t pay for a lot of activities that might lead to more efficient utilization and how can they go.

So why don’t we start with the first thing, and would anyone like to elaborate on pricing distortions for individual services?

David Dranove: If I could say everybody understands that the relationship between prices and incremental costs is completely random; prices are supposed to be a signal to both providers, to figure out whether they can efficiently meet needs, and to consumers as a way of expressing how much they value the goods and services. That’s why markets work better than regulated systems. It’s when prices work.

I kind of despair of anything actually happening because, this is a discussion that’s been going on for God knows how long. There are a lot of things that we need to fix, but let me tell you one thing that I don’t see changing anytime soon: on the supplier side, yes, I know, hospitals say that they make a lot of money in cardiovascular, and they lose money in emergency room care. But then, you ask them, well, wait a second, don’t you get a lot of the cardio patients through the ER?

And they go yes, and you say and let me ask you another question: how much of your costs are direct costs, and how much are allocated overhead? In a typical hospital, allocated overhead is 55 to 60 percent. How confident are you in your overhead allocation? Not at all.

I don’t think hospitals have any clue how much they make off of any product, and I tell you physicians certainly don’t. So it’s not clear how pricing is really going to send an appropriate signal if we’re not costing well at all.

Paul Ginsburg: And let me turn to some of the other people.

Nancy Auer: I would agree with that to a certain extent. I think that hospitals have not known their true costs in years past. I think because of declining reimbursements, hospitals are getting a lot better at that now.

But it’s more complicated than just simply saying we just need to be more efficient and decrease the costs. I mean, what you are seeing is people don’t want to spend the time to understand all the problems and go there; they just want to cut the costs. So you can do that to a certain extent. But then, what happens? Well, let’s play that out a little bit.

What you see is you see a specialty hospital or an outpatient center being developed that does not provide the full range of services an acute care hospital does, or you see an acute care hospital that wants to match the competitive pricing of another hospital who doesn’t offer psychiatric care, that doesn’t offer addiction recovery, that doesn’t offer needed services that the community actually needs but increases their overall costs.

So you have to be careful to go there and just look at a price without understanding what that price entails.

Paul Ginsburg: Before I turn to Mai to comment, could the HSC staff pick up the question cards, so we’ll have them when it’s time for questions?


Mai Pham: I’d say that physicians have a pretty good sense of what their costs are, and they go where the money is. We heard about some very rational responses to prices among physicians. Evaluation and management does not pay. So PCPs are spending a lot more time in their offices trying to provide evaluation and management services to build up volume, and so, as a consequence, they’re refusing ER care. They’re refusing to take call for ER patients, and they’re refusing to accept patients who come through the ER.

Specialists know that procedure-based care pays more, and they’ve paid more over time. As procedures have become more efficient, and the payment systems, the payment scales have not kept up with those technological changes, and those specialists go where the money is. They just happen to be more fortunate than the PCPs in that they have that option within the traditional realm of clinical care that they provide.

I think that it’s entirely rational. It’s why we’re seeing the i mmense creativity, if you will, in the new services and charges that physicians are coming up with, as well as an explanation for the less lucrative services that they’re withdrawing from.

Paul Ginsburg: David?

David Delaney: The other thing I guess I would add is as these joint--well, as the joint ventures and the for profit entities and the physicians draw services out of the hospital, and payers, employers, say gee, I can go get an x-ray here for $20, and if I get it done in the hospital, it’s $30, so they take those services out of the hospital, we’re all going to be still dependent upon certain services to be provided in a hospital setting.

When we all talk about efficiency, that leaves the hospitals with the necessity of spreading overhead costs to the remaining services they have. It makes that hospital less efficient in the use of its resources, in the uses of its staff, and what it does is drives price up on the remaining resources that are there.

If we don’t have certain profit margins, then, the ability to maintain the quality of care that’s being expected is not going to be achievable. So I think again, when you look on a unit price basis, on a pure competitive basis, competition does not always breed the most efficient process that we can put in place.

At a minimum, while I’m not against competition, I think we need to understand that we need to have controlled competition is probably more beneficial to all of us than open competition.

Paul Ginsburg: Okay; actually, one thing: I think a number of--I guess Mai mentioned that it’s pressure on physician incomes that are generating some of the entrepreneurial. I mean, could one say that about the entire health care system, that a health care system, say, 15, 20 years ago saw pricing distortions and just accepted them, well, I do well on this; I don’t on that, but now, various factors have motivated people to pursue, to respond to those things and to try to do more of what’s paid better?

David Dranove: Although it is true that in terms of MRI pricing, for example, 15 years ago, we saw the first wave of physicians starting their own CT centers, and what was interesting there was because of competition, prices actually went down tremendously, and the makers, the GE Medical Systems and Siemens, took a bath. And we heard, I think, in the last panel some fear that everybody is going to buy MRIs, and maybe it was one of these panelists; all of the doctors are getting into the MRI market.

If that’s really true to the extent that’s suggested, I would seriously considering short-selling GE and Siemens once again.


Mai Pham: I think that’s fair. I think there was a general flavor that there was some speculative activity going on.

Paul Ginsburg: As far as the people in the health systems, the notion that if facilities are overbuilt, they’ll be overused, what’s the current perspective on that? I know that the health services research field focused a lot on that in the 1970s, and, you know, we’re hearing it again. Do you have any perspectives?

David Dranove: Since that’s my dissertation--


David Dranove: --in fact, it’s pretty much the case that you can’t publish a paper on supplier-induced demand without it coming through my office for better or for worse, so here’s the current state: Victor Fuchs is the duck theory, which is if it looks like a duck, and it walks like a duck, and it talks like a duck, then it is a duck, so everything looks like inducement, so there must be inducement.

Chuck Phelps at the University of Rochester is the Tom Cruise show me the money. It was Tom Cruise, wasn’t it? No, whoever that was.

Nancy Auer: It was Cuba Gooding.

David Dranove: Cuba Gooding, show me the money; show me the research.

The research, I think, at best suggests, well, the research certainly suggests that incentives matter. If you pay fee-for-service, you’re going to get more stuff done, and if you capitate, you’re going to get less stuff done. In terms of will physicians whose incomes are suffering do more stuff as a result, the best you could say about that research would be something along the lines of a 10 percent cut in income, maybe you get 1 percent more stuff, and that’s the most favorable version of that research.

And let me give you a great example: there’s a lot of consternation over physicians who own their own testing equipment, and it’s true that doctors who own their own testing equipment do twice as many tests as doctors who don’t. But the problem is that doctors have different predispositions to doing tests, and we know that doctors who tend to do a lot of tests also are the ones who own their own equipment.

Wonderful New England Journal study from a decade ago showed that doctors who purchased testing equipment did increase their utilization but only by a factor of about 10 percent, and you could explain that all by convenience and access. So I tend to be more on the Chuck Phelps show me the money side. I don’t think this is a real big problem. This is a managed care--they raise it as a bogeyman as to why they are suffering, and I don’t think it’s a real problem.

David Delaney: Let me throw in a real life situation. We have a small community north of Indianapolis that one of the large national auto manufacturers has a great deal of members or employees and dependents there, and the community has been the highest cost community for that motors company for prescription drugs for a number of years on a PMPM basis.

We went into an incentive model with that company, and on behalf of the physicians, we negotiated that. For the first two years of that program, the prescription drug trend line was held to single digits when the motors across the country trend line was in excess of 19 percent. After two years and some incentive checks written, the motors company decided that they no longer wanted to do that.

In the year after that, that trend line went up almost 19 percent. I think there is a recognition by health care providers that to sit down and explain and confront the patient in some cases takes time and effort and that there should be some reward for that. And in the face of no reward for that, then, I think providers say, then, why should I do it? Because if I have to spend five more minutes with every patient doing that, then, I have then seen six less patients that day, and that comes right out of my pocket.

So I do think that some of the incentives are valid and will help improve efficiency and improve cost of all medical services.

Mai Pham: I don’t have the money to show David, but I do have a general sense that, you know, when we talk about information empowering consumers, I think what we take for granted is that consumers are already getting quite a bit of information. Part of the problem is that it’s so heavily balanced, imbalanced in favor of providers. Providers don’t have a problem reading what it is consumers want to know. They’re directly marketing to consumers, physicians and hospitals and drug manufacturers.

And their messages are both more palatable from a content point of view but also from a marketing point of view. They are completely overpowering the countermessages that we would hope consumers would be getting. So I think it’s not just an absence of information. It’s that there is some overwhelming messages already out there.

Paul Ginsburg: Two of our panelists are in a very good position to have perceptions about the state of relationships between hospitals and their staff physicians, which I think many of the people with visions of how health care is going to improve has always talked about the need for hospitals and physicians working better together.

What’s your perception of where things are today?

Nancy Auer: Well, that’s a very good question, because I think they’re terrible today, seriously.

It used to be, you know, physicians and hospitals are interdependent. They’re not independent of each other, because hospitals provide the fa cilities, the nursing care, what have you, but the clinicians, the physicians, provide the clinical care, and they determine how that clinical care is going to be delivered.

So if we are ever going to get to the quality question, what we really need are hospitals and physicians working together and sharing data and information more than they ever have in the past. And instead, we’ve fostered a system where the market is just competition over the dollar, because that’s how we’re being rewarded. So the physician, who is under the gun, and what Mai said is absolutely true; the physicians are in their offices trying to see as many patients as they can now, because that’s how they get paid, and they’re not willing anymore to spend time on the hospital committees that look at how that care is delivered and try to get to the more efficient, the more quality kind of questions that we need to have examined.

Furthermore, you’re seeing a problem that’s going to impact clinical care directly. Mai made the observation that physicians are no longer willing to provide on call services to the hospital. That’s very true. They look at the Intala mandates as being a hospital problem and not their problem, and they can make more money if they stay in their outpatient surgery centers than if they come into the hospital and have to cancel their elective appointments and take call for the Emergency Department.

Paul Ginsburg: Thank you.


David Delaney: I would agree with a lot of what Nancy said. I believe that in my own corporation’s standpoint, we have pretty good relations with the physicians. However, I would tell you I think a lot of that has been borne out of the fact that we probably have more joint ventures with physicians than anyone else in our market.

A few years ago, as physicians felt the need to expand their revenue streams and their incomes, that brought the tension unquestionably between hospitals and physicians. And I think the pursuit of joint ventures by both have helped mitigate some of that tension, although, for those of you who may be in that environment, I will tell you the tension is never gone.

But I do think that there is a lot of concern going forward as well about the quality issue, and that’s something that hospitals are going to have a tough time dealing with. They feel that with so many physicians using a hospital, how do you adequately address those physicians who are not the most efficient? It’s a very difficult thing to do. I think the community at large, employers and even payers, to some degree, have the attitude that hospital, that physician practices at your hospital; that is your problem.

It cannot be just a hospital problem. There are just too many rules, too many laws, too many potentials for lawsuits for hospitals to be solely responsible for that, which, again, I think, goes back to why we need community-based quality reporting that assists the hospital in that endeavor and pursuit, because again, as this data comes out, the tensions between hospitals and physicians are going to grow and specifically to that issue as well.

Paul Ginsburg: Now, if I could follow up, you mentioned that you do a lot of joint ventures with physicians. And I was wondering if you could talk a little bit about the degree to which physicians are easier to work with on these joint ventures because they are part owners.

David Delaney: Well, boy, I hope the cameras are off on this one.


Paul Ginsburg: Actually, it is going out live to the Web.


David Delaney: I think it lends itself to a better relationship than there would have been in the lack of a joint venture. As you get into partnerships with physicians, and they start looking at costs, and they start looking at return on investment and things of that nature, I think they have a whole different perspective, having never been under the rules and obligations from a regulatory standpoint, from a reporting standpoint, that hospitals are subject to. Most of these joint ventures become subject to those issues, and physicians have a hard time understanding why you have to do this or that and why costs are what they are.

And I would just simply say that if hospitals, as hospitals get into broad-based physician joint ventures, it takes a whole different personality of a hospital management team to do that, because it takes a level of understanding and a level of explanation that hospitals themselves have not been used to having to do, and I would say in our case, our physician joint ventures have worked very well for us. The loyalty to our network from our physicians has been greatly enhanced.

One would argue that the marketing and negotiating and leverage in that circumstance in the marketplace has benefitted us as well. But I would say that it will take a definitive change--it takes a definitive change in personality and attitude as a hospital to be able to make those ventures be as successful as they can be.

Paul Ginsburg: That’s interesting, because often, we have heard that a lot of the bases for joint ventures between hospitals and physicians have been defensive on the part of the hospital, is to forestall physicians doing it themselves. Has your experience led you to believe that maybe if you were doing it over again, and you had the ability to do it yourself as a hospital, that you would rather do it as a joint venture with physicians?

David Delaney: Certainly, the heart hospitals in Indianapolis were driven by outside, for-profit investor influence. That was something that I think that everybody in town realized that from an overall overhead standpoint and from an overall cost standpoint, it probably wasn’t the best thing for the community at large.

Now, do I think those are going to improve quality? I could give some examples of that, but they’re going to improve service and quality, but from an overall cost and efficiency standpoint, I’m not sure, from a network perspective, it’s going to deliver that.

In trying to look back and say would we have done it ourselves and not brought the physicians in, I think it’s been a significant benefit to our organization. Our organization’s attitude, at this time going forward, is that we try to bring physicians to the table in a joint venture attitude, because I do believe that we believe long-term it will give us the opportunity to work with them cooperatively on efficiency and on quality, because we are both, then, at the same table.

As opposed to us just worrying about the hospital and them just worrying about it in their practice, we are both, then, going to be held accountable by payers, by employers, for the contracted status of that entity that we are both now joint venture partners in.

Paul Ginsburg: Thank you.

I urge the staff to bring the question cards up to me. But before we get into the questions, I just want to give each of the panelists a chance to, you know, say whatever they want in reaction to our discussion.

Mai Pham: I think I would just agree with--I think it was David’s comments earlier that there does seem to be general consensus out in the provider community that payment scales are out of balance and that they really deserve to be looked at again. I think even specialists who are benefitting from the current system would agree.

Nancy Auer: I think there are--I agree with that, but there are other pressures that we really haven’t talked about that are pushing down on the providers other than just the reimbursement issues, and Mai touched on it earlier when she said the malpractice climate is quite harsh right now for physicians, and they’re feeling the effects of that.

And I think that’s resulting in physicians wanting to partner not only just for pure reimbursement for services but for malpractice protection with hospitals, so that in our area, we’re seeing a lot of physicians that want to be under the mantle of the hospital’s malpractice umbrella, either as employees or some kind of risk-sharing arrangement.

Paul Ginsburg: Thank you.

David Dranove: One thought that came to mind, as David was just talking about these joint ventures and also hospital-physician relations, is that some of the things that people are proposing are likely to lead us down a path where we’re going to see physicians failing--literally just failing to have a business.

Nobody is going to want to use them. They’re going to do badly on accepted report cards. They’re going to do poorly on economic measures, and I’m just kind of curious as to whether we’re prepared for that and what kind of political heat we’re going to experience in a world where, you know, if I open a restaurant, I’ve got a one in three chance of surviving the next two years. I don’t say physicians are going to have that kind of failure rate, but we may start to see something that we have never seen before.

David Delaney: The other thing that I guess I would add is that it’s very real the problem from a provider standpoint of the increasing number of people who have no health insurance.

And compounded on that, it’s not only that they have no health insurance, but they have to pay more copays and more deductibles and a greater out of pocket in the future, the level of bad debt that’s going to be incurred in the hospital setting and in the physician practice setting is going to, I think, climb considerably.

Those services and the cost of those services are going to have to be paid by someone, and if anyone believes that there’s not going to be a significant cost shift to those who have insurance, they’re fooling themselves. And in the future, even if we become more efficient, if the payers are allowed to continue to not offer health insurance and to be able to selectively say if you’re under an individual policy, and you had a cancer bout three years ago, and even though you’ve had a clean bill of health for those three years, we’re not going to offer you coverage, if those folks cannot get coverage, we in the provider side are going to have to cost shift that, and that could, in the future, become a significant inflationary trend on both price from the hospital perspective and premium from an employer perspective.

And I hope that everyone understands that that’s a problem that I think is a huge black cloud hanging out there on the horizon that I don’t believe is really being given adequate attention.

Paul Ginsburg: Yes; I want to venture a partial answer to the point David rose and see what Nancy Auer thinks of it, that if, in fact, we do have an era of greater information report cards, and some physicians don’t do very well, I think the key is going to be how that lines up with the perceptions of the leadership of the medical community, were those the bad doctors, or are they the good doctors, and there’s something wrong with the data?

Nancy Auer: Certainly, you hear physicians saying that now; that couldn’t be me; that data’s not right, you know, I take care of sicker, older, more difficult, whatever, patients.

I think the challenge with the data is medical leadership so that people who are in the position of leadership can, number one, demand good information about illness scores, severity of illness, whatever it is, the data on performance, and then, they can work with their colleagues to accept, understand and want to act on that data.

I know within our own hospital setting, once the physicians trust the data, and once they see it, they are willing to act and act appropriately to make change.

Paul Ginsburg: Thank you.

If people would like to ask questions from the floor, this would be a good time to come up and start with a question card question to David Dranove.

Your point about the failure of consumers to choose integrated delivery systems reflecting the success rather than the failure of the market and comparing it to the selection of costly, less-efficient SUVs is interesting, but isn’t there a major difference in that health care markets have third party insurance with moral hazard, tax subsidies for picking costly choices, unequal employer contributions, et cetera? In short, can we really compare this to markets where consumers pay directly with their own money?

David Dranove: It’s a very good point. My point about integrated delivery systems, I think, was kind of peripheral or orthogonal to that. Those simply, during the 1990s, weren’t ready to go. The linkages were necessary to make those successful linkages between doctors and hospitals weren’t there, and they failed, too, because they weren’t efficient structures by and large. They’re obviously not a universal failure.

But, say, the comparison between PPO and HMO, certainly, the tax code continues to favor more generous plans. One cannot deny that. And we did see as we went through a business cycle that available income to workers does affect the preferences for plans, and I actually would be surprised if we don’t see a little bit of a rebound for that. And I do agree that the role of the employer in setting up contribution levels, look, it’s a market, but it’s a weird market. What’s one of the major things that employers seem to be doing right now? It’s not necessarily to get employees to make rational choices between HMO and PPO; it’s to get their employees to choose their spouse’s plan.


David Dranove: Which is completely irrelevant from the perspective of making rational rankings of HMO and PPO. So I guess I confess one simplifies in a five-minute speech perhaps too much.


Paul Ginsburg: Yes.

Rita Redburg: Hi, Rita Redburg. I’m a Robert Wood Johnson Health Policy Fellow.

And I had a question for Dr. Dranove on supply-induced demand in terms of show me the data. I thought, you know, the Wendburg Fisher data are looking at geographic variation; you know, when they broke it down, they isolated supply-sensitive issues as the key driver of that huge geographic variation we see that did not track with quality and, in fact, as you know, the more procedures, there were slightly lower quality indicators.

David Dranove: Sure.

Rita Redburg: So I’m wondering if you would comment on that.

David Dranove: Yes; we had a--it’s been well-known for a long time that where you see more suppliers, you see more consumption, and the question is cause and effect. So I did a study using all the classic methods that people use to try to sort those out, finding that where we have more obstetricians, we have more babies. And I got the same magnitude as everyone else.

And so, unless you believe that the obstetricians are knocking on women’s doors and saying you know, I kind of need to get a little more business, so maybe you should go get yourself pregnant--


David Dranove: --you kind of think, well, wait a second: the kinds of methods people are using to identify inducement, they’re finding inducement even where it doesn’t exist.

Now, there are some studies that find that using better methods, but the magnitudes are small.

Rita Redburg: Right; I mean, I think we would have to obviously--babies are patient-generated, but a lot of testing is physician-generated, and--

David Dranove: Now, don’t get me wrong. If I get the same result as you do, but I get it for babies, and you get it for testing, then maybe we’re using the wrong method. And people who have used the right methods get very small results.

Paul Ginsburg: We’ll go on to the next question, and this is addressed to anyone.

Since ancillary services within physician offices are exempt from stark self-referral laws, is it time to revisit this exception because technological advances are making it possible for doctors to provide more services in their offices?

Paul Ginsburg: Mai?

Mai Pham: I would suggest the answer is yes.


Paul Ginsburg: Okay; another one for you, David.

You mention in passing that--wait, this really--this is a little bit different--that integrated delivery systems were ahead of their time. With an increasingly chronically ill popu lation, will integrated delivery systems become a preferred model of choice for consumers anytime soon?

David Dranove: I’ve always felt that the key to making the integrated delivery system work was the coordination across all of the providers in the chain, and coordination requires information systems, and the information systems weren’t there in the nineties.

They’re starting to come into place. I think there’s also one other key: independent actors can put in place information systems that talk to each other, so you don’t have to be Evanston Hospital and Evanston Northwestern Health Care part of the same organization to put such an information system in place.

With one regulatory hurdle: with HIPA, if you’re independent actors, you can’t put in that information system that talks to each other. And actually, I think HIPA, more than anything else, is going to lead, in the next decade, to the revisiting of the integrated delivery system.

Paul Ginsburg: How much does the pricing--it’s friction or fiction--a manifestation of public program formulas to maintain increased reimbursement from these programs leading to overall higher prices in the marketplace? That’s for anyone. I think the questioner is getting at to what extent are the pricing problems the result of, say, private payers following public payers and there being problems in the public formulas. I’m not sure.

David Delaney: I’m not sure that I can understand the question well enough to address it. I would just say that obviously, from our system’s perspective, the pricing of our products is really, you know, done so in a way to try to spread the burden for profitability to achieve a certain profit margin for the reinvestment of capital to replace building by new technology, so that our pricing model is probably not as definitive as that.

Clearly, though, from a cost shift standpoint, knowing very well that our reimbursement from Medicare and Medicaid programs is substantially less than the commercial payer market, we do find ourselves in a place when we’re budgeting to be able to forecast volumes between the private sector and the public sector programs and then, you know, adjust, I guess, as an end result, since we know what we’re going to get reimbursed from the public sector, adjust our final rate increases to drive adequate income from the private side to make profit margins.

Paul Ginsburg: Good.

Actually, the writer might have been focusing on--I mean, one thing that I’ve been thinking about a lot is that in a sense, the pricing for one service versus another service, and, you know, we have a, you know, certainly, in our public programs, particularly in the Medicare program, we work very hard to gather cost data to try to get prices in accordance with costs.

I would say, though I don’t know yet, and people can correct me, that probably private insurers don’t invest as much either in measuring costs or in getting detailed studies of markets as to how much they should be paying for this versus that, so that probably, you know, particularly, when it comes to things that hospitals provide, probably, you know, the inadequacies of hospital charge data, in a sense, flow through both the public payers’ and the private payers’ decisions, and hospitals really have no incentive to invest in cost accounting studies, et cetera, to have accurate charge data, accurate in relation to costs.

Well, I think we’ve used our time, and I want to thank the panel for a really interesting discussion.


Paul Ginsburg: We’ll be breaking for lunch for a half an hour. Behind the room, there are box lunches, and we’ll start with a policy panel at 12:45.

[Whereupon, at 12:16 p.m., the session recessed for lunch, to reconvene the same day at 12:51 p.m.]

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Len Nichols: Welcome back. I’m quite happy to be part of this panel today. I have some very knowledgeable people about policy questions, and I think after the discussions we’ve had this morning, the natural set of questions to turn to, not just in this towns, is so, what are we going to do about all this? What is going to be the policy response, or what might be some policy responses?

And we’re very lucky to be joined by the panelists we have. We’ll start with Sarah Mathias, who’s an attorney at the Office of Policy Studies within the Office of General Counsel at the Federal Trade Commission. Sarah has been a leader in organizing and participating in the hearings that FTC, Justice together have been holding on competition in the health care industry for some time, and in addition to that, Sarah is actually from Arkansas, which proves she’s smart, so she’s going to go first and talk about antitrust policy.

Go ahead.

Sarah Mathias: Thank you. It’s a pleasure to be here, and it’s nice to hear that Arkansans are presumed to be smart, so that’s great.

I also am thrilled to be on this panel with such well-thought-of people and people who are great innovators in what’s going on in the marketplace.

I also have to give a disclaimer. This is my personal point of view and not that of the FTC or any commissioners, so don’t blame the FTC; blame me for anything that I say today.

I think that one of the common comments that we’ve heard here is that the paper or maybe what’s going on in the communities is pessimism about what can happen with competition. And I think it’s kind of a disheartening paper, but I don’t think we should give up hope at all. I think that competition has a role in the health care market with the various sectors of the health care, that being the providers, the hospitals, the physicians, the pharmaceuticals, making sure that there’s appropriate advertising to the consumers so that they can make a better judgment and other areas of the health care industry as well.

Now, to answer a question, and everybody--well, not everybody, but there have been some comments about the FTC and where has it been, we have been active in numerous areas of the health care arena, and I’ll get to the hospital merger in just a second, but did want to go through some of the things that we have been doing and that we continue to do and that we will do in the future.

That includes our--we’ve brought numerous actions against physicians who have gotten together to collectively negotiate prices and significant contract terms. Now, you know, we all would like to pay everybody exactly what they’re required, but I think that when the negotiations come down, and people get together for setting prices, that harms the competition and harms the marketplace from acting appropriately.

And so, we do come in in various instances to try to stop that collusion from occurring. Three recent examples that we have, and a couple of these are ongoing cases, so I’m not going to say that we always win, but we’ll see what happens. One is in Yakima, Washington, where about 90 percent of the physicians got together to set prices and negotiate with the plans. And in that situation, you’re not going to have a free marketplace.

We are also currently doing investigations, and I can only speak to the allegations in the complaint. In Brown and Toland, which is in San Francisco and also north Texas, and again, these are instances where, by getting together, the physicians have set the--have tried to set and have set increased payments, which harms the consumer, because you have that increased payment. It harms the consumer, because you don’t have the competition going on among the providers to maybe lower the costs or find other innovative ways to provide health care. And it also unreasonably restrains trade.

We also have brought a number of different types of pharmaceutical cases. Some of them, they’re a little bit better known, or some of the cases that we’ve brought against name brand pharmaceuticals that have gotten together with generics, and partly, sometimes, as an effect of the patent cases that have gone on, the name brands have settled the cases, paid the generics a lot to maybe delay the market, which also harms the consumer, and we’ve had a number of cases trying to increase the opportunity for generics to come into the market, which ultimately helps the consumer.

We’ve also been taking steps to try to make sure that innovative ways of providing more health care are able to make their way into the marketplace, and one example, again, where we have a current case going on is in South Carolina. It’s the South Carolina State Board of Dentistry that we’ve brought a case against, and basically, what happened is the legislature had instituted new laws that allowed the dental hygienists to go directly to the schools to provide care to the children, the economically disadvantaged children.

The dental hygienists did do that for awhile, until the Dental Board came in and created an emergency legislation or emergency rule that prohibited them from entering the schools and providing cleanings and sealants without first the dentist having the opportunity to look at the teeth.

That is a current case that we are trying to make sure that the dental hygienists can get back in, and this is also an opportunity that sometimes, it’s not just dental hygienists; you need possibly more competition. We’ve brought cases on behalf of nurse midwives in other instances of other ways that care can be provided maybe at a lower price and increase the access.

Now, back to the hospital mergers. It’s true: we lost a number of cases. I think it may have been six that we lost, and the Department of Justice lost one. And we have taken a time and opportunity to maybe look at some of the reasons why we were losing; look at some of the measures. Part of it was there was at least one judge who had a bias potentially to the nonprofits, saying the nonprofits will not use their market share or their market power to increase prices. There have actually been studies that show that nonprofit hospitals do respond similarly to for-profits when they have the market share and ability to raise prices.

They may use that money differently. It’s not going back to the shareholder, necessarily; maybe it’s going to the community, paying the doctors more, but by raising the prices, they may be limiting the access to consumers from being able to get care.

Part of what we have done in this time to set back is we’ve done a merger retrospective and looked at some of the hospitals that actually did merge to see what happened in the various marketplaces. Quite honestly, this was not met with enthusiasm by the hospitals. Quite a few entities were displeased with us coming back in and reinvestigating.

We have brought a recent case and a brand new complaint against the Northwestern Evanston merger that David Dranove was earlier speaking of, and in that instance, the allegations in our complaint basically find--and based on the merger guidelines and the actual anti-competitive effects, we have found that some of the prices for the HMOs within the group went up 52 percent and for the PPO over 100 percent for the price increase.

Now, I’ve got to tell you, my Aunt Sheri is so angry that we’ve brought this case, because she lives in the Evanston area and thinks she’s gotten the best care ever. But it’s still an instance where if you do have the prices going up, you do have some harm to the consumers if they ultimately can’t pay for the care.

So we are involved, and we continue to be involved, and I think that competition may not be the only answer, but I think it is a very important answer to ensure that we’re working on improving cost, quality and access for all people.

Len Nichols: Well, thanks, Sarah. I appreciate that, and we will come back to you later in the question session.

Our next presenter will be Bill Scanlon, who really nee ds no introduction to this audience, since he’s been the director of health care issues at GAO; very recently retired, but even less introduction to those of us in health services research, since Bill has been publishing papers basically since I finished college. I didn’t know going back that far, but that’s pretty impressive.

He’s focused mostly on Medicare and Medicaid programs but especially provider payment policies and provision of long-term care services, and those payment policies, of course, is where the economist’s heart is warmed, and that’s probably what he might talk about today.

Bill Scanlon: Thanks very much, Len. I’m not sure if I’m here for the policy perspective or the historical perspective, given that I’ve lived the history. So I’ve found the article, I mean, to be sort of truly eye-opening in terms of the level of frustration that the Center found in visiting these 12 communities.

I think that it doesn’t take much, though, when you look at sort of what’s been happening recently in terms of cost increases, and you think about sort of what our options are to try and deal with them, that you become frustrated very quickly. And so, the idea that it’s widespread throughout the country is not much of a shock.

The idea, though, it came down in the article at times to almost either-or situations or choices between sort of the role of competition the role of government, I do think is something that we have to look at carefully, because I think in this country, we cannot do without reliance upon competition in terms of trying to sort of organize a better sort of health care system.

Our version of a single payer system, the Medicare program, relies upon the markets for different services that beneficiaries are going to use and ignores sort of how well those markets are or not how well those markets are operating at its peril. I think that we really need, in the Medicare program, sort of to take into account more of how we can harness the market forces that exist, and we need to do this on a service by service basis; we need to do it on a geographic area by geographic area basis to make sort of Medicare work more effectively.

But really, the focus here is much more on the private sector, and there, I am guilty of sort of my heritage as an economist that I am a believer, sort of, in competition and that we can sort of gain much from competition. But I also learned that there are times when markets fail and that that is when we sort of turn to government. So I think we need to look carefully at the health care market and ask ourselves where are the elements of failure? Whether government can intervene sort of to make things better.

Now, one of the things about turning to government that one does with some trepidation is that government’s challenge is much more difficult than that of the private sector. Competition works through trial and error. I don’t know how many businesses are going to fail today, but it’s probably a relatively sizeable number. Government doesn’t have that option. Government can’t fail. Government often can’t reverse a bad decision. It needs to build on that bad decision to try and make things better for the future.

That’s a very challenging way of going about things. In the private sector, where many sort of entities fail quickly and disappear, we forget about that, and we focus on the successes. So keep in mind sort of the challenge that government faces when one thinks about turning to government.

For me, in health care, there are three important sort of aspects of market failure. The first is information. Patients just don’t know what they need or what would be of value to them when they seek services. This is fundamental. It puts the providers in a much more advantageous position than others are in normal transactions, and it’s something that we need to take into account.

Third-party payment is the second sort of failure which we’ve talked about some today in terms of individuals not sort of being aware of the cost of services and not being sensitive to those costs, and even if they had value information, they wouldn’t necessarily sort of take into account costs, since they’re not paying for the true costs of the service.

The third thing, I think, which we shouldn’t ignore but which is not a primary focus of this discussion here is the idea that efficient providers are not going to necessarily provide the social goods that we need out of our health care system. This is particularly true of hospitals. Today, as we face the need for hospital capacity to deal with things like bioterrorism incidents or sort of a widespread naturally occurring disease, we have to ask ourselves, is the hospital going to be there if it’s operating efficiently at a scale which is only sufficient to provide services to people on a routine basis and not equipped to deal with the peak loads that may occur when some disaster of one form or another occurs.

In terms of the experience that we’ve gotten from the competition, sort of, of the nineties, I guess I would be somewhat concerned that we overinterpret its failure. We have to--I think we need to ask ourselves whether it was the elements or the principles of competition that failed or the implementation, sort of, of the nineties.

Was it an issue of the model being implemented sort of truly and faithfully, or was it an issue of the model being implemented sort of only partially and that there is still promise in elements of the model, at least. I don’t disagree with sort of the factors that were identified in the paper as being barriers to competition; in particular, sort of the increasing sort of power of providers to negotiate sort of better terms.

Some of the success of managed care sort of during the nineties was the fact that the providers were caught unaware, and in some respects, very sort of one-sided contracts were being negotiated with providers and we are now potentially sort of seeing some of the swing of the pendulum as sort of contracts that are one-sided in the other direction sort of are being negotiated.

The promise of managed care, though, that I think we need to focus on is the issue of how can payers play an important role in fulfilling the information gap that exists for patients. Now, the model that was prominent in the nineties was the idea that we would do something akin to report cards, and consumers would then choose plans on the basis of which plan is performing best, and within a plan, you might choose a health system, delivery system, which was performing best.

I don’t think that kind of information is going to solve the problem that we have. What we need is information at the point of service. If you look at the work of John Wendburg, and you see the perversity in terms of the utilization of services across this country, where there are services that are overused and underused, and there’s wide variation sort of from area to area, you realize we’ve got a problem in terms of the decisions being made about the delivery of services.

We need to think of ways that we can get information to consumers so that decisions can be made about sort of the services that they’re going to be using at the point of service as opposed to sort of summing up experiences and telling consumers post or after the fact this is what the overall experience of a plan is.

I think the promise for this exists in terms of electronic medical records. We’ve got to take the health care system sort of out of the age of being a cottage industry sort of with no capital. We need to sort of develop sort of an infrastructure, information technology infrastructure, that is going to support real time information that’s going to assist sort of patients and payers to make rational decisions.

Now, electronic medical records are being developed, but if they’re going to all be in the hands of the providers, and they’re not going to be accessible to the payers and to the patients, they’re not going to be of utility to us in terms of trying to change the nature of decisions that are being made with respect to services.

So I think it’s one of the key things to think of in the future, and it was actually raised sort of as a potential social good sort of in the paper is the idea that we invest in information technology. We’d find a way sort of to do it that it can be sort of accessible to both payers and patients as well as sort of providers, and it sort of assists in the decision making that needs to be made.

Now, as an economist, I’m very familiar that when you think about expenditures, that quantity is only half the equation. The other half is price, and we still need to think about price. There was an article in Health Affairs, I think it was a little over a year ago, by Uva Reinhart and his colleagues saying it’s the prices, stupid, sort of explaining why there is a difference between the U.S., sort of, and the rest of the world. And we do need to be thinking about sort of how it is we can bring some pressure to bear in terms of keeping prices sort of growth more limited, and, you know, one of the things that we even can potentially think about is can prices be reduced?

We had a question this morning about the issue of sort of the cost of services. The costs are not absolute. People can find different ways to do things when they face the challenge of a lower revenue source, and we need to think about sort of whether there can be additional pressure in terms of sort of the prices that sort of providers face so that they find innovative and more efficient ways to deliver sort of services.

This is an area to where I go back to where I started with respect to the Medicare program. One of the things, I think, that the public sector can do in terms of influencing sort of the experience in the health care system is to be vigilant in terms of the prices that it pays. Medicare is a large program. Between Medicare and Medicaid, we’re talking about more than $400 billion worth of services. It has an effect on the overall market.

Now, one of the challenges that those programs face is that the information that they have in terms of setting prices and also defending their prices are extremely poor. One of the points made in the program, in the paper, was that often, quality and access issues are raised whenever anybody tries to control price. And the reality is that when the Congress is facing decisions with respect to price, prices within the Medicare program, they don’t have current information about what’s happening with respect to Medicare beneficiaries and their access to services.

If Congress changes fees for physicians at the beginning of a calendar year, they’re not going to know for 18 months or more in terms of what happened when that price change occurred. That’s unacceptable. There’s no corporation in this country that operates with an 18-month data lag on critical information about sort of how their policies are working.

So information technology and data are, again, sort of keys to try and address, sort of, the price situation from a public sector perspective, and I think it’s also true from a private sector perspective.

I’m going to stop. Thank you.

Len Nichols: Okay; next, we’ll hear from Marilyn Dahl, who is the deputy commissioner for health care quality and oversight, two pretty important words here this morning, in the New Jersey Department of Health and Senior Services. This basically gives her responsibility for oversight of all acute care facilities and HMOs in New Jersey as well as the distribution of subsidies to hospitals providing charity care.

I think that about sums it up. Marilyn?

Marilyn Dahl: Thank you.

We’ve been talking all day today about markets and their ability to help control costs and also to promote appropriate utilization, to have quality, not too much, not too little, but the right kinds of services.

And there has been a suggestion in the articles about maybe a greater role for the regulatory role again. From the state perspective, I remain very skeptical that states can have much impact on the overall health system cost issue outside of their significant but still comparatively narrow role as prudent purchasers.

I have to say in the article, I shuddered at the very mention of the issue of hospital rate setting. And I’m also not sanguine about CON as a cost control tool. New Jersey abandoned hospital rate setting just over a decade ago. I wasn’t working in the state then, but I understand that it perpetuated and overbedded inefficient hospital system where every hospital was guaranteed that it would make enough money to cover its costs.

It promoted a culture which we still see, to a large extent, of seeking political solutions to financial and management problems. It never succeeded in closing hospitals. There were some plans to close some hospitals that were rapidly torpedoed. As I said, rate setting was abandoned about 10 years ago.

In the past 7 years, 11 hospitals out of, I guess, originally about 95 in the state have closed, general hospitals. I administer one left over element of rate setting, allocating $381 million in charity care subsidies per year among hospitals. New Jersey, unlike almost every other state, requires every one of our hospitals to be a safety net hospital and provide care to everybody who shows up.

The charity care system is a formula-driven system by statute. It’s supposed to be very straightforward. But it often feels more like a strategic arms race. There’s gaming; there’s litigation; we respond with regulatory changes, and we’ve ended up with a system that’s so complicated that I think that there are probably only about three people in the state that understand it.

And I imagine that that was pretty much the way it was in the old rate setting days. I don’t understand quite why it works or how it works in Maryland, but I don’t think it worked in New Jersey. And so, as I said, I shudder at the very thought of a return to that scenario.

New Jersey is also a certificate of need state, but since 1998, certificate of need has been limited to a fairly narrow range of services and types of facilities, and these days, we think of it only as being designed to promote access to care and quality of care. It’s not a cost control device, and I’m not sure it was ever effective in this area.

It’s too late to close the barn door on this particular issue. Since 1998, when we had substantial deregulation, the number of acute care facilities in our state has just about doubled. And almost all of the growth has come in the ambulatory, freestanding facility area, which is providing a lot of competition to our hospitals.

And finally, I just can’t imagine the legislature reinstating certificate of need broadly, having taken the steps that they’ve taken.

I don’t want to give up yet on the concept of promoting competition around quality. That was what made managed competition sound so attractive, because in one strategy, you would be solving both the cost control and the quality issue all at once. I think states have an important role to play in developing and publicizing information about quality, being those truthful outside observers that can provide the information that allow not only consumers but, frankly, the more engaged stakeholders, the providers and the payers, to react to it.

Len has correctly said this is not a silver bullet, but I think it is an essential even if not a sufficient condition for any future efforts to promote an efficient health care system. New Jersey was one of the first states to collect and publish quality information. We published our first HMO annual performance report in 1997. From 1997 to 2003, there has been steady incremental improvement in key preventive and primary care measures, and it adds up over time to significant improvement in a number of areas.

At the same time, all HMOs continue to fall well short of what would be optimum care and basic preventive measures. And I’m finally beginning to believe the HMOs when they argue that the key is ch anging provider behavior and that they don’t really have much leverage in this area. Again, as Len has pointed out in his article, today’s networks are so inclusive that no one HMO has much impact on the provider practice patterns. Add to this the decidedly sour relationship between providers and carriers, and it’s not surprising that providers are suspicious of the credibility of evidence-based medicine when it’s preached by managed care.

In New Jersey, while we will continue to publish our HMO report card, and we do believe it has stimulated quality improvement, we concluded we also need to take performance reporting down to the level of the delivery system. In June of this year, we expect to publish our first hospital performance report. We will look at the treatment of heart attack and pneumonia pushing the JCAHCO measures. We’re optimistic that this report will improve quality in New Jersey hospitals. We’ve seen it happen in the case of cardiac surgery.

We started publishing a report in 1997 looking then at 1994 data. We issued our most recent report based on 2000 data several months ago, and from 1994 to 2000, there was a 39 percent decline in mortality. Hospitals have told us that these reports, along with some volume-based licensure standards that we have, have helped them build physician support for undertaking systematic improvements, and quite frankly, it’s also been a vehicle whereby lower volume poor performing surgeons have ended up leaving the system and the state.

Perhaps once there begins to be more objective comparative data on quality of care, we will actually see a growing interest in value-based purchasing, so that these tiered arrangements or the other kinds of point of service things that have been mentioned can become more of a reality. There is a lot of talking by Leapfrog and some other large payers; we have to see whether they will actually deliver on providing the financial incentives to reward better performance. We are seeing that CMS and Medicare, especially with the recent law change, are supposed to be directed more towards recognizing value and quality when they purchase.

I think that these are really critical initiatives, and it is an area where I think states have a very important role to play. Thank you.

Len Nichols: Thanks, Marilyn. I appreciate your perspective, and I appreciate your caution about regulation. I think that’s always a healthy dose to keep in mind.

And finally, let me turn to Jack Meyer. Jack is the president of the Economic and Social Research Institute, which is a think tank here in Washington; does research for lots of issues that are near and dear to all our hearts. But Jack has also been in government and in various settings. He was in the Carter administration, and I think continued on in some others, and so, Jack knows a lot about policy implications as well as real world trappings in the health care system.

But most recently, Jack has led a project funded by the Robert Wood Johnson Foundation called Covering America, which assembled, I think, now, something approximating 20 proposals from a broad array of human beings who are thinking about our system at large.

So, Jack is the best I ever saw at herding intellectual cats, I must say.


Jack Meyer: Thank you, Len. It’s a pleasure to be here, and I really found your article quite gripping.

I want to start with a little parable. Ten years ago today, a man was wandering in the forest, and he was quite lost, and all of a sudden, shazam, a genie appears and says John Q. Public, I will grant you three wishes.

Now, you would think John Q. would go for $1 million, a trip around the world. But John Q. was an avid reader of Health Affairs, and he said--


Jack Meyer: --here are my three wishes, genie: first, I’d like universal coverage for health care. You got it. Second, I would like airtight cost containment for health care. I can do that. And third, this is a tough one, I would like to reduce and really eliminate inappropriate care and medical errors. No problem, said the genie, but I’ve got a few tasks for you, and it’s going to take 10 years to do it.

And I’m going to give you these tasks, and I’m going to put you in charge of all of the stakeholders in the system, so you round up the docs, the hospitals, business, labor, health plans. You work on these tasks. You meet me here at this spot in the forest 10 years from today, March 12, 2004--sounds like a long time away--you show me that you’ve done these tasks, and I will grant your three wishes.

You got it. What are the tasks?

Well, the genie says first of all, I’m told there’s an explosion of medical technology in health care. It provides wondrous benefits, and the problem is that sometimes, it’s applied to things that are not cost-effective or even medically effective. This leads to a lot of excessive spending, and I want you to work on that.

Second, I want you to work with your fellow wizards and stakeholders and organize the system into vertically integrated delivery systems that follow the precepts of evidence-based medicine, narrow the networks, pick providers based on cost and quality, take care of that.

And by now, John Q. has a checklist out, and he’s writing away, and third, I want you to take these public and private purchasers, governments, Medicare, large employers, and have them purchase sensibly based on selective contracting, where the criteria, again, will be related to cost and quality.

Fourth, these subsidies, I’m told, in health care, are really a problem. And I’m going to start by asking you to take that tax subsidy, which I’m told is open-ended and inflationary and very inequitable, goes to middle and upper income people primarily, and eliminate it if possible but, by all means, cap it at the very least. And while you’re at it, fifth, I want you to take the public subsidies for low-income people and make them need-based. It shouldn’t matter whether somebody has kids in the household or doesn’t; whether they live in Ohio or Georgia or California. If they’re poor and near poor, they ought to get help.

And finally, I hear all this talk about lawyers and litigation and med mal. I want you to fix up the medical malpractice system. And I’m putting you in charge. You do that, and you meet me here in 10 years; you show me that, and I’ll grant your three wishes.

Boy, that sounds like a tall order, but--and then, poof, the genie disappears. And the guy is really scared. He’s alone out there in the forest. Suddenly, another puff of smoke; shazam; three researchers appear on the scene.


Jack Meyer: Len Nichols, Paul Ginsburg and their consultant, Bob Hurley--


Jack Meyer: --from the Center for Studying Health System Change.

They say John Q., it’s 10 years later now. He’s back in the forest. He comes out to meet the genie. And--oh, I’m sorry, I skipped a step.


Jack Meyer: I brought them down too soon.

Ten years later, John Q. is out there in the forest, and the genie comes back and said did you do the things I told you to?

No, I didn’t. I wasn’t able to do them.

Did you do any of them?

No, I didn’t. Wasn’t able to do any of them. And the genie disappears.

Now, the second puff of smoke, and Len and Paul come in with Bob and say we’re here from the Center; we want to interview you. We want to find out--


Jack Meyer: --we would normally do a structured interview lasting about an hour, but you look like you’ve had a bad day.


Jack Meyer: So we’re going to ask you just two questions: first, what happened the last 10 years? And second, where do we go from here?

So, the genie says--I mean, John Q. says on the first question, wasn’t my fault. We tried these market forces. They didn’t work. I don’t know; don’t look at me. It just--something must have gone wrong, but health costs have exploded. There are more uninsured now tha n there were 10 years ago; inappropriate care is rampant. And so, you know, I just don’t know what to say.

And Len says to him, well, okay, we’ll jot that down. But you haven’t answered my question, now, where do we go from here?

John Q. Public says will you promise not to reveal what I’m about to say and do?

Yes, we’ll hold that secret. We’ll guard it.

And John Q. drops to his knees and begins to pray. He says, dear Lord, there’s a dragon in the forest, and it has sharp fangs and breathes fire. It’s the dragon of cost escalation and all the problems in health care. And I am powerless to slay this dragon. Please, please, dear Lord, and do not quote me on this, please, send in the Government.


Jack Meyer: Send CMS in--


Jack Meyer: --to slay this dragon. I cannot do it.

And tears are rolling down his cheeks, he’s so frightened. And so, he then closes by saying and I hope you guys will write this down in Health Affairs, and please don’t quote me, but that’s my take on it.

So the moral of this story, the reason I tell it is that I think all of us have looked at--whether it’s market forces or regulation and not done our own homework. We have not organized the stakeholders to take on the sacred cows in health care. We have left the subsidies in their pathetic shape. We have gone to virtually wide-open networks. We haven’t touched the med mal system. We haven’t developed good technological--good ways of assessing new medical technology.

And when someone has tried to do so, we have slammed them to the mat. Then, we expect some magical force, market forces, government regulation, to do the job that we were unwilling to do; in fact, we’ve made it very difficult for them to do it. So the moral of the story, as far as I can see, is if you make a bargain with the genie, you’ve got to keep your end of the bargain.



Len Nichols: Well, you can see why we wanted these guys to speak, but I didn’t know Jack had become a preacher in his--


Len Nichols: I’m feeling threatened here, but nevertheless, we’ll continue.

Let me start this by giving the panelists a chance to respond to whatever may have come to mind as others spoke. Do you want to add your own metaphor there?

Sarah Mathias: I’ll go ahead. I don’t have a fun story. But I think that as Bill mentioned and as was mentioned by the other panelists, one of the key things that we need to provide the consumer, and by consumer, I mean the patient, the employer, the plans, everybody who’s purchasing health care, is more information. And that is doing the empowering that was spoken of, educating the consumer to understand the quality information when it gets out there; educating the consumer about the choices that they make when they decide to take a more expensive method of care that may be just as good as a less expensive. We need to figure out ways to get that information out there, both cost and quality.

We’ve talked a lot about quality information. I think cost information is equally important. And I think that that is one of the key factors that we need to plug into the system to make the system of health care work better.

Len Nichols: Go ahead.

Bill Scanlon: I think Jack has identified that in many respects, we are the source of our own problems. And at the same time, though, I think it’s very important to note how difficult it’s ever going to be for us to change from being the source of our own problems.

The interest--I think it’s Uva Reinhart that talks about one person’s income is another person’s excess. And the idea that there are sort of totally sort of contradictory or opposite sort of forces behind every one of these principles that Jack mentioned creates a situation that we have a huge sort of hurdle to overcome to try and achieve sort of the changes that he suggested, which I agree with would make a big difference in terms of dealing with the problem we have.

A thought I have about this is is there a cataclysmic event that will fundamentally change sort of the way we look at the health care markets, and we will be willing to take on some of these sacred sort of principles? Being sort of here for historical purposes, I remember sort of what happened in terms of our automobile markets. It was the Arab oil embargo that changed sort of American buying habits, at least for awhile.

Up to that point in time, there was only one kind of car in this country. It was big, and it was American. And we suddenly changed sort of those habits. Are we going to reach a level of costs where we suddenly are willing to address some of these issues that Jack has raised?

Now, I would hope that we do and be optimistic about that, but I have to say when I sort of entered this field back in the seventies that people were talking about costs are now 7, 8 percent of GDP, and we’re going to reach a point where we’re just not going to tolerate it anymore; we’re going to do something about it.

Well, you all know where we are today, and we are still talking about they’re going to reach a point where we’re not going to tolerate it, and we’re going to do something about it. We just haven’t figured out what that point is yet.

Marilyn Dahl: One thought that I had is the managed care was an easy target for providers to be able to bring to its knees. People felt that, you know, I have to go get a referral for this; they tell me I can’t take this drug; I have to go through these hurdles. And all along, there was this fundamental mistrust because the notion was, and I think providers probably believed it as well as promoted it, that managed care was all about money and not at all about quality.

And I think that the basic resistance that people will have to changing what they have now--I recall that the demise of the Clinton plan came about as people began to fear they might lose what they have. And I think that managed care perhaps came a little too early. The tools for trying to define and measure and articulate quality are still fairly primitive. They are also expensive.

It costs us, as a state, an enormous amount of money to do our HMO report card, to do our cardiac surgery report card, and now, we’re undertaking a hospital report card that’s really looking at only two measures of care that are pretty simple. We’re hoping that it will be a kind of systematic carryover to other processes of care in the hospital, but the challenge of really knowing what’s good quality and what isn’t and measuring it and then reacting to it, I think, is astronomically large.

And given that managed care probably made as many mistakes as they made good judgments, made them an easy target. We have an external appeal system that my staff administers for people who have been denied care from any type of managed care carrier. And every year, consistently, that appeals board kind of comes down 50-50, either in favor of the plan or the doctor and the patient. And I don’t know if I should feel happy or appalled that it’s always 50-50. It’s like, do we ever really know what we’re doing?

Len Nichols: Well, clearly, we’re flipping coins.

Go ahead, Jack.

Jack Meyer: Well, I think there’s a reluctance to face the twin challenges of figuring out how to assess innovation and new medical technology, which is exploding on us and has wondrous events. And until we stop kidding ourselves that it’s some easy inefficiency that can be fixed and that we can get--although there are some inefficiencies, we’re going to be in trouble.

And secondly, we have to come face-to-face with the need to learn how to manage the care of people that have chronic illnesses and disabilities who are driving the cost. I say that because to listen to the popular rhetoric, you would think that what’s driving costs is the fact that the five of us, six of us up here don’t face stiff enough cost sharing at point of use.

And I don’t believe that health services should be free, except for very poor peop le. I don’t have anything against nominal copayments or reasonable copayments and deductibles. But I honestly think that we’re kidding ourselves that by restructuring the benefit packages and relying more on front-end high deductible policies and heavy copayments that we will address the cost problem. And I honestly don’t think we will. I think the problem is a lot of this stuff works, and people need it, and we’ve got to figure out how to allocate it, and that’s not fun politically.

But it’s not that we’re all hypochondriacs and that if you just raise copayments, we won’t go to the hospital or the doctor. It would be nice if it were. But it’s, as this audience knows, a relatively small proportion of us at any given time are critically in need of services, either as a result of trauma or disability or chronic illness, and we have to learn how to manage that better. We have to learn how to measure it and evaluate it and reward health systems that do it well and not have them risk selected against, all of which is terribly difficult and challenging to do. There’s no quick fix.

And I see that the desire for a quick fix here is no different than the desire for a quick fix for our Medicare and Social Security programs, where we want to believe that the answer to those problems doesn’t involve raising the age of eligibility or raising the payroll tax or income-relating the benefits, because those are all unpopular things to do, so there must be some way we can control doctors’ fees or hospital fees or something that, you know, please, don’t make me do this.

And that’s sort of why I told the parable, because the problem is that it’s going to take very tough calls and political leaders with some courage to identify the real problems and stakeholders around the country that are willing to admit that they are part of the problem.

Len Nichols: I want to start, now, asking questions of the panelists, but you start thinking about your questions, too, and either write them on the card or get ready to come to the mikes in a little bit.

And I’ll start with Sarah, because I was very happy to hear the range of activities that the FTC is engaged in, not just in a sense proving you were right about the mergers you tried to stop, which is always both important and fun and useful for the next round--


Len Nichols: --but in addition, looking at sort of what I would say a little outside the box kind of antitrust things on the suppression of generics and the protection of innovation, as you put it, in the dental hygienists and so forth.

So I guess my question is, when you look out, and you see the system as a whole, and obviously, at the FTC, you have to be very selective about which cases you can take on, since the country is big, and you’re not, at the end of the day, which segments of the health care marketplace do you think you could sort of add the most value or do the most good if you probe a little bit under the hood?

Sarah Mathias: I think in some ways, we are appropriately going into some of those areas. I think that we can help probe maybe more in the pharmaceutical area; that is an area where the, you know, you have the potential for more generic entry, and part of one of the things that we have done is we did do a study of the generic pharmaceutical industry and the name brand and what was going on and made some recommendations for changes to the Hatch-Waxman Act, which actually were--some of them were taken and used and hopefully closed some of the loopholes.

So there are areas where we can continue to investigate and look, and I think pharmaceuticals is one of them. I think continuing to look at various hospital mergers and make sure that everybody knows we’re out there. I also think it’s appropriate, and a lot of people are very concerned that the FTC continues to bring cases and complaints against physicians that have gotten together that are groups of physicians that haven’t done any sort of integration, and the only reason why they’re getting together is to fix prices.

I think even though we’ve been doing that for years and bringing these cases, and I think over the last year, we brought over 14 cases against physician groups, I think we need to continue going out there, making sure, educating people so that they know they can’t get together and fix prices, because that’s not going to help the marketplace.

So I think in many ways, we are appropriately allocating our resources. It’s very important to our current chairman. It was important to our past chairman.

And actually, one of the other areas that we get involved in that I think is important to competition as well is we do have the consumer protection area, and we do monitor and watch direct consumer advertising to make sure it’s truthful, because there is a lot of education that can occur through advertising so long as it’s honest and forthright, and it’s a resource for the consumer to be able to use in the future.

And so, I think that’s another important area where we have been and where I personally think that we should continue our engagement.

Len Nichols: Great; thanks, Sarah.

Bill, you stressed the electronic medical record, and I think you have a lot of support in seeing that as in some ways certainly not the silver bullet but a step and a stepping stone toward improvement. I wonder if there’s a way to potentially leverage the EMR to move us toward a system of episode-based payment--first of all, is episode-based payment a good idea? We heard a lot of talk about unit costs sort of being the wrong unit and so forth; and second, can EMR get us there?

Bill Scanlon: I think one of the challenges we face in terms of changing the unit that we’re going to pay for is defining the unit, I mean, and an episode is an elusive entity, to say the least.

Taken to the extreme, I mean, part of the problem I think that we face with managed care and the trust that never developed for managed care was that we were paying on a capitated basis for all the care that someone needed, and it created--if you were to believe the economists, and fee-for-service creates the incentive for overuse, capitation should also create the incentive for underuse, and that creates this climate of distrust.

I think we have to face the same kind of question when we think about sort of an episode payment: are we doing it in a way that we’re not going to create sort of incentives that create distrust?

Part of that, I mean, I think we need to couple sort of any payment changes with a real effort to provide the information to patients so that there is a feeling of trust. If an organization can convince you that telling you not to get the service is a value, then, we’ve potentially reached the right sort of moment.

It’s because many services aren’t good for you. They may not be so dangerous that you’re going to be harmed, but there wasn’t any utility to them for you; you were wasting your time; the resources were being wasted, but the patient doesn’t know that. We need to reach the point--I mean, this is clinical information as well--that people have a sense of trust, and then, I think we can sort of worry about sort of how to match the payment to that.

So I’m a little hesitant to completely endorse episode payments without sort of having the requisite information sort of underlying them.

Len Nichols: A researcher at heart; good; okay.

Marilyn, you mentioned a couple of times how you’re not optimistic that regulation or anything like that is going to be a good idea, and you wouldn’t go back there if you could, and you said you wouldn’t go if you advised it. But you did hold out sort of if the state, as a purchaser, could do a whole lot better. And I guess I’d like you to expand on that a little bit; in particular, what could the state do, maybe combining Medicaid and state employee, whatever, to enhance value-based purchasing in the market as a whole?

Marilyn Dahl: Well, you are touching on issues where I don’t have responsibilities.

Len Nichols: Therefore, you can be more free.


Marilyn Dahl: Well, or more cautious.

We do have about 800,000 people in New Jersey in our state health benefits plan, which is mostly self-insured. We have, I think, about 800,000 or 900,000 people in our Medicaid and S-CHIP program in New Jersey. They’re very different populations. The plans that the state contracts with to provide services to those populations are very different. And disclaimer: other agencies entirely are involved in running these programs. I’m not, so I have more of a kind of an outsider’s view of these things.

But there’s often a lot of talk about combining the purchasing power, but I think that that may, perhaps, be missing some of the real operational challenges of trying to bring those--that all together into one pot. Beyond that, our state health benefits plan has for several years actually tied small incentive portion of its compensation to HMOs to the HMOs’ performance on our annual report card.

It’s not a dramatic amount of money. The standard is probably not as stringent as some people would like, but it’s there, and some HMOs have actually had to forfeit a little money as a result of it. So there are some steps being taken.

Len Nichols: Okay; okay.

Jack, it’s hard to know what to ask, so I’ll make something up here. What really struck me about your metaphor was I couldn’t decide whether what we need is sort of confidence-building measures; let’s all agree to join hands and take little bitty steps together, or whether we need a great, bold savior stroke to come down, the puff of smoke or whatever, to come solve the problem.

So I guess the question really is what is the proper role for political leadership in moving us from here to there? Is it just to preach to us? Is it to set up structures through Medicare to be a better buyer? Is it to promote standards? What is the proper role for our health staff’s bosses to try to move this forward?

Jack Meyer: Well, that’s a good question. First, I think it’s to be honest about what’s causing the problem and what’s not, and there’s just such a tendency in the political arena to say that, you know, all you have to do, one hearing up here, I remember the chairman of a committee said after I’d said that I thought what would be needed to save Medicare would be, in the long run, that was the question, that you would need to probably raise the payroll tax a bit, raise the age of eligibility and income-relate contributions. The guy was in shock.


Jack Meyer: And he said, well, before I would do any of that, I would get the doctors out of their Mercedes. And, you know, he got a nice round of applause.


Jack Meyer: But, you know, you’ve got to--political leaders have to be honest is the first thing we’ve got to do. And then, they have to work with private sector leaders so that when situations come up, when there’s a medical procedure that comes on stream, and five double-blind clinical trials have shown that it’s not medically effective, and a payer comes along and says we’re not going to pay for this, and then, they’re sued for $125 million, that that political leader needs to understand that the med mal system and the way it’s structured today is creating a climate in which we cannot possibly control costs.

So I don’t say you have to have a cap or this or that, but you have to recognize that that’s a problem or that when, you know, and work with business leaders so that they understand when there’s a network that they have that has 98 percent of the physicians in it, and the 2 percent are way outliers in terms of their utilization that, you know, and then, Mrs. Smith runs to the HR director and says please put my doc, he’s one of these 2 percent, that that employer has to say no to her, you know.

So I think it’s a matter of leadership, changing the government programs. I’ll recognize a political leader when I see one if they at least understand the role of the tax subsidy. I know it’s a lightning rod. And if they understand that there are people with no income that get no subsidy, because they have no kids and the household, and yet, we have this $140 billion a year open-ended tax subsidy.

So political leaders, I think, have to tackle that tough agenda, and if they do, I would give them credit even if they failed. But you can’t--instead, what they like to do is it’s the drug company; it’s the doctors making too much money; it’s managed care. They all have their favorite culprit that they want to beat up on, and frankly, it works in the political arena. You get a lot of applause.

It’s just like convincing, you know, I’m probably going to get in trouble in saying this, but it’s just like trying to convince yourself that India and China are the sole source of our economic problems or--not that there aren’t some issues there, but it’s scapegoating. And as long as we scapegoat, and that’s what our political leaders do, we’ll never solve the problem.

Len Nichols: Paul, did you want to ask a question?

Paul Ginsburg: Actually, I’ve been sitting here in case you called on me.


Paul Ginsburg: And actually, I’ve been spending a lot of my time thinking about the comment Bob--that Bill made when he talked about a cataclysmic trigger related to costs, and, you know, will a cataclysmic trigger happen? And I was thinking that, well, costs are one of the things that is least likely to lend itself to have a cataclysmic trigger, because, you know, costs go up in percentage terms; they affect some people; they don’t affect other people.

To some individuals, it’s probably cataclysm when they get to the point where they can’t afford health insurance anymore. You know, that will get their attention. You know, maybe, I guess one of the earlier panelists mentioned at the employer level, when the CEO or the, I guess the C suite, he called them, when the C suite gets involved, so that, as opposed to the HR department.

I almost wonder if a key thing in getting people’s attention about costs is going to be the media, that the media is going to decide through their writing that a cataclysm has occurred, and that’s going to tell us.

One thing that I’ve worried about for a long time is the fact that to the degree that there really is, you know, substantial effects of costs on people, that the people that are really feeling it, which are the lower-income people who earn enough to be above public programs, they’re the ones that feel it the most, but the elites are not feeling it. So, in a sense, you know, we can dismiss many options or dismiss managed care, because we don’t like them interfering with our health care, whereas, lower income people might think that’s a much better deal than having to pay huge amounts out of pocket.

So that’s just some thoughts about--stimulated by Bill.

Len Nichols: Good.

We’ve got a couple of questions from the audience. Feel free to come up to the mikes if you’d like.

One is back to the FTC. The question is what is the FTC’s stance on certificate of need and the recent moratorium on health care construction in the Medicare bill and, in parentheses, isn’t that somehow anti-American?


Len Nichols: Not to prejudice your answer.

Sarah Mathias: No, no, the FTC has, throughout, I think, starting in the mid-1980s, come out with several advisory letters and opinions and research that our basic stance is that certificates of need are not healthy for the economy; that they do ultimately raise prices, create artificial barriers, shield the existing hospitals or providers so that they don’t have to compete; they don’t have to innovate and limit innovation.

There are actually a number of papers, working papers, that we have out there addressing the certificate of need. I don’t know if the FTC itself has come out with a specific statement, and I don’t think we have, regarding the recent Medicare legislation that has to do with limiting the building of single-specialty hospitals; at least I assume that’s what the--

Len Nichols: Right.

Sarah Mathias: --second half of that question had to deal with.

So, you know, I can’t say that the FTC thinks that that moratorium is good or bad and what it might do. You know, typically, the FTC is for the entry of competition and innovation. To the extent that that has been happening with single-specialty hospitals or specialty hospitals, that may be viewed as a good thing, especially if it’s improving quality.

I personally think, though, that as we see that happen, and I like the--and I personally like entry--so long as we have the price distortion that we have, set by pretty much CMS that pays cardiac care or orthopedic care at a higher level than maybe the market would, and to the extent we have put regulations on hospitals requiring them to provide the community care, and maybe some of the specialty facilities are able to get out of that, we need to evaluate that.

If we are requiring unpaid care, we should pay for it. And that would help the marketplace. But this is not what the FTC has said. This is more looking at it and trying to figure out how to improve the situation, because if we are relying on the various hospitals to provide the unpaid care, and the single-specialty hospitals are not being required to do that, then, we need to look at that, because that is not a working marketplace based on true market prices.

Len Nichols: Paul, did you want to add?

Paul Ginsburg: Yes, I wanted to add that I actually got an email about a week ago about this being--about the moratorium not being American, and it led me to go and read the legislation. And the legislation is not a moratorium on construction; it’s a moratorium on the whole hospital exemption from the stark rules. So, you know, it’s very much in the purview of government, whether you agree with it or not.

Sarah Mathias: I mean, I do think that it will limit the building until that gets worked out, and maybe the appropriate thing is we’re taking the opportunity or the Government is taking the opportunity to study some of the effects; I mean, I think making, you know, if it were just--if a law that was created just stamped out the growth, absolutely said no more single-specialty hospitals without looking at the effects on the community and on health care and on innovation and on quality, then I think that that would be a very poor result, and I think having the chance to look at what has been done is a prudent step.

Len Nichols: Good.

We’ve got one at the mike. Go ahead.

Paul Ketchan: Hi, I’m Paul Ketchan. I’m the executive vice-president of the Medical Society of Virginia.

I travel around the State of Virginia and talk to physicians a lot. One of the things that I like to ask of them is tell me about your worried well population. And it absolutely just astounds me the answers I get to that. So it let to my question about Jack’s parable about John Q. Citizen, do we pay adequate enough attention probably from a system or health policy standpoint to John Q. Citizen? You know, the Secretary addressed obesity in his press conference the other day, and he made at least an attempt to tell people to do sit-ups while they’re watching TV--


Paul Ketchan: And I thought that was really nice.

But, you know, the question is we talk about the efficiency of the system, could we ever design a system efficient enough to deal with a public that is engaging in the kind of health behaviors, the lifestyle-related diseases that we’re starting to see, and are we paying enough attention to what the public’s role in these answers are?

Jack Meyer: Well, it’s a good question. You know, I do think that John Q. Public and Mary Q. Public have an obligation not to beg their physician for an antibiotic when they have a virus and to finish their medication and to bring their kids in for checkups; and, you know, you’re absolutely right: there’s a personal responsibility issue here. My honest opinion is that it’s been blown out of perspective in terms of its relative importance to solving the problem.

I don’t think it’s teeny or minimal, but the reason I say that is if you look at something like diabetes care, where we know what to do, yes, the patient has an obligation. But the physician has an obligation to make sure that patient gets their hemoglobin checked. The physician has an obligation to refer that person to a podiatrist. The physician has an obligation to refer that person to an ophthalmologist.

And managed care companies have an obligation to make sure that providers are doing those things, and it’s just my observation that hypochondria or lack of responsibility or not taking care of ourselves is not as important as a lot of people think. It’s not unimportant. I’m sure there are people who disagree with me on that. I think what really is the situation is that we have people with illnesses that are very costly and difficult to manage. They play a role in that.

But very often, it’s conditions beyond their control. If people have disabilities, you know, they’re going to use a lot of health care resources, and we have to learn to manage their care. So, in closing, I would just say it’s important, but we shouldn’t use that to get out from under the need to learn how to manage that care, and I’m very worried that in this desire to put it on the patient, we’ve forgotten about the need to manage all of the inefficiencies in the industry and really, frankly, figure out what technology works.

QUESTION: Thank you. I think looking at this room, I may be one of the only people who is going to say that I am an elected official, so one of the people who has caused the debacle of the last 10 years, but fortunately in a very small pond. I’m a state senator in Rhode Island.

I will comment that one of the reasons I think that we have such a hard time taking the leadership positions you talk about, something I struggle to do, is that the complexity of the issues is very hard for people to understand through the media or the ways that usually reach people.

And also, it’s very hard to say to people, you know, if you’re willing to make the sacrifice, it’s going to be worth it, because so far, it generally hasn’t for people, so I think that’s a real problem for us when we say, you know, stick with this policy initiative. Now, sometimes, it’s because we haven’t stuck with anything long enough to know if anything is going to be worth it.

But I actually came up here for a different reason, and that’s to Ms. Mathias about the issue, the problem we’re having, and I don’t think we’re one of the only states, and we’re having pressure from our providers, is the excessive dominance of one insurer, who, our providers are saying to us, we actually want the legal right to gather together to negotiate with the insurer.

I’m of many minds about that. But I’m more concerned as a public official the power they have in shaping our provider networks and what our providers look like. And maybe to Ms. Dahl, whether we should be concerned about that, or do we say, you know, Blue Cross does in fact have our best interests at heart; let’s let them go. They can be a good proxy for the public good.

And I don’t know if the FTC looks at a Blue Cross differently than they look at a United Health Care. They control 72 percent of our market, and we’re one of eight or nine states in a position like that.

Thank you.

Sarah Mathias: There are a couple of avenues that I have to address in that question. The first one is that the FTC is limited, severely limited, in what it can do in the insurance market by the McCarran-Ferguson Act. That is really much more the Department of Justice’s arena. And the Department of Justice did get involved in a Texas insurance merger, Aetna and someone, to limit some of the potential payer strength that could have occurred from the merger.

So that is one avenue. Another question in there or something that I feel the need to address is the fact that the physicians want to get together to collectively negotiate without doing any integration or clinical or financial integration. The FTC has come out numerous times, written advisory letters to states that have asked, and basically, our point of view that if there is no efficiency that is attached to that, that it is not a wise idea. It may raise the prices and limit the access for the consumer. So we have come fairly strongly out against that.

A third avenue, as part of that, is when an entity like a payer or a plan has developed their strength in part because of just good growth and good management or because they’ve been there so long, they have not necessarily done anything that’s illegal, that we can necessarily take action against unless they begin, maybe, to engage in monopsonistic behavior. And those are very difficult cases, because typically, the prices are going down for the consumer.

So I think that’s--you may not have asked all of those questions, but those are some of the thoughts that arise. So, unfortunately, the FTC doesn’t get involved in the insurance market is the simple answer.

QUESTION: My question is for Bill Scanlon. You spoke about a cataclysmic event and how in the seventies, folks were concerned about 7 percent of the GDP going to health care, and now, it’s projected to be almost 20 percent in 2015. Do you think a cataclysmic event might be more tied now to the number of uninsured, and what do you think would be an unacceptable level of uninsured for this nation?

Bill Scanlon: I’d like to pick up on what Paul indicated in that; I mean, cataclysmic event may not sort of have a bright line around it. I mean, it’s going to be sort of an erosion that occurs in either area. And I think that we may reach the point, particularly as insurance becomes more expensive, that we do get enough more uninsured that, again, agreeing with Paul, it’s going to take the media, in some respects, to create this event, because there are sort of individuals now and companies as well who are feeling the pressure here tremendously, but if it’s not in the consciousness of enough people, there’s not going to be a response to it.

The, you know, the counter here is that we’ve got to be confident about what steps we’re going to take when that consciousness is here, because again, going back to the point made in the paper, the specter of quality and access problems is going to scare off the rest of the population that isn’t sort of in dire straits at the moment. They’re not going to be receptive to change, because they’re okay. And they don’t want to be sort of harmed by poor quality and poor access, so I think that’s the kind of factors that are going to play in terms of whether or not this, quote, cataclysmic event ever occurs.

Len Nichols: You did such a good job closing the last one that we’ll give you the last question here.

Dave Crowder: Well, I think we’re reaching that cataclysmic event by just the fact that the cost for employers is so high. My companies like for me to work with the uninsured just as much as anybody else, because we’re paying for it, basically, and try to look to ways to solve those problems as well.

And I think one of the other things I see about conferences like this is the experts talk to the experts, and the communication really doesn’t get down to the real people. And I love Health Affairs. I mean, I’m glad it only comes out six times a year, because it gives me two months to try to understand what those articles are.


Dave Crowder: The first month, I just read the footnotes.


Dave Crowder: But what we need, kind of, is a Health Affairs for Dummies.


Dave Crowder: And we need it for people like me that want to know things, and I think that applies to a lot of docs. I know it applies to HR people, applies to execs in the companies. They just don’t have time to really look at a journal like Health Affairs and digest it. I mean, maybe 5 or 10 percent of their time is committed to the health aspects.

And we need some translators that translate those articles and the research that is done in ways that are short and concise and explain things in a quickly understandable way. We’re just getting involved with disease management. That’s kind of our next step, and I think we’re going to start with three or four of our big ticket items. That will probably be coronary artery disease, congestive heart failure, perhaps asthma and definitely diabetes mellitus and try to learn, with baby steps, how to do the process.

And I agree it’s a joint responsibility between the provider or the physician. I hate provider-consumer. I guess I’ve been a doc too long. But the thing is that yes, the docs need to do their job, and they need to make the referrals. The other thing is that from the payer side, we can put maybe a little more pressure on the employee patient to see that they take care of their responsibility as well, because for instance, with diabetes, that’s an area that requires education, education, education, and you’ve got to break through a lot of denial with that group of patients to really get their cooperation.

And one of the things with industry is really just trying to convince the employee first that you’re really interested in them and you’re not just trying to save costs, and I guess that’s kind of been some of the stuff that I’ve done. And I guess we don’t worry too much about what physicians charge in the office. I’d rather pay an exorbitant office fee any day than have somebody have to go to the emergency room. And I think in one of the earlier panels, talked about doctors trying to see too many patients in a day, and I think that really happens, and some docs are really proud of the fact that they can see 900 patients in a day.

I don’t go to them myself.


Dave Crowder: But the thing is that I’d rather pay a physician a $200 office visit and have him take 10 or 15 minutes extra to explain why that acute back strain really doesn’t have to have an MRI, and then, maybe he doesn’t--he or she doesn’t have to see that six extra patients to try to make the income goals.

Len Nichols: The point is well taken, sir. Good luck.

Paul, do you want to wrap it up?

Paul Ginsburg: Sure; I’ll say a few things to close the conference.

Please, first, do me a favor and fill out the evaluations. We make good use of them and with the feedback in shaping our future conferences. I am very pleased to say that there will be a round five community tracking study site visits. We’ve assembled the research team, and we’ll be in the field from January through June in 2005.

I want to again thank the Robert Wood Johnson Foundation for its support of the site visits and this conference and the Health Affairs issue and remind people that if you want to go back to some of the highlights of this conference, there’s the Webcast that RWJF has done on its Website and on our Website, and we will have a transcript of the conference on our Website.

I want to thank all of the panelists throughout the day, who I thought did a marvelous job and really brought a lot to this conference. I’d like to thank some of the other respondents from the sites who were here today just listening in the audience and probably passing some of those question cards in and also thank the HSC staff, who made the conference arrangements, particularly Roland Edwards, who always does this impeccably.

Thank you.


[Whereupon, at 2:11 p.m., the conference concluded.]


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